WRL SERIES FUND INC, 497, 1997-01-03

WRL SERIES FUND INC
497, 1997-01-03

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WRL SERIES FUND, INC.

AGGRESSIVE GROWTH PORTFOLIO
EMERGING GROWTH PORTFOLIO
INTERNATIONAL EQUITY PORTFOLIO
GLOBAL SECTOR PORTFOLIO
GLOBAL PORTFOLIO
GROWTH PORTFOLIO
C.A.S.E. GROWTH
U.S. EQUITY PORTFOLIO
VALUE EQUITY PORTFOLIO
TACTICAL ASSET ALLOCATION PORTFOLIO
EQUITY-INCOME PORTFOLIO
UTILITY PORTFOLIO
BALANCED PORTFOLIO
BOND PORTFOLIO
SHORT-TO-INTERMEDIATE GOVERNMENT PORTFOLIO
MONEY MARKET PORTFOLIO

STATEMENT OF ADDITIONAL INFORMATION

This Statement of Additional Information is not a prospectus but supplements
and should be read in conjunction with the WRL Series Fund, Inc. (the "Fund")
Prospectus. A copy of the Prospectus may be obtained from the Fund by writing
the Fund at 201 Highland Avenue, Largo, Florida 33770-2597 or by calling the
Fund at (800) 851-9777.

Investment Adviser:

WRL INVESTMENT MANAGEMENT, INC.

Sub-Advisers:

FRED ALGER MANAGEMENT, INC.
VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT, INC.
SCOTTISH EQUITABLE INVESTMENT MANAGEMENT LIMITED
GE INVESTMENT MANAGEMENT INCORPORATED
MERIDIAN INVESTMENT MANAGEMENT CORPORATION
INVESCO GLOBAL ASSET MANAGEMENT LIMITED
JANUS CAPITAL CORPORATION
C.A.S.E. MANAGEMENT, INC.
NWQ INVESTMENT MANAGEMENT COMPANY, INC.
DEAN INVESTMENT ASSOCIATES
LUTHER KING CAPITAL MANAGEMENT CORPORATION
FEDERATED INVESTMENT COUNSELING
AEGON USA INVESTMENT MANAGEMENT, INC.
J.P. MORGAN INVESTMENT MANAGEMENT INC.

The date of the Prospectus to which this Statement of Additional Information
relates and the date of this Statement of Additional Information is January
1, 1997.

<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE IN THIS STATEMENT CROSS-REFERENCE
OF TO
ADDITIONAL INFORMATION PAGE IN PROSPECTUS
----------------------- -------------------
<S> <C> <C>
INVESTMENT OBJECTIVES AND POLICIES 1 12-25

Investment Restrictions 1 25

Aggressive Growth Portfolio 1 12-13
Emerging Growth Portfolio 2 13-14
International Equity Portfolio 3 14-15
Global Portfolio 5 16
Growth, C.A.S.E. Growth and Bond Portfolios 7 17-18; 23
U.S. Equity Portfolio 8 18
Value Equity Portfolio 10 19
Global Sector Portfolio 11 15-16
Tactical Asset Allocation Portfolio 12 20
Equity-Income Portfolio 13 21
Utility Portfolio 15 21
Balanced Portfolio 16 22
Short-to-Intermediate Government Portfolio 17 23
Money Market Portfolio 18 24-25

Investment Policies 20 25-27

Lending 20 27
Borrowing 20 26
Foreign Securities 20 31
Investment Funds (International Equity Portfolio) 21 N/A
Repurchase and Reverse Repurchase
Agreements 21 29
U.S. Government Securities 22 30
Non-Investment Grade Debt Securities 22 35
Convertible Securities 22 29
Investments in Futures, Options and Other
Derivative Instruments 23 32-33
Zero Coupon, Pay-In-Kind and Step Coupon
Securities 34 35
Warrants and Rights 34 36
Mortgage-Backed Securities 35 34
Asset-Backed Securities 35 34
Pass-Through Securities 35 34
Other Income Producing Securities 36 N/A
Illiquid and Restricted/144A Securities 36 32
Other Investment Companies 37 27
Quality and Diversification Requirements (Money
Market Portfolio) 37 24
Bank and Thrift Obligations 38 30
</TABLE>

<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE IN THIS STATEMENT CROSS-REFERENCE
OF TO
ADDITIONAL INFORMATION PAGE IN PROSPECTUS
--------------------------- -----------------------
<S> <C> <C>
Management of the Fund 39 36

Directors and Officers 39 36
The Investment Adviser 41 37
The Sub-Advisers 45 39-43

Portfolio Transactions and Brokerage 48 44

Portfolio Turnover 48 26
Placement of Portfolio Brokerage 49 26
Purchase and Redemption of Shares 52 44
Determination of Offering Price 52 45
Net Asset Valuation 52 45

Investment Experience Information 52 45

Calculation of Performance Related Information 53 11
Total Return 53 11
Yield Quotations 54 11
Yield Quotations - Money Market Portfolio 54 11

Taxes 55 11

Capital Stock of the Fund 57 47

Registration Statement 57 46

Financial Statements 57 N/A

Other Information 58 45

Appendix A - Description of Portfolio Securities A-1 N/A
</TABLE>

<PAGE>

INVESTMENT OBJECTIVES AND POLICIES

The investment objectives of the Aggressive Growth Portfolio, Emerging Growth
Portfolio, International Equity Portfolio, Global Sector Portfolio, Global
Portfolio, Growth Portfolio, C.A.S.E. Growth Portfolio, U.S. Equity
Portfolio, Value Equity Portfolio, Tactical Asset Allocation Portfolio,
Equity-Income Portfolio, Utility Portfolio, Balanced Portfolio, Bond
Portfolio, Short-to-Intermediate Government Portfolio, and Money Market
Portfolio, (a "Portfolio" or collectively, the "Portfolios") of the Fund are
described in the Portfolios' Prospectus. Shares of the Portfolios are sold
only to the separate accounts of Western Reserve Life Assurance Co. of Ohio
("Western Reserve") and to separate accounts of certain of its affiliated
life insurance companies (collectively, the "Separate Accounts") to fund the
benefits under certain variable life insurance policies (the "Policies") and
variable annuity contracts (the "Annuity Contracts").

As indicated in the Prospectus, each Portfolio's investment objective and,
unless otherwise noted, their investment policies and techniques may be
changed by the Board of Directors of the Fund without approval of
shareholders or holders of the Policies or of the Annuity Contracts
(collectively, "Policyholders"). A change in the investment objectives or
policies of a Portfolio may result in the Portfolio having investment
objectives or policies different from those which a Policyholder deemed
appropriate at the time of investment.

As indicated in the Prospectus, each Portfolio is subject to certain
fundamental policies and restrictions which may not be changed without the
approval of the holders of a majority of the outstanding voting shares of the
Portfolio. "Majority" for this purpose and under the Investment Company Act
of 1940, as amended (the "1940 Act") means the lesser of (i) 67% of the
shares represented at a meeting at which more than 50% of the outstanding
shares of a Portfolio are represented or (ii) more than 50% of the
outstanding shares of a Portfolio. A complete statement of all such
fundamental policies is set forth below.

INVESTMENT RESTRICTIONS

/diamond/ AGGRESSIVE GROWTH PORTFOLIO

The Portfolio may not, as a matter of fundamental policy:

1. With respect to 75% of the Portfolio's total assets, purchase the
securities of any one issuer (other than Government securities as defined in
the 1940 Act) if immediately after and as a result of such purchase (a) the
value of the holdings of the Portfolio in the securities of such issuer
exceeds 5% of the value of the Portfolio's total assets, or (b) the Portfolio
owns more than 10% of the outstanding voting securities of any one class of
securities of such issuer.

2. Purchase any securities that would cause more than 25% of the value of
the Portfolio's total assets to be invested in the securities of issuers
conducting their principal business activities in the same industry; provided
that there shall be no limit on the purchase of U.S. Government securities.

3. Invest in commodities except that the Portfolio may purchase or sell
stock index futures contracts and related options thereon if thereafter no
more than 5% of its total assets are invested in aggregate initial margin and
premiums.

4. Purchase or sell real estate or real estate limited partnerships,
except that the Portfolio may purchase and sell securities secured by real
estate, mortgages or interests therein and securities that are issued by
companies that invest or deal in real estate.

5. Make loans to others, except through purchasing qualified debt
obligations, lending portfolio securities or entering into repurchase
agreements.

6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the
disposition of its portfolio securities.

Furthermore, the Portfolio has adopted the following non-fundamental
investment restrictions which may be changed by the Board of Directors of the
Fund without shareholder or Policyholder approval:

<PAGE>

(A) The Portfolio may not invest in warrants, except that the Portfolio
may invest in warrants if, as a result, the investments (valued at the lower
of cost or market) would not exceed 5% of the value of the Portfolio's net
assets, of which not more than 2% of the Portfolio's net assets may be
invested in warrants not listed on a recognized domestic stock exchange.
Warrants by the Portfolio as part of a unit or attached to securities at the
time of acquisition are not subject to this limitation.

(B) The Portfolio may not sell securities short or purchase securities on
margin, except that the Portfolio may obtain any short-term credit necessary
for the clearance of purchases and sales of securities. These restrictions
shall not apply to transactions involving selling securities "short against
the box."

(C) The Portfolio may not invest in securities of other investment
companies, except as it may be acquired as part of a merger, consolidation,
reorganization, acquisition of assets or offer of exchange.

(D) The Portfolio may not pledge, hypothecate, mortgage or otherwise
encumber more than 10% of the value of the Portfolio's total assets except as
noted in (G) below. These restrictions shall not apply to transactions
involving reverse repurchase agreements or the purchase of securities subject
to firm commitment agreements or on a when-issued basis.

(E) The Portfolio may not invest directly in oil, gas, or other mineral
development or exploration programs or leases, however, the Portfolio may own
debt or equity securities of companies engaged in those businesses.

(F) The Portfolio may not borrow money, except that the Portfolio may
borrow from banks for investment purposes as set forth in the Prospectus.
Immediately after any borrowing, including reverse repurchase agreements, the
Portfolio will maintain asset coverage of not less than 300% with respect to
all borrowings.

(G) The Portfolio may not invest more than 15% of its net assets in
illiquid securities. This does not include securities eligible for resale
pursuant to Rule 144A under the Securities Act of 1933 or any other
securities as to which the Board of Directors has made a determination as to
liquidity, as permitted under the 1940 Act.

(H) The Portfolio may not invest in companies for the purpose of
exercising control or management.

(I) The Portfolio may not issue senior securities, except that the
Portfolio may borrow from banks for investment purposes so long as the
Portfolio maintains the required coverage.

(J) The Portfolio may not purchase or retain the securities of any issuer
if, to the knowledge of the Portfolio, any of the officers or directors of
the Portfolio or Investment Adviser individually owns more than 0.5% of the
outstanding securities of the issuer and together they own beneficially more
than 5% of the securities.

/diamond/ EMERGING GROWTH

The Portfolio may not, as a matter of fundamental policy:

1. With respect to 75% of the Portfolio's total assets purchase the
securities of any one issuer (other than Government securities as defined in
the 1940 Act) if immediately after and as a result of such purchase (a) the
value of the holdings of the Portfolio in the securities of such issuer
exceeds 5% of the value of the Portfolio's total assets, or (b) the Portfolio
owns more than 10% of the outstanding voting securities of any one class of
securities of such issuer.

2. Invest more than 25% of the Portfolio's assets in the securities of
issuers primarily engaged in the same industry. Utilities will be divided
according to their services; for example, gas, gas transmission, electric and
telephone, and each will be considered a separate industry for purposes of
this restriction. In addition, there shall be no limitation on the purchase
of obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, or of certificates of deposit and bankers' acceptances.

3. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent the
Portfolio from investing in securities or other instruments backed by
physical commodities).

4. Purchase or sell real estate (but this shall not prevent the Portfolio
from investing in securities or other instruments backed by real estate,
including mortgage-backed securities, or securities of companies engaged in
the real estate business).

<PAGE>

5. Lend any security or make any other loan if, as a result, more than 25%
of its total assets would be lent to other parties (but this limitation does
not apply to purchases of commercial paper, debt securities or repurchase
agreements).

6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the
disposition of its portfolio securities.

Furthermore, the Portfolio has adopted the following non-fundamental
investment restrictions which may be changed by the Board of Directors of the
Fund without shareholder or Policyholder approval:

(A) The Portfolio's investment in warrants (options on securities), valued
at the lower of cost or market, may not exceed 5% of the value of its total
assets. Included within that amount, but not to exceed 2% of the value of the
Portfolio's net assets, may be warrants that are not listed on the New York
or American Stock Exchange. Warrants acquired by the Portfolio in units or
attached to securities shall be deemed to be without value.

(B) The Portfolio may not sell securities short, unless it owns or has the
right to obtain securities equivalent in kind and amount to the securities
sold short, provided that margin payments and other deposits in connection
with transactions in options, futures contracts and options on futures
contracts shall not be deemed to constitute selling securities short.

(C) The Portfolio may not purchase securities on margin, except that the
Portfolio may obtain such short-term credits as are necessary for the
clearance of transactions and that margin payments and other deposits in
connection with transactions in options, futures contracts and options on
futures contracts shall not be deemed to constitute purchasing securities on
margin.

(D) The Portfolio may not (i) purchase securities of other investment
companies, except in the open market where no commission except the ordinary
broker's commission is paid, or (ii) purchase or retain securities issued by
other open-end investment companies. Limitations (i) and (ii) do not apply to
money market funds or to securities received as dividends, through offers of
exchange, or as a result of a consolidation, merger or other reorganization.

(E) The Portfolio may not mortgage or pledge any securities owned or held
by the Portfolio in amounts that exceed, in the aggregate, 15% of the
Portfolio's net assets, provided that this limitation does not apply in the
case of assets deposited to provide margin or guarantee positions in options,
futures contracts and options on futures contracts or the segregation of
assets in connection with such contracts.

(F) The Portfolio may not invest directly in oil, gas, or other mineral
development or exploration programs or leases; however, the Portfolio may own
debt or equity securities of companies engaged in those businesses.

(G) The Portfolio may borrow money only for temporary or emergency
purposes (not for leveraging or investment) in an amount not exceeding 25% of
the value of the Portfolio's total assets (including the amount borrowed)
less liabilities (other than borrowings). Any borrowings that exceed 25% of
the value of the Portfolio's total assets by reason of a decline in total
assets will be reduced within three business days to the extent necessary to
comply with the 25% limitation. This policy shall not prohibit reverse
repurchase agreements.

(H) The Portfolio may not invest more than 15% of its net assets in
illiquid securities. This does not include securities eligible for resale
pursuant to Rule 144A under the Securities Act of 1933 Act or any other
securities as to which the Board of Directors has made a determination as to
liquidity, as permitted under the 1940 Act.

(I) The Portfolio may not invest in companies for the purpose of
exercising control or management.

(J) The Portfolio may not issue senior securities, except as permitted by
the 1940 Act.

(K) The Portfolio may not invest in securities of foreign issuers
denominated in foreign currency and not publicly traded in the United States
if at the time of acquisition more than 20% of the Portfolio's total assets
would be invested in such securities.

/diamond/ INTERNATIONAL EQUITY PORTFOLIO

The Portfolio may not, as a matter of fundamental policy:

1. With respect to 75% of the Portfolio's total assets, purchase the
securities of any one

3
<PAGE>

issuer (other than Government securities as defined in the 1940 Act) if
immediately after and as a result of such purchase (a) the value of the
holdings of the Portfolio in the securities of such issuer exceeds 5% of the
value of the Portfolio's total assets, or (b) the Portfolio owns more than
10% of the outstanding voting securities of any one class of securities of
such issuer. All securities of a foreign government and its agencies will be
treated as a single issuer for purposes of this restriction.

2. Invest more than 25% of the Portfolio's assets in the securities of
issuers primarily engaged in the same industry. Utilities will be divided
according to their services, for example, gas, gas transmission, electric and
telephone, and each will be considered a separate industry for purposes of
this restriction, provided that there shall be no limitation on the purchase
of obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, or of certificates of deposit and bankers' acceptances.
For purposes of this restriction, (a) the government of a country, other than
the United States, will be viewed as one industry; and (b) all supranational
organizations together will be viewed as one industry.

3. Purchase or sell physical commodities other than foreign currencies
unless acquired as a result of ownership of securities (but this shall not
prevent the Portfolio from purchasing or selling options, futures, swaps and
forward contracts or from investing in securities or other instruments backed
by physical commodities).

4. Invest directly in real estate or interests in real estate; however,
the Portfolio may own securities or other instruments backed by real estate,
including mortgage-backed securities, or debt or equity securities issued by
companies engaged in those businesses.

5. Lend any security or make any other loan if, as a result, more than 30%
of its total assets would be lent to other parties (but this limitation does
not apply to purchases of commercial paper, debt securities or to repurchase
agreements).

6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the
disposition of its portfolio securities.

Furthermore, the Portfolio has adopted the following non-fundamental
investment restrictions which may be changed by the Board of Directors of the
Fund without shareholder or Policyholder approval:

(A) The Portfolio may not (i) enter into any futures contracts or options
on futures contracts for purposes other than bona fide hedging transactions
within the meaning of Commodity Futures Trading Commission regulations if the
aggregate initial margin deposits and premiums required to establish
positions in futures contracts and related options that do not fall within
the definition of bona fide hedging transactions would exceed 5% of the fair
market value of the Portfolio's net assets, after taking into account
unrealized profits and losses on such contracts it has entered into and (ii)
enter into any futures contracts or options on futures contracts if the
aggregate amount of the Portfolio's commitments under outstanding futures
contracts positions and options on futures contracts would exceed the market
value of its total assets.

(B) The Portfolio may not sell securities short, unless it owns or has the
right to obtain securities equivalent in kind and amount to the securities
sold short and provided that transactions in options, swaps and forward
futures contracts are not deemed to constitute selling securities short.

(C) The Portfolio may not purchase securities on margin, except that the
Portfolio may obtain such short-term credits as are necessary for the
clearance of transactions, provided that margin payments and other deposits
in connection with transactions in options, futures, swaps and forward
contracts shall not be deemed to constitute purchasing securities on margin.

(D) The Portfolio may not purchase securities of other investment
companies, other than a security acquired in connection with a merger,
consolidation, acquisition, reorganization or offer of exchange and except as
otherwise permitted under the 1940 Act. Investments by the Portfolio in GEI
Short-Term Investment Fund, a private investment fund advised by GE
Investment Management Incorporated ("GEIM"), created specifically to serve as
a vehicle for the collective investment of cash balances of the Portfolio and
other accounts advised by GEIM or General Electric Investment Corporation
("GEIC"), are not subject to this restriction, pursuant to and in accordance
with necessary regulatory approvals.

<PAGE>
(E) The Portfolio may not mortgage or pledge any securities owned or held
by the Portfolio in amounts that exceed, in the aggregate, 15% of the
Portfolio's net assets, provided that this limitation does not apply to
reverse repurchase agreements or in the case of assets deposited to margin or
guarantee positions in futures, options, swaps or forward contracts or the
segregation of assets in connection with such contracts.

(F) The Portfolio may borrow money only for temporary or emergency
purposes (not for leveraging or investment) in an amount not exceeding 33-1/3%
of the value of the Portfolio's total assets (including the amount
borrowed) less liabilities (other than borrowings). Any borrowings that
exceed 33-1/3% of the value of the Portfolio's total assets by reason of a
decline in net assets will be reduced within three business days to the
extent necessary to comply with the 33-1/3% limitation. This policy shall
not prohibit reverse repurchase agreements or deposits of assets to margin or
guarantee positions in futures, options, swaps or forward contracts, or the
segregation of assets in connection with such contracts. (California
insurance regulations currently limit such borrowings to 25% of total assets.
See the Prospectus for the Fund's Portfolios, page 26.)

(G) The Portfolio may not invest more than 15% of its net assets in
illiquid securities. This does not include securities eligible for resale
pursuant to Rule 144A under the Securities Act of 1933 Act or any other
securities as to which a determination as to liquidity has been made pursuant
to guidelines adopted by the Board of Directors, as permitted under the 1940
Act.

(H) The Portfolio may not invest in companies for the purpose of
exercising control or management.

(I) The Portfolio may not issue senior securities, except as permitted by
the 1940 Act.

With respect to investment restriction 2. above, the Portfolio may use the
industry classifications reflected by the S&P 500 Composite Stock Index, if
applicable at the time of determination. For all other Portfolio holdings,
the Portfolio may use the Directory of Companies Required to File Annual
Reports with the SEC and Bloomberg Inc. In addition, the Portfolio may select
its own industry classifications, provided such classifications are
reasonable.

/diamond/ GLOBAL PORTFOLIO

The Portfolio may not, as a matter of fundamental policy:

1. (a) With respect to 75% of the Portfolio's assets, invest in the
securities (other than Government securities as defined in the 1940 Act) of
any one issuer if immediately thereafter, more than 5% of the Portfolio's
total assets would be invested in securities of that issuer; or (b) with
respect to 100% of the Portfolio's assets, own more than either (i) 10% in
principal amount of the outstanding debt securities of an issuer, or (ii) 10%
of the outstanding voting securities of an issuer, except that such
restrictions shall not apply to Government securities, bank money market
instruments or bank repurchase agreements.

2. Invest more than 25% of the Portfolio's assets in the securities of
issuers primarily engaged in the same industry. Utilities will be divided
according to their services; for example, gas, gas transmission, electric and
telephone, and each will be considered a separate industry for purposes of
this restriction, provided that there shall be no limitation on the purchase
of obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, or of certificates of deposit and bankers' acceptances.

4. Invest directly in real estate or interests in real estate; however,
the Portfolio may own debt or equity securities issued by companies engaged
in those businesses.

6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the
disposition of its portfolio securities. Furthermore, the Portfolio has
adopted the following

<PAGE>

non-fundamental investment restrictions which may be changed by the Board of
Directors of the Fund without shareholder or Policyholder approval:

(A) The Portfolio's investment in warrants, valued at the lower of cost or
market, may not exceed 5% of the value of its net assets. Included within
that amount, but not to exceed 2% of the value of the Portfolio's net assets,
may be warrants that are not listed on the New York or American Stock
Exchange. Warrants acquired by the Portfolio in units or attached to
securities shall be deemed to be without value.

(B) The Portfolio may not (i) enter into any futures contracts or options
on futures contracts for purposes other than bona fide hedging transactions
within the meaning of Commodity Futures Trading Commission regulations if the
aggregate initial margin deposits and premiums required to establish
positions in futures contracts and related options that do not fall within
the definition of bona fide hedging transactions would exceed 5% of the fair
market value of the Portfolio's net assets, after taking into account
unrealized profits and losses on such contracts it has entered into and (ii)
enter into any futures contracts or options on futures contracts if the
aggregate amount of the Portfolio's commitments under outstanding futures
contracts positions and options on futures contracts would exceed the market
value of its total assets.

(C) The Portfolio may not sell securities short, unless it owns or has the
right to obtain securities equivalent in kind and amount to the securities
sold short and provided that transactions in options, swaps and forward
futures contracts are not deemed to constitute selling securities short.

(D) The Portfolio may not purchase securities on margin, except that the
Portfolio may obtain such short-term credits as are necessary for the
clearance of transactions, provided that margin payments and other deposits
in connection with transactions in options, futures, swaps and forward
contracts shall not be deemed to constitute purchasing securities on margin.

(E) The Portfolio may not (i) purchase securities of other investment
companies, except in the open market where no commission except the ordinary
broker's commission is paid, or (ii) purchase or retain securities issued by
other open-end investment companies.

Limitations (i) and (ii) do not apply to money market funds or to securities
received as dividends, through offers of exchange, or as a result of a
consolidation, merger or other reorganization.

(F) The Portfolio may not mortgage or pledge any securities owned or held
by the Portfolio in amounts that exceed, in the aggregate, 15% of the
Portfolio's net assets, provided that this limitation does not apply to
reverse repurchase agreements or in the case of assets deposited to margin or
guarantee positions in futures, options, swaps or forward contracts or the
segregation of assets in connection with such contracts.

(G) The Portfolio may not invest directly in oil, gas, or other mineral
development or exploration programs or leases; however, the Portfolio may own
debt or equity securities of companies engaged in those businesses.

(H) The Portfolio may borrow money only for temporary or emergency
purposes (not for leveraging or investment) in an amount not exceeding 25% of
the value of the Portfolio's total assets (including the amount borrowed)
less liabilities (other than borrowings). Any borrowings that exceed 25% of
the value of the Portfolio's total assets by reason of a decline in net
assets will be reduced within three business days to the extent necessary to
comply with the 25% limitation. This policy shall not prohibit reverse
repurchase agreements or deposits of assets to margin or guarantee positions
in futures, options, swaps or forward contracts, or the segregation of assets
in connection with such contracts.

(I) The Portfolio may not invest more than 15% of its net assets in
illiquid securities. This does not include securities eligible for resale
pursuant to Rule 144A under the Securities Act of 1933 Act or any other
securities as to which the Board of Directors has made a determination as to
liquidity, as permitted under the 1940 Act.

(J) The Portfolio may not invest in companies for the purpose of
exercising control or management.

(K) The Portfolio may not issue senior securities, except as permitted by
the 1940 Act.

<PAGE>

/diamond/ GROWTH PORTFOLIO, C.A.S.E.
GROWTH PORTFOLIO AND BOND
PORTFOLIO

A Portfolio may not, as a matter of fundamental policy:

1. With respect to 75% of the Portfolio's total assets, purchase the
securities of any one issuer (other than cash items and "Government
securities" as defined in the 1940 Act) if immediately after and as a result
of such purchase (a) the value of the holdings of the Portfolio in the
securities of such issuer exceeds 5% of the value of the Portfolio's total
assets, or (b) the Portfolio owns more than 10% of the outstanding voting
securities of any one class of securities of such issuer.

2. Invest more than 25% (15% for C.A.S.E. Growth Portfolio) of the value
of the Portfolio's assets in any particular industry (other than Government
securities).

3. Purchase or sell physical commodities other than foreign currencies
unless acquired as a result of ownership of securities (but this restriction
shall not prevent the Portfolio from purchasing or selling options, futures
contracts, caps, floors and other derivative instruments, engaging in swap
transactions or investing in securities or other instruments backed by
physical commodities).

4. Invest directly in real estate or interests in real estate, including
limited partnership interests; however, the Portfolio may own debt or equity
securities issued by companies engaged in those businesses.

5. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the
disposition of portfolio securities of the Portfolio.

6. Lend any security or make any other loan if, as a result, more than 25%
of its total assets would be lent to other parties (but this limitation does
not apply to purchases of commercial paper, debt securities or to repurchase
agreements).

Furthermore, the Portfolios have adopted the following non-fundamental
investment restrictions which may be changed by the Board of Directors of the
Fund without shareholder or Policyholder approval:

(A) A Portfolio may not, as a matter of non-fundamental policy: (i) enter
into any futures contracts or options on futures contracts for purposes other
than bona fide hedging transactions within the meaning of Commodity Futures
Trading Commission regulations if the aggregate initial margin deposits and
premiums required to establish positions in futures contracts and related
options that do not fall within the definition of bona fide hedging
transactions would exceed 5% of the fair market value of the Portfolio's net
assets, after taking into account unrealized profits and losses on such
contracts it has entered into and (ii) enter into any futures contracts or
options on futures contracts if the aggregate amount of the Portfolio's
commitments under outstanding futures contracts positions and options on
futures contracts would exceed the market value of its total assets.

(B) A Portfolio may not mortgage or pledge any securities owned or held by
the Portfolio in amounts that exceed, in the aggregate, 15% of the
Portfolio's net assets, provided that this limitation does not apply to
reverse repurchase agreements or in the case of assets deposited to provide
margin or guarantee positions in options, futures contracts, swaps, forward
contracts or other derivative instruments or the segregation of assets in
connection with such transactions.

(C) A Portfolio may not sell securities short, unless it owns or has the
right to obtain securities equivalent in kind and amount to the securities
sold short, and provided that transactions in options, futures contracts,
swaps, forward contracts and other derivative instruments are not deemed to
constitute selling securities short.

(D) A Portfolio may not purchase securities on margin, except that a
Portfolio may obtain such short-term credits as are necessary for the
clearance of transactions, and provided that margin payments and other
deposits made in connection with transactions in options, futures contracts,
swaps, forward contracts, and other derivative instruments shall not be
deemed to constitute purchasing securities on margin.

(E) A Portfolio may borrow money only for temporary or emergency purposes
(not for leveraging or investment) in an amount not exceeding 25% of the
value of the Portfolio's total assets (including the amount borrowed) less

<PAGE>

liabilities (other than borrowings). Any borrowings that exceed 25% of the
value of the Portfolio's total assets by reason of a decline in net assets
will be reduced within three business days to the extent necessary to comply
with the 25% restriction. This policy shall not prohibit reverse repurchase
agreements or deposits of assets to provide margin or guarantee positions in
connection with transactions in options, future contracts, swaps, forward
contracts, or other derivative instruments or the segregation of assets in
connection with such transactions.

(F) A Portfolio may not invest more than 15% of its net assets in illiquid
securities. This does not include securities eligible for resale pursuant to
Rule 144A under the Securities Act of 1933 Act or any securities for which
the Board of Directors or the Sub-Adviser has made a determination of
liquidity, as permitted under the 1940 Act.

(G) A Portfolio may not (i) purchase securities of other investment
companies, except in the open market where no commission except the ordinary
broker's commission is paid, or (ii) purchase or retain securities issued by
other open-end investment companies. Restrictions (i) and (ii) do not apply
to money market funds or to securities received as dividends, through offers
to exchange, or as a result of reorganization, consolidation, or merger. If
the Portfolio invests in a money market fund, the Investment Adviser will
reduce its advisory fee by the amount of any investment advisory or
administrative service fees paid to the investment manager of the money
market fund.

(H) A Portfolio may not invest directly in oil, gas or other mineral
development or exploration programs or leases; however, the Portfolio may own
debt or equity securities of companies engaged in those businesses.

(I) A Portfolio may not invest more than 25% of its net assets at the time
of purchase in the securities of foreign issuers and obligors.

(J) A Portfolio may not invest in companies for the purpose of exercising
control or management.

(K) A Portfolio may not issue senior securities, except as permitted by
the 1940 Act.

/diamond/ U.S. EQUITY PORTFOLIO

The Portfolio may not, as a matter of fundamental policy:

2. Purchase any security that would cause more than 25% of the value of
the Portfolio's total assets to be invested in the securities of issuers
conducting their principal business activities in the same industry; provided
that there shall be no limit on the purchase of U.S. government securities
(as defined in the 1940 Act). For purposes of this restriction, (a) the
government of a country, other than the United States, will be viewed as one
industry; and (b) all supranational organizations together will be viewed as
one industry.

3. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent the
Portfolio from purchasing or selling options, futures, swaps and forward
contracts or from investing in securities or other instruments backed by
physical commodities).

4. Purchase or sell real estate (but this shall not prevent the Portfolio
from investing in securities or other instruments backed by real-estate,
including mortgage-backed securities, or securities of companies engaged in
the real estate business).

6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the
disposition of its portfolio securities.

<PAGE>

7. Borrow money or issue senior securities (as defined in the 1940 Act),
except that the Portfolio may borrow money from banks for temporary or
emergency purposes (not for leveraging or investment) in an aggregate amount
not exceeding 33-1/3% of the value of its total assets (including the amount
borrowed) less liabilities (other than borrowings) at the time the borrowing
is made. Whenever borrowings, including reverse repurchase agreements, of 5%
or more of the Portfolio's total assets are outstanding, the Portfolio will
not purchase securities. (California insurance regulations currently limit
such borrowings to 25% of total assets. See the Prospectus for the Portfolios
of the Fund, page 26.)

Furthermore, the Portfolio has adopted the following non-fundamental
investment restrictions which may be changed by the Board of Directors of the
Fund without shareholder or Policyholder approval:

(A) The Portfolio may not sell securities short, unless it owns or has the
right to obtain securities equivalent in kind and amount of the securities
sold short.

(B) The Portfolio may not purchase securities on margin, except that the
Portfolio may obtain such short-term credits as are necessary for clearance
of transactions. (For purposes of this restriction, the deposit or payment of
initial or variation margin in connection with futures contracts, financial
futures contracts or related options, and options on securities, options on
securities indexes and options on currencies will not be deemed to be a
purchase of securities on margin by the Portfolio.)

(C) The Portfolio may not purchase securities of other investment
companies, other than a security acquired in connection with a merger,
consolidation, acquisition, reorganization or offer of exchange and except as
otherwise permitted under the 1940 Act. Investments by the Portfolio in GEI
Short-Term Investment Fund, a private investment fund advised by GE
Investment Management Incorporated ("GEIM"), created specifically to serve as
a vehicle for the collective investment of cash balances of the Portfolio and
other accounts advised by GEIM or General Electric Investment Corporation
("GEIC") are not subject to this restriction, pursuant to and in accordance
with necessary regulatory approvals.

(D) The Portfolio may not invest more than 15% of its net assets in
illiquid securities. For purposes of this restriction, illiquid securities
are securities that cannot be disposed of by the Portfolio within seven days
in the ordinary course of business at approximately the amount at which the
Portfolio has valued the securities. This Restriction does not include
securities eligible for resale pursuant to Rule 144A under the Securities Act
of 1933 Act or any other securities as to which a determination as to
liquidity has been made pursuant to guidelines adopted by the Board of
Directors, as permitted under the 1940 Act.

(E) The Portfolio may not purchase restricted securities if more than 10%
of the total assets of the Portfolio would be invested in restricted
securities. Restricted securities are securities that are subject to
contractual or legal restrictions on transfer, excluding for purposes of this
restriction, restricted securities that are eligible for resale pursuant the
Rule 144A under the Securities Act of 1933, as amended ("Rule 144A
Securities), that have been determined to be liquid under guidelines
established by the Fund's Board of Directors. In no event, will the
Portfolio's investment in illiquid and non-publicly traded securities, in the
aggregate, exceed 15% of its net assets.

(F) The Portfolio may not invest in companies for the purpose of
exercising control or management, except to the extent that exercise by the
Fund of its rights under agreements related to Portfolio securities would be
deemed to constitute such control.

(G) The Portfolio may not purchase or sell put options, call options,
spreads or combinations of put options, call options and spreads, except that
the Portfolio may purchase and sell covered put and call options on
securities and stock indexes, and futures contracts and options on futures
contracts.

<PAGE>

/diamond/ VALUE EQUITY PORTFOLIO

The Portfolio may not, as a matter of fundamental policy:

3. Make loans except (i) by purchasing debt securities in accordance with
its investment objectives and policies or by entering into repurchase
agreements or (ii) by lending the Portfolio securities to banks, brokers,
dealers and other financial institutions so long as such loans are not
inconsistent with the 1940 Act or the rules and regulations or
interpretations of the Securities and Exchange Commission (the "SEC")
thereunder.

4. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments.

5. Purchase or sell real estate or real estate limited partnerships (but
this shall not prevent the Portfolio from investing in securities or other
instruments backed by real estate, including mortgage-backed securities, or
securities of companies engaged in the real estate business).

6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the
disposition of its portfolio securities.

Furthermore, the Portfolio has adopted the following non-fundamental
investment restrictions which may be changed by the Board of Directors of the
Fund without shareholder or Policyholder approval:

(A) The Portfolio may not purchase on margin or sell short.

(B) The Portfolio may not invest more than an aggregate of 15% of the net
assets of the Portfolio, determined at the time of investment, in illiquid
securities, subject to legal or contractual restrictions on resale or
securities for which there are no readily available markets.

(D) The Portfolio may not write or acquire options or interests, or invest
directly, in oil, gas, mineral leases or other mineral exploration or
development programs or leases; however, the Portfolio may own debt or equity
securities of companies engaged in these businesses.

(E) The Portfolio may not pledge, mortgage or hypothecate any of its
assets to an extent greater than 10% of its total assets at fair market
value.

(F) The Portfolio may borrow money only from banks for temporary or
emergency purposes (not for leveraging or investment) in an amount not
exceeding 10% of the value of the Portfolio's total assets (including the
amount borrowed) less liabilities (other than borrowings). Any borrowings
that exceed 10% of the value of the Portfolio's total assets by reason of a
decline in net assets will be reduced within three business days to the
extent necessary to comply with the 10% limitation. The Portfolio may not
purchase additional securities when borrowings exceed 5% of total assets.

(G) The Portfolio may not (i) purchase securities of other investment
companies, except in the open market where no commission except the ordinary
broker's commission is paid, or (ii) purchase or retain securities issued by
other open-end investment companies. Limitations (i) and (ii) do not apply to
money market funds or to securities received as dividends, through offers of
exchange, or as a result of a consolidation, merger or other reorganization.

(H) The Portfolio may not issue senior securities, except as permitted by
the 1940 Act.

<PAGE>

/diamond/ GLOBAL SECTOR PORTFOLIO

The Portfolio may not, as a matter of fundamental policy:

1. With respect to seventy-five percent (75%) of the Portfolio's total
assets, purchase the securities of any one issuer, except cash items and
"government securities" as defined under the 1940 Act, if the purchase would
cause the Portfolio to have more than 5% of the value of its total assets
invested in the securities of such issuer or to own more than 10% of the
outstanding voting securities of such issuer.

2. Borrow money from banks or issue senior securities (as defined in the
1940 Act), except that the Portfolio may borrow money from banks for
temporary or emergency purposes (not for leveraging or investment) and may
enter into reverse repurchase agreements in an aggregate amount not exceeding
33-1/3% of the value of its total assets (including the amount borrowed)
less liabilities (other than borrowings). Any borrowings that come to exceed
33-1/3% of the value of the Portfolio's total assets by reason of a decline
in net assets will be reduced within three business days to the extent
necessary to comply with the 33-1/3% limitation. This restriction shall not
prohibit deposits of assets to margin or guarantee positions in futures,
options, swaps or forward contracts, or the segregation of assets in
connection with such contracts.

3. Invest directly in real estate or interests in real estate; however,
the Portfolio may own debt or equity securities issued by companies engaged
in those businesses.

4. Purchase or sell physical commodities other than gold or foreign
currencies unless acquired as a result of ownership of securities (but this
shall not prevent the Portfolio from purchasing or selling options, futures,
swaps and forward contracts or from investing in securities or other
instruments backed by physical commodities).

5. Lend any security or make any other loan if, as a result, more than
33-1/3% of its total assets would be lent to other parties (but this limitation
does not apply to purchases of commercial paper, debt securities or to
repurchase agreements).

6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the
disposition of portfolio securities of the Portfolio.

7. Invest more than 25% of the value of its total assets in any particular
industry (other than government securities).

With respect to restriction no. 2, above, in accordance with the requirements
of current California insurance regulations, the Portfolio will restrict
borrowings to no more than 10% of total assets, except that the Portfolio may
temporarily borrow amounts equal to as much as 25% of total assets if such
borrowing is necessary to meet redemptions. If California's insurance
regulations are changed at some future time to permit borrowings in excess of
10% but less than 33-1/3% of total assets, the Portfolio may conduct
borrowings in accordance with such revised limits.

Furthermore, the Portfolio has adopted the following non-fundamental
investment restrictions which may be changed by the Board of Directors of the
Fund without shareholder or Policyholder approval:

(A) The Portfolio will not (i) enter into any futures contracts or options
on futures contracts if immediately thereafter the aggregate margin deposits
on all outstanding futures contracts positions held by the Portfolio and
premiums paid on outstanding options on futures contracts, after taking into
account unrealized profits and losses, would exceed 5% of the market value of
the total assets of the Portfolio, or (ii) enter into any futures contracts
if the aggregate net amount of the Portfolio's commitments under outstanding
futures contracts positions of the Portfolio would exceed the market value of
the total assets of the Portfolio.

(B) The Portfolio may not sell securities short, unless it owns or has the
right to obtain securities equivalent in kind and amount to the securities
sold short without the payment of any additional consideration therefor, and
provided that transactions in options, swaps and forward futures contracts
are not deemed to constitute selling securities short.

(C) The Portfolio may not purchase securities on margin, except that the
Portfolio may obtain such short-term credits as are necessary for the
clearance of transactions, and provided that margin payments and other
deposits in connection with transactions in options, futures,

<PAGE>

swaps and forward contracts shall not be deemed to constitute purchasing
securities on margin.

(D) The Portfolio may not (i) purchase securities of closed-end investment
companies, except in the open market where no commission except the ordinary
broker's commission is paid, or (ii) purchase or retain securities issued by
other open-end investment companies. Limitations (i) and (ii) do not apply to
money market funds, funds that are the only practical means, or one of the
few practical means, of investing in a particular emerging country, or to
securities received as dividends, through offers of exchange, or as a result
of a reorganization, consolidation, or merger.

(E) The Portfolio may not mortgage or pledge any securities owned or held
by the Portfolio in amounts that exceed, in the aggregate, 15% of the
Portfolio's net asset value, provided that this limitation does not apply to
reverse repurchase agreements or in the case of assets deposited to margin or
guarantee positions in futures, options, swaps or forward contracts or placed
in a segregated account in connection with such contracts.

(F) The Portfolio may not purchase securities of any issuer with a record
of less than three years' continuous operation, including that of
predecessors (other than U.S. government agencies and instrumentalities or
instruments guaranteed by an entity with a record of more than three years'
continuous operation, including that of predecessors), if such purchase would
cause the Portfolio's investments in all such issuers to exceed 5% of the
Portfolio's total assets taken at market value at the time of such purchase.

(H) The Portfolio may not purchase any security or enter into a repurchase
agreement if, as a result, more than 15% of its net assets would be invested
in any combination of: (i) repurchase agreements not entitling the holder to
payment of principal and interest within seven days, and (ii) securities that
are illiquid by virtue of legal or contractual restrictions on resale or the
absence of a readily available market. The Board of Directors, or the
Portfolio's Co-Sub-Advisers acting pursuant to authority delegated by the
Board of Directors, may determine that a readily available market exists for
securities eligible for resale pursuant to Rule 144A under the Securities Act
of 1933 Act, or any successor to such rule. According to the determination,
such securities would not be subject to the foregoing limitation.

(I) The Portfolio may not invest in companies for the purpose of
exercising control or management, except to the extent that exercise by the
Fund of its rights under agreements related to Portfolio securities would be
deemed to constitute such control.

With respect to investment restriction (H) above, the Fund's Board of
Directors has delegated to the Co-Sub-Advisers the authority to determine
that a liquid market exists for securities eligible for resale pursuant to
Rule 144A under the Securities Act of 1933 Act, or any successor to such rule
and that such securities are not subject to such restriction. Under
guidelines established by the Board of Directors, the Co-Sub-Advisers will
consider the following factors, among others, in making this determination:
(1) the frequency of trades and quotes for the security; (2) the number of
dealers willing to purchase or sell the security and the number of other
potential purchasers; (3) the willingness of dealers to undertake to make a
market in the security; and (4) the nature of the security and the nature of
marketplace trades (E.G., the time needed to dispose of the security, the
method of soliciting offers and the mechanics of transfer).

/diamond/ TACTICAL ASSET ALLOCATION
PORTFOLIO

The Portfolio may not, as a matter of fundamental policy:

2. Invest more than 25% of the Portfolio's assets in the securities of
issuers primarily

<PAGE>
engaged in the same industry. Utilities will be divided according to their
services, for example, gas, gas transmission, electric and telephone, and
each will be considered a separate industry for purposes of this restriction.
In addition, there shall be no limitation on the purchase of obligations
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, or of certificates of deposit and bankers' acceptances.

3. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments.

6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the
disposition of its portfolio securities.

Furthermore, the Portfolio has adopted the following non-fundamental
investment restrictions which may be changed by the Board of Directors of the
Fund without shareholder or Policyholder approval:

(A) The Portfolio's investment in warrants valued at the lower of cost or
market, may not exceed 5% of the value of its net assets. Included within
that amount, but not to exceed 2% of the value of the Portfolio's net assets,
may be warrants that are not listed on the New York or American Stock
Exchange. Warrants acquired by the Portfolio in units or attached to
securities shall be deemed to be without value.

(B) The Portfolio may not sell securities short, unless it owns or has the
right to obtain securities equivalent in kind and amount to the securities
sold short.

(C) The Portfolio may not purchase securities on margin, except that the
Portfolio may obtain such short-term credits as are necessary for the
clearance of transactions.

(E) The Portfolio may not mortgage or pledge any securities owned or held
by the Portfolio in amounts that exceed, in the aggregate, 15% of the
Portfolio's net assets.

(G) The Portfolio may not invest in companies for the purpose of
exercising control or management.

(H) The Portfolio may not issue senior securities, except as permitted by
the 1940 Act.

(I) The Portfolio may not invest in securities of foreign issuers
denominated in foreign currency and not publicly traded in the United States
if at the time of acquisition more than 25% of the Portfolio's total assets
would be invested in such securities. See "Foreign Securities", p. 20.

(J) The Portfolio may borrow money only for temporary or emergency
purposes (not for leveraging or investment) in excess of 25% of the value of
the Portfolio's total assets (including the amount borrowed) less liabilities
(other than borrowings). Any borrowings that exceed 25% of the value of the
Portfolio's total assets by reason of a decline in net assets will be reduced
within three business days to the extent necessary to comply with the 25%
limitation.

/diamond/ EQUITY-INCOME PORTFOLIO

The Portfolio may not, as a matter of fundamental policy:

<PAGE>

total assets, or (b) the Portfolio owns more than 10% of the outstanding
voting securities of such issuer.

2. Invest more than 25% of the Portfolio's assets in the securities of
issuers primarily engaged in the same industry. Utilities will be divided
according to their services, for example, gas, gas transmission, electric and
telephone, and each will be considered a separate industry for purposes of
this restriction. In addition, there shall be no limitation on the purchase
of obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, or of certificates of deposit and bankers' acceptances.

6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the
disposition of its portfolio securities.

Furthermore, the Portfolio has adopted the following non-fundamental
investment restrictions which may be changed by the Board of Directors of the
Fund without shareholder or Policyholder approval:

(B) The Portfolio may not sell securities short, unless it owns or has the
right to obtain securities equivalent in kind and amount to the securities
sold short, and provided that margin payments and other deposits in
connection with transactions in options, swaps and forward futures contracts
are not deemed to constitute selling securities short.

(C) The Portfolio may not purchase securities on margin, except that the
Portfolio may obtain such short-term credits as are necessary for the
clearance of transactions, and that margin payments and other deposits in
connection with transactions in options, futures, swaps and forward contracts
shall not be deemed to constitute purchasing securities on margin.

Limitations (i) and (ii) do not apply to money market funds or to securities
received as dividends, through offers of exchange, or as a result of a
consolidation, merger or other reorganization.

(E) The Portfolio may not mortgage or pledge any securities owned or held
by the Portfolio in amounts that exceed, in the aggregate, 15% of the
Portfolio's net assets, provided that this limitation does not apply in the
case of assets deposited to margin or guarantee positions in options, futures
contracts and options on futures contracts or placed in a segregated account
in connection with such contracts.

(G) The Portfolio may borrow money only for temporary or emergency
purposes (not for leveraging or investment) in an amount not exceeding 25% of
the value of the Portfolio's total assets (including the amount borrowed)
less liabilities (other than borrowings). Any borrowings that exceed 25% of
the value of the Portfolio's total assets by reason of a decline in net
assets will be reduced within three business days to the extent necessary to
comply with the 25% limitation.

(H) The Portfolio may not invest more than 15% of its net assets in
illiquid securities. This

<PAGE>
does not include securities eligible for resale pursuant to Rule 144A under
the Securities Act of 1933 Act or any other securities as to which the Board
of Directors has made a determination as to liquidity, as permitted under the
1940 Act.

(I) The Portfolio may not invest in companies for the purpose of
exercising control or management.

(J) The Portfolio may not issue senior securities, except as permitted by
the 1940 Act.

(K) The Portfolio may not invest in securities of foreign issuers
denominated in foreign currency and not publicly traded in the United States
if at the time of acquisition more than 10% of the Portfolio's total assets
would be invested in such securities.

/diamond/ UTILITY PORTFOLIO

The Portfolio may not, as a matter of fundamental policy:

2. Purchase or sell commodities. However, the Portfolio may purchase put
options on portfolio securities and on financial futures contracts. In
addition, the Portfolio reserves the right to hedge the Portfolio by entering
into financial futures contracts and to sell calls on financial futures
contracts.

3. Purchase or sell real estate, although it may invest in the securities
of companies whose business involves the purchase or sale of real estate or
in securities which are secured by real estate or interests in real estate.

4. Lend any of its assets except portfolio securities up to one-third of
the value of its total assets. This shall not prevent the purchase or holding
of corporate bonds, debentures, notes, certificates of indebtedness or other
debt securities of an issuer, repurchase agreements, or other transactions
which are permitted by the Portfolio's investment objective and policies.

5. Underwrite any issue of securities, except as it may be deemed to be an
underwriter under the 1933 Act in connection with the sale of restricted
securities which the Portfolio may purchase pursuant to its investment
objective and policies.

Furthermore, the Portfolio has adopted the following non-fundamental
investment restrictions which may be changed by the Board of Directors of the
Fund without shareholder or Policyholder approval:

(A) The Portfolio will not sell securities short unless: (i) during the
time the short position is open, it owns an equal amount of the securities
sold or securities readily and freely convertible into or exchangeable,
without payment of additional consideration, for securities of the same issue
as, and equal in amount to, the securities sold short; and (ii) not more than
10% of the Portfolio's net assets (taken at current value) is held as
collateral for such sales at any one time.

(B) The Portfolio will not purchase securities on margin, other than in
connection with the purchase of put options on financial futures contracts,
but may obtain such short-term credits as may be necessary for the clearance
of transactions.

(C) The Portfolio will not invest more than 15% of its net assets in
illiquid securities. This does not include securities eligible for resale
pursuant to Rule 144A under the Securities Act of 1933 Act or any securities
for which the Board of Directors or the Sub-Adviser has made a determination
of liquidity, as permitted under the 1940 Act.

(D) The Portfolio will not purchase interests in oil, gas, or other
mineral exploration or development programs or leases, although it may invest
in or sponsor such programs.

(E) The Portfolio will not borrow money or engage in reverse repurchase
agreements for investment leverage, but rather as a temporary, extraordinary,
or emergency measure to facilitate management of the Portfolio by enabling
the Portfolio to meet redemption requests when the liquidation of portfolio
securities is deemed to be inconvenient or disadvantageous. The Portfolio
will not purchase any securities while any borrowings are outstanding.
However, during the period any reverse repurchase agreements are outstanding,
but only to the extent necessary to

<PAGE>

assure completion of the reverse repurchase agreements, the Portfolio will
restrict the purchase of portfolio instruments to money market instruments
maturing on or before the expiration date of the reverse repurchase
agreements.

(F) The Portfolio will not purchase or retain the securities of any issuer
if the officers and Directors of the Portfolio or its Sub-Adviser owning
individually more than 1/2 of 1% of the issuer's securities together own more
than 5% of the issuer's securities.

(G) The Portfolio will not purchase securities of a company for the
purpose of exercising control or management. However, the Portfolio will
acquire no more than 10% of the voting securities of an issuer and may
exercise its voting power in the Portfolio's best interest. From time to
time, the Portfolio, together with other investment companies advised by
affiliates or subsidiaries of Federated Investors, may together buy and hold
substantial amounts of a company's voting stock. All such stock may be voted
together. In some cases, the Portfolio and the other investment companies
might collectively be considered to be in control of the company in which
they have invested.

(H) The Portfolio will not issue senior securities, except that the
Portfolio may borrow money and engage in reverse repurchase agreements in
amounts up to one-third of the value of its net assets, including the amounts
borrowed.

(I) The Portfolio will not purchase the securities of any issuer (other
than the U.S. Government, its agencies, or instrumentalities or instruments
secured by securities of such issuers, such as repurchase agreements or cash
or cash items) if, as a result, more than 5% of the value of its total assets
would be invested in the securities of such issuer, or acquire more than 10%
of any class of voting securities of any issuer. For these purposes the
Portfolio takes all common stock and all preferred stock of an issuer each as
a single class, regardless of priorities, series, designations, or other
differences.

(J) The Portfolio will not write call options on securities unless the
securities are held in the Portfolio's portfolio or unless the Portfolio is
entitled to them in deliverable form without further payment or after
segregating cash in the amount of any further payment. The Portfolio will not
purchase put options on securities unless the securities are held in the
Portfolio's portfolio.

/diamond/ BALANCED PORTFOLIO

The Portfolio may not, as a matter of fundamental policy:

2. Invest more than 25% of the Portfolio's assets in the securities of
issuers primarily engaged in the same industry. Utilities will be divided
according to their services, for example, gas, gas transmission, electric and
telephone, and each will be considered a separate industry for purposes of
this restriction. In addition, there shall be no limitation on the purchase
of obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, or of certificates of deposit and bankers' acceptances.

5. Lend any security or make any other loan if, as a result, more than 25%
of its total assets would be lent to other parties (but this limitation does
not apply to purchase of commercial paper or debt securities).

6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the
disposition of its portfolio securities.

Furthermore, the Portfolio has adopted the following non-fundamental
investment restrictions

<PAGE>

which may be changed by the Board of Directors of the Fund without
shareholder or Policyholder approval:

(B) The Portfolio may not sell securities short, unless it owns or has the
right to obtain securities equivalent in kind and amount to the securities
sold short.

(C) The Portfolio may not purchase securities on margin, except that the
Portfolio may obtain such short-term credits as are necessary for the
clearance of transactions.

(E) The Portfolio may not mortgage or pledge any securities owned or held
by the Portfolio in amounts that exceed, in the aggregate, 15% of the
Portfolio's net assets.

(G) The Portfolio may borrow money only for temporary or emergency
purposes (not for leveraging or investment) in excess of 25% of the value of
the Portfolio's total assets (including the amount borrowed) less liabilities
(other than borrowings). Any borrowings that exceed 25% of the value of the
Portfolio's total assets by reason of decline in net assets will be reduced
within three business days to the extent necessary to comply with the 25%
limitation.

(I) The Portfolio may not invest in companies for the purpose of
exercising control or management.

(J) The Portfolio may not issue senior securities, except as permitted by
the 1940 Act.

(K) The Portfolio may not invest in securities of foreign issuers
denominated in foreign currency and not publicly traded in the United States
if at the time of acquisition more than 25% of the Portfolio's total assets
would be invested in such securities. See "Foreign Securities", p. 20.

/diamond/ SHORT-TO-INTERMEDIATE
GOVERNMENT PORTFOLIO

The Portfolio may not, as a matter of fundamental policy:

2. Invest more than 25% of the Portfolio's assets in the securities of
issuers primarily engaged in the same industry. Utilities will be divided
according to their services; for example, gas, gas transmission, electric and
telephone, and each will be considered a separate industry for purposes of
this restriction, provided that there shall be no limitation on the purchase
of obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, or of certificates of deposit and bankers' acceptances.

3. Purchase or sell physical commodities unless acquired as a result of
ownership of

17
<PAGE>
securities or other instruments (but this shall not prevent the Portfolio from
investing in securities or other instruments backed by physical commodities).

6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the
disposition of its portfolio securities.

Furthermore, the Portfolio has adopted the following non-fundamental
investment restrictions which may be changed by the Board of Directors of the
Fund without shareholder or Policyholder approval:

(B) The Portfolio may not sell securities short, unless it owns or has the
right to obtain securities equivalent in kind and amount to the securities
sold short.

(C) The Portfolio may not purchase securities on margin, except that the
Portfolio may obtain such short-term credits as are necessary for the
clearance of transactions.

(G) The Portfolio may borrow money only for temporary or emergency
purposes (not for leveraging or investment) in an amount not exceeding 25% of
the value of the Portfolio's total assets (including the amount borrowed)
less liabilities (other than borrowings). Any borrowings that exceed 25% of
the value of the Portfolio's total assets by reason of a decline in net
assets will be reduced within three business days to the extent necessary to
comply with the 25% limitation. This policy shall not prohibit reverse
repurchase agreements.

(I) The Portfolio may not invest in companies for the purpose of
exercising control or management.

(J) The Portfolio may not issue senior securities, except as permitted by
the 1940 Act.

(K) The Portfolio may not invest in securities of foreign issuers
denominated in foreign currency and not publicly traded in the United States
if at the time of acquisition more than 10% of the Portfolio's total assets
would be invested in such securities. See "Foreign Securities," p. 20.

/diamond/ MONEY MARKET PORTFOLIO

The Portfolio may not, as a matter of fundamental policy:

1. With respect to 75% of the Portfolio's total assets, purchase the
securities of any one issuer (other than cash items and "Government
securities" as defined in the 1940 Act) if immediately after and as a result
of such purchase
18
<PAGE>
(a) the value of the holdings of the Portfolio in the securities of such
issuer exceeds 5% of the value of the Portfolio's total assets, or (b) the
Portfolio owns more than 10% of the outstanding voting securities of any one
class of securities of such issuer.

2. Invest more than 25% of the value of the Portfolio's assets in any
particular industry (other than Government securities or obligations of U.S.
branches of U.S. banks).

3. Purchase or sell physical commodities unless acquired as a result of
ownership of securities.

4. Purchase or sell puts, calls, straddles, spreads, or any combination
thereof, real estate (including real estate limited partnerships),
commodities, or commodity contracts or interest in oil, gas or mineral
exploration or development programs or leases. However, the Portfolio may
purchase debt securities or commercial paper issued by companies which invest
in real estate or interest therein, including real estate investment trusts.

5. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the
disposition of portfolio securities of the Portfolio.

Furthermore, the Portfolio has adopted the following non-fundamental
investment restrictions which may be changed by the Board of Directors of the
Fund without shareholder or Policyholder approval:

(A) The Portfolio may not mortgage or pledge any securities owned or held
by the Portfolio in amounts that exceed, in the aggregate, 15% of the
Portfolio's net assets, provided that this limitation does not apply to
reverse repurchase agreements or the segregation of assets in connection with
such transactions.

(B) The Portfolio may not sell securities short, unless it owns or has the
right to obtain securities equivalent in kind and amount to the securities
sold short.

(C) The Portfolio may not purchase securities on margin, except that the
Portfolio may obtain such short-term credits as are necessary for the
clearance of transactions.

(D) The Portfolio may borrow money only for temporary or emergency
purposes (not for leveraging or investment) in an amount not exceeding 25% of
the value of the Portfolio's total assets (including the amount borrowed)
less liabilities (other than borrowings). Any borrowings that exceed 25% of
the value of the Portfolio's total assets by reason of a decline in net
assets will be reduced within three business days to the extent necessary to
comply with the 25% restriction. This policy shall not prohibit reverse
repurchase agreements or the segregation of assets in connection with such
transactions.

(E) The Portfolio may not invest more than 10% of its net assets in
illiquid securities. This does not include securities eligible for resale
pursuant to Rule 144A under the Securities Act of 1933 or any securities for
which the Board of Directors or the Sub-Adviser has made a determination of
liquidity, as permitted under the 1940 Act.

(F) The Portfolio may not (i) purchase securities of other investment
companies, except in the open market where no commission except the ordinary
broker's commission is paid, or (ii) purchase or retain securities issued by
other open-end investment companies. Restrictions (i) and (ii) do not apply
to securities received as dividends, through offers to exchange, or as a
result of reorganization, consolidation, or merger.

(G) The Portfolio may not invest directly in oil, gas or other mineral
development or exploration programs or leases; however, the Portfolio may own
securities of companies engaged in those businesses.

(H) The Portfolio may not invest in companies for the purpose of
exercising control or management.

(I) The Portfolio may not issue senior securities, except as permitted by
the 1940 Act.

Except with respect to borrowing money, if a percentage limitation set forth
above in the investment restrictions for each Portfolio is complied with at
the time of the investment, a subsequent change in the percentage resulting
from any change in value of a Portfolio's net assets will not result in a
violation of such restriction.

<PAGE>

State laws and regulations may impose additional limitations on borrowing,
lending, and the use of options, futures, and other derivative instruments.
In addition, such laws and regulations may require a Portfolio's investments
in foreign securities to meet additional diversification and other
requirements.

INVESTMENT POLICIES

This section explains certain other Portfolio policies, subject to each
Portfolio's investment restrictions. PLEASE CAREFULLY REVIEW THE "INVESTMENT
RESTRICTIONS" FOR EACH PORTFOLIO LISTED ABOVE. (For a complete discussion of
each Portfolio's investment policies and restrictions, please refer to the
Fund's Prospectus for these Portfolios.)

/diamond/ LENDING

Each of the Portfolios may lend its portfolio securities subject to the
restrictions stated in this Statement of Additional Information. Under
applicable regulatory requirements (which are subject to change), the
following conditions apply to securities loans: (a) the loan must be
continuously secured by liquid assets maintained on a current basis in an
amount at least equal to the market value of the securities loaned; (b) each
Portfolio must receive any dividends or interest paid by the issuer on such
securities; (c) each Portfolio must have the right to call the loan and
obtain the securities loaned at any time upon notice of not more than five
business days, including the right to call the loan to permit voting of the
securities; and (d) each Portfolio must receive either interest from the
investment of collateral or a fixed fee from the borrower. Securities loaned
by a Portfolio remain subject to fluctuations in market value. A Portfolio
may pay reasonable finders, custodian and administrative fees in connection
with a loan. Securities lending, as with other extensions of credit, involves
the risk that the borrower may default. Although securities loans will be
fully collateralized at all times, a Portfolio may experience delays in, or
be prevented from, recovering the collateral. During the period that the
Portfolio seeks to enforce its rights against the borrower, the collateral
and the securities loaned remain subject to fluctuations in market value. The
Portfolios do not have the right to vote securities on loan, but would
terminate the loan and regain the right to vote if it were considered
important with respect to the investment. A Portfolio may also incur expenses
in enforcing its rights. If a Portfolio has sold a loaned security, it may
not be able to settle the sale of the security and may incur potential
liability to the buyer of the security on loan for its costs to cover the
purchase.

The Growth, Bond, Global, International Equity, Short-to-Intermediate
Government, Emerging Growth and Equity-Income Portfolios may also lend (or
borrow) money to other funds that are managed by their respective
Sub-Adviser, provided each Portfolio seeks and obtains permission from the
SEC. (See "Other Investment Policies And Restrictions - Borrowing" in the
Fund's Prospectus.)

/diamond/ BORROWING

Subject to its investment restrictions, each Portfolio may borrow money from
banks for temporary or emergency purposes. (The Aggressive Growth Portfolio
may also borrow for investment purposes.) For a complete discussion of
Portfolio borrowing, see "Other Investment Policies And Restrictions
- - Borrowing" in the Fund's Prospectus.

/diamond/ FOREIGN SECURITIES

Subject to the limitations set forth above, a Portfolio may purchase certain
foreign securities. Investments in foreign securities, particularly those of
non-governmental issuers, involve considerations which are not ordinarily
associated with investing in domestic issuers. These considerations include
changes in currency rates, currency exchange control regulations, the
possibility of expropriation, the unavailability of financial information or
the difficulty of interpreting financial information prepared under foreign
accounting standards, less liquidity and more volatility in foreign
securities markets, the impact of political, social or diplomatic
developments, and the difficulty of assessing economic trends in foreign
countries. It is possible that market quotations for foreign securities will
not be readily available. In such event, these securities shall be valued at
fair market value as determined in good faith by the Sub-Adviser for each
Portfolio under the supervision of the Board of

<PAGE>

Directors. If it should become necessary, a Portfolio could encounter greater
difficulties in invoking legal processes abroad than would be the case in the
United States. Transaction costs with respect to foreign securities may be
higher. The Portfolio's Investment Adviser and each Sub-Adviser will consider
these and other factors before investing in foreign securities.

A Portfolio may also purchase American Depositary Receipts ("ADRs"), which
are dollar-denominated receipts issued generally by domestic banks and
represent the deposit with the bank of a security of a foreign issuer. A
Portfolio may also invest in American Depositary Shares ("ADSs"), European
Depositary Receipts ("EDRs") or Global Depositary Receipts ("GDRs") and other
types of receipts of shares evidencing ownership of the underlying foreign
security.

FOREIGN EXCHANGE TRANSACTIONS. To the extent a Portfolio invests directly in
foreign securities, a Portfolio will engage in foreign exchange transactions.
The foreign currency exchange market is subject to little government
regulation, and such transactions generally occur directly between parties
rather than on an exchange or in an organized market. This means that a
Portfolio is subject to the full risk of default by a counterparty in such a
transaction. Because such transactions often take place between different
time zones, a Portfolio may be required to complete a currency exchange
transaction at a time outside of normal business hours in the counterparty's
location, making prompt settlement of such transaction impossible. This
exposes a Portfolio to an increased risk that the counterparty will be unable
to settle the transaction. Although the counterparty in such transactions is
often a bank or other financial institution, currency transactions are
generally not covered by insurance otherwise applicable to such institutions.
For a more detailed explanation regarding the special risks of investing in
foreign securities, see "Portfolio Securities And Risk Factors - Foreign
Securities" and "Portfolio Securities And Risk Factors - Foreign Bank
Obligations" in the Fund's Prospectus.

/diamond/ INVESTMENT FUNDS (INTERNATIONAL
EQUITY PORTFOLIO)

The International Equity Portfolio may invest in investment funds which have
been authorized by the governments of certain countries specifically to
permit foreign investment in securities of companies listed and traded on the
stock exchanges in these respective countries. If the Portfolio invests in
such investment funds, the Portfolio's shareholders will bear not only their
proportionate share of the expenses of the Portfolio (including operating
expenses and the fees of the Investment Adviser), but also will bear
indirectly similar expenses of the underlying investment funds. In addition,
the securities of these investment funds may trade at a premium over their
net asset value.

/diamond/ REPURCHASE AND REVERSE
REPURCHASE AGREEMENTS

Subject to a Portfolio's investment restrictions and Policies, a Portfolio
may enter into repurchase or reverse repurchase agreements.

In a repurchase agreement, a Portfolio purchases a security and
simultaneously commits to resell that security to the seller at an agreed
upon price on an agreed upon date within a number of days (usually not more
than seven) from the date of purchase. The resale price reflects the purchase
price plus an agreed upon incremental amount that is unrelated to the coupon
rate or maturity of the purchased security. A repurchase agreement involves
the obligation of the seller to pay the agreed upon price, which obligation
is in effect secured by the value (at least equal to the amount of the agreed
upon resale price and marked-to-market daily) of the underlying security. A
Portfolio may engage in a repurchase agreement with respect to any security
in which it is authorized to invest. While it does not presently appear
possible to eliminate all risks from these transactions (particularly the
possibility of a decline in the market value of the underlying securities, as
well as delays and costs to a Portfolio in connection with bankruptcy
proceedings), it is the policy of the Portfolio to limit repurchase
agreements to those parties whose creditworthiness has been reviewed and
found satisfactory by a Portfolio's Sub-Adviser. (See "Repurchase and Reverse
Repurchase Agreements", page 29 of the Fund's Prospectus.)

In a reverse repurchase agreement, a Portfolio sells a portfolio security to
another party, such as a bank or broker-dealer, in return for cash and agrees
to repurchase the instrument at a

<PAGE>

particular price and time. While a reverse repurchase agreement is
outstanding, the Portfolio will segregate with its custodian cash and
appropriate liquid assets to cover its obligation under the agreement. A
Portfolio will enter into reverse repurchase agreements only with parties
that the Portfolio's Sub-Adviser deems creditworthy.

/diamond/ U.S. GOVERNMENT SECURITIES

Subject to a Portfolio's investment restrictions or policies, a Portfolio may
invest in U.S. Government obligations which generally include direct
obligation of the U.S. Treasury (such as U.S. Treasury bills, notes, and
bonds) and obligations issued or guaranteed by U.S. Government agencies or
instrumentalities. Examples of the types of U.S. Government securities that
the Portfolio may hold include the Federal Housing Administration, Small
Business Administration, General Services Administration, Federal Farm Credit
Banks, Federal Intermediate Credit Banks, and Maritime Administration. U.S.
Government securities may be supported by the full faith and credit of the
U.S. Government (such as securities of the Small Business Administration); by
the right of the issuer to borrow from the U.S. Treasury (such as securities
of the Federal Home Loan Bank); by the discretionary authority of the U.S.
Government to purchase the agency's obligations (such as securities of the
Federal National Mortgage Association); or only by the credit of the issuing
agency.

Examples of agencies and instrumentalities which may not always receive
financial support from the U.S. Government are: Federal Land Banks; Central
Bank for Cooperatives; Federal Intermediate Credit Banks; Federal Home Loan
Banks; Farmers Home Administration; and Federal National Mortgage Association
("FNMA").

/diamond/ NON-INVESTMENT GRADE DEBT
SECURITIES

Subject to limitations set forth in a Portfolio's investment policies, a
Portfolio may invest its assets in debt securities below the four highest
grades ("lower grade debt securities" commonly referred to as "junk bonds"),
as determined by Moody's Investors Service, Inc. ("Moody's") (lower than Baa)
or Standard & Poor's Corporation (lower than BBB). Bonds and preferred stock
rated "B" or "b" by Moody's are not considered investment grade debt
securities. (See Appendix A in the Prospectus for a description of debt
security ratings.)

Before investing in any lower-grade debt securities, a Portfolio's
Sub-Adviser will determine that such investments meet the Portfolio's
investment objective and that the lower-grade debt securities ratings are
supported by an internal credit review, which the Portfolio's Sub-Adviser
will conduct in each such instance. Lower-grade debt securities usually have
moderate to poor protection of principal and interest payments, have certain
speculative characteristics, and involve greater risk of default or price
declines due to changes in the issuer's creditworthiness than
investment-grade debt securities. Because the market for lower-grade debt
securities may be thinner and less active than for investment grade debt
securities, there may be market price volatility for these securities and
limited liquidity in the resale market. Market prices for lower-grade debt
securities may decline significantly in periods of general economic
difficulty or rising interest rates. Through portfolio diversification and
credit analysis, investment risk can be reduced, although there can be no
assurance that losses will not occur.

The quality limitation set forth in each Portfolio's investment policies is
determined immediately after the Portfolio's acquisition of a given security.
Accordingly, any later change in ratings will not be considered when
determining whether an investment complies with the Portfolio's investment
policies.

/diamond/ CONVERTIBLE SECURITIES

Subject to any investment limitations set forth in a Portfolio's policies or
investment restrictions, a Portfolio may invest in convertible securities.
Convertible securities may include corporate notes or preferred stock, but
ordinarily are a long-term debt obligation of the issuer convertible at a
stated exchange rate into common stock of the issuer. As with all debt
securities, the market value of convertible securities tends to decline as
interest rates increase and, conversely, to increase as interest rates
decline. Convertible securities generally offer lower interest or dividend
yields than non-convertible securities of similar quality. However, when the
market price of the common stock underlying a convertible security exceeds
the conversion

<PAGE>

price, the price of the convertible security tends to reflect the value of
the underlying common stock. As the market price of the underlying common
stock declines, the convertible security tends to trade increasingly on a
yield basis, and thus may not depreciate to the same extent as the underlying
common stock. Convertible securities generally rank senior to common stocks
in an issuer's capital structure and are consequently of higher quality and
entail less risk of declines in market value than the issuer's common stock.
However, the extent to which such risk is reduced depends in large measure
upon the degree to which the convertible security sells above its value as a
fixed-income security. In evaluating investment in a convertible security,
primary emphasis will be given to the attractiveness of the underlying common
stock. The convertible debt securities in which a Portfolio may invest are
subject to the same rating criteria as the Portfolio's investment in
non-convertible debt securities.

/diamond/ INVESTMENTS IN FUTURES, OPTIONS
AND OTHER DERIVATIVE
INSTRUMENTS

The following investments are subject to limitations as set forth in each
Portfolio's investment restrictions and policies:

FUTURES CONTRACTS. A Portfolio may enter into contracts for the purchase or
sale for future delivery of equity or fixed-income securities, foreign
currencies or contracts based on financial indices, including interest rates
or indices of U.S. Government or foreign government securities or equity or
fixed-income securities ("futures contracts"). U.S. futures contracts are
traded on exchanges that have been designated "contract markets" by the
Commodity Futures Trading Commission ("CFTC") and must be executed through a
futures commission merchant ("FCM"), or brokerage firm, which is a member of
the relevant contract market. Through their clearing corporations, the
exchanges guarantee performance of the contracts as between the clearing
members of the exchange. Since all transactions in the futures market are
made through a member of, and are offset or fulfilled through a clearinghouse
associated with, the exchange on which the contracts are traded, a Portfolio
will incur brokerage fees when it buys or sells futures contracts.

When a Portfolio buys or sells a futures contract, it incurs a contractual
obligation to receive or deliver the underlying instrument (or a cash payment
based on the difference between the underlying instrument's closing price and
the price at which the contract was entered into) at a specified price on a
specified date. Transactions in futures contracts generally will not be made
other than to seek to hedge against potential changes in interest or currency
exchange rates or the prices of a security or a securities index which might
correlate with or otherwise adversely affect either the value of a
Portfolio's securities or the prices of securities which the Portfolio is
considering buying at a later date.

The buyer or seller of futures contracts is not required to deliver or pay
for the underlying instrument unless the contract is held until the delivery
date. However, both the buyer and seller are required to deposit "initial
margin" for the benefit of an FCM when the contract is entered into. Initial
margin deposits are equal to a percentage of the contract's value, as set by
the exchange on which the contract is traded, and may be maintained in cash
or certain high-grade liquid assets. If the value of either party's position
declines, that party will be required to make additional "variation margin"
payments with an FCM to settle the change in value on a daily basis. The
party that has a gain may be entitled to receive all or a portion of this
amount. Initial and variation margin payments are similar to good faith
deposits or performance bonds, unlike margin extended by a securities broker,
and initial and variation margin payments do not constitute purchasing
securities on margin for purposes of the Portfolio's investment limitations.
In the event of the bankruptcy of an FCM that holds margin on behalf of a
Portfolio, the Portfolio may be entitled to return of margin owed to the
Portfolio only in proportion to the amount received by the FCM's other
customers. The Portfolio's Sub-Adviser will attempt to minimize the risk by
careful monitoring of the creditworthiness of the FCM's with which the
Portfolio does business and by depositing margin payments in a segregated
account with the custodian when practical or otherwise required by law.

Although a Portfolio would hold cash and liquid assets in a segregated
account with a value sufficient to cover the Portfolio's open futures
obligations, the segregated assets would be

<PAGE>

available to the Portfolio immediately upon closing out the futures position,
while settlement of securities transactions could take several days. However,
because the Portfolio's cash that may otherwise be invested would be held
uninvested or invested in liquid assets so long as the futures position
remains open, the Portfolio's return could be diminished due to the
opportunity cost of foregoing other potential investments.

The acquisition or sale of a futures contract may occur, for example, when a
Portfolio holds or is considering purchasing equity securities and seeks to
protect itself from fluctuations in prices without buying or selling those
securities. For example, if prices were expected to decrease, a Portfolio
might sell equity index futures contracts, thereby hoping to offset a
potential decline in the value of equity securities in the Portfolio by a
corresponding increase in the value of the futures contract position held by
the Portfolio and thereby preventing a Portfolio's net asset value from
declining as much as it otherwise would have. A Portfolio also could seek to
protect against potential price declines by selling portfolio securities and
investing in money market instruments. However, since the futures market is
more liquid than the cash market, the use of futures contracts as an
investment technique allows a Portfolio to maintain a defensive position
without having to sell portfolio securities.

Similarly, when prices of equity securities are expected to increase, futures
contracts may be bought to attempt to hedge against the possibility of having
to buy equity securities at higher prices. This technique is sometimes known
as an anticipatory hedge. Since the fluctuations in the value of futures
contracts should be similar to those of equity securities, a Portfolio could
take advantage of the potential rise in the value of equity securities
without buying them until the market has stabilized. At that time, the
futures contracts could be liquidated and the Portfolio could buy equity
securities on the cash market. To the extent a Portfolio enters into futures
contracts for this purpose, the assets in the segregated asset account
maintained to cover the Portfolio's obligations with respect to futures
contracts will consist of liquid assets from its portfolio in an amount equal
to the difference between the contract price and the aggregate value of the
initial and variation margin payments made by the Portfolio with respect to
the futures contracts.

The ordinary spreads between prices in the cash and futures markets, due to
differences in the nature of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial margin
and variation margin requirements. Rather than meeting additional variation
margin requirements, investors may close out futures contracts through
offsetting transactions which could distort the normal price relationship
between the cash and futures markets. Second, the liquidity of the futures
market depends on participants entering into offsetting transactions rather
than making or taking delivery. To the extent participants decide to make or
take delivery, liquidity in the futures market could be reduced and prices in
the futures market distorted. Third, from the point of view of speculators,
the margin deposit requirements in the futures market are less onerous than
margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may cause temporary price
distortions. Due to the possibility of the foregoing distortions, a correct
forecast of general price trends by a Portfolio's Sub-Adviser still may not
result in a successful use of futures contracts.

Futures contracts entail risks. Although each Portfolio's Sub-Adviser
believes that use of such contracts can benefit a Portfolio, if the
Sub-Adviser's investment judgment is incorrect, a Portfolio's overall
performance could be worse than if the Portfolio had not entered into futures
contracts. For example, if a Portfolio has attempted to hedge against the
effects of a possible decrease in prices of securities held by the Portfolio
and prices increase instead, the Portfolio may lose part or all of the
benefit of the increased value of these securities because of offsetting
losses in the Portfolio's futures positions. In addition, if the Portfolio
has insufficient cash, it may have to sell securities from its portfolio to
meet daily variation margin requirements. Those sales may, but will not
necessarily, be at increased prices which reflect the rising market and may
occur at a time when the sales are disadvantageous to a Portfolio.

The prices of futures contracts depend primarily on the value of their
underlying instruments. Because there are a limited number of types of

<PAGE>

futures contracts, it is possible that the standardized futures contracts
available to a Portfolio will not match exactly the Portfolio's current or
potential investments. A Portfolio may buy and sell futures contracts based
on underlying instruments with different characteristics from the securities
in which it typically invests - for example, by hedging investments in
portfolio securities with a futures contract based on a broad index of
securities - which involves a risk that the futures position will not
correlate precisely with the performance of the Portfolio's investments.

Futures prices can also diverge from the prices of their underlying
instruments, even if the underlying instruments correlate with a Portfolio's
investments. Futures prices are affected by such factors as current and
anticipated short-term interest rates, changes in volatility of the
underlying instruments, and the time remaining until expiration of the
contract. Those factors may affect securities prices differently from futures
prices. Imperfect correlations between a Portfolio's investments and its
futures positions may also result from differing levels of demand in the
futures markets and the securities markets, from structural differences in
how futures and securities are traded, and from imposition of daily price
fluctuation limits for futures contracts. A Portfolio may buy or sell futures
contracts with a greater or lesser value than the securities it wishes to
hedge or is considering purchasing in order to attempt to compensate for
differences in historical volatility between the futures contract and the
securities, although this may not be successful in all cases. If price
changes in a Portfolio's futures positions are poorly correlated with its
other investments, its futures positions may fail to produce desired gains or
result in losses that are not offset by the gains in the Portfolio's other
investments.

Because futures contracts are generally settled within a day from the date
they are closed out, compared with a settlement period of seven days for some
types of securities, the futures markets can provide superior liquidity to
the securities markets. Nevertheless, there is no assurance a liquid
secondary market will exist for any particular futures contract at any
particular time. In addition, futures exchanges may establish daily price
fluctuation limits for futures contracts and may halt trading if a contract's
price moves upward or downward more than the limit in a given day. On
volatile trading days when the price fluctuation limit is reached, it may be
impossible for a Portfolio to enter into new positions or close out existing
positions. If the secondary market for a futures contract is not liquid
because of price fluctuation limits or otherwise, a Portfolio may not be able
to promptly liquidate unfavorable positions and potentially be required to
continue to hold a futures position until the delivery date, regardless of
changes in its value. As a result, the Portfolio's access to other assets
held to cover its futures positions also could be impaired.

Although futures contracts by their terms call for the delivery or
acquisition of the underlying commodities or a cash payment based on the
value of the underlying commodities, in most cases the contractual obligation
is offset before the delivery date of the contract by buying, in the case of
a contractual obligation to sell, or selling, in the case of a contractual
obligation to buy, an identical futures contract on a commodities exchange.
Such a transaction cancels the obligation to make or take delivery of the
commodities.

Each Portfolio intends to comply with guidelines of eligibility for exclusion
from the definition of the term "commodity pool operator" with the CFTC and
the National Futures Association, which regulate trading in the futures
markets. Such guidelines presently require that to the extent that a
Portfolio enters into futures contracts or options on a futures position that
are not for bona fide hedging purposes (as defined by the CFTC), the
aggregate initial margin and premiums on these positions (excluding the
amount by which options are "in-the-money") may not exceed 5% of the
Portfolio's net assets.

OPTIONS ON FUTURES CONTRACTS. A Portfolio may buy and write options on
futures contracts. An option on a futures contract gives the Portfolio the
right (but not the obligation) to buy or sell a futures contract at a
specified price on or before a specified date. The purchase and writing of
options on futures contracts is similar in some respects to the purchase and
writing of options on individual securities. See "Options on Securities" on
page 29. Transactions in options on futures contracts will generally not be
made other than to attempt to hedge against potential changes in interest
rates or currency exchange rates or the price of a security or a securities
index which might correlate with or otherwise

<PAGE>

adversely affect either the value of the Portfolio's securities or the
process of securities which the Portfolio is considering buying at a later
date.

The purchase of a call option on a futures contract may or may not be less
risky than ownership of the futures contract or the underlying instrument,
depending on the pricing of the option compared to either the price of the
futures contract upon which it is based or the price of the underlying
instrument. As with the purchase of futures contracts, when a Portfolio is
not fully invested it may buy a call option on a futures contract to attempt
to hedge against a market advance.

The writing of a call option on a futures contract may constitute a partial
hedge against declining prices of the security or foreign currency which is
deliverable under, or of the index comprising, the futures contract. If the
futures price at the expiration of the option is below the exercise price,
the Portfolio will retain the full amount of the option premium which
provides a partial hedge against any decline that may have occurred in the
Portfolio's holdings. The writing of a put option on a futures contract may
constitute a partial hedge against increasing prices of the security or
foreign currency which is deliverable under, or of the index comprising, the
futures contract. If the futures price at expiration of the option is higher
than the exercise price, the Portfolio will retain the full amount of the
option premium which provides a partial hedge against any increase in the
price of securities which the Portfolio is considering buying. If a call or
put option a Portfolio has written is exercised, the portfolio will incur
loss which will be reduced by the amount of the premium it received.
Depending on the degree of correlation between change in the value of its
portfolio securities and changes in the value of the futures positions, a
Portfolio's losses from existing options on futures may to some extent be
reduced or increase by changes in the value of portfolio securities.

The purchase of a put option on a futures contract is similar in some respect
to the purchase of protective put options on portfolio securities. For
example, a Portfolio may buy a put option on a futures contact to attempt to
hedge the Portfolio's securities against the risk of falling prices.

The amount of risk a Portfolio assumes when it buys an option on a futures
contract is the premium paid for the option plus related transaction costs.
In addition to the correlation risks discussed above, the purchase of an
option also entails the risk that changes in the value of the underlying
futures contract will not be fully reflected in the value of the options
bought.

FORWARD CONTRACTS. A Portfolio may enter into forward foreign currency
exchange contracts ("forward currency contracts") to attempt to minimize the
risk to the Portfolio from adverse changes in the relationship between the
U.S. dollar and other currencies. A forward currency contract is an
obligation to buy or sell an amount of a specified currency for an agreed
price (which may be in U.S. dollars or a foreign currency) at a future date
which is individually negotiated between currency traders and their
customers. A Portfolio may invest in forward currency contracts with stated
contract values of up to the value of the Portfolio's assets.

A Portfolio may exchange foreign currencies for U.S. dollars and for other
foreign currencies in the normal course of business and may buy and sell
currencies through forward currency contracts in order to fix a price for
securities it has agreed to buy or sell. A Portfolio may enter into a forward
currency contract, for example, when it enters into a contract to buy or sell
a security denominated in or exposed to fluctuations in a foreign currency in
order to "lock in" the U.S. dollar price of the security ("transaction
hedge").

Additionally, when a Portfolio's Sub-Adviser believes that a foreign currency
in which portfolio securities are denominated may suffer a substantial
decline against the U.S. dollar, a Portfolio may enter into a forward
currency contract to sell an amount of that foreign currency (or a proxy
currency whose performance is expected to replicate the performance of that
currency) for U.S. dollars approximating the value of some or all of the
portfolio securities denominated in that currency (not exceeding the value of
the Portfolio's assets denominated in that currency) or by participating in
options or futures contracts with respect to the currency, or, when the
Portfolio's Sub-Adviser believes that the U.S. dollar may suffer a
substantial decline against a foreign currency for a fixed U.S. dollar amount
("position hedge"). This type of hedge

<PAGE>

seeks to minimize the effect of currency appreciation as well as
depreciation, but does not protect against a decline in the security's value
relative to other securities denominated in the foreign currency.

A Portfolio also may enter into a forward currency contract with respect to a
currency where the Portfolio is considering the purchase of investments
denominated in that currency but has not yet done so ("anticipatory hedge").

In any of the above circumstances a Portfolio may, alternatively, enter into
a forward currency contract with respect to a different foreign currency when
a Portfolio's Sub-Adviser believes that the U.S. dollar value of that
currency will correlate with the U.S. dollar value of the currency in which
portfolio securities of, or being considered for purchase by, the Portfolio
are denominated ("cross-hedge"). For example, if a Portfolio's Sub-Adviser
believes that a particular foreign currency may decline relative to the U.S.
dollar, a Portfolio could enter into a contract to sell that currency or a
proxy currency (up to the value of the Portfolio's assets denominated in that
currency) in exchange for another currency that the Sub-Adviser expects to
remain stable or to appreciate relative to the U.S. dollar. Shifting a
Portfolio's currency exposure from one foreign currency to another removes
the Portfolio's opportunity to profit from increases in the value of the
original currency and involves a risk of increased losses to the Portfolio if
the Portfolio's Sub-Adviser's projection of future exchange rates is
inaccurate.

A Portfolio also may enter into forward contracts to buy or sell at a later
date instruments in which a Portfolio may invest directly or on financial
indices based on those instruments. The market for those types of forward
contracts is developing and it is not currently possible to identify
instruments on which forward contracts might be created in the future.

A Portfolio will cover outstanding forward currency contracts by maintaining
liquid portfolio securities denominated in the currency underlying the
forward contract or the currency being hedged. To the extent that a Portfolio
is not able to cover its forward currency positions with underlying portfolio
securities, the Fund's custodian will segregate cash or other liquid assets
having a value equal to the aggregate amount of the Portfolio's commitments
under forward contracts entered into with respect to position hedges and
cross-hedges. If the value of the segregated securities declines, additional
cash or liquid assets will be segregated on a daily basis so that the value
of the account will be equal to the amount of the Portfolio's commitments
with respect to such contracts. As an alternative to maintaining all or part
of the segregated assets, a Portfolio may buy call options permitting the
Portfolio to buy the amount of foreign currency subject to the hedging
transaction by a forward sale contract or the Portfolio may buy put options
permitting the Portfolio to sell the amount of foreign currency subject to a
forward buy contract.

While forward contracts are not currently regulated by the CFTC, the CFTC may
in the future assert authority to regulate forward contracts. In such event a
Portfolio's ability to utilize forward contracts in the manner set forth in
the Prospectus may be restricted. Forward contracts will reduce the potential
gain from a positive change in the relationship between the U.S. dollar and
foreign currencies. Unforeseen changes in currency prices may result in
poorer overall performance for a Portfolio than if it had not entered into
such contracts. The use of foreign currency forward contracts will not
eliminate fluctuations in the underlying U.S. dollar equivalent value of the
proceeds of or rates of return on a Portfolio's foreign currency denominated
portfolio securities.

The matching of the increase in value of a forward contract and the decline
in the U.S. dollar equivalent value of the foreign currency denominated asset
that is the subject of the hedging transaction generally will not be precise.
In addition, a Portfolio may not always be able to enter into forward
contracts at attractive prices and accordingly may be limited in its ability
to use these contracts in seeking to hedge the Portfolio's assets.

Also, with regard to a Portfolio's use of cross-hedging transactions, there
can be no assurance that historical correlations between the movement of
certain foreign currencies relative to the U.S. dollar will continue. Thus,
at any time poor correlation may exist between movements in the exchange
rates of the foreign currencies underlying a Portfolio's cross-hedges and the
movements in the exchange rates of the foreign currencies in which the
Portfolio's assets that

<PAGE>

are subject of the cross-hedging transactions are denominated.

OPTIONS ON FOREIGN CURRENCIES. A Portfolio may buy put and call options and
may write covered put and call options on foreign currencies for hedging
purposes in a manner similar to that in which futures contracts or forward
contracts on foreign currencies may be utilized. For example, a decline in
the U.S. dollar value of a foreign currency in which portfolio securities are
denominated will reduce the U.S. dollar value of such securities, even if
their value in the foreign currency remains constant. In order to protect
against such diminutions in the value of portfolio securities, a Portfolio
may buy put options on the foreign currency. If the value of the currency
declines, the Portfolio will have the right to sell such currency for a fixed
amount in U.S. dollars and will thereby offset, in whole or in part, the
adverse effect on its portfolio which otherwise would have resulted.

Conversely, when a rise in the U.S. dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing
the cost of such securities, a Portfolio may buy call options thereon. The
purchase of such options could offset, at least partially, the effects of the
adverse movements in exchange rates. The purchase of an option on a foreign
currency may constitute an effective hedge against fluctuations in exchange
rates, although, in the event of exchange rate movements adverse to a
Portfolio's option position, the Portfolio could sustain losses on
transactions in foreign currency options which would require that the
Portfolio lose a portion or all of the benefits of advantageous changes in
those rates. In addition, in the case of other types of options, the benefit
to a Portfolio from purchases of foreign currency options will be reduced by
the amount of the premium and related transaction costs.

A Portfolio may write options on foreign currencies for the same types of
hedging purposes. For example, in attempting to hedge against a potential
decline in the U.S. dollar value of foreign currency denominated securities
due to adverse fluctuations in exchange rates, a Portfolio could, instead of
purchasing a put option, write a call option on the relevant currency. If the
expected decline occurs, the option will most likely not be exercised and the
diminution in value of portfolio securities will be offset by the amount of
the premium received.

Similarly, instead of purchasing a call option to attempt to hedge against a
potential increase in the U.S. dollar cost of securities to be acquired, a
Portfolio could write a put option on the relevant currency which, if rates
move in the manner projected, will expire unexercised and allow the Portfolio
to hedge the increased cost up to the amount of premium. As in the case of
other types of options, however, the writing of a foreign currency option
will constitute only a partial hedge up to the amount of the premium
received, and only if exchange rates move in the expected direction. If that
does not occur, the option may be exercised and the Portfolio would be
required to buy or sell the underlying currency at a loss which may not be
offset by the amount of the premium. Through the writing of options on
foreign currencies, a Portfolio also may lose all or a portion of the
benefits which might otherwise have been obtained from favorable movements in
exchange rates.

A Portfolio may write covered call options on foreign currencies. A call
option written on a foreign currency by a Portfolio is "covered" if the
Portfolio owns the underlying foreign currency covered by the call or has an
absolute and immediate right to acquire that foreign currency without
additional cash consideration (or for additional cash consideration held in a
segregated account by its custodian) upon conversion or exchange of other
foreign currency held in its portfolio. A call option is also covered if the
Portfolio has a call on the same foreign currency and in the same principal
amount as the call written if the exercise price of the call held (i) is
equal to or less than the exercise price of the call written or (ii) is
greater than the exercise price of the call written, and if the difference is
maintained by the Portfolio in cash or high-grade liquid assets in a
segregated account with the Fund's custodian.

A Portfolio may also write call options on foreign currencies for
cross-hedging purposes that may not be deemed to be covered. A call option on
a foreign currency is for cross-hedging purposes if it is not covered but is
designed to provide a hedge against a decline due to an adverse change in the
exchange rate in the U.S. dollar value of a security which the Portfolio owns
or has the right to acquire and which is denominated in the currency
underlying the option. In

<PAGE>

such circumstances, the Portfolio collateralizes the option by maintaining
segregated assets in an amount not less than the value of the underlying
foreign currency in U.S. dollars marked-to-market daily.

A Portfolio may buy or write options in privately negotiated transactions on
the types of securities and indices based on the types of securities in which
the Portfolio is permitted to invest directly. A Portfolio will effect such
transactions only with investment dealers and other financial institutions
(such as commercial banks or savings and loan institutions) deemed
creditworthy, and only pursuant to procedures adopted by the Portfolio's
Sub-Adviser for monitoring the creditworthiness of those entities. To the
extent that an option bought or written by a Portfolio in a negotiated
transaction is illiquid, the value of an option bought or the amount of the
Portfolio's obligations under an option written by the Portfolio, as the case
may be, will be subject to the Portfolio's limitation on illiquid
investments. In the case of illiquid options, it may not be possible for the
Portfolio to effect an offsetting transaction at the time when the
Portfolio's Sub-Adviser believes it would be advantageous for the Portfolio
to do so.

OPTIONS ON SECURITIES. In an effort to reduce fluctuations in net asset
value, a Portfolio may write covered put and call options and may buy put and
call options and warrants on securities that are traded on United States and
foreign securities exchanges and over-the-counter ("OTC"). A Portfolio also
may write call options that are not covered for cross-hedging purposes. A
Portfolio may write and buy options on the same types of securities that the
Portfolio could buy directly and may buy options on financial indices as
described above with respect to futures contracts. There are no specific
limitations on a Portfolio's writing and buying options on securities.

A put option gives the holder the right, upon payment of a premium, to
deliver a specified amount of a security to the writer of the option on or
before a fixed date at a predetermined price. A call option gives the holder
the right, upon payment of a premium, to call upon the writer to deliver a
specified amount of a security on or before a fixed date at a predetermined
price.

A put option written by a Portfolio is "covered" if the Portfolio (i)
maintains cash not available for investment or other liquid assets with a
value equal to the exercise price in a segregated account with its custodian
or (ii) holds a put on the same security and in the same principal amount as
the put written and the exercise price of the put held is equal to or greater
than the exercise price of the put written. The premium paid by the buyer of
an option will reflect, among other things, the relationship of the exercise
price to the market price and the volatility of the underlying security, the
remaining term of the option, supply and demand and interest rates. A call
option written by a Portfolio is "covered" if the Portfolio owns the
underlying security covered by the call or has an absolute and immediate
right to acquire that security without additional cash consideration (or has
segregated additional cash consideration with its custodian) upon conversion
or exchange of other securities held in its portfolio. A call option is also
deemed to be covered if the Portfolio holds a call on the same security and
in the same principal amount as the call written and the exercise price of
the call held (i) is equal to or less than the exercise price of the call
written or (ii) is greater than the exercise price of the call written if the
difference is maintained by the Portfolio in cash and high-grade liquid
assets in a segregated account with its custodian.

A Portfolio collateralizes its obligation under a written call option for
cross-hedging purposes by segregating with its custodian cash or other liquid
assets in an amount not less than the market value of the underlying
security, marked-to-market daily. A Portfolio would write a call option for
cross-hedging purposes, instead of writing a covered call option, when the
premium to be received from the cross-hedge transaction would exceed that
which would be received from writing a covered call option and the
Portfolio's Sub-Adviser believes that writing the option would achieve the
desired hedge.

If a put or call option written by a Portfolio was exercised, the Portfolio
would be obligated to buy or sell the underlying security at the exercise
price. Writing a put option involves the risk of a decrease in the market
value of the underlying security, in which case the option could be exercised
and the underlying security would then be sold by the option holder to the
Portfolio at a higher price than its current market value.

<PAGE>

Writing a call option involves the risk of an increase in the market value of
the underlying security, in which case the option could be exercised and the
underlying security would then be sold by the Portfolio to the option holder
at a lower price than its current market value. Those risks could be reduced
by entering into an offsetting transaction. The Portfolio retains the premium
received from writing a put or call option whether or not the option is
exercised.

The writer of an option may have no control when the underlying security must
be sold, in the case of a call option, or bought, in the case of a put
option, since with regard to certain options, the writer may be assigned an
exercise notice at any time prior to the termination of the obligation.
Whether or not an option expires unexercised, the writer retains the amount
of the premium. This amount, of course, may, in the case of a covered call
option, be offset by a decline in the market value of the underlying security
during the option period. If a call option is exercised, the writer
experiences a profit or loss from the sale of the underlying security. If a
put option is exercised, the writer must fulfill the obligation to buy the
underlying security.

The writer of an option that wishes to terminate its obligation may effect a
"closing purchase transaction". This is accomplished by buying an option of
the same series as the option previously written. The effect of the purchase
is that the writer's position will be canceled by the clearing corporation.
However, a writer may not effect a closing purchase transaction after being
notified of the exercise of an option. Likewise, an investor who is the
holder of an option may liquidate its position by effecting a "closing sale
transaction". This is accomplished by selling an option of the same series as
the option previously bought. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected.

Effecting a closing transaction in the case of a written call option will
permit a Portfolio to write another call option on the underlying security
with either a different exercise price or expiration date or both or, in the
case of a written put option, will permit a Portfolio to write another put
option to the extent that the exercise price thereof is secured by deposited
high-grade liquid assets. Also, effecting a closing transaction will permit
the cash or proceeds from the concurrent sale of any securities subject to
the option to be used for other portfolio investments. If a Portfolio desires
to sell a particular security on which the Portfolio has written a call
option, the Portfolio will effect a closing transaction prior to or
concurrent with the sale of the security.

A Portfolio may realize a profit from a closing transaction if the price of
the purchase transaction is less than the premium received from writing the
option or the price received from a sale transaction is more than the premium
paid to buy the option; a Portfolio may realize a loss from a closing
transaction if the price of the purchase transaction is less than the premium
paid to buy the option. Because increases in the market of a call option will
generally reflect increases in the market price of the underlying security,
any loss resulting from the repurchase of a call option is likely to be
offset in whole or in part by appreciation of the underlying security owned
by the Portfolio.

An option position may be closed out only where there exists a secondary
market for an option of the same series. If a secondary market does not
exist, it might not be possible to effect closing transactions in particular
options with the result that a Portfolio would have to exercise the options
in order to realize any profit. If a Portfolio is unable to effect a closing
purchase transaction in a secondary market, it will not be able to sell the
underlying security until the option expires or the Portfolio delivers the
underlying security upon exercise. Reasons for the absence of a liquid
secondary market may include the following: (i) there may be insufficient
trading interest in certain options, (ii) restrictions may be imposed by a
national securities exchange on which the option is traded ("Exchange") on
opening or closing transactions or both, (iii) trading halts, suspensions or
other restrictions may be imposed with respect to particular classes or
series of options or underlying securities, (iv) unusual or unforeseen
circumstances may interrupt normal operations on an Exchange, (v) the
facilities of an Exchange or the Options Clearing Corporation ("OCC") may not
at all times be adequate to handle current trading volume, or (vi) one or
more Exchanges could, for economic or other reasons, decide or be compelled
at some future date to discontinue the trading of options (or a particular
class or series of options), in which event the secondary market on that
Exchange (or in that class or

30
<PAGE>

series of options) would cease to exist, although outstanding options on that
Exchange that had been issued by the OCC as a result of trades on that
Exchange would continue to be exercisable in accordance with their terms.

A Portfolio may write options in connection with buy-and-write transactions;
that is, a Portfolio may buy a security and then write a call option against
that security. The exercise price of a call option may be below
("in-the-money"), equal to ("at-the-money") or above ("out-of-the-money") the
current value of the underlying security at the time the option is written.
Buy-and-write transactions using in-the-money call options may be used when
it is expected that the price of the underlying security will remain flat or
decline moderately during the option period. Buy-and-write transactions using
at-the-money call options may be used when it is expected that the price of
the underlying security will remain fixed or advance moderately during the
option period. Buy-and-write transactions using out-of-the-money call options
may be used when it is expected that the premiums received from writing the
call option plus the appreciation in the market price of the underlying
security up to the exercise price will be greater than the appreciation in
the price of the underlying security alone. If the call options are exercised
in such transactions, a Portfolio's maximum gain will be the premium received
by it for writing the option, adjusted upwards or downwards by the difference
between the Portfolio's purchase price of the security and the exercise
price. If the options are not exercised and the price of the underlying
security declines, the amount of such decline will be offset by the amount of
premium received.

The writing of covered put options is similar in terms of risk and return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and a Portfolio's gain will be limited to the
premium received. If the market price of the underlying security declines or
otherwise is below the exercise price, the Portfolio may elect to close the
position or take delivery of the security at the exercise price and a
Portfolio's return will be the premium received from the put options minus
the amount by which the market price of the security is below the exercise
price.

A Portfolio may buy put options to attempt to hedge against a decline in the
value of its securities. By using put options in this way, a Portfolio will
reduce any profit it might otherwise have realized in the underlying security
by the amount of the premium paid for the put option and by transaction
costs.

A Portfolio may buy call options to attempt to hedge against an increase in
the price of securities that the Portfolio may buy in the future. The premium
paid for the call option plus any transaction costs will reduce the benefit,
if any, realized by a Portfolio upon exercise of the option, and, unless the
price of the underlying security rises sufficiently, the option may expire
worthless to the Portfolio.

In purchasing an option, a Portfolio would be in a position to realize a gain
if, during the option period, the price of the underlying security increased
(in the case of a call) or decreased (in the case of a put) by an amount in
excess of the premium paid and would realize a loss if the price of the
underlying security did not increase (in the case of a call) or decrease (in
the case of a put) during the period by more than the amount of the premium.
If a put or call option brought by a Portfolio were permitted to expire
without being sold or exercised, the Portfolio would lose the amount of the
premium.

Although they entitle the holder to buy equity securities, warrants on and
options to purchase equity securities do not entitle the holder to dividends
or voting rights with respect to the underlying securities, nor do they
represent any rights in the assets of the issuer of those securities.

INTEREST RATE SWAPS AND SWAP-RELATED PRODUCTS. In order to attempt to protect
the value of a Portfolio's investments from interest rate or currency
exchange rate fluctuations, a Portfolio may enter into interest rate swaps,
and may buy or sell interest rate caps and floors. A Portfolio expects to
enter into these transactions primarily to attempt to preserve a return or
spread on a particular investment or portion of its portfolio. A Portfolio
also may enter into these transactions to attempt to protect against any
increase in the price of securities the Portfolio may consider buying at a
later date. A Portfolio does not intend to use these transactions as a
speculative investment. Interest rate swaps involve the exchange by a
Portfolio with another party of their respective commitments to pay or
receive

31
<PAGE>

interest, E.G., an exchange of floating rate payments for fixed rate
payments. The exchange commitments can involve payments to be made in the
same currency or in different currencies. The purchase of an interest rate
cap entitles the purchaser, to the extent that a specified index exceeds a
predetermined interest rate, to receive payments of interest on a
contractually based principal amount from the party selling the interest rate
cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined interest rate, to
receive payments of interest on a contractually based principal amount from
the party selling the interest rate floor.

Swap and swap-related products are specialized OTC instruments and their use
involves risks specific to the markets in which they are entered into. A
Portfolio will usually enter into interest rate swaps on a net basis, I.E.,
the two payment streams are netted out, with the Portfolio receiving or
paying, as the case may be, only the net amount of the two payments. The net
amount of the excess, if any, of a Portfolio's obligations over its
entitlements with respect to each interest rate swap will be calculated on a
daily basis and an amount of cash or other liquid assets having an aggregate
net asset value of at least equal to the accrued excess will be segregated
with the Fund's custodian. If a Portfolio enters into an interest rate swap
on other than a net basis, the Portfolio would segregate assets in the full
amount accrued on a daily basis of the Portfolio's obligations with respect
to the swap. A Portfolio will not enter into any interest rate swap, cap or
floor transaction unless the unsecured senior debt or the claims-paying
ability of the other party thereto is rated in one of the three highest
rating categories of at least one nationally recognized statistical rating
organization at the time of entering into such transaction. A Portfolio's
Sub-Adviser will monitor the creditworthiness of all counterparties on an
ongoing basis. If there is a default by the other party to such a
transaction, a Portfolio will have contractual remedies pursuant to the
agreements related to the transaction.

The swap market has grown substantially in recent years with a large number
of banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. The Sub-Advisers have determined
that, as a result, the swap market has become relatively liquid. Caps and
floors are more recent innovations for which standardized documentation has
not yet been developed and, accordingly, they are less liquid than swaps. To
the extent a Portfolio sells (I.E., writes) caps and floors, it will
segregate with the custodian cash or other liquid assets having an aggregate
net asset value at least equal to the full amount, accrued on a daily basis,
of the Portfolio's obligations with respect to any caps or floors.

Interest rate swap transactions are subject to limitations set forth in each
Portfolio's policies. These transactions may in some instances involve the
delivery of securities or other underlying assets by a Portfolio or its
counterparty to collateralize obligations under the swap. Under the
documentation currently used in those markets, the risk of loss with respect
to interest rate swaps is limited to the net amount of the interest payments
that a Portfolio is contractually obligated to make. If the other party to an
interest rate swap that is not collateralized defaults, a Portfolio would
risk the loss of the net amount of the payments that the Portfolio
contractually is entitled to receive. A Portfolio may buy and sell (I.E.,
write) caps and floors without limitation, subject to the segregated account
requirement described above.

In addition to the instruments, strategies and risks described in this
Statement of Additional Information and in the Prospectus, there may be
additional opportunities in connection with options, futures contracts,
forward currency contracts, and other hedging techniques, that become
available as each Portfolio's Sub-Adviser develops new techniques, as
regulatory authorities broaden the range of permitted transactions and as new
instruments and techniques are developed. A Sub-Adviser may use these
opportunities to the extent they are consistent with each Portfolio's
respective investment objective and are permitted by each Portfolio's
respective investment limitations and applicable regulatory requirements.

SPECIAL INVESTMENT CONSIDERATIONS AND RISKS. The successful use of the
investment practices described above with respect to futures contracts,
options on futures contracts, forward contracts, options on securities and on
foreign currencies, and swaps and swap-related products draws upon skills and
experience which are different from those needed to select

32
<PAGE>

the other instruments in which the Portfolios invest. Should interest or
exchange rates or the prices of securities or financial indices move in an
unexpected manner, a Portfolio may not achieve the desired benefits of
futures, options, swaps and forwards or may realize losses and thus be in a
worse position than if such strategies had not been used. Unlike many
exchange-traded futures contracts and options on futures contracts, there are
no daily price fluctuation limits with respect to options on currencies,
forward contracts and other negotiated or OTC instruments, and adverse market
movements could therefore continue to an unlimited extent over a period of
time. In addition, the correlation between movements in the price of the
securities and currencies hedged or used for cover will not be perfect and
could produce unanticipated losses.

A Portfolio's ability to dispose of its positions in the foregoing
instruments will depend on the availability of liquid markets in the
instruments. Markets in a number of the instruments are relatively new and
still developing, and it is impossible to predict the amount of trading
interest that may exist in those instruments in the future. Particular risks
exist with respect to the use of each of the foregoing instruments and could
result in such adverse consequences to a Portfolio as the possible loss of
the entire premium paid for an option bought by the Portfolio, the inability
of the Portfolio, as the writer of a covered call option, to benefit from the
appreciation of the underlying securities above the exercise price of the
option and the possible need to defer closing out positions in certain
instruments to avoid adverse tax consequences. As a result, no assurance can
be given that a Portfolio will be able to use those instruments effectively
for the purposes set forth above.

In connection with certain of its hedging transactions, assets must be
segregated with the Fund's custodian bank to ensure that the Portfolio will
be able to meet its obligations under these instruments. Assets held in a
segregated account generally may not be disposed of for so long as the
Portfolio maintains the positions giving rise to the segregation requirement.
Segregation of a large percentage of the Portfolio's assets could impede
implementation of the Portfolio's investment policies or the Portfolio's
ability to meet redemption requests or other current obligations.

ADDITIONAL RISKS OF OPTIONS ON FOREIGN CURRENCIES, FORWARD CONTRACTS AND
FOREIGN INSTRUMENTS. Unlike transactions entered into by a Portfolio in
futures contracts, options on foreign currencies and forward contracts are
not traded on contract markets regulated by the CFTC or (with the exception
of certain foreign currency options) by the SEC. To the contrary, such
instruments are traded through financial institutions acting as
market-makers, although foreign currency options are also traded OTC. In an
OTC trading environment, many of the protections afforded to exchange
participants will not be available. For example, there are no daily price
fluctuation limits, and adverse market movements could therefore continue to
an unlimited extent over a period of time. Although the buyer of an option
cannot lose more than the amount of the premium plus related transaction
costs, this entire amount could be lost. Moreover, an option writer and a
buyer or seller of futures or forward contracts could lose amounts
substantially in excess of any premium received or initial margin or
collateral posted due to the potential additional margin and collateral
requirements associated with such positions.

Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on
organized exchanges are available with respect to such transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the OCC, thereby reducing
the risk of counterparty default. Further, a liquid secondary market in
options traded on a national securities exchange may be more readily
available than in the OTC market, potentially permitting a Portfolio to
liquidate open positions at a profit prior to exercise or expiration, or to
limit losses in the event of adverse market movements.

The purchase and sale of exchange-traded foreign currency options, however,
is subject to the risks of the availability of a liquid secondary market
described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effects of other
political and economic events. In addition, exchange-traded options on
foreign currencies

33
<PAGE>

involve certain risks not presented by the OTC market. For example, exercise
and settlement of such options must be made exclusively through the OCC,
which has established banking relationships in applicable foreign countries
for this purpose. As a result, the OCC may, if it determines that foreign
government restrictions or taxes would prevent the orderly settlement of
foreign currency option exercises, or would result in undue burdens on the
OCC or its clearing member, impose special procedures on exercise and
settlement, such as technical changes in the mechanics of delivery of
currency, the fixing of dollar settlement prices or prohibitions, on
exercise.

In addition, options on U.S. Government securities, futures contracts,
options on futures contracts, forward contracts and options on foreign
currencies may be traded on foreign exchanges and over-the-counter in foreign
countries. Such transactions are subject to the risk of governmental actions
affecting trading in or the prices of foreign currencies or securities. The
value of such positions also could be adversely affected by (i) other complex
foreign political and economic factors, (ii) lesser availability than in the
United States of data on which to make trading decisions, (iii) delays in a
Portfolio's ability to act upon economic events occurring in foreign markets
during nonbusiness hours in the United States, (iv) the imposition of
different exercise and settlement terms and procedures and margin
requirements than in the United States, and (v) low trading volume.

/diamond/ ZERO COUPON, PAY-IN-KIND AND
STEP COUPON SECURITIES

Subject to any limitations set forth in the policies and investment
restrictions for a Portfolio, a Portfolio may invest in zero coupon,
pay-in-kind or step coupon securities. Zero coupon and step coupon bonds are
issued and traded at a discount from their face amounts. They do not entitle
the holder to any periodic payment of interest prior to maturity or prior to
a specified date when the securities begin paying current interest. The
discount from the face amount or par value depends on the time remaining
until cash payments begin, prevailing interest rates, liquidity of the
security and the perceived credit quality of the issuer. Pay-in-kind
securities may pay all or a portion of their interest or dividends in the
form of additional securities. Because they do not pay current income, the
price of pay-in-kind securities can be very volatile when interest rates
change.

Current Federal income tax law requires holders of zero coupon securities and
step coupon securities to report the portion of the original issue discount
on such securities that accrues that year as interest income, even though the
holders receive no cash payments of interest during the year. In order to
qualify as a "regulated investment company" under the Internal Revenue Code,
each Portfolio must distribute its investment company taxable income,
including the original issue discount accrued on zero coupon or step coupon
bonds. Because a Portfolio will not receive cash payments on a current basis
in respect of accrued original-issue discount on zero coupon bonds or step
coupon bonds during the period before interest payments begin, in some years
a Portfolio may have to distribute cash obtained from other sources in order
to satisfy the distribution requirements under the Code. A Portfolio might
obtain such cash from selling other portfolio holdings. These actions are
likely to reduce the assets to which a Portfolio's expenses could be
allocated and to reduce the rate of return for the Portfolio. In some
circumstances, such sales might be necessary in order to satisfy cash
distribution requirements even though investment considerations might
otherwise make it undesirable for the Portfolio to sell the securities at the
time.

Generally, the market prices of zero coupon, step coupon and pay-in-kind
securities are more volatile than the prices of securities that pay interest
periodically and in cash and are likely to respond to changes in interest
rates to a greater degree than other types of debt securities having similar
maturities and credit quality.

/diamond/ WARRANTS AND RIGHTS

Subject to its investment limitations, a Portfolio may invest in warrants and
rights. Warrants are, in effect, longer-term call options. They give the
holder the right to purchase a given number of shares of a particular company
at specified prices, usually higher than the market price at the time of
issuance, for a period of years or to perpetuity. The purchaser of a warrant
expects the market price of the security will exceed the

34
<PAGE>

purchase price of the warrant plus the exercise price of the warrant, thus
giving him a profit. Of course, because the market price may never exceed the
exercise price before the expiration date of the warrant, the purchaser of
the warrant risks the loss of the entire purchase price of the warrant.
Warrants generally trade in the open market and may be sold rather than
exercised. Warrants are sometimes sold in unit form with other securities of
an issuer. Units of warrants and common stock may be employed in financing
young unseasoned companies. The purchase price of a warrant varies with the
exercise price of the warrant, the current market value of the underlying
security, the life of the warrant and various other investment factors.

In contrast, rights, which also represent the right to buy common shares,
normally have a subscription price lower than the current market value of the
common stock and a life of two to four weeks.

Warrants and rights may be considered more speculative than certain other
types of investments in that they do not entitle a holder to dividends or
voting rights with respect to the securities which may be purchased, nor do
they represent any rights in the assets of the issuing company. Also, the
value of a warrant or right does not necessarily change with the value of the
underlying securities and a warrant or right ceases to have value if it is
not exercised prior to the expiration date.

/diamond/ MORTGAGE-BACKED SECURITIES

A Portfolio may invest in mortgage-backed securities issued or guaranteed by
the U.S. Government, its agencies or instrumentalities, or institutions such
as banks, insurance companies, and savings and loans. Some of these
securities, such as Government National Mortgage Association ("GNMA")
certificates, are backed by the full faith and credit of the U.S. Treasury
while others, such as Federal Home Loan Mortgage Corporation ("Freddie Mac")
certificates, are not.

Mortgage-backed securities represent interests in a pool of mortgages.
Principal and interest payments made on the mortgages in the underlying
mortgage pool are passed through to the Portfolio. Unscheduled prepayments of
principal shorten the securities' weighted average life and may lower their
total return. The value of these securities also may change because of
changes in the market's perception of the creditworthiness of the federal
agency or private institution that issued them. In addition, the mortgage
securities market in general may be adversely affected by changes in
governmental regulation or tax policies.

/diamond/ ASSET-BACKED SECURITIES

Asset-backed securities represent interests in pools of consumer loans
(generally unrelated to mortgage loans) and most often are structured as
pass-through securities. Interest and principal payments ultimately depend on
payment of the underlying loans by individuals, although the securities may
be supported by letters of credit or other credit enhancements. The
underlying assets (E.G., loans) are subject to prepayments which shorten the
securities' weighted average life and may lower their returns. If the credit
support or enhancement is exhausted, losses or delays in payment may result
if the required payments of principal and interest are not made. The value of
these securities also may change because of changes in the market's
perception of the creditworthiness of the servicing agent for the pool, the
originator of the pool, or the financial institution providing the credit
support or enhancement. A Portfolio will invest its assets in asset-backed
securities subject to any limitations set forth in its investment policies or
restrictions.

/diamond/ PASS-THROUGH SECURITIES

Subject to a Portfolio's investment restrictions and policies, a Portfolio
may invest its net assets in various types of pass-through securities, such
as mortgage-backed securities, asset-backed securities and participation
interests. A pass-through security is a share or certificate of interest in a
pool of debt obligations that have been repackaged by an intermediary, such
as a bank or broker-dealer. The purchaser receives an undivided interest in
the underlying pool of securities. The issuers of the underlying securities
make interest and principal payments to the intermediary which are passed
through to purchasers, such as the Portfolio. The most common type of
pass-through securities are mortgage-backed securities. GNMA Certificates are
mortgage-backed securities that evidence an undivided interest in a pool of
mortgage

35
<PAGE>

loans. GNMA Certificates differ from traditional bonds in that principal is
paid back monthly by the borrowers over the term of the loan rather than
returned in a lump sum at maturity. The Portfolio will generally purchase
"modified pass-through" GNMA Certificates, which entitle the holder to
receive a share of all interest and principal payments paid and owned on the
mortgage pool, net of fees paid to the "issuer" and GNMA, regardless of
whether or not the mortgagor actually makes the payment. GNMA Certificates
are backed as to the timely payment of principal and interest by the full
faith and credit of the U.S. Government.

The Federal Home Loan Mortgage Corporation ("FHLMC") issues two types of
mortgage pass-through securities: mortgage participation certificates ("PCs")
and guaranteed mortgage certificates ("GMCs"). PCs resemble GNMA Certificates
in that each PC represents a pro rata share of all interest and principal
payments made and owned on the underlying pool. FHLMC guarantees timely
payments of interest on PCs and the full return of principal. GMCs also
represent a pro rata interest in a pool of mortgages. However, these
instruments pay interest semi-annually and return principal once a year in
guaranteed minimum payments. This type of security is guaranteed by FHLMC as
to timely payment of principal and interest, but is not backed by the full
faith and credit of the U.S. Government.

FNMA issues guaranteed mortgage pass-through certificates ("FNMA
Certificates"). FNMA Certificates resemble GNMA Certificates in that each
FNMA Certificate represents a pro rata share of all interest and principal
payments made and owned on the underlying pool. This type of security is
guaranteed by FNMA as to timely payment of principal and interest, but it is
not backed by the full faith and credit of the U.S. Government.

/diamond/ OTHER INCOME PRODUCING
SECURITIES

Subject to each Portfolio's investment restrictions and policies, other types
of income producing securities that a Portfolio may purchase include, but are
not limited to, the following types of securities:

VARIABLE AND FLOATING RATE OBLIGATIONS. These types of securities are
relatively long-term instruments that often carry demand features
permitting the holder to demand payment of principal at any time or at
specified intervals prior to maturity.

STANDBY COMMITMENTS. These instruments, which are similar to a put, give a
Portfolio the option to obligate a broker, dealer or bank to repurchase a
security held by the Portfolio at a specified price.

TENDER OPTION BONDS. Tender option bonds are relatively long-term bonds
that are coupled with the agreement of a third party (such as a broker,
dealer or bank) to grant the holders of such securities the option to
tender the securities to the institution at periodic intervals.

INVERSE FLOATERS. Inverse floaters are instruments whose interest bears an
inverse relationship to the interest rate on another security. A Portfolio
will not invest more than 5% of its assets in inverse floaters.

SEE "DEBT SECURITIES AND FIXED-INCOME INVESTING," PAGE 28 OF THE PROSPECTUS
FOR A DESCRIPTION OF RISKS INVOLVED WITH THESE SECURITIES.

A Portfolio will purchase instruments with demand features, standby
commitments and tender option bonds primarily for the purpose of increasing
the liquidity of its portfolio. See Appendix A in this Statement of
Additional Information regarding income producing securities in which a
Portfolio may invest.

/diamond/ ILLIQUID AND RESTRICTED/144A
SECURITIES

A Portfolio may invest up to 15% (the Money Market Portfolio may only invest up
to 10%) of its net assets in illiquid securities (I.E., securities that are not
readily marketable).

In recent years, a large institutional market has developed for certain
securities that are not registered under the 1933 Act. Institutional
investors generally will not seek to sell these instruments to the general
public, but instead will often depend on an efficient institutional market in
which such unregistered securities can readily be resold or on an issuer's
ability to honor a demand for repayment. Therefore, the fact that there are
contractual or legal restrictions on resale to the general public or certain
institutions is not dispositive of the liquidity of such investments.

36
<PAGE>

Rule 144A under the 1933 Act established a "safe harbor" from the
registration requirements of the 1933 Act for resales of certain securities
to qualified institutional buyers. Institutional markets for restricted
securities that might develop as a result of Rule 144A could provide both
readily ascertainable values for restricted securities and the ability to
liquidate an investment in order to satisfy share redemption orders. An
insufficient number of qualified institutional buyers interested in
purchasing a Rule 144A-eligible security held by a Portfolio could, however,
adversely affect the marketability of such portfolio security and the
Portfolio might be unable to dispose of such security promptly or at
reasonable prices.

The Fund's Board of Directors has authorized each Portfolio's Sub-Adviser to
make liquidity determinations with respect to Rule 144A securities in
accordance with the guidelines established by the Board of Directors. Under
the guidelines, the Portfolio's Sub-Adviser will consider the following
factors in determining whether a Rule 144A security is liquid: 1) the
frequency of trades and quoted prices for the security; 2) the number of
dealers willing to purchase or sell the security and the number of other
potential purchasers; 3) the willingness of dealers to undertake to make a
market in the security; and 4) the nature of the marketplace trades,
including the time needed to dispose of the security, the method of
soliciting offers and the mechanics of the transfer. The sale of illiquid
securities often requires more time and results in higher brokerage charges
or dealer discounts and other selling expenses than does the sale of
securities eligible for trading on national securities exchanges or in the
OTC markets. The Portfolio may be restricted in its ability to sell such
securities at a time when a Portfolio's Sub-Adviser deems it advisable to do
so. In addition, in order to meet redemption requests, a Portfolio may have
to sell other assets, rather than such illiquid securities, at a time which
is not advantageous.

/diamond/ OTHER INVESTMENT COMPANIES

In accordance with certain provisions of the 1940 Act, the Portfolio may
invest up to 10% of its total assets, calculated at the time of purchase, in
the securities of money market funds, which are investment companies. The
1940 Act also provides that a Portfolio generally may not invest (i) more
than 5% of its total assets in the securities of any one investment company
or (ii) in more than 3% of the voting securities of any other investment
company. A Portfolio (except the Growth, Bond and Global Portfolios) will
indirectly bear its proportionate share of any investment advisory fees and
expenses paid by the funds in which it invest, in addition to the investment
advisory fee and expenses paid by the Portfolio. If the Growth, Bond and
Global Portfolios invest in a money market fund, the Investment Adviser will
reduce its advisory fee by the amount of any investment advisory or
administrative service fees paid to the investment manager of the money
market fund.

The International Equity and U.S. Equity Portfolios may not purchase
securities of other investment companies, other than a security acquired in
connection with a merger, consolidation, acquisition, reorganization or offer
of exchange and except as otherwise permitted under the 1940 Act. Investments
by the International Equity and U.S. Equity Portfolios in GEI Short-Term
Investment Fund, an investment fund advised by GEIM, created specifically to
serve as a vehicle for the collective investment of cash balances of these
Portfolios and other accounts advised by GEIM or GEIC, is not considered an
investment in another investment company for purposes of these restrictions.
The GEI Short-Term Investment Fund is not registered with the Securities and
Exchange Commission as an investment company.

/diamond/ QUALITY AND DIVERSIFICATION
REQUIREMENTS (MONEY MARKET
PORTFOLIO)

For the purpose of maintaining a stable net asset value per share, the Money
Market Portfolio will (i) limit its investment in the securities (other than
U.S. Government securities and securities that benefit from certain types of
credit enhancement arrangements) of any one issuer to no more than 5% of its
total assets, measured at the time of purchase, except at any time for an
investment in a single issuer of up to 25% of the Portfolio's total assets
held for not more than three business days; and (ii) limit investments to
securities that present minimal credit risks and securities (other than U.S.
Government securities) that are rated within the highest short-term rating
category by

37
<PAGE>

at least two nationally recognized statistical rating organizations
("NRSROs") or by the only NRSRO that has rated the security. Securities which
originally had a maturity of over one year are subject to more complicated,
but generally similar rating requirements. A description of illustrative
credit ratings is set forth in Appendix A to the Fund's Prospectus. The
Portfolio may also purchase unrated securities that are of comparable quality
to the rated securities described above as determined by the Board of
Directors. Additionally, if the issuer of a particular security has issued
other securities of comparable priority and security and which have been
rated in accordance with (ii) above, that security will be deemed to have the
same rating as such other rated securities.

In addition, the Board of Directors of the Fund has adopted procedures which
(i) require the Fund's Directors to approve or ratify purchases by the
Portfolio of securities (other than U.S. Government securities) that are
rated by only one NRSRO or that are unrated; (ii) require the Portfolio to
maintain a dollar-weighted average portfolio maturity of not more than 90
days and to invest only in securities with a remaining maturity of not more
than 13 months; and (iii) require the Portfolio, in the event of certain
downgrading of or defaults on portfolio holdings, to dispose of the holdings,
subject in certain circumstances to a finding by the Fund's Directors that
disposing of the holding would not be in the Portfolio's best interest.

/diamond/ BANK AND THRIFT OBLIGATIONS

Bank and thrift obligations in which a Portfolio may invest are limited to
dollar-denominated certificates of deposit, time deposits and bankers'
acceptances issued by bank or thrift institutions. Certificates of deposit
are short-term, unsecured, negotiable obligations of commercial banks and
thrift institutions. Time deposits are non-negotiable deposits maintained in
bank or thrift institutions for specified periods of time at stated interest
rates. Bankers' acceptances are negotiable time drafts drawn on commercial
banks usually in connection with international transactions.

Bank and thrift obligations in which the Portfolio invests may be, but are
not required to be, issued by institutions that are insured by the Federal
Deposit Insurance Corporation (the "FDIC"). Bank and thrift institutions
organized under Federal law are supervised and examined by Federal
authorities and are required to be insured by the FDIC. Institutions
organized under state law are supervised and examined by state banking
authorities but are insured by the FDIC only if they so elect. State
institutions insured by the FDIC are subject to Federal examination and to a
substantial body of Federal law regulation. As a result of Federal and state
laws and regulations, federally insured bank and thrift institutions are,
among other things, generally required to maintain specified levels of
reserves and are subject to other supervision and regulation designed to
promote financial soundness.

Obligations of foreign branches of domestic banks and of United Kingdom
branches of foreign banks may be general obligations of the parent bank in
addition to the issuing branch, or may be limited by the terms of a specific
obligation and governmental regulation. Such obligations are subject to
different risks than are those of domestic banks or domestic branches of
foreign banks. These risks include foreign economic and political
developments, foreign governmental restrictions that may adversely affect
payment of principal and interest on the obligations, foreign exchange
controls and foreign withholding and other taxes on interest income. Foreign
branches of domestic banks and United Kingdom branches of foreign banks are
not necessarily subject to the same or similar regulatory requirements that
apply to domestic banks, such as mandatory reserve requirements, loan
limitations and accounting, auditing and financial recordkeeping
requirements. In addition, less information may be publicly available about a
foreign branch of a domestic bank or about a foreign bank than about a
domestic bank. Certificates of deposit issued by wholly-owned Canadian
subsidiaries of domestic banks are guaranteed as to repayment of principal
and interest (but not as to sovereign risk) by the domestic parent bank.

Obligations of domestic branches of foreign banks may be general obligations
of the parent bank in addition to the issuing branch, or may be limited by
the terms of a specific obligation and by governmental regulation as well as
governmental action in the country in which the foreign bank has its head
office. A domestic branch of a foreign bank with assets in excess of

38
<PAGE>

$1 billion may or may not be subject to reserve requirements imposed by the
Federal Reserve System or by the state in which the branch is located if the
branch is licensed by that state. In addition, branches licensed by the
Comptroller of the Currency and branches licensed by certain states ("State
Branches") may or may not be required to: (i) pledge to the regulator, by
depositing assets with a designated bank within the state, an amount of its
assets equal to 5% of its total liabilities; and (ii) maintain assets within
the state in an amount equal to a specified percentage of the aggregate
amount of liabilities of the foreign bank payable at or through all of its
agencies or branches within the state. The deposits of State Branches may not
necessarily be insured by the FDIC.

A Portfolio may purchase obligations, or all or a portion of a package of
obligations, of smaller institutions that are Federally insured, provided the
obligation of any single institution does not exceed the Federal insurance
coverage of the obligation, presently $100,000.

MANAGEMENT OF THE FUND

DIRECTORS AND OFFICERS

The directors and executive officers of the Fund and their principal
occupations for at least the last five years are set forth below:

PETER R. BROWN, DIRECTOR (DOB 5/10/28), 1475 South Belcher Road, Largo,
Florida 33771. Chairman of the Board, Peter Brown Construction Company,
(construction contractors and engineers), Largo, Florida (1963 - present);
Trustee of IDEX Series Fund, former Trustee of IDEX Fund, IDEX II Series
Fund and IDEX Fund 3; Rear Admiral (Ret.) U.S. Navy Reserve, Civil Engineer
Corps.

CHARLES C. HARRIS, DIRECTOR (DOB 7/15/ 30), 35 Winston Drive, Clearwater,
Florida 34616. Retired (1988 - present); Senior Vice President, Treasurer
(1966 - 1988), Western Reserve Life Assurance Co. of Ohio; Vice President,
Treasurer (1968 - 1988), Director (1968 - 1987), Pioneer Western Corporation;
Vice President of the Fund (1986 to December, 1990); Trustee of IDEX Series
Fund, former Trustee of IDEX Fund, IDEX II Series Fund and IDEX Fund 3.

RUSSELL A. KIMBALL, JR., DIRECTOR (DOB 8/17/44), 1160 Gulf Boulevard,
Clearwater Beach, Florida 34630. General Manager, Sheraton Sand Key Resort
(resort hotel), Clearwater, Florida (1975 - present).

JOHN R. KENNEY (1, 2) CHAIRMAN OF THE BOARD OF DIRECTORS AND PRESIDENT (DOB
2/8/ 38). Chairman of the Board of Directors (1982 - present), Chief
Executive Officer (1982 - Present), President (1978 - 1987 and December, 1992
- present), Director (1978 - present), Western Reserve Life Assurance Co. of
Ohio; Chairman of the Board of Directors (September, 1996 - present), WRL
Investment Management, Inc. (investment adviser), Largo, Florida; Chairman
of the Board of Directors (September, 1996 - present), WRL Investment
Services, Inc., Largo, Florida; Chairman of the Board of Directors and Chief
Executive Officer (1988 - February, 1991), President (1988 - 1989), Director
(1976 - February, 1991), Executive Vice President (1972 - 1988), Pioneer
Western Corporation (financial services), Largo, Florida; President and
Director (1985 - 1990) and Director (December, 1990 - present); Idex
Management, Inc. (investment adviser), Largo, Florida; Trustee (1987
- September. 1996), Chairman (December, 1989 - September, 1990 and November,
1990 - September, 1996) and President and Chief Executive Officer (November,
1986 - September, 1990), IDEX Fund, IDEX II Series Fund and IDEX Fund 3;
Trustee and Chairman (September, 1996 - present) of IDEX Series Fund,
(investment companies) all of Largo, Florida.

G. JOHN HURLEY (1, 2) DIRECTOR AND EXECUTIVE VICE PRESIDENT (DOB 9/12/48).
Executive Vice President (June, 1993 - present), Chief Operating Officer
(March, 1994 - present), Western Reserve Life Assurance Co. of Ohio; Director
(September, 1996 - present), WRL Investment Management, Inc. (investment
adviser), Largo, Florida; Director (September, 1996 - present), WRL
Investment Services, Inc., Largo, Florida; President and Chief

39
<PAGE>

Executive Officer (September, 1990 - September, 1996), Trustee (June, 1990
- September, 1996) and Executive Vice President (June, 1988 - September, 1990)
of IDEX Fund, IDEX II Series Fund and IDEX Fund 3 (investment companies);
Trustee, President and Chief Financial Officer (September, 1996 - present) of
IDEX Series Fund; President, Chief Executive Officer and Director of
InterSecurities, Inc. (May, 1988 - present); Assistant Vice President of
AEGON USA Managed Portfolios, Inc. (September, 1991 - August, 1992); Vice
President of Pioneer Western Corporation (May, 1988 - February, 1991)
(financial services), Largo, Florida.

RICHARD B. FRANZ, II (1, 2) Treasurer (DOB 7/12/50). Senior Vice President
(1987 - present), Chief Financial Officer (1987 - December, 1995) and
Treasurer (1988 - present), Western Reserve Life Assurance Co. of Ohio;
Senior Vice President and Treasurer (1988 - February, 1991), Pioneer Western
Corporation (financial services), Largo, Florida; Treasurer (1988
- September, 1990 and November, 1990 - December, 1996), IDEX Fund, IDEX II
Series Fund and IDEX Fund 3 (investment companies), all of Largo, Florida.

REBECCA A. FERRELL (1, 2) SECRETARY, VICE PRESIDENT AND COUNSEL (DOB
12/10/60). Assistant Vice President and Counsel (June, 1995 - present),
Attorney (August, 1993 - June, 1995), Western Reserve Life Assurance Co. of
Ohio; Secretary and Assistant Vice President (March, 1994 - September, 1995),
Secretary, Vice President and Counsel (September, 1995 - September, 1996) of
IDEX Fund, IDEX II Series Fund and IDEX Fund 3 (investment companies);
Secretary, Vice President and Counsel of IDEX Series Fund (September, 1996
- present); Attorney (September, 1992 - August, 1993), Hearne, Graziano, Nader
& Buhr, P.A.; Legal Writing Instructor (August, 1991 - June, 1992), Florida
State University College of Law.

ALAN M. YAEGER (1, 2) EXECUTIVE VICE PRESIDENT (DOB 10/21/46). Executive Vice
President (June, 1993 - present), Chief Financial Officer (December, 1995
- present), Senior Vice President (1981 - June, 1993) and Actuary (1972
- present), Western Reserve Life Assurance Co. of Ohio; Director (September,
1996 - present), WRL Investment Management, Inc., (investment adviser) Largo,
Florida; Director (September, 1996 - present), WRL Investment Services, Inc.,
Largo, Florida.
- ------------------------
(1) The principal business address is Western Reserve Life Assurance Co. of
Ohio, P.O. Box 5068, Clearwater, Florida 34618-5068.

(2) Interested person as defined in the 1940 Act and affiliated person of
Investment Adviser.

The Fund pays no salaries or compensation to any of its officers, all of whom
are employees of WRL. The Fund pays an annual fee of $6,000 to each Director
who is not affiliated with the Investment Adviser or the Sub-Advisers
("disinterested Director"). Each Director also receives $500, plus expenses,
per each regular and special Board meeting attended. The table below shows
each Portfolio's allocation of Directors' fees and expenses paid for the year
ended December 31, 1995. The compensation table provides compensation amounts
paid to disinterested Directors of the Fund for the fiscal year ended
December 31, 1995.

40
<PAGE>

DIRECTOR'S FEES PAID - YEAR ENDED DECEMBER 31, 1995

PORTFOLIO AMOUNT PAID
- --------- -----------
Aggressive Growth $ 2,251
Emerging Growth 4,959
International Equity(1) N/A

Global Sector(1) N/A

Global 4,495
Growth 10,513
C.A.S.E. Growth 3
U.S. Equity(1) N/A
Value Equity(1) N/A
Tactical Asset Allocation 396
Equity-Income 3,426
Utility 411
Balanced 521
Bond 1,255
Short-to-Intermediate Government 242
Money Market 528
- -----------------
(1) Portfolio had not commenced operations as of December 31, 1995.

COMPENSATION TABLE

<TABLE>
<CAPTION>
TOTAL COMPENSATION PAID
AGGREGATE COMPENSATION TO DIRECTORS FROM
FROM WRL SERIES FUND, INC.
NAME OF PERSON, POSITION WRL SERIES FUND, INC. AND IDEX SERIES FUND
- ------------------------ -------------------------- ------------------------
<S> <C> <C>
Peter R. Brown, Director $9,500 $32,500
Charles C. Harris, Director $9,500 $32,000
Russell A. Kimball, Jr., Director $8,500 $ 8,500
</TABLE>

Commencing on January 1, 1996, a non-qualified deferred compensation plan
(the "Plan") became available to directors who are not interested persons of
the Fund. Under the Plan, compensation may be deferred that would otherwise
be payable by the Fund, or IDEX Series Fund to a disinterested Director or
Trustee on a current basis for services rendered as director. (IDEX Fund and
IDEX Fund 3 were merged with and into the Growth Portfolio of IDEX II Series
Fund on September 20, 1996, at which time IDEX II Series Fund was renamed
IDEX Series Fund.) Deferred compensation amounts will accumulate based on the
value of Class A shares of a portfolio of IDEX Series Fund (without
imposition of sales charge), as elected by the director. It is not
anticipated that the Plan will have any impact on the Fund. As of December 1,
1996, the Directors and officers of the Fund beneficially owned in the
aggregate less than 1% of the Fund's shares through ownership of Policies and
Annuity Contracts indirectly invested in the Fund. The Board of Directors has
established an Audit Committee consisting of Messrs. Brown, Harris and
Kimball.

/diamond/ THE INVESTMENT ADVISER

The information that follows supplements the information provided about the
Investment Adviser under the caption "Management of the Fund - Investment
Adviser" in the Prospectus.

WRL Investment Management, Inc. ("WRL Management") serves as the investment
adviser to each Portfolio of the Fund pursuant to an Investment Advisory
Agreement dated January 1, 1997 with the Fund. The Investment Adviser is a
wholly-owned subsidiary of Western Reserve, which is a wholly-owned
subsidiary of First AUSA

41
<PAGE>

Life Insurance Company ("First AUSA"), a stock life insurance company which
is wholly-owned by AEGON USA, Inc. ("AEGON"). AEGON is a financial services
holding company whose primary emphasis is on life and health insurance and
annuity and investment products. AEGON is a wholly-owned indirect subsidiary
of AEGON nv, a Netherlands corporation, which is a publicly traded
international insurance group.

The Investment Advisory Agreement was approved by the Fund's Board of
Directors, including a majority of the Directors who are not "interested
persons" of the Fund (as defined in the 1940 Act) on October 3, 1996 and by
the shareholders of each Portfolio of the Fund on December 16, 1996. The
Investment Advisory Agreement provides that it will continue in effect for an
initial term ending January 1, 1999, and from year to year thereafter, if
approved annually (a) by the Board of Directors of the Fund or by a majority
of the outstanding shares of the Portfolio, and (b) by a majority of the
Directors who are not parties to such contract or "interested persons" of any
such party. The Investment Advisory Agreement may be terminated without
penalty on 60 days' written notice at the option of either party or by the
vote of the shareholders of each Portfolio and terminates automatically in
the event of its assignment (within the meaning of the 1940 Act).

While the Investment Adviser is at all times subject to the direction of the
Board of Directors of the Fund, the Investment Advisory Agreement provides
that the Investment Adviser, subject to review by the Board of Directors, is
responsible for the actual management of the Fund and has responsibility for
making decisions to buy, sell or hold any particular security. The Investment
Adviser also is obligated to provide all the office space, facilities,
equipment and personnel necessary to perform its duties under the Investment
Advisory Agreement. For further information about the management of each
Portfolio of the Fund, see "The Sub-Advisers", on page 45-48.

ADVISORY FEE. The method of computing the investment advisory fee is fully
described in the Fund's Prospectus. For the years ended December 31, 1995,
1994 and 1993, the Investment Adviser was paid fees for its services to each
Portfolio in the following amounts:

ADVISORY FEES

YEAR ENDED DECEMBER 31
---------------------------------------------
PORTFOLIO 1995 1994 1993
- --------- -------------- -------------- ------------
Aggressive Growth $ 849,097 $ 125,449(1) $ N/A
Emerging Growth 1,838,573 1,262,170 240,6113
International Equity(2) N/A N/A N/A

Global Sector(2) N/A N/A N/A

Global 2,075,054 1,600,706 232,026
Growth 7,847,750 6,850,340 6,840,711
C.A.S.E. Growth 5,519(4) N/A N/A
U.S. Equity(2) N/A N/A N/A
Value Equity(2) N/A N/A N/A
Tactical Asset Allocation 433,844(5) N/A N/A
Equity-Income 1,746,022 1,180,759 224,748(3)
Utility 128,859 33,553(1) N/A
Balanced 195,339 67,043(1) N/A
Bond 409,862 407,667 387,264
Short-to-Intermediate Government 126,134 133,919 72,622
Money Market 422,357 351,798 224,406
-------------- -------------- -------------
TOTAL $16,078,410 $12,013,404 $8,222,388
============== ============== =============
- -----------------
(1) Portfolio commenced operations March 1, 1994.
(2) Portfolio had not commenced operations as of December 31, 1995.
(3) Portfolio commenced operations March 1, 1993.
(4) Portfolio commenced operations May 1, 1995.
(5) Portfolio commenced operations January 3, 1995.

42
<PAGE>

PAYMENT OF EXPENSES. Under the terms of the Investment Advisory Agreement,
the Investment Adviser is responsible for providing investment advisory
services and furnishing office space for officers and employees of the
Investment Adviser connected with investment management of the Portfolios.
Each Portfolio pays: all expenses incurred in connection with the formation
and organization of a Portfolio, including the preparation (and filing, when
necessary) of the Portfolio's contracts, plans, and documents, conducting
meetings of organizers, directors and shareholders; preparing and filing the
post-effective amendment to the Fund's registration statement effecting
registration of a Portfolio and its shares under the 1940 Act and the 1933
Act and all other matters relating to the information and organization of a
Portfolio and the preparation for offering its shares; expenses in connection
with ongoing registration or qualification requirements under Federal and
state securities laws; investment advisory fees; pricing costs (including the
daily calculations of net asset value); brokerage commissions and all other
expenses in connection with execution of portfolio transactions, including
interest; all federal, state and local taxes (including stamp, excise, income
and franchise taxes) and the preparation and filing of all returns and
reports in connection therewith; any compensation, fees, or reimbursements
which the Fund pays to its Directors who are not "interested persons," as
that phrase is defined in the 1940 Act, of the Fund or WRL Management;
compensation of the Fund's custodian, administrative and transfer agent,
registrar and dividend disbursing agent; legal, accounting and printing
expenses; other administrative, clerical, recordkeeping and bookkeeping
expenses; auditing fees; certain insurance premiums; services for
shareholders (including allocable telephone and personnel expenses); costs of
certificates and the expenses of delivering such certificates to the
purchaser of shares relating thereto; expenses of local representation in
Maryland; fees and/or expenses payable pursuant to any plan of distribution
adopted with respect to the Fund in accordance with Rule 12b-1 under the 1940
Act; expenses of shareholders' meetings and of preparing, printing, and
distributing notices, proxy statements and reports to shareholders; expenses
of preparing and filing reports with Federal and state regulatory
authorities; all costs and expenses, including fees and disbursements, of
counsel and auditors, filing and renewal fees and printing costs in
connection with the filing of any required amendments, supplements or
renewals of registration statement, qualifications or prospectuses under the
Securities Act of 1933 and the securities laws of any states or territories,
subsequent to the effectiveness of the initial registration statement under
the Securities Act of 1933; all costs involved in preparing and printing
prospectuses of the Fund; extraordinary expenses; and all other expenses
properly payable by the Fund or the Portfolios.

The Investment Adviser has voluntarily undertaken, until at least April 30,
1997, to pay expenses on behalf of the Portfolios (except the Global Sector
Portfolio) to the extent normal operating expenses (including investment
advisory fees but excluding interest, taxes, brokerage fees, commissions and
extraordinary charges) exceed, as a percentage of each Portfolio's average
daily net assets, 1.00% (0.70% for the Bond and Money Market Portfolios,
1.50% for the International Equity Portfolio and 1.30% for the U.S. Equity
Portfolio). The following expenses were paid by the previous investment
adviser, Western Reserve, for the fiscal years ended December 31, 1995, 1994,
and 1993:

43
<PAGE>

PORTFOLIO EXPENSES PAID BY INVESTMENT ADVISER

YEAR ENDED DECEMBER 31
------------------------------------------
PORTFOLIO 1995 1994 1993
- --------------------------------- ------------ ------------- -----------
Aggressive Growth $ -0-(1) $ 28,885(2) $ N/A
Emerging Growth -0-(1) -0-(1) 51,181(6)
International Equity(7) N/A N/A N/A

Global Sector(7) N/A N/A N/A

Global(3) -0-(1) -0-(1) -0-(1)
Growth -0-(1) -0-(1) -0-(1)
C.A.S.E. Growth 23,832(4) N/A N/A
U.S. Equity(7) N/A N/A N/A
Value Equity(7) N/A N/A N/A
Tactical Asset Allocation(5) -0-(1) N/A N/A
Equity-Income -0-(1) -0-(1) 36,518(6)
Utility 14,417 40,1482 N/A
Balanced -0-(1) 28,629(2) N/A
Bond -0-(1) -0-(1) -0-(1)
Short-to-Intermediate Government -0-(1) -0-(1) 2,226
Money Market -0-(1) -0-(1) -0-(1)
- -----------------
(1) There were no expenses paid on behalf of this Portfolio because the
expenses did not exceed the limitations.
(2) Portfolio commenced operations on March 1, 1994.
(3) Prior to May 1, 1994, the Investment Adviser had voluntarily undertaken
to pay expenses on behalf of the Global Portfolio to the extent that
these expenses exceeded 2.50% of the first $30 million of assets, 2.00%
of the next $70 million of assets, and 1.50% of assets in excess of $100
million.
(4) Portfolio commenced operations on May 1, 1995.
(5) Portfolio commenced operations on January 3, 1995.
(6) Portfolio commenced operations on March 1, 1993.
(7) Portfolio had not commenced operations as of December 31, 1995.

SERVICE AGREEMENT. Effective January 1, 1997, the Fund has entered into an
Administrative Services and Transfer Agency Agreement ("Services Agreement")
with WRL Investment Services, Inc. ("WRL Services"), an affiliate of WRL
Management and Western Reserve, to furnish the Fund with administrative
services to assist the Fund in carrying out certain of its functions and
operations. The Service Agreement was approved by the Fund's Board of
Directors, including a majority of Directors who are not "interested persons"
of the Fund (as defined in the 1940 Act) on October 3, 1996. Under this
Agreement, WRL Services shall furnish to each Portfolio, subject to the
overall supervision of the Fund's Board, supervisory, administrative, and
transfer agency services, including recordkeeping and reporting. WRL Services
is reimbursed by the Fund monthly on a cost incurred basis.

DISTRIBUTION AGREEMENT. Effective January 1, 1997, the Fund adopted a
distribution plan ("Distribution Plan") pursuant to Rule 12b-1 under the 1940
Act, as amended. Pursuant to the Distribution Plan, the Fund has entered into
a Distribution Agreement with InterSecurities, Inc. ("ISI"), whose principal
office is located at 201 Highland Avenue, Largo, Florida 33770. The
Distribution Plan and related Agreement were approved by the Fund's Board of
Directors, including a majority of Directors who are not "interested persons"
of the Fund (as defined in the 1940 Act) on October 3, 1996, and the
Distribution Plan was approved by the shareholders of each Portfolio of the
Fund on December 16, 1996. ISI is an affiliate of the Investment Adviser.

Under the Distribution Plan and Distribution Agreement, the Fund, on behalf
of the Portfolios, will reimburse ISI after each calendar month for certain
Fund distribution expenses incurred or paid by ISI, provided that these
expenses in the aggregate do not exceed 0.15%, on an annual basis, of the
average daily net asset value of shares of each Portfolio.

Distribution expenses for which ISI may be reimbursed under the Distribution
Plan and Distribution Agreement include, but are not limited to, expenses of
printing and distributing the Fund's prospectus and statement of additional
information to potential investors; developing and preparing Fund
advertisements; sales literature and other promotional materials; holding
seminars

44
<PAGE>

and sales meetings designed to promote distribution of Fund shares; the
development of consumer-oriented sales materials describing and/or relating
to the Fund; and expenses attributable to "distribution-related services"
provided to the Fund, which include such things as salaries and benefits,
office expenses, equipment expenses, training costs, travel costs, printing
costs, supply expenses, computer programming time, and data center expenses,
each as they relate to the promotion of the sale of Fund shares.

ISI submits to the Directors of the Fund for approval annual distribution
budgets and quarterly reports of distribution expenses with respect to each
Portfolio. ISI allocates to each Portfolio distribution expenses specifically
attributable to the distribution of shares of such Portfolio. Distribution
expenses not specifically attributable to the distribution of shares of a
particular Portfolio are allocated among the Portfolios, based upon the ratio
of net asset value of each Portfolio to the net asset value of all
Portfolios, or such other factors as ISI deems fair and are approved by the
Fund's Board of Directors. ISI has determined that it will not seek payment
by the fund of distribution expenses with respect to any Portfolio during the
fiscal year ending December 31, 1997. Prior to ISI seeking reimbursement,
policyowners will be notified in advance.

It is anticipated that benefits provided by the Distribution Plan may include
lower fixed costs as a percentage of assets as Fund assets increase through
the growth of the Fund due to enhanced marketing efforts.

/diamond/ THE SUB-ADVISERS

This discussion supplements the information provided about each Portfolio's
Sub-Adviser under the caption "Management of the Fund - The Sub-Advisers" in
the Prospectus.

Each Sub-Adviser serves, pursuant to each Sub-Advisory Agreement dated
January 1, 1997 between WRL Management and the respective Sub-Adviser, on
behalf of each Portfolio. The Sub-Advisory Agreements were approved by the
Board of Directors of the Fund, including a majority of the Directors who
were not "interested persons" of the Fund (as defined in the 1940 Act) on
October 3, 1996 and by the shareholders of each Portfolio of the Fund on
December 16, 1996. The Sub-Advisory Agreements provide that they will
continue in effect for an initial term ending January 1, 1999, and from year
to year thereafter, if approved annually (a) by the Board of Directors of the
Fund or by a majority of the outstanding shares of each Portfolio and (b) by
a majority of the Directors who are not parties to such Agreements or
"interested persons" (as defined in the 1940 Act) of any such party. The
Sub-Advisory Agreements may be terminated without penalty on 60 days' written
notice at the option of either party or by the vote of the shareholders of
each Portfolio and terminate automatically in the event of their assignment
(within the meaning of the 1940 Act) or termination of the Investment
Advisory Agreement.

Pursuant to the Sub-Advisory Agreements, each Sub-Adviser provides investment
advisory assistance and portfolio management advice to the Investment Adviser
for their respective Portfolio(s). Subject to review by the Investment
Adviser and the Board of Directors of the Fund, the Sub-Advisers are
responsible for the actual management of their respective Portfolio(s) and
for making decisions to buy, sell or hold a particular security. Each
Sub-Adviser bears all of its expenses in connection with the performance of
its services under their Sub-Advisory Agreement such as compensating and
furnishing office space for their officers and employees connected with
investment and economic research, trading and investment management of the
respective Portfolio(s).

Each Sub-Adviser is a registered investment adviser under the Investment
Advisers Act of 1940, as amended. The Sub-Advisers for the Portfolios of the
Fund are:

FRED ALGER MANAGEMENT, INC. ("Alger Management") serves as Sub-Adviser to the
Aggressive Growth Portfolio. Alger Management, located at 75 Maiden Lane, New
York, New York 10038, is a wholly-owned subsidiary of Fred Alger & Company,
Incorporated, which in turn is a wholly-owned subsidiary of Alger Associates,
Inc., a financial services holding company. Alger Management is generally
engaged in the business of rendering investment advisory services to
institutions and, to a lesser extent, individuals. Alger Management has been
engaged in the business

45
<PAGE>

of rendering investment advisory services since 1964 and has approximately
$5.4 billion under management.

VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT, INC. ("Van Kampen") serves as
Sub-Adviser to the Emerging Growth Portfolio. Van Kampen, located at One
Parkview Plaza, Oakbrook Terrace, Illinois 60181, is an indirect wholly-owned
subsidiary of VK/AC Holding, Inc. ("VK/AC Holding"). VK/AC Holding is a
wholly-owned subsidiary of MSAM Holdings II, Inc., which, in turn, is a
wholly-owned subsidiary of Morgan Stanley Group, Inc.

MERIDIAN INVESTMENT MANAGEMENT CORPORATION ("MERIDIAN") AND INVESCO GLOBAL
ASSET MANAGEMENT LIMITED ("INVESCO") serve as Co-Sub-Advisers to the Global
Sector Portfolio. As discussed in the Prospectus, Meridian has the
responsibility for allocating the Portfolio's assets among asset categories,
countries and/or industries. After these allocations have been designed by
Meridian, INVESCO will select the specific securities within each category,
country or industry.

Meridian is located at 12835 East Arapahoe Road, Tower II, 7th Floor,
Englewood, Colorado 80112. Meridian is a wholly-owned subsidiary of Meridian
Management & Research Corporation ("MM&R"). Meridian provides investment
management and related services to other mutual fund portfolios and
individual, corporate, charitable and retired accounts.

INVESCO is located at Rosebank, 12 Bermudiana Road, Hamilton, Bermuda HM11.
In performing services under its Sub-Advisory Agreement with WRL Management,
INVESCO is authorized to use INVESCO-affiliated companies and their
employees, provided that INVESCO supervises and remains fully responsible for
all such services. Pursuant to this authority, INVESCO has entered into
service agreements with INVESCO Asset Management Limited, 11 Devonshire
Square, London, EC2M 4YR England, for assistance in managing the Portfolio's
investments in foreign securities, and with INVESCO Trust Company, 7800 East
Union Avenue, Denver, Colorado 80237, for assistance in managing the
Portfolio's investments in U.S. securities. These agreements were approved by
the Board of Directors of the Fund, including a majority of the Directors who
were not "interested persons" of the Fund (as defined in the 1940 Act) on
March 18, 1996. INVESCO and its affiliates are indirect wholly-owned
subsidiaries of INVESCO PLC, a global firm that managed approximately $84
billion as of December 31, 1995. INVESCO PLC is headquartered in London, with
money managers located in Europe, North America and the Far East.

JANUS CAPITAL CORPORATION ("Janus") serves as the Sub-Adviser to the Growth
Portfolio, the Bond Portfolio and the Global Portfolio.

Janus, located at 100 Fillmore Street, Denver, Colorado 80206, has been
engaged in the management of the Janus funds since 1969. Janus also serves as
investment adviser or sub-adviser to other mutual funds, and for individual,
corporate, charitable and retirement accounts. The aggregate market value of
the assets managed by Janus was over $40 billion as of October 1, 1996.
Kansas City Southern Industries, Inc. ("KCSI") owns 83% of Janus. KCSI, whose
address is 114 West 11th Street, Kansas City, Missouri 64105-1804, is a
publicly-traded holding company whose largest subsidiary, the Kansas City
Southern Railway Company, is primarily engaged in the transportation
industry. Other KCSI subsidiaries are engaged in financial services and real
estate.

C.A.S.E. MANAGEMENT, INC. ("C.A.S.E. Management") serves as Sub-Adviser to
the C.A.S.E. Growth Portfolio.

C.A.S.E. Management, located at 2255 Glades Road, Suite 221-A, Boca Raton,
Florida 33431, is a wholly-owned subsidiary of C.A.S.E., Inc. C.A.S.E.
Management provides investment management services to financial institutions,
high net worth individuals, and other professional money managers.

NWQ INVESTMENT MANAGEMENT COMPANY, INC. ("NWQ") serves as the Sub-Adviser to
the Value Equity Portfolio.

NWQ, located at 655 South Hope Street, 11th Floor, Los Angeles, California
90017, is a wholly-owned subsidiary of United Asset Management Corporation
and provides investment management services to institutions and high net
worth individuals. NWQ had approximately $5.6 billion in assets under
management as of December 31, 1995.

46
<PAGE>

DEAN INVESTMENT ASSOCIATES ("Dean Investment") serves as Sub-Adviser to the
Tactical Asset Allocation Portfolio.

Dean Investment, located at 2480 Kettering Tower, Dayton, Ohio 45423-2480, is
wholly-owned by C.H. Dean and Associates, Inc. Founded in 1972, Dean
Investments manages portfolios for individuals and institutional clients
worldwide. Dean Investments provides a full range of investment advisory
services and currently has $3.756 billion of assets under management.

LUTHER KING CAPITAL MANAGEMENT CORPORATION ("Luther King") serves as
Sub-Adviser to the Equity-Income Portfolio.

Luther King is located at 301 Commerce Street, Suite 1600, Fort Worth, Texas
76102. Ultimate control of Luther King is exercised by J. Luther King, Jr.
Luther King provides investment management services to accounts of individual
investors, mutual funds, and other institutional investors. Luther King has
served as an investment adviser for approximately 17 years; as of March 1,
1996, the total assets managed by Luther King exceeded $4.5 billion.

FEDERATED INVESTMENT COUNSELING ("Federated") serves as the Sub-Adviser to
the Utility Portfolio.

Federated, located at Federated Investors Tower, Pittsburgh, Pennsylvania
15222-3779, is a wholly-owned subsidiary of Federated Investors. All of the
voting securities of Federated Investors are owned by a trust, the trustees
of which are John F. Donahue, his wife, Rhodora Donahue, and his son, J.
Christopher Donahue.

AEGON USA INVESTMENT MANAGEMENT, INC. ("AEGON Investment") serves as
Sub-Adviser to the Short-to-Intermediate Government Portfolio and the
Balanced Portfolio.

AEGON Investment, located at 4333 Edgewood Road, N.E., Cedar Rapids, Iowa
52499, is a wholly-owned subsidiary of AEGON and thus is an affiliate of the
Investment Adviser. AEGON Investment also serves as sub-adviser to the two
bond portfolios of IDEX Series Fund. AEGON Investment also manages the
general account investment portfolios of the life insurance subsidiaries of
AEGON and had in excess of $22.6 billion under management as of January 1,
1996.

J.P. MORGAN INVESTMENT MANAGEMENT INC. ("J.P. Morgan") serves as Sub-Adviser
to the Money Market Portfolio.

J.P. Morgan, located at 522 Fifth Avenue, New York, New York 10036, is a
wholly-owned subsidiary of J.P. Morgan & Co., Incorporated. J.P. Morgan
provides investment management and related services for corporate, public,
and union employee benefit funds, foundations, endowments, insurance
companies and government agencies.

SCOTTISH EQUITABLE INVESTMENT MANAGEMENT LIMITED ("Scottish Equitable")
serves as a Co-Sub-Adviser to the International Equity Portfolio. Scottish
Equitable is located at Edinburgh Park, Edinburgh EH12 9SE. Scottish
Equitable is a wholly-owned subsidiary of Scottish Equitable plc, successor
to Scottish Equitable Life Assurance Society. Scottish Equitable is also an
indirect wholly-owned subsidiary of AEGON nv. As of December 31, 1995
Scottish Equitable plc had approximately $15.9 billion in assets under
management. The Co-Sub-Adviser provides investment advisory and management
services to certain of its affiliates and to external organizations.

GE INVESTMENT MANAGEMENT INCORPORATED ("GEIM") serves as a Co-Sub-Adviser to
the International Equity Portfolio and as Sub-Adviser to the U.S. Equity
Portfolio.

GEIM is located at 3003 Summer Street, Stamford, Connecticut 06905. GEIM,
which was formed under the laws of Delaware in 1988, is a wholly-owned
subsidiary of General Electric Company ("GE"). GEIM's principal officers and
directors serve in similar capacities with respect to General Electric
Investment Corporation ("GEIC", and, together with GEIM, collectively
referred to as "GE Investments"), which like GEIM is a wholly-owned
subsidiary of GE. As of June 30, 1996, GEIM and GEIC together managed assets
in excess of $ 55 billion. GE Investments provides investment management
services to external organizations and to certain of its affiliates.

47
<PAGE>

The method of computing each Sub-Adviser's fees is set forth in the Fund's
Prospectus. For the years ended December 31, 1995, 1994 and 1993 each
Sub-Adviser was paid fees for their services in the following amounts:

SUB-ADVISORY FEES

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------
SUB-ADVISER PORTFOLIO 1995 1994 1993
- ------------------------ -------------------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Alger Management Aggressive Growth $ 424,549 $ 62,724(2) -0-
Van Kampen Emerging Growth 919,287 630,629 $ 120,306(3)
Scottish Equitable/GEIM International Equity(1) N/A N/A N/A
Meridian/INVESCO Global Sector(1) N/A N/A N/A
Janus Bond 204,931 203,833 193,632
Growth 3,923,875 3,425,888 3,420,355
Global 1,037,527 801,005 115,238
C.A.S.E. Management C.A.S.E. Growth 2,759(5) N/A N/A
GEIM U.S. Equity(1) N/A N/A N/A
NWQ Value Equity(1) N/A N/A N/A
Dean Investment Tactical Asset Allocation 216,922(4) N/A N/A
Luther King Equity-Income 873,011 590,528 112,374(3)
Federated Utility 85,906 22,369(2) N/A
AEGON Investment Short-to-Intermediate 63,067 66,959 36,310
Government
Balanced 94,669 19,275(2) N/A
J.P. Morgan Money Market 211,178(6) 176,549(6) 112,155(6)
<FN>
- -----------------
(1) Portfolio had not commenced operations as of December 31, 1995.
(2) Portfolio commenced operations March 1, 1994.
(3) Portfolio commenced operations March 1, 1993.
(4) Portfolio commenced operations January 3, 1995.
(5) Portfolio commenced operations May 1, 1995.
(6) Fees paid to Janus, the Portfolio's previous Sub-Adviser.
</FN>
</TABLE>

PORTFOLIO TRANSACTIONS AND BROKERAGE

/diamond/ PORTFOLIO TURNOVER

The information that follows supplements the information provided about
portfolio turnover under the caption "Other Investment Policies and
Restrictions - Portfolio Turnover" in the Prospectus. In computing the
portfolio turnover rate for a Portfolio, securities whose maturities or
expiration dates at the time of acquisition are one year or less are
excluded. Subject to this exclusion, the turnover rate for a Portfolio is
cal-culated by dividing (a) the lesser of purchases or sales of portfolio
securities for the fiscal year by (b) the monthly average of portfolio
securities owned by the Portfolio during the fiscal year.

The following table provides the Portfolios' turnover rates for the fiscal
years ended December 31, 1995, 1994 and 1993:

48
<PAGE>

PORTFOLIO TURNOVER RATES

YEAR ENDED DECEMBER 31
------------------------------------------
PORTFOLIO 1995 1994 1993
- --------------------------------- ----------- ---------- --------------
Aggressive Growth 108.04% 89.73%(5) N/A
Emerging Growth 124.13% 72.62% 12.79%(2)
International Equity(1) N/A N/A N/A

Global Sector(1) N/A N/A N/A

Global 130.60% 192.06% 79.93%
Growth 130.48% 107.33% 77.91%
C.A.S.E. Growth 121.62%(3) N/A N/A
U.S. Equity(1) N/A N/A N/A
Value Equity(1) N/A N/A N/A
Tactical Asset Allocation 38.68%(4) N/A N/A
Equity-Income 52.59% 53.50% 27.41%(2)
Utility 78.34% 36.13%(5) N/A
Balanced 98.55% 57.73%(5) N/A
Bond 120.54% 131.73% 149.02%
Short-to-Intermediate Government 51.82% 93.70% 28.64%
Money Market(6) N/A N/A N/A
- -----------------
(1) Portfolio had not yet commenced operations as of December 31, 1995.
(2) Portfolio commenced operations March 1, 1993.
(3) Portfolio commenced operations May 1, 1995.
(4) Portfolio commenced operations January 3, 1995.
(5) Portfolio commenced operations March 1, 1994.
(6) Money Market does not have a stated portfolio turnover rate, as securities
of the type in which it invests are excluded in the usual calculation of
that rate.

The future annual turnover rates cannot be precisely predicted, although an
annual turnover rate in excess of 100% is not presently anticipated for the
Aggressive Growth, Tactical Asset Allocation, Utility, Balanced and
Short-to-Intermediate Government Portfolios; 50% for the Value Equity
Portfolio; 150% for the Growth Portfolio; and 200% for the Global Portfolio.

There are no fixed limitations regarding the portfolio turnover rates of the
Portfolios. Portfolio turnover rates are expected to fluctuate under constantly
changing economic conditions and market circumstances. Higher turnover rates
tend to result in higher brokerage fees. Securities initially satisfying the
basic policies and objective of each Portfolio may be disposed of when they are
no longer deemed suitable.

/diamond/ PLACEMENT OF PORTFOLIO
BROKERAGE

Subject to policies established by the Board of Directors of the Fund, each
Portfolio's Sub-Adviser (INVESCO, a Co-Sub-Adviser to the Global Sector
Portfolio, determines placement of portfolio brokerage for that Portfolio) is
primarily responsible for placement of a Portfolio's securities transactions. In
placing orders, it is the policy of a Portfolio to obtain the most favorable net
results, taking into account various factors, including price, dealer spread or
commissions, if any, size of the transaction and difficulty of execution. While
each Sub-Adviser generally will seek reasonably competitive spreads or
commissions, a Portfolio will not necessarily be paying the lowest spread or
commission available. A Portfolio does not have any obligation to deal with any
broker, dealer or group of brokers or dealers in the execution of transactions
in portfolio securities.

Decisions as to the assignment of portfolio brokerage business for a Portfolio
and negotiation of its commission rates are made by the Sub-Adviser, whose
policy is to obtain "best execution" (prompt and reliable execution at the most
favorable security price) of all portfolio transactions. In placing portfolio
transactions, the Sub-Adviser may give consideration to brokers who provide
supplemental investment research, in addition to such research Money Market(6)
N/A obtained for a flat fee,

49
<PAGE>

to the Sub-Adviser, and pay spreads or commissions to such brokers or dealers
furnishing such services which are in excess of spreads or commissions which
another broker or dealer may charge for the same transaction.

In selecting brokers and in negotiating commissions, the Sub-Adviser
considers such factors as: the broker's reliability; the quality of its
execution services on a continuing basis; the financial condition of the
firm; and research products and services provided, which include: (i)
furnishing advice, either directly or through publications or writings, as to
the value of securities, the advisability of purchasing or selling specific
securities and the availability of securities or purchasers or sellers of
securities and (ii) furnishing analyses and reports concerning issuers,
industries, securities, economic factors and trends and portfolio strategy
and products and other services (such as third party publications, reports
and analyses, and computer and electronic access, equipment, software,
information and accessories) that assist each Sub-Adviser in carrying out its
responsibilities.

Supplemental research obtained through brokers or dealers will be in addition
to, and not in lieu of, the services required to be performed by a
Sub-Adviser. The expenses of a Sub-Adviser will not necessarily be reduced as
a result of the receipt of such supplemental information. A Sub-Adviser may
use such research products and services in servicing other accounts in
addition to the respective Portfolio. If a Sub-Adviser determines that any
research product or service has a mixed use, such that it also serves
functions that do not assist in the investment decision-making process, the
Sub-Adviser will allocate the costs of such service or product accordingly.
The portion of the product or service that a Sub-Adviser determines will
assist it in the investment decision-making process may be paid for in
brokerage commission dollars. Such allocation may create a conflict of
interest for the Sub-Adviser. Conversely, such supplemental information
obtained by the placement of business for a Sub-Adviser will be considered by
and may be useful to the Sub-Adviser in carrying out its obligations to a
Portfolio.

When a Portfolio purchases or sells a security in the OTC market, the
transaction takes place directly with a principal market-maker, without the
use of a broker, except in those circumstances where, in the opinion of the
Sub-Adviser, better prices and executions are likely to be achieved through
the use of a broker.

Securities held by a Portfolio may also be held by other separate accounts,
mutual funds or other accounts for which the Investment Adviser or
Sub-Adviser serves as an adviser, or held by the Investment Adviser or
Sub-Adviser for their own accounts. Because of different investment
objectives or other factors, a particular security may be bought by the
Investment Adviser or Sub-Adviser for one or more clients when one or more
clients are selling the same security. If purchases or sales of securities
for a Portfolio or other entities for which they act as investment adviser or
for their advisory clients arise for consideration at or about the same time,
transactions in such securities will be made, insofar as feasible, for the
respective entities and clients in a manner deemed equitable to all. To the
extent that transactions on behalf of more than one client of the Investment
Adviser or Sub-Adviser during the same period may increase the demand for
securities being purchased or the supply of securities being sold, there may
be an adverse effect on price.

On occasions when the Investment Adviser or a Sub-Adviser deems the purchase
or sale of a security to be in the best interests of a Portfolio as well as
other accounts or companies, it may to the extent permitted by applicable
laws and regulations, but will not be obligated to, aggregate the securities
to be sold or purchased for the Portfolio with those to be sold or purchased
for such other accounts or companies in order to obtain favorable execution
and lower brokerage commissions. In that event, allocation of the securities
purchased or sold, as well as the expenses incurred in the transaction, will
be made by the Sub-Adviser in the manner it considers to be most equitable
and consistent with its fiduciary obligations to the Portfolio and to such
other accounts or companies. In some cases this procedure may adversely
affect the size of the position obtainable for a Portfolio.

The Board of Directors of the Fund periodically reviews the brokerage
placement practices of each Sub-Adviser on behalf of the Portfolios, and
reviews the prices and commissions, if any, paid by the Portfolios to
determine if they were reasonable.

<PAGE>

The Board of Directors of the Fund has authorized the Sub-Advisers to
consider sales of the Policies and Annuity Contracts by a broker-dealer as a
factor in the selection of broker-dealers to execute Portfolio transactions.
In addition, the Sub-Advisers may occasionally place portfolio business with
affiliated brokers of the Investment Adviser or a Sub-Adviser, including:
InterSecurities, Inc. P.O. Box 5068, Clearwater, Florida 33518; DST
Securities, Inc., 301 West 11th Street, Kansas City, Missouri 64105; Fred
Alger & Company, Inc., 75 Maiden Lane, New York, New York 10038; and AEGON
USA Securities, Inc., P.O. Box 1449, Cedar Rapids, Iowa 52499. As stated
above, any such placement of Portfolio business will be subject to the
ability of the broker-dealer to provide best execution and to the Rules of
Fair Practice of the National Association of Securities Dealers, Inc.

COMMISSIONS PAID BY THE PORTFOLIOS

<TABLE>
<CAPTION>
AGGREGATE COMMISSIONS
YEAR ENDED DECEMBER 31
----------------------------
PORTFOLIO 1995 1994
- --------------- ------------- -------------
<S> <C> <C>
Aggressive
Growth $ 240,067 $ 76,028(2)
Emerging 542,420 317,287
Global 712,827(4) 241,051
Growth 1,577,115 1,466,443
C.A.S.E.
Growth 8,662(5) N/A
Tactical Asset
Allocation 208,950(6) N/A
Equity-Income 316,489 354,400
Utility 52,921 40,095(2)
Balanced 90,724 43,311(2)
</TABLE>

<TABLE>
<CAPTION>
(RESTUBBED TABLE CONTINUED FROM ABOVE)

AFFILIATED BROKERAGE COMMISSIONS
YEAR ENDED DECEMBER 31
------------------------------------------------------------------------------------------------------
PORTFOLIO 1993 1995 % 1994 % 1993 %
- --------- ------------- ----------- ---------------- ---------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Aggressive
Growth N/A $240,067 100%(1) $75,128 98.82%(1) N/A N/A
Emerging 74,070(3) N/A N/A N/A N/A N/A N/A
Global 53,250 N/A N/A N/A N/A N/A N/A
Growth 1,022,522 N/A /less than/1% 2,796 /less than/1% 85,404 /less than/1%
C.A.S.E.
Growth N/A N/A N/A N/A N/A N/A N/A
Tactical Asset
Allocation N/A N/A N/A N/A N/A N/A N/A
Equity-Income 113,996(3) N/A N/A N/A N/A N/A N/A
Utility N/A N/A N/A N/A N/A N/A N/A
Balanced N/A 1,040 1.15% 8,700 20.09%(7) N/A N/A

The Aggressive Growth Portfolio paid affiliated brokerage commissions to Alger,
Inc., the Growth Portfolio paid affiliated brokerage commissions to DST
Securities, Inc. and the Balanced Portfolio paid affiliated brokerage
commissions to AEGON USA Securities, Inc.

The Bond Portfolio, the Money Market Portfolio and the Short-to-Intermediate
Government Portfolio did not pay any brokerage commissions for the years ended
December 31, 1995, 1994 and 1993.

No information is included for the Global Sector, Value Equity, International
Equity or U.S. Equity Portfolios as they had not commenced operations as of
December 31, 1995.
<FN>
- -----------------
(1) The percentage of the Portfolio's aggregate dollar amount of transactions
involving the payment of commissions effected through Alger, Inc. for the
fiscal year ended December 31, 1995 and for the period March 1, 1994
through December 31, 1994 was 100% and 99.89%, respectively.
(2) Portfolio commenced operations March 1, 1994.
(3) Portfolio commenced operations March 1, 1993.
(4) This figure is higher than 1994 due to the relative increase in the
amount of total assets invested in foreign securities.
(5) Portfolio commenced operations May 1, 1995.
(6) Portfolio commenced operations January 3, 1995.
(7) The percentage of the Portfolio's aggregate dollar amount of transactions
involving the payment of commissions effected through AEGON USA
Securities, Inc. for the fiscal year ended December 31, 1995 and for the
period March 1, 1994 to December 31, 1994 was 9.63% and 38.06%,
respectively.
</FN>
</TABLE>

51
<PAGE>

PURCHASE AND REDEMPTION OF SHARES

/diamond/ DETERMINATION OF OFFERING PRICE

Shares of the Portfolios are currently sold only to the Separate Accounts to
fund the benefits under the Policies and the Annuity Contracts. The
Portfolios may, in the future, offer their shares to other insurance company
separate accounts. The Separate Accounts invest in shares of a Portfolio in
accordance with the allocation instructions received from holders of the
Policies and the Annuity Contracts. Such allocation rights are further
described in the prospectuses and disclosure documents for the Policies and
the Annuity Contracts. Shares of the Portfolios are sold and redeemed at
their respective net asset values as described in the Prospectus.

/diamond/ NET ASSET VALUATION

As stated in the Prospectus, the net asset value of the Portfolios' shares is
ordinarily determined, once daily, as of the close of the regular session of
business on the New York Stock Exchange ("Exchange") (usually 4:00 p.m.,
Eastern time) on each day the Exchange is open. (Currently the Exchange is
closed on New Year's Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.) The per
share net asset value of a Portfolio is determined by dividing the total
value of the securities and other assets, less liabilities, by the total
number of shares outstanding. In determining net asset value, securities
listed on the national securities exchanges and traded on the NASDAQ National
Market are valued at the closing prices on such markets, or if such a price
is lacking for the trading period immediately preceding the time of
determination, such securities are valued at their current bid price. Foreign
securities and currencies are converted to U.S. dollars using the exchange
rate in effect at the close of the Exchange. Other securities for which
quotations are not readily available are valued at fair values as determined
in good faith by a Portfolio's Investment Adviser under the supervision of
the Fund's Board of Directors. Money market instruments maturing in 60 days
or less are valued on the amortized cost basis. Values of gold bullion held
by a Portfolio are based upon daily quotes provided by banks or brokers
dealing in such commodities.

INVESTMENT EXPERIENCE INFORMATION

THE INFORMATION PROVIDED IN THIS SECTION SHOWS THE HISTORICAL INVESTMENT
EXPERIENCE OF EACH OF THE PORTFOLIOS. IT DOES NOT REPRESENT OR PROJECT FUTURE
INVESTMENT PERFORMANCE.

The Growth, Money Market and Bond Portfolios commenced operations on October
2, 1986; the Global and Short-to-Intermediate Government Portfolios commenced
operations on December 3, 1992; the Emerging Growth and the Equity-Income
Portfolios commenced operations March 1, 1993; the Aggressive Growth,
Balanced and Utility Portfolios commenced operations on March 1, 1994; the
Tactical Asset Allocation Portfolio commenced operations on January 3, 1995;
and the C.A.S.E. Growth Port-folio commenced operations on May 1, 1995. The
rates of return shown below depict the actual investment experience of each
Portfolio for the periods shown. (The Value Equity, Global Sector,
International Equity, and U.S. Equity Portfolios had not commenced operations
as of December 31, 1995, so performance information is not yet available for
these Portfolios).

52
<PAGE>

CALCULATION OF PERFORMANCE RELATED INFORMATION

The Prospectus contains a brief description of how performance is calculated.

/diamond/ TOTAL RETURN

The rates of return shown are based on the actual investment performance,
after the deduction of investment advisory fees and direct Portfolio
expenses. The rates are average annual compounded rates of return for the
periods ended on December 31, 1995.

The rates of return do not reflect charges or deductions against the Series
Life Account or the Series Annuity Account, or charges and deductions against
the Policies or the Annuity Contracts. Accordingly, these rates of return do
not illustrate how actual investment performance will affect benefits under
the Policies or the Annuity Contracts. Where relevant, the prospectuses for
the Policies and the Annuity Contracts contain performance information about
these products. Moreover, these rates of return are not an estimate,
projection or guarantee of future performance.

Also shown are comparable figures for the unmanaged Standard and Poor's Index
of 500 Common Stocks, a widely used measure of stock market performance.

AVERAGE ANNUAL COMPOUNDED RATES OF RETURN
FOR THE PERIODS ENDED ON DECEMBER 31, 1995

<TABLE>
<CAPTION>
FUND PORTFOLIO INCEPTION 5 YEARS 4 YEARS 3 YEARS 2 YEARS 1 YEAR
- -------------- ------------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Aggressive Growth (1.26%)(4) N/A N/A N/A N/A 38.02%
Emerging Growth 24.71% (3) N/A N/A N/A (7.36%) 46.79%
International Equity(7) N/A N/A N/A N/A N/A N/A
Global Sector(7) N/A N/A N/A N/A N/A N/A
Global 18.67% (2) N/A N/A 18.55% 11.07% 23.06%
Growth 17.63% (1) 18.06% 9.46% 11.94% 16.15% 47.12%
C.A.S.E. Growth 20.65% (6) N/A N/A N/A N/A N/A
U.S. Equity(7) N/A N/A N/A N/A N/A N/A
Value Equity(7) N/A N/A N/A N/A N/A N/A
Tactical Asset Allocation 20.09% (5) N/A N/A N/A N/A N/A
Equity-Income 13.49% (3) N/A N/A N/A (0.53%) 24.66%
Utility (4.58%)(4) N/A N/A N/A N/A 25.25%
Balanced (5.73%)(4) N/A N/A N/A N/A 19.80%
Bond 8.48% (1) 10.50% 8.50% 9.08% 6.98% 22.99%
Short-to-Intermediate
Government N/A (2) N/A N/A 4.58% (0.43%) 13.54%
Money Market 4.98% (1) 3.91% 3.57% 3.76% 4.42% 5.40%
Standard & Poor's Index
of 500 Common Stocks 14.68% 16.59% 13.36% 15.34% 18.07% 37.58%
<FN>
- -----------------
(1) Portfolio commenced operations on October 2, 1986.
(2) Portfolio commenced operations on December 3, 1992.
(3) Portfolio commenced operations on March 1, 1993.
(4) Portfolio commenced operations on March 1, 1994.
(5) Portfolio commenced operations on January 3, 1995.
(6) Portfolio commenced operations on May 1, 1995.
(7) Portfolio had not yet commenced operations as of December 31, 1995.
</FN>
</TABLE>

53
<PAGE>
Total return quotations for each of the Portfolios are computed by finding
the average annual compounded rates of return over the relevant periods that
would equate the initial amount invested to the ending redeemable value,
according to the following equation:

P (1+T)(n) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value (at the end of the applicable period of a
hypothetical $1,000 payment made at the beginning of the applicable
period)

The total return quotation calculations for a Portfolio reflect the deduction
of a proportionate share of the Portfolio's investment advisory fee and
Portfolio expenses and assume that all dividends and capital gains during the
period are reinvested in the Portfolio when made. The calculations also
assume a complete redemption as of the end of the particular period.

Total return quotation calculations do not reflect charges or deductions
against the Series Life Account or the Series Annuity Account or charges and
deductions against the Policies or the Annuity Contracts. Accordingly, these
rates of return do not illustrate how actual investment performance will
affect benefits under the Policies or the Annuity Contracts. Where relevant,
the prospectuses for the Policies and the Annuity Contracts contain
performance information about these products. Moreover, these rates of return
are not an estimate, projection or guarantee of future performance.
Additional information regarding the investment performance of the Portfolios
appears in the Prospectus.

/diamond/ YIELD QUOTATIONS

The yield quotations for a Portfolio (for Money Market Portfolio yield, see
"Yield Quotations - Money Market Portfolio", below) are based on a specific
thirty-day period and are computed by dividing the net investment income per
share earned during the period by the maximum offering price per share on the
last date of the period, according to the following formula:

YIELD = 2 [ (a-b
--- + 1)(6) - 1]
cd
Where: a = dividends and interest earned
during the period by the
Portfolio
b = expenses accrued for the period
(net of reimbursement)
c = the average daily number of
shares outstanding during the
period that were entitled to
receive dividends
d = the maximum offering price per
share on the last day of the period

The yield of the Bond Portfolio and the Short-to-Intermediate Government
Portfolio as computed above for the thirty day period ended December 31, 1995
was 5.75% and 5.58%, respectively.

/diamond/ YIELD QUOTATIONS - MONEY
MARKET PORTFOLIO

From time to time the Money Market Portfolio may quote its yield in reports
or other communications to policyholders or in advertising material. Yield
quotations are expressed in annualized terms and reflect dividends of a
Portfolio declared and reinvested daily based upon the net investment income
earned by a Portfolio each day. The Portfolio's yields fluctuate and the
yield on any day for any past period is not an indication as to future yields
on any investment in the Portfolio's shares. Future yields are not
guaranteed.

Yield is computed in accordance with a standardized method required by the
SEC. The yields for the Money Market Portfolio for the seven-day period ended
December 31, 1995, was 5.32% and was equivalent to a compound effective yield
of 5.46%. The current yield for the Money Market Portfolio is an
annualization, without compounding, of the portfolio rate of return, and is
computed by determining the net change in the value of a hypothetical
pre-existing account in the Portfolio having a balance of one share at the
beginning of a seven calendar day period for which yield is to be quoted,
dividing the net change by the value of the account at the beginning of the
period to obtain the base period return, and annualizing the results (I.E.,
multiplying the base period return by 365/7). The net change in the value of
the account reflects the value of additional shares purchased with dividends
declared on the original shares and any such additional shares, but does not
include

54
<PAGE>

realized gains and losses or unrealized appreciation and depreciation. The
Money Market Portfolio may also calculate the compound effective annualized
yields by adding 1 to the base period return (calculated as described above),
raising that sum to a power equal to 365/7, and subtracting 1. The yield
quotations for the Money Market Portfolio do not take into consideration any
deductions imposed by the Series Life Account or the Series Annuity Account.

Yield information is useful in reviewing the Money Market Portfolio's
performance in seeking to meet its investment objective, but, because yields
fluctuate, such information cannot necessarily be used to compare an investment
in shares of the Portfolio with bank deposits, savings accounts and similar
investment alternatives, which often provide an agreed or guaranteed fixed yield
for a stated period of time. Also, the Portfolio's yields cannot always be
compared with yields determined by different methods used by other funds. It
should be emphasized that yield is a function of the kind and quality of the
instruments in the Money Market Portfolio, portfolio maturity and operating
expenses.

TAXES

Shares of the Portfolios are offered only to the Separate Accounts that fund
the Policies and Annuity Contracts. See the respective prospectuses for the
Policies and Annuity Contracts for a discussion of the special taxation of
insurance companies with respect to the Separate Accounts and of the
Policies, the Annuity Contracts and the holders thereof.

Each Portfolio has qualified (except the U.S. Equity Portfolio and
International Equity Portfolio which intend to qualify), and expects to
continue to qualify, for treatment as a regulated investment company ("RIC")
under the Internal Revenue Code of 1986, as amended (the "Code"). In order to
qualify for that treatment, a Portfolio must distribute to its Policyholders
for each taxable year at least 90% of its investment company taxable income
(consisting generally of net investment income, net short-term capital gain,
and net gains from certain foreign currency transactions) ("distribution
Requirement") and must meet several additional requirements. These
requirements include the following: (1) the Portfolio must derive at least
90% of its gross income each taxable year from dividends, interest, payments
with respect to securities loans, and gains from the sale or other
disposition of securities or foreign currencies, or other income (including
gains from options, futures or forward contracts) derived with respect to its
business of investing in securities or those currencies ("Income
Requirement"); (2) the Portfolio must derive less than 30% of its gross
income each taxable year from the sale or other disposition of securities, or
any of the following, that were held for less than three months - options,
futures or forward contracts (other than those on foreign currencies), or
foreign currencies (or options, futures or forward contracts thereon) that
are not directly related to the Portfolio's principal business of investing
in securities (or options and futures with respect thereto) ("Short-Short
Limitation"); (3) at the close of each quarter of the Portfolio's taxable
year, at least 50% of the value of its total assets must be represented by
cash and cash items, U.S. Government securities, securities of other RICs,
and other securities that, with respect to any one issuer, do not exceed 5%
of the value of the Portfolio's total assets and that do not represent more
than 10% of the outstanding voting securities of the issuer; and (4) at the
close of each quarter of the Portfolio's taxable year, not more than 25% of
the value of its total assets may be invested in securities (other than U.S.
Government securities or the securities of other RICs) of any one issuer.

As noted in the Prospectus, each Portfolio must, and intends to, comply with
the diversification requirements imposed by section 817(h) of the Code and
the regulations thereunder. These requirements, which are in addition to the
diversification requirements mentioned above, place certain limitations on
the proportion of each Portfolio's assets that may be represented by any
single investment (which includes all securities of the same issuer). For
purposes of section 817(h), all securities of the same issuer, all

55
<PAGE>

interests in the same real property project, and all interest in the same
commodity are treated as a single investment. In addition, each U.S.
Government agency or instrumentality is treated as a separate issuer, while
the securities of a particular foreign government and its agencies,
instrumentalities and political subdivisions all will be considered
securities issued by the same issuer. For information concerning the
consequences of failure to meet the requirements of section 817(h), see the
respective prospectuses for the Policies or the Annuity Contracts.

A Portfolio will not be subject to the 4% Federal excise tax imposed on RICs
that do not distribute substantially all their income and gains each calendar
year because that tax does not apply to a RIC whose only shareholders are
segregated asset accounts of life insurance companies held in connection with
variable annuity contracts and/or variable life insurance policies.

The use of hedging strategies, such as writing (selling) and purchasing
options and futures contracts and entering into forward contracts, involves
complex rules that will determine for income tax purposes the character and
timing of recognition of the income received in connection therewith by the
Portfolios. Income from the disposition of foreign currencies (except certain
gains therefrom that may be excluded by future regulations), and income from
transactions in options, futures, and forward contracts derived by a
Portfolio with respect to its business of investing in securities or foreign
currencies, will qualify as permissible income under the Income Requirement.

However, income from the disposition of options and futures contracts (other
than those on foreign currencies) will be subject to the Short-Short
Limitation if they are held for less than three months. Income from the
disposition of foreign currencies, and options, futures, and forward
contracts on foreign currencies, that are not directly related to a
Portfolio's principal business of investing in securities (or options and
futures with respect to securities) also will be subject to the Short-Short
Limitation if they are held for less than three months.

If a Portfolio satisfies certain requirements, any increase in value on a
position that is part of a "designated hedge" will be offset by any decrease
in value (whether realized or not) of the offsetting hedging position during
the period of the hedge for purposes of determining whether the Portfolio
satisfies the Short-Short Limitation. Thus, only the net gain (if any) from
the designated hedge will be included in gross income for purposes of that
Limitation. A Portfolio will consider whether it should seek to qualify for
this treatment for its hedging transactions. To the extent a Portfolio does
not qualify for this treatment, it may be forced to defer the closing out of
certain options and futures contracts beyond the time when it otherwise would
be advantageous to do so, in order for the Portfolio to qualify as a RIC.

Dividends and interest received by each Portfolio may be subject to income,
withholding or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield on its securities. Tax conventions between
certain countries and the United States may reduce or eliminate these foreign
taxes, however, and foreign countries generally do not impose taxes on
capital gains in respect of investments by foreign investors.

A Portfolio may invest in the stock of "passive foreign investment companies"
("PFICs"). A PFIC is a foreign corporation that, in general, meets either of
the following tests: (1) at least 75% of its gross income is passive or (2)
an average of at least 50% of its assets produce, or are held for the
production of, passive income. Under certain circumstances, a Portfolio will
be subject to Federal income tax on a portion of any "excess distribution"
received on the stock of a PFIC or of any gain on disposition of that stock
(collectively "PFIC income"), plus interest thereon, even if the Portfolio
distributes the PFIC income as a taxable dividend to its shareholders. The
balance of the PFIC income will be included in a Portfolio's investment
company taxable income and, accordingly, will not be taxable to it to the
extent that income is distributed to its shareholders. If a Portfolio invests
in a PFIC and elects to treat the PFIC as a "qualified electing fund," then
in lieu of the foregoing tax and interest obligations, the Portfolio will be
required to include in income each year its pro rata share of the qualified
electing fund's annual ordinary earnings and net capital gain (the excess of
net long-term capital gain over net short-term capital loss), even if they
are not distributed to the Portfolio; those amounts would be subject to the
Distribution Requirement. In most

56
<PAGE>

instances it will be very difficult, if not impossible, to make this election
because of certain requirements thereof.

The foregoing is only a general summary of some of the important Federal
income tax considerations generally affecting the Portfolios and their
shareholders. No attempt is made to present a complete explanation of the
Federal tax treatment of the Portfolios' activities, and this discussion and
the discussion in the prospectuses and/or statements of additional
information for the Policies and Annuity Contracts are not intended as a
substitute for careful tax planning. Accordingly, potential investors are
urged to consult their own tax advisors for more detailed information and for
information regarding any state, local, or foreign taxes applicable to the
Policies, Annuity Contracts and the holders thereof.

CAPITAL STOCK OF THE FUND

As described in the Prospectus, the Fund offers a separate class of common
stock for each Portfolio. The Fund is currently comprised of the following
Portfolios: International Equity Portfolio; Aggressive Growth Portfolio;
Emerging Growth Portfolio; Global Sector Portfolio; Global Portfolio; Growth
Portfolio; C.A.S.E. Growth Portfolio; Value Equity Portfolio; Tactical Asset
Allocation Portfolio; Equity-Income Portfolio; Utility Portfolio; Balanced
Portfolio; Bond Portfolio; Short-to-Intermediate Government Portfolio; Money
Market Portfolio; C.A.S.E. Growth & Income Portfolio; C.A.S.E. Quality Growth
Portfolio; Foreign Sector Portfolio; US Sector Portfolio; Janus Balanced
Portfolio; Leisure Portfolio; and U.S. Equity Portfolio.

REGISTRATION STATEMENT

There has been filed with the Securities and Exchange Commission, Washington,
D.C. a Registration Statement under the Securities Act of 1933, as amended,
with respect to the securities to which this Statement of Additional
Information relates. If further information is desired with respect to the
Portfolios or such securities, reference is made to the Registration
Statement and the exhibits filed as part thereof.

FINANCIAL STATEMENTS

The audited financial statements for each Portfolio (except the Global Sector
Portfolio, the Value Equity Portfolio, the International Equity Portfolio and
the U.S. Equity Portfolio) of the Fund for the year ended December 31, 1995,
and the report of the Fund's independent accountants are included in the 1995
Annual Report, and are incorporated herein by reference to such report. The
financial statements (unaudited) of the Fund for the six-month period ended
June 30, 1996 are included in the Fund's Semi-Annual Report and are
incorporated herein by reference to such report. Unaudited financial
statements for the Global Sector and Value Equity Portfolios are included in
this Statement of Additional Information. Because the International Equity
and U.S. Equity Portfolios did not commence operations until January 2, 1997,
there are no financial statements for these Portfolios.

57
<PAGE>

OTHER INFORMATION

/diamond/ INDEPENDENT ACCOUNTANTS

Price Waterhouse LLP, located at 1055 Broadway, 10th Floor, Kansas City,
Missouri 64105, serves as the Fund's independent accountants. The Fund has
engaged Price Waterhouse LLP to examine, in accordance with generally accepted
standards, its annual report. In addition, Price Waterhouse LLP signs the tax
returns for each of the Portfolios of the Fund.

/diamond/ CUSTODIAN

Investors Bank & Trust Company ("IBT")located at 89 South Street, Boston,
Massachusetts 02111, serves as the Fund's Custodian and Dividend Disbursing
Agent. IBT provides comprehensive asset administrative services to the Fund and
other members of the financial industry which include: multi-currency
accounting; institutional transfer agency services; domestic and global custody;
performance measures; foreign exchange; and securities lending and mutual fund
administrative services.

58
<PAGE>

APPENDIX A
DESCRIPTION OF PORTFOLIO SECURITIES

The following is intended only as a supplement to the information
contained in the Prospectus and should be read only in conjunction with the
Prospectus. Terms defined in the Prospectus and not defined herein have the
same meanings as those in the Prospectus.

1. CERTIFICATE OF DEPOSIT.* A certificate of deposit generally is a
short-term, interest bearing negotiable certificate issue by a commercial
bank or savings and loan association against funds deposited in the issuing
institution.

2. EURODOLLAR CERTIFICATE OF DEPOSIT.* A Eurodollar certificate of
deposit is a short-term obligation of a foreign subsidiary of a U.S. bank
payable in U.S. dollars.

3. FLOATING RATE NOTE.* A floating rate note is debt issued by a
corporation or commercial bank that is typically several years in term but
whose interest rate is reset every one to six months.

4. TIME DEPOSIT.* A time deposit is a deposit in a commercial bank for a
specified period of time at a fixed interest rate for which a negotiable
certificate is not received.

5. BANKERS' ACCEPTANCE.* A bankers' acceptance is a time draft drawn on a
commercial bank by a borrower, usually in connection with international
commercial transactions (to finance the import, export, transfer or storage
of goods). The borrower is liable for payment as well as the bank, which
unconditionally guarantees to pay the draft at its face amount on the
maturity date. Most acceptances have maturities of six months or less and are
traded in secondary markets prior to maturity.

6. VARIABLE AMOUNT MASTER DEMAND NOTE.* A variable amount master demand
note is a note which fixes a minimum and maximum amount of credit and
provides for lending and repayment within those limits at the discretion of
the lender. Before investing in any variable amount master demand notes, a
Portfolio will consider the liquidity of the issuer through periodic credit
analysis based upon publicly available information.

7. PREFERRED STOCKS. Preferred stocks are securities which represent an
ownership interest in a corporation and which give the owner a prior claim
over common stock on the corporation's earnings and assets. Preferred stock
generally pays quarterly dividends. Preferred stocks may differ in many of
their provisions. Among the features that differentiate preferred stock from
one another are the dividend rights, which may be cumulative or
non-cumulative and participating or non-participating, redemption provisions,
and voting rights. Such features will establish the income return and may
affect the prospectus for capital appreciation or risks of capital loss.

8. CONVERTIBLE SECURITIES. A Portfolio may invest in debt securities
convertible into or exchangeable for equity securities, or debt securities
that carry with them the right to acquire equity securities, as evidenced by
warrants attached to such securities or acquired as part of units of the
securities. Such securities normally pay less current income than securities
into which they are convertible, and the concomitant risk of loss from
declines in those values.

9. COMMERCIAL PAPER.* Commercial paper is a short-term promissory note
issued by a corporation primarily to finance short-term credit needs.

10. REPURCHASE AGREEMENT.* A repurchase agreement is an instrument under
which a Portfolio acquires ownership of a debt security and the seller agrees
to repurchase the obligation at a mutually agreed upon time and price. The
total amount received on repurchase is calculated to exceed the price paid by
the Portfolio, reflecting an agreed upon market rate of interest for the
period from the time of a Portfolio's purchase of the security to the
settlement date (I.E., the time of repurchase), and would not necessarily
relate to the interest rate on the underlying securities. A Portfolio will
only enter into repurchase agreements with underlying securities consisting
of U.S. Government or government agency securities, certificates of deposit,
commercial paper or bankers' acceptances, and will be entered only with
- -----------------
* Short-term Securities.

A-1
<PAGE>

primary dealers. While a Portfolio may invest in repurchase agreements for
periods up to 30 days, it is expected that typically such periods will be for
a week or less. The staff of the SEC has taken the position that repurchase
agreements of greater than seven days together with other illiquid
investments should be limited to an amount not in excess of 15% of a
Portfolio's net assets.

Although repurchase transactions usually do not impose market risks on the
purchaser, a Portfolio would be subject to the risk of loss if the seller
fails to repurchase the securities for any reason and the value of the
securities is less than the agreed upon repurchase price. In addition, if the
seller defaults, a Portfolio may incur disposition costs in connection with
liquidating the securities. Moreover, if the seller is insolvent and
bankruptcy proceedings are commenced, under current law, a Portfolio could be
ordered by a court not to liquidate the securities for an indeterminate
period of time and the amount realized by a Portfolio upon liquidation of the
securities may be limited.

11. REVERSE REPURCHASE AGREEMENT. A reverse repurchase agreement involves
the sale of securities held by a Portfolio, with an agreement to repurchase
the securities at an agreed upon price, date and interest payment. A
Portfolio will use the proceeds of the reverse repurchase agreements to
purchase other money market securities maturing, or under an agreement to
resell, at a date simultaneous with or prior to the expiration of the reverse
repurchase agreement. A Portfolio will utilize reverse repurchase agreements
when the interest income to be earned from the investment of the proceeds
from the transaction is greater than the interest expense of the reverse
repurchase transactions.

12. ASSET-BACKED SECURITIES. A Portfolio may invest in securities backed
by automobile receivables and credit-card receivables and other securities
backed by other types of receivables or other assets. Credit support for
asset-backed securities may be based on the underlying assets and/or provided
through credit enhancements by a third party. Credit enhancement techniques
include letters of credit, insurance bonds, limited guarantees (which are
generally provided by the issuer), senior-subordinated structures and
over-collateralization. A Portfolio will only purchase an asset-backed
security if it is rated at least "A" by S&P or Moody's.

13. MORTGAGE-BACKED SECURITIES. A Portfolio may purchase mortgage-backed
securities issued by government and non-government entities such as banks,
mortgage lenders, or other financial institutions. Mortgage-backed securities
include mortgage pass-through securities, mortgage-backed bonds, and mortgage
pay-through securities. A mortgage pass-through security is a pro-rata
interest in a pool of mortgages where the cash flow generated from the
mortgage collateral is passed through to the security holder. Mortgage-backed
bonds are general obligations of their issuers, payable out of the issuers'
general funds and additionally secured by a first lien on a pool of
mortgages. Mortgage pay-through securities exhibit characteristics of both
pass-through and mortgage-backed bonds. Mortgage-backed securities also
include other debt obligations secured by mortgages on commercial real estate
or residential properties. Other types of mortgage-backed securities will
likely be developed in the future, and a Portfolio may invest in them if it
is determined they are consistent with the Portfolio's investment objective
and policies.

14. COLLATERALIZED MORTGAGE OBLIGATIONS. (CMOs) are pay-through securities
collateralized by mortgages or mortgage-backed securities. CMOs are issued in
classes and series that have different maturities and often are retired in
sequence.

15. STRIPPED MORTGAGE-BACKED SECURITIES. Stripped mortgage-backed
securities are created when the principal and interest payments of a
mortgage-backed security are separated by a U.S. Government agency or a
financial institution. The holder of the "principal-only" security receives
the principal payments made by the underlying mortgage-backed security, while
the holder of the "interest-only" security receives interest payments from
the same underlying security.

The value of mortgage-backed securities may change due to changes in the
market's perception of issuers. In addition, the mortgage securities market
in general may be adversely affected by regulatory or tax changes.
Non-governmental mortgage-backed securities may offer a higher yield than
those issued by government entities but also may be subject to greater price
change than government securities.

Like most mortgage securities, mortgage-backed securities are subject to
prepayment risk. When prepayment occurs, unscheduled or early payments are
made on the underlying mortgages, which may

A-2
<PAGE>

shorten the effective maturities of those securities an may lower their total
return. Furthermore, the prices of stripped mortgage-backed securities can be
significantly affected by changes in interest rates as well. As interest
rates fall, prepayment rates tend to increase, which in turn tends to reduce
prices of "interest-only" securities and increase prices of "principal-only"
securities. Rising interest rates can have the opposite effect.

16. FINANCING CORPORATION SECURITIES. (FICOs) are debt obligations issued
by the Financing Corporation. The Financing Corporation was originally
created to recapitalize the Federal Savings and Loan Insurance Corporation
(FSLIC) and now functions as a financing vehicle for the FSLIC Resolution
Fund, which received substantially all of FSLIC's assets and liabilities.

17. U.S. GOVERNMENT SECURITIES. U.S. Government securities are securities
issued by or guaranteed by the U.S. Government or its agencies or
instrumentalities. U.S. Government securities have varying degrees of
government backing. They may be backed by the credit of the U.S. Government
as a whole or only by the issuing agency or instrumentality. For example,
securities issued by the Financing Corporation are supported only by the
credit of the Financing Corporation, and not by the U.S. Government.
Securities issued by the Federal Home Loan Banks and the Federal National
Mortgage Association (FNMA) are supported by the agency's right to borrow
money from the U.S. Treasury under certain circumstances. U.S. Treasury
bonds, notes, and bills, and some agency securities, such as those issued by
the Government National Mortgage Association (GNMA), are backed by the full
faith and credit of the U.S. Government as to payment of principal and
interest and are the highest quality U.S. Government securities. Each
Portfolio, and its share price and yield, are not guaranteed by the U.S.
Government.

18. ZERO COUPON BONDS. Zero coupon bonds are created three ways:

1) U.S. TREASURY STRIPS (Separate Trading of Registered Interest and
Principal of Securities) are created when the coupon payments and
the principal payment are stripped from an outstanding Treasury
bond by the Federal Reserve Bank. Bonds issued by the Resolution
Funding Corporation (REFCORP) and the Financial Corporation (FICO)
also can be stripped in this fashion.

2) STRIPS are created when a dealer deposits a Treasury Security or a
Federal agency security with a custodian for safe keeping and then
sells the coupon payments and principal payment that will be
generated by this security separately. Proprietary receipts, such
as Certificates of Accrual on Treasury Securities (CATS), Treasury
Investment Growth Receipts (TIGRS), and generic Treasury Receipts
(TRs), are stripped U.S. Treasury securities separated into their
component parts through custodial arrangements established by their
broker sponsors. FICO bonds have been stripped in this fashion. The
Portfolios have been advised that the staff of the Division of
Investment Management of the Securities and Exchange Commission
does not consider such privately stripped obligations to be U.S.
Government securities, as defined by the 1940 Act. Therefore, the
Portfolios will not treat such obligations as U.S. Government
securities for purposes of the 65% portfolio composition ratio.

3) ZERO COUPON BONDS can be issued directly by Federal agencies and
instrumentalities, or by corporations. Such issues of zero coupon
bonds are originated in the form of a zero coupon bond and are not
created by stripping an outstanding bond.

Zero coupon bonds do not make regular interest payments. Instead they are
sold at a deep discount from their face value. Because a zero coupon bond
does not pay current income, its price can be very volatile when interest
rates change. In calculating its dividends, the fund takes into account as
income a portion of the difference between zero coupon bond's purchase price
and its face value.

19. BOND WARRANTS. A warrant is a type of security that entitles the
holder to buy a proportionate amount of a bond at a specified price, usually
higher than the market price at the time of issuance, for a period of years
or to perpetuity. Warrants generally trade in the open market and may be sold
rather than exercised.

20. OBLIGATIONS OF SUPRANATIONAL ENTITIES. Obligations of supranational
entities include those of international organizations designated or supported
by governmental entities to promote economic reconstruction or development
and of international banking institutions and related government agencies.

A-3
<PAGE>

Examples include the International Bank for Reconstruction and Development
(the World Bank), the European Coal and Steel Community, the Asian
Development Bank and the Inter-American Development Bank. The governmental
members, or "stockholders," usually make initial capital contributions to the
supranational entity and in many cases are committed to make additional
capital contributions if the supranational entity is unable to repay its
borrowings. Each supranational entity's lending activities are limited to a
percentage of its total capital (including "callable capital" contributed by
members at the entity's call), reserves and net income. There is no assurance
that foreign governments will be able or willing to honor their commitments.

21. EQUIPMENT LEASE AND TRUST CERTIFICATES. A Portfolio may invest in
equipment lease and trust certificates, which are debt securities that are
secured by direct or indirect interest in specified equipment or equipment
leases (including, but not limited to, railroad rolling stock, planes,
trucking or shipping fleets, or other personal property).

A-4
<PAGE>

WRL SERIES FUND, INC.
MERIDIAN/INVESCO GLOBAL SECTOR PORTFOLIO
(UNAUDITED)
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES

ASSETS: AUGUST 31, 1996

Investments in securities, at market value
(cost $ 3,088,114)............................. $ 3,067,842

Short-term securities, at amortized cost 0
Cash............................................ 481,096
Receivables:
Fund shares sold.............................. 0
Securities sold............................... 0
Interest...................................... 12,265
Dividends..................................... 1,900
Foreign Receivable............................ 132
Other......................................... 0
------------

Total assets................................ 3,563,235
------------

LIABILITIES:

Fund shares purchased.......................... 0
Securities purchased........................... 258,767
Accounts payable and accrued liabilities:
Investment advisory fees..................... 2,523
Custody fees................................. 459
Dividends to shareholders.................... 0
Deposits for securities on loan.............. 0
Other Fees................................... 0
------------

Total liabilities.......................... 261,749
------------

Total net assets......................... $ 3,301,486
============
NET ASSETS:

Capital stock
($ .01 par value 75,000,000 authorized) $ 3,336
Additional paid-in capital..................... 3,311,952
Accumulated undistributed income:
Accumulated undistributed net investment
income (loss).............................. 12,736
Accumulated undistributed net realized
gain (loss) on:
Investment transactions.................... (6,461)
Foreign currency transactions.............. 71
Net unrealized appreciation (depreciation) on:
Investment securities........................ (20,272)
Foreign currency transactions................ 124
Net assets applicable to outstanding ------------
shares of capital............................ $ 3,301,486
============
Shares outstanding at August 31, 1996 333,551
============
Net asset value per share...................... $ 9.90
============

STATEMENT OF OPERATIONS
PERIOD ENDED
INVESTMENT INCOME: AUGUST 31, 1996*

Interest....................................... $ 16,172
Dividends (Net of foreign tax of $95) 4,569
---------

Total investment income.................... 20,741
---------

EXPENSES:

Investment advisory fees....................... 6,773
Printing and shareholder reports............... 192
Custody fees................................... 10,181
Legal fees..................................... 17
Auditing and accounting fees................... 1,505
Directors fees................................. 3
Registration fees.............................. 4
Other fees..................................... 7
---------
Total expenses............................. 18,682

Less:
Advisory fee waiver..........................
and expense reimbursement.................. 10,677
Fees paid indirectly......................... 0
---------
Net expenses............................. 8,005
---------
Net investment income (loss)................... 12,736
---------
Net realized gain (loss) on:
Investment securities........................ (6,461)
Foreign currency transactions................ 71
---------
Total net realized gain (loss)............. (6,390)
---------
Change in unrealized appreciation
(depreciation) on:
Investment securities........................ (20,272)
Foreign currency transactions................ 124
Total change in unrealized ---------
appreciation (depreciation)................ (20,148)
---------
Net gain (loss) on investments................ (26,538)
---------
Net increase (decrease) in net assets
resulting from operations..... ........... $ (13,802)
=========
* The inception of this portfolio was May 1, 1996.

WRL SERIES FUND, INC.
MERIDIAN/INVESCO GLOBAL SECTOR PORTFOLIO
(UNAUDITED)
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
PERIOD ENDED
AUGUST 31, 1996*

OPERATIONS:
<S> <C>
Net investment income (loss)........................................... $ 12,736
Net realized gain (loss) on investments and foreign
currency transactions................................................ (6,390)
Change in unrealized appreciation (depreciation) on investments and
foreign currency transactions........................................ (20,148)
-----------
Net increase (decrease) in net assets resulting from operations...... (13,802)
-----------
DISTRIBUTION TO SHAREHOLDERS:

Net investment income................................................. 0
Net realized gains.................................................... 0
-----------
Total distributions................................................. 0
-----------
CAPITAL SHARE TRANSACTIONS:

Net proceeds from sales of shares..................................... 3,438,371
Dividends and distributions reinvested................................ 0
Cost of shares repurchased............................................ (123,083)
-----------
Increase (decrease) in net assets from capital shares transactions.. 3,315,288
-----------
Net increase (decrease) in net assets .............................. 3,301,486

NET ASSETS:

Beginning of period................................................... 0
-----------
End of period......................................................... $ 3,301,486
===========
Undistributed net investment income................................. $ 12,736
===========
SHARE ACTIVITY:

Shares outstanding - beginning of period ............................. 0
-----------
Shares issued......................................................... 345,983
Shares issued - reinvestment of dividends and distributions........... 0
Shares redeemed....................................................... (12,432)
-----------
Increase (decrease) in shares outstanding............................. 333,551
-----------
Shares outstanding - end of period.................................... 333,551
===========

* The inception of this portfolio was May 1, 1996

</TABLE>
<PAGE>

WRL SERIES FUND, INC
MERIDIAN/INVESCO GLOBAL SECTOR PORTFOLIO
(UNAUDITED)
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS*
FOR THE PERIOD ENDED

AUGUST 31
---------
1996/dagger/
-----

Net asset value, beginning of period ................ $ 10.00
Income from operations:
Net investment income (loss) .................... .07
Net realized and unrealized
gain (loss) on investments..................... (.17)
---------
Total income (loss) from operations............ (.10)
---------
Distributions:
Dividends from net investment income............. (.00)
Distributions from net realized gains
on investments................................. .00
---------
Total distributions............................ (.00)
---------
Net asset value, end of period....................... $ 9.90
=========

Total return ........................................ -1.01%

Ratios and supplemental data:
Net assets at end of period
(in thousands)................................... $ 3,301
Ratio of expenses to average net assets ........... 1.10%
Ratio of net investment income (loss)
to average net assets............................ 1.74%
Ratio of commissions paid to number of shares...... 3.43%
Portfolio turnover rate............................ 10.57%

* The above table illustrates the change for a share outstanding computed using
average shares outstanding through the period. See Note 5.

/dagger/ The inception of this portfolio was May 1, 1996. The total return is
not annualized.

<PAGE>

WRL SERIES FUND, INC.
VALUE EQUITY PORTFOLIO
(UNAUDITED)
- -------------------------------------------------------------------------------

STATEMENT OF ASSETS AND LIABILITIES

ASSETS: AUGUST 31, 1996

Investments in securities, at market value
(cost $ 16,470,141) ...................................... $16,609,973

Short-term securities, at .................................. 5,372,743
amortized cost
Cash ....................................................... 0
Receivables:
Fund shares sold ......................................... 0
Securities sold .......................................... 0
Interest ................................................. 2,229
Dividends ................................................ 23,508
Other .................................................... 0
-----------

Total assets ........................................... 22,008,453
-----------
LIABILITIES:

Fund shares purchased ..................................... 0
Securities purchased ...................................... 1,371,441
Accounts payable and accrued liabilities:
Investment advisory fees ................................ 8,894
Custody and transfer agent fees ......................... 0
Auditing and accounting fees .............................. 2,223
Dividends to shareholders ............................... 0
Deposits for securities on loan ......................... 0
Other fees .............................................. 0
-----------

Total liabilities ..................................... 1,382,558
-----------

Total net assets .................................... $20,625,895
===========
NET ASSETS:

Capital stock
($ .01 par value 75,000,000 authorized) .................. $ 20,273
Additional paid-in capital ................................. 20,425,689
Accumulated undistributed income:
Accumulated undistributed net investment
income (loss) .......................................... 40,110
Accumulated undistributed net realized
gain (loss) on:
Investment transactions ................................ (9)
Net unrealized appreciation (depreciation) on:
Investment securities .................................... 139,832
------------
Net assets applicable to outstanding
shares of capital ........................................ $ 20,625,895
============
Shares outstanding at August 31, 1996 ...................... 2,027,264
============

Net asset value per share .................................. $ 10.17
============

STATEMENT OF OPERATIONS

PERIOD ENDED
INVESTMENT INCOME: AUGUST 31, 1996*

Interest ..................................................... $ 25,702
Dividends .................................................... 33,135
---------

Total investment income .................................. 58,837
---------

EXPENSES:

Investment advisory fees ..................................... 14,981
Printing and shareholder reports ............................. 885
Custody fees ................................................. 10,691
Legal fees ................................................... 55
Auditing and accounting fees ................................. 1,505
Directors fees ............................................... 9
Registration fees ............................................ 13
Other fees ................................................... 32
---------

Total expenses ........................................... 28,171

Less:
Advisory fee waiver
and expense reimbursement ................................ 9,440
Fees paid indirectly ....................................... 4
---------

Net expenses ........................................... 18,727
---------

Net investment income (loss) ................................. 40,110
---------

Net realized gain (loss) on:
Investment securities ...................................... (9)
---------

Total net realized gain (loss) ......................... (9)

Change in unrealized appreciation
(depreciation) on:
Investment securities ...................................... 139,832
---------
Total change in unrealized
appreciation (depreciation) ........................... 139,832
---------
Net gain (loss) on investments ............................... 139,823
---------

Net increase (decrease) in net
assets resulting from
operations ............................................... $ 179,933
=========
* The inception of this portfolio was May 1, 1996

<PAGE>

WRL SERIES FUND, INC.
VALUE EQUITY PORTFOLIO
(UNAUDITED)
- -------------------------------------------------------------------------------

STATEMENT OF CHANGES IN NET ASSETS

PERIOD ENDED
OPERATIONS: AUGUST 31, 1996*

Net investment income (loss) ................................ $ 40,110
Net realized gain (loss) on investments ..................... (9)
Change in unrealized appreciation (depreciation) ............ 139,832
on investments ------------

Net increase (decrease) in net assets ..................... 179,933
resulting from operations ------------

DISTRIBUTION TO SHAREHOLDERS:

Net investment income ....................................... 0
Net realized gains .......................................... 0
------------

Total distributions ....................................... 0
------------

CAPITAL SHARE TRANSACTIONS:

Net proceeds from sales of shares ......................... 20,722,618
Dividends and distributions reinvested .................... 0
Cost of shares repurchased ................................ (276,656)
------------

Increase (decrease) in net assets from capital .......... 20,445,962
shares transactions ------------

Net increase (decrease) in net assets ................... 20,625,895

NET ASSETS:

Beginning of period ....................................... 0
------------

End of period ............................................. $ 20,625,895
============
Undistributed net investment income ..................... $ 40,110
============

SHARE ACTIVITY:

Shares outstanding - beginning of period .................. 0
------------

Shares issued ............................................. 2,055,476
Shares issued - reinvestment of dividends ................. 0
and distributions
Shares redeemed ........................................... (28,212)
------------

Increase (decrease) in shares outstanding ................. 2,027,264
------------

Shares outstanding - end of period ........................ 2,027,264
============

* The inception of this portfolio was May 1, 1996.

<PAGE>

WRL SERIES FUND, INC.
VALUE EQUITY PORTFOLIO
(UNAUDITED)

FINANCIAL HIGHLIGHTS*
FOR THE PERIOD ENDED
AUGUST 31
------------
1996\dagger\
------------

Net asset value, beginning of period .............................. $ 10.00
Income from operations:

Net investment income (loss) .................................. .06
Net realized and unrealized
gain (loss) on investments .................................. .11
----------

Total income (loss) from operations ......................... .17
----------

Distributions:

Dividends from net investment income .......................... .00
Distributions from net realized gains
on investments .............................................. .00
----------
Total distributions ......................................... .00
----------

Net asset value, end of period .................................... $ 10.17
===========

Total return ...................................................... 1.74%

Ratios and supplemental data:
Net assets at end of period

(in thousands) ................................................ $ 20,626
Ratio of expenses to average net assets ......................... 0.65%
Ratio of net investment income (loss)
to average net assets ......................................... 1.39%
Ratio of commissions paid to number of shares ................... 7.30%
Portfolio turnover rate ......................................... 1.62%

* The above table illustrates the change for a share outstanding computed using
average shares outstanding through the period. See Note 5.

\dagger\ The inception of this portfolio was May 1, 1996.

<PAGE>

WRL SERIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
AUGUST 31, 1996

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The WRL Series Fund, Inc. (the "Fund") is a diversified, open-end,
investment management company registered under the Investment Company Act of
1940, as amended. The Fund was incorporated on August 21, 1985 as a Maryland
Corporation and commenced operations on October 2, 1986.

The Fund consists of a series of investment portfolios, including the
Meridian/INVESCO Global Sector Portfolio, and the Value Equity Portfolio (the
"Portfolios"). Shares of the Fund are sold to the WRL Series Life Account (the
"Life Account") and the WRL Series Annuity Account (the "Annuity Account"),
collectively called the Separate Accounts of Western Reserve Life Assurance Co.
of Ohio ("WRL"), to fund benefits under variable universal life insurance
policies and variable annuity contracts issued by WRL.

On May 1, 1996, WRL supplied seed capital as follows:

Meridian/INVESCO Global Sector $1,000,000
Value Equity 500,000

The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.

A. VALUATION OF INVESTMENTS

Securities held by the Portfolios are valued at market value, except
for short-term debt securities. Short-term debt securities maturing in
60 days or less are valued on the amortized cost basis, which
approximates market value. Stocks are valued at the latest sale price
on the last business day of the fiscal period as reported by the
principal securities exchange on which the issue is traded or, if no
sale is reported for a stock, the latest bid price is used. Bonds are
valued using prices quoted by a major dealer in bonds which offers a
pricing service. Certain pricing methodologies, such as matrix pricing
of bonds, may involve the use of estimates and actual sales prices may
differ. Securities for which quotations may not be readily available
are valued as determined in good faith in accordance with procedures
established by and under the general supervision of the Fund's Board of
Directors.

The value of foreign securities are translated into U.S. dollars using
spot foreign exchange rates.

B. SECURITY TRANSACTIONS AND INVESTMENT INCOME

Security transactions are recorded on the trade date. Security gains
and losses are calculated on the first-in first-out basis for both tax
and financial reporting purposes. Dividend income is recorded on the
ex-dividend date, and interest income, including amortization of bond
premium and accretion of discount, is accrued daily. Dividend income on
foreign securities is recorded net of foreign tax withholdings.

The accounting records of the Fund are maintained in U.S. dollars. For
transactions denominated in a currency other than the U.S. dollar,
purchases and sales of securities, income received, and expenses paid
are translated into U.S. dollars at the foreign exchange spot rate on
the date the transaction is recorded. Currency gain and loss is also
calculated on payables and receivables that are denominated in foreign
currencies. The payables and receivables are generally related to
security transactions and income.

The unrealized gain or loss on forward foreign currency contracts is
due to the difference between the foreign exchange contract rate and
the foreign exchange forward rate applicable to that contract at the
end of the period. This gain or loss becomes realized when the contract
is closed or settled.

Futures contracts and options are valued based upon daily settlement
prices with the fluctuations in value recorded as unrealized gains and
losses. These gains and losses become realized when the position is
closed. The risks associated with the use of options and futures
contracts involve the possibilities of an illiquid market and an
imperfect correlation between the value of the instrument and the
underlying security.

C. FEDERAL INCOME TAXES

It is the Fund's policy to distribute substantially all its taxable
income and capital gains to its shareholders and otherwise qualify as a
regulated investment company under the Internal Revenue Code. Pursuant
to Code Section 4982(f), regulated investment companies serving as
funding vehicles

<PAGE>

WRL SERIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

NOTE 1 (CONTINUED)

for life insurance company separate accounts are not subject to excise tax
distribution requirements. Accordingly, no provision for Federal income
taxes has been made.

Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatments for such items as wash sales, foreign currency
transactions, net operating losses and capital loss carryforwards.

D. DIVIDENDS AND DISTRIBUTIONS

Dividends of the Portfolios are declared and reinvested semi-annually,
while capital gain distributions are declared and reinvested annually.
Dividends and distributions of the Fund are generally paid to and
reinvested by the Separate Account on the next business day after
declaration.

E. ORGANIZATION COSTS

All costs incurred in connection with the formation of the Fund and its
portfolios were normally paid by WRL.

NOTE 2 - INVESTMENT ADVISORY AND AFFILIATES

A. INVESTMENT ADVISORY

The Fund has entered into an annually renewable investment advisory
agreement for the Portfolios with WRL as investment adviser. The Fund pays
to WRL, and charges to each respective Portfolio, advisory fees each month
at the following annual rate expressed as a percentage of the average daily
net assets of the respective Portfolio:

PORTFOLIO PERCENT OF ASSETS
--------- -----------------
Meridian/INVESCO Global Sector 1.10%
Value Equity .80%

WRL has entered into a sub-advisory agreement with various management
companies. Pursuant to the Meridian/INVESCO Global Sector Portfolio
agreement, Meridian Investment Management Corporation receives
monthly compensation from the Investment Adviser, as a percentage of the
Portfolio's average daily net assets, at an annual rate of 0.30% of the
first $100 million of assets and 0.35% of assets in excess of $100 million.
For its services, INVESCO Global Asset Management Limited receives monthly
compensation from the Investment Adviser, as a percentage of the
Portfolio's average daily net assets, at an annual rate of 0.40% of the
first $100 million of assets and 0.35% of assets in excess of $100 million.

Pursuant to the Value Equity Portfolio agreement, fifty percent of the
advisory fee paid to WRL less fifty percent of any expense reimbursement is
due to NWQ Investment Management, Inc.

WRL currently voluntarily waives its advisory fees to the extent a
Portfolio's normal operating expenses exceeds the percentage of net assets
of the Portfolio as listed below:

PORTFOLIO PERCENTAGE OF ASSETS
--------- --------------------
Value Equity 1.00%

The Portfolios are charged for expenses that specifically relate to their
individual operations. All other operating expenses of the Fund that are
not attributable to a specific portfolio are allocated based upon the
proportionate number of contract holders of the underlying sub-accounts.
WRL directly incurs and pays these operating expenses relating to the Fund,
which subsequently reimburses WRL. All normal operating expenses that
exceed the established expense limit set forth above will be borne by WRL.

B. AFFILIATES

WRL is an indirect wholly-owned subsidiary of AEGON USA, Inc., which is an
indirect wholly-owned subsidiary of AEGON nv, a Netherlands corporation.

WRL SERIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

NOTE 3 - SECURITY TRANSACTIONS

Securities transactions are summarized as follows:

MERIDIAN/
INVESCO
GLOBAL VALUE
SECTOR EQUITY
PORTFOLIO PORTFOLIO
--------- ---------
For the period ended August 31, 1996:
<S> <C> <C>
Purchases of securities:
Long-term excluding U.S. Government........... $ 2,634,192 $ $ 16,563,929
U.S. Government securities.................... 630,462 0
Proceeds from maturities and sales of securities:
Long-term excluding U.S. Government........... 33,625 93,778
U.S. Government securities.................... 136,763 0
</TABLE>

NOTE 4 - FEDERAL INCOME TAX MATTERS

The income, expenses, gains and losses on securities transactions attributed
to each Portfolio for accounting purposes, are also attributed to that Portfolio
for Federal income tax purposes. Gains and losses on forward currency contracts,
if applicable, are treated as ordinary income for Federal income tax purposes
pursuant to Section 988 of the Internal Revenue Code.

Each portfolio has and will continue to comply with the provisions of the
Internal Revenue Code applicable to regulated investment companies, and
accordingly, has made or intends to make sufficient distributions of net
investment income and net realized gains, if any, to relieve it from all federal
and state income taxes and federal excise taxes.

The aggregate cost of investments and composition of unrealized appreciation
and depreciation for federal income tax purposes as of August 31, 1996 are as
follows:
<TABLE>
<CAPTION>

NET UNREALIZED
FEDERAL TAX UNREALIZED UNREALIZED APPRECIATION
PORTFOLIO COST BASIS APPRECIATION DEPRECIATION (DEPRECIATION)
- --------- ---------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Meridian/INVESCO Global Sector............ $ 3,088,114 $ 75,119 $ 95,391 $ (20,272)
Value Equity.............................. 21,842,884 322,808 182,976 139,832
</TABLE>

NOTE 5 - FINANCIAL HIGHLIGHTS

The Financial Highlights for each Portfolio is for the period from
inception, which is less than one year; therefore the total return shown is not
annualized.

The total return and the change in value of the Portfolio reflect the
advisory fee and all other Portfolio expenses and include reinvestment of
dividends and capital gains; they do not reflect the charges against the
corresponding sub-accounts or the charges and deduction under the applicable
annuity contracts.

The ratio of expenses to average net assets in the financial highlights is
net of advisory fee waiver (see Note 2). The August 31, 1996 ratio is
annualized, along with the ratio of net investment income to average net assets.

Without the advisory fee waived by WRL, the ratio would be as follows:

Meridian/INVESCO Global Sector 2.56%
Value Equity 0.97%

<PAGE>