AMERICAN CAPITAL LIFE INVESTMENT TRUST, 485APOS, 1995-02-15

AMERICAN CAPITAL LIFE INVESTMENT TRUST
485APOS, 1995-02-15

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<PAGE> 1

REGISTRATION NO. 33-628
811-4425
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-1A

REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933 (X)
POST-EFFECTIVE AMENDMENT NO. 17 (X)

REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 (X)
AMENDMENT NO. 19 (X)

AMERICAN CAPITAL LIFE INVESTMENT TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
2800 POST OAK BLVD., HOUSTON, TEXAS 77056
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)(ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (713) 993-0500

NORI L. GABERT, ESQ.
VICE PRESIDENT, ASSOCIATE GENERAL COUNSEL AND CORPORATE SECRETARY
VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT, INC.
2800 POST OAK BLVD.
HOUSTON, TEXAS 77056
(NAME AND ADDRESS OF AGENT FOR SERVICE)
---------------------
Approximate Date of Proposed Public Offering: As soon as practicable following
effectiveness of this Registration Statement.
---------------------
It is proposed that this filing will become effective:
/ / immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b) of Rule 485
/ / 60 days after filing pursuant to paragraph (a)(i)
/ / on (date) pursuant to paragraph (a)(i)

/ / 75 days after filing pursuant to paragraph (a)(ii)

/X/ on April 30, 1995, pursuant to paragraph (a)(ii) of Rule 485.

If appropriate, check the following box:
/ / this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.

REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF SHARES OF BENEFICIAL INTEREST
OF THE AMERICAN CAPITAL COMMON STOCK PORTFOLIO, THE AMERICAN CAPITAL DOMESTIC
STRATEGIC INCOME PORTFOLIO, THE AMERICAN CAPITAL GOVERNMENT PORTFOLIO, THE
AMERICAN CAPITAL MULTIPLE STRATEGY PORTFOLIO AND THE AMERICAN CAPITAL MONEY
MARKET PORTFOLIO $0.01 PAR VALUE, UNDER THE SECURITIES ACT OF 1933 PURSUANT TO
RULE 24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940, AND FILED A RULE 24F-2
NOTICE FOR ITS 1993 FISCAL YEAR ON BEHALF OF THE AMERICAN CAPITAL COMMON STOCK
PORTFOLIO, THE AMERICAN CAPITAL DOMESTIC STRATEGIC INCOME PORTFOLIO, THE
AMERICAN CAPITAL MULTIPLE STRATEGY PORTFOLIO AND THE AMERICAN CAPITAL MONEY
MARKET PORTFOLIO ON OR ABOUT FEBRUARY 24, 1994. NO 24F-2 FILING WAS NECESSARY
FOR THE AMERICAN CAPITAL GOVERNMENT PORTFOLIO. A RULE 24F-2 NOTICE WILL NOT BE
REQUIRED FOR AMERICAN CAPITAL EMERGING GROWTH PORTFOLIO, THE AMERICAN CAPITAL
GLOBAL EQUITY PORTFOLIO, AND THE AMERICAN CAPITAL REAL ESTATE SECURITIES
PORTFOLIO UNTIL FEBRUARY OR MARCH OF 1996.

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<PAGE> 2

AMERICAN CAPITAL LIFE INVESTMENT TRUST

CROSS REFERENCE SHEET

<TABLE>
<CAPTION>
FORM N-1A PART A ITEM PROSPECTUS CAPTION
- --------------------- -------------------------------------------
<C> <S> <C>
1. Cover Page................................. Front Cover Page
2. Synopsis................................... Prospectus Summary
3. Condensed Financial Information............ Financial Highlights
4. General Description of Registrant.......... The Fund and Its Management Investment
Objective and Policies; Investment
Practices and Restrictions
5. Management of the Fund..................... The Fund and Its Management
6. Capital Stock and Other Securities......... The Fund and Its Management; Redemption of
Shares; Dividends, Distributions and
Taxes
7. Purchase of Securities Being Offered....... Purchase of Shares
8. Redemption or Repurchase................... Redemption of Shares
9. Pending Legal Proceedings.................. Inapplicable

PART B STATEMENT OF ADDITIONAL INFORMATION CAPTION
- ------ -------------------------------------------
10. Cover Page................................. Cover Page
11. Table of Contents.......................... Table of Contents
12. General Information and History............ General Information
13. Investment Objectives and Policies......... Investment Restrictions
14. Management of the Registrant............... General Information; Investment Advisory
Agreement, Trustees and Executive
Officers
15. Control Persons and Principal Holders of
Securities............................... Trustees and Executive Officers
16. Investment Advisory and Other Services..... Investment Advisory Agreement; Distributor;
Other Information
17. Brokerage Allocation and Other Practices... Portfolio Transactions and Brokerage
18. Capital Stock and Other Securities......... Inapplicable
19. Purchase, Redemption and Pricing of
Securities Being Offered................. Purchase and Redemption of Shares;
Determination of Net Asset Value
20. Tax Status................................. Distributions and Taxes
21. Underwriters............................... Distributor
22. Calculation of Performance Data............ Prior Performance Information
23. Financial Statements....................... Financial Statements

PART C
- ------
</TABLE>

Information required to be included in Part C is set forth under the
appropriate item in Part C of this registration statement.
<PAGE> 3

***************************************************************************
* *
* Information contained herein with respect to the securities of *
* American Capital Emerging Growth Portfolio and American Capital *
* Global Equity Portfolio is subject to completion or amendment. A *
* registration statement relating to these securities has been filed *
* with the Securities and Exchange Commission. Those securities may not *
* be sold nor may offers to buy be accepted prior to the time the *
* registration statement becomes effective. With respect to the *
* securities of American Capital Emerging Growth Portfolio and American *
* Capital Global Equity Portfolio this prospectus shall not constitute *
* an offer to sell or the solicitation of an offer to buy nor shall *
* there be any sale of these securities in any State in which such *
* offer, solicitation or sale would be unlawful prior to registration *
* or qualification under the securities laws of any such State. *
* *
***************************************************************************

SUBJECT TO COMPLETION DATED FEBRUARY 15, 1995

AMERICAN CAPITAL LIFE INVESTMENT TRUST
2800 Post Oak Boulevard
Houston, Texas 77056
(800) 421-5666

May 1, 1995

American Capital Life Investment Trust (the "Fund") is an open-end
diversified management investment company which offers shares in eight separate
Portfolios, each of which is in effect a separate fund. Seven Portfolios are
described in this Prospectus. The eighth is described in a separate Prospectus.
Shares are sold only to separate accounts (the "Accounts") of various insurance
companies to fund the benefits of variable annuity or variable life insurance
policies (the "Contracts"). The Accounts invest in shares of the Portfolios in
accordance with allocation instructions received from Contractowners. Such
allocation rights are further described in the accompanying Prospectus for the
Contracts. The investment objectives of the Portfolios are as follows:

American Capital Common Stock Portfolio (the "Common Stock Portfolio") seeks
capital appreciation by investing in a portfolio of securities consisting
principally of common stocks.

American Capital Domestic Strategic Income Portfolio (the "Domestic
Strategic Income Portfolio") seeks current income as its primary objective.
Capital appreciation is a secondary objective. The Portfolio attempts to
achieve these objectives through investment primarily in a diversified
portfolio of fixed-income securities. The Portfolio may invest in investment
grade securities and lower rated and nonrated securities. LOWER RATED
SECURITIES ARE REGARDED BY THE RATING AGENCIES AS PREDOMINANTLY SPECULATIVE
WITH RESPECT TO THE ISSUER'S CONTINUING ABILITY TO MEET PRINCIPAL AND
INTEREST PAYMENTS.

American Capital Emerging Growth Portfolio (the "Emerging Growth Portfolio")
seeks capital appreciation by investing in a portfolio of securities
consisting principally of common stocks of small and medium sized companies
considered by Van Kampen American Capital Asset Management, Inc. (the
"Adviser"), to be emerging growth companies.

American Capital Global Equity Portfolio (the "Global Equity Portfolio")
seeks long-term growth of capital through investments in an internationally
diversified portfolio of equity securities of companies of any nation
including the United States.

American Capital Government Portfolio (the "Government Portfolio") seeks to
provide investors with a high current return consistent with preservation of
capital. The Portfolio invests primarily in debt securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities. In
order to hedge against changes in interest rates, the Portfolio may also
purchase or sell options and engage in transactions involving interest rate
futures contracts and options on such contracts.

American Capital Money Market Portfolio (the "Money Market Portfolio") seeks
protection of capital and high current income by investing in short-term
money market instruments. INVESTMENTS IN THE MONEY MARKET PORTFOLIO ARE
NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT. ALTHOUGH THE MONEY
MARKET PORTFOLIO SEEKS TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER
SHARE, THERE IS NO ASSURANCE THAT IT WILL BE ABLE TO DO SO.

American Capital Multiple Strategy Portfolio (the "Multiple Strategy
Portfolio") seeks a high total investment return consistent with prudent
risk through a fully managed investment policy utilizing equity securities,
primarily common stocks of large capitalization companies, as well as
investment grade intermediate and long-term debt securities and money market
securities.

There is no assurance that any Portfolio will achieve its investment
objectives.
- --------------------------------------------------------------------------------

This Prospectus tells Contractowners briefly the information they should
know before allocating premiums or cash value to the Fund. Investors should read
and retain this Prospectus for future reference.

A Statement of Additional Information dated the same date as this Prospectus
has been filed with the Securities and Exchange Commission ("SEC") and contains
further information about the Fund. A copy of the Statement of Additional
Information may be obtained without charge by calling or writing the Fund at the
telephone number and address printed above. The Statement of Additional
Information is hereby incorporated by reference into this Prospectus.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR STATE REGULATORS NOR HAS THE COMMISSION OR STATE
REGULATORS PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 4

AMERICAN CAPITAL LIFE INVESTMENT TRUST

<TABLE>
<S> <C>
CUSTODIAN: State Street Bank and Trust
Company
225 Franklin Street
Boston, Massachusetts 02110

SHAREHOLDER ACCESS Investor Services, Inc.
SERVICE AGENT: P.O. Box 418256
Kansas City, Missouri 64141-9256

DISTRIBUTOR: Van Kampen American Capital
Distributors, Inc.
One Park View Plaza
Oak Brook Terrace, Illinois
60181

INVESTMENT Van Kampen American Capital
ADVISER: Asset Management, Inc.
2800 Post Oak Boulevard
Houston, Texas 77056

INVESTMENT John Govett & Co. Limited
SUBADVISER: 4 Battle Bridge Lane
London SE1 2HR
England
</TABLE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
<S> <C>
Page
----
Prospectus Summary.......................... 3
Financial Highlights........................ 6
Introduction................................ 11
Investment Objectives and Policies.......... 11
Common Stock Portfolio.................... 11
Domestic Strategic Income Portfolio....... 12
Emerging Growth Portfolio................. 16
Global Equity Portfolio................... 16
Government Portfolio...................... 19
Money Market Portfolio.................... 24
Multiple Strategy Portfolio............... 25
Investment Practices and Restrictions....... 26
The Fund and Its Management................. 30
Purchase of Shares.......................... 33
Determination of Net Asset Value............ 33
Redemption of Shares........................ 34
Dividends, Distributions and Taxes.......... 34
Prior Performance Information............... 36
Additional Information...................... 38
Appendix.................................... 39
</TABLE>

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No dealer, salesperson, or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus or in the Statement of Additional Information, and, if given or made,
such other information or representations must not be relied upon as having been
authorized by the Fund or by the Distributor. This Prospectus does not
constitute an offering by the Distributor in any jurisdiction in which such
offering may not lawfully be made.
- --------------------------------------------------------------------------------

2
<PAGE> 5

PROSPECTUS SUMMARY

Shares Offered........ Shares of Beneficial Interest in seven Portfolios: the
Common Stock Portfolio, the Domestic Strategic Income
Portfolio, the Emerging Growth Portfolio, the Global
Equity Portfolio, the Government Portfolio, the Money
Market Portfolio, and the Multiple Strategy Portfolio.

Type of Company....... Diversified, open-end management investment company.

Investment
Objectives.......... The Common Stock Portfolio seeks capital appreciation;
the Domestic Strategic Income Portfolio seeks current
income and capital appreciation; the Emerging Growth
Portfolio seeks capital appreciation; the Global Equity
Portfolio seeks long-term growth of capital; the
Government Portfolio seeks high current return consistent
with preservation of capital; the Money Market Portfolio
seeks protection of capital and high current income; and
the Multiple Strategy Portfolio seeks high total
investment return.

Investment Policies
Risk Factors........ The Common Stock Portfolio invests principally in common
stocks of companies which, in the judgment of the
Adviser, have above average potential for capital
appreciation. Because prices of common stocks and other
securities fluctuate, the value of an investment in the
Portfolio will vary based upon the Portfolio's investment
performance. Use of options, futures contracts and
options on futures contracts may include additional risk.
See "Investment Practices and Restrictions -- Using
Options, Futures Contracts and Options on Futures
Contracts."

The Domestic Strategic Income Portfolio invests in a
diversified portfolio of fixed-income securities. The
Portfolio expects that at all times at least 80% of its
assets will be invested in fixed-income securities rated
at the time of purchase B or higher by Moody's Investors
Service ("Moody's") or Standard & Poor's Corporation
("S&P"), nonrated debt securities and U.S. Government
securities. Securities rated BB or lower are regarded by
the rating agencies as predominantly speculative with
respect to the issuer's continuing ability to meet
principal and interest payments. Because investment in
lower rated securities involves greater investment risk,
achievement of the Portfolio's investment objectives may
be more dependent on the Adviser's credit analysis than
would be the case if the Portfolio were investing in
higher rated securities. Lower rated securities may be
more susceptible to real or perceived adverse economic
and competitive industry conditions than investment grade
securities and thus be subject to higher risk. A
projection of an economic downturn, for example, could
cause a decline in lower rated securities prices because
the advent of a recession could lessen the ability of a
highly leveraged company to make principal and interest
payments on its debt securities. In addition, the
secondary trading market for lower rated securities may
be less liquid than the market for higher grade
securities. The market prices of debt securities also
generally fluctuate with changes in interest rates so
that the Portfolio's net asset value can be expected to
decrease as long-term interest rates rise and to

3
<PAGE> 6

increase as long-term interest rates fall. The above
risks may be increased by investments in debt securities
not producing immediate cash income, such as zero-coupon
and pay-in-kind securities. See "Investment Objectives
and Policies."

The Emerging Growth Portfolio invests at least 65% of the
Portfolio's total assets in common stocks of small and
medium sized companies (less than $2 billion of market
capitalization or annual sales), both domestic and
foreign, considered by the Adviser to be emerging growth
companies. The companies in which the Portfolio invests
may offer greater opportunities for growth of capital
than larger, more established companies, but investments
in such companies may involve special risks. See
"Investment Objectives and Policies" and "Investment
Practices and Restrictions -- Foreign Securities." The
use of options, futures contracts and related options may
include additional risks. See "Investment Practices and
Restrictions -- Using Options, Futures Contracts and
Related Options."

The Global Equity Portfolio invests in an internationally
diversified portfolio of equity securities of companies
of any nation including the United States. See
"Investment Objectives and Policies." Use of options,
futures contracts and related options may include
additional risks. See "Investment Practices and
Restrictions -- Using Options, Futures Contracts and
Related Options."

The Government Portfolio invests primarily in debt
securities issued or guaranteed by the U.S. Government,
its agencies or instrumentalities. The Portfolio may sell
(write) and purchase call and put options. The Portfolio
also may purchase and sell interest rate futures
contracts and options on such contracts since such
transactions are entered into for bona fide hedging
purposes. The Portfolio may purchase or sell U.S.
Government securities on a forward commitment basis. The
market prices of debt securities, including U.S.
Government securities, generally fluctuate with changes
in interest rates so that the Portfolio's net asset value
can be expected to decrease as long-term interest rates
rise and to increase as long-term interest rates fall.
See "Investment Objectives and Policies -- Government
Portfolio -- General."

The Money Market Portfolio invests in money market
instruments.

The Multiple Strategy Portfolio may, at various times, be
substantially invested in equity securities, bonds and
notes or money market securities, based upon the
Adviser's evaluation of economic and market trends and
anticipated relative return available from a particular
kind of security. Because prices of securities fluctuate,
the value of an investment in the Portfolio will vary
based upon the Portfolio's investment performance. Use of
options, futures contracts and options on futures
contracts may include additional risk. See "Investment
Practices and Restrictions -- Using Options, Futures
Contracts and Options on Futures Contracts."

Investment Adviser.... The Adviser has served as investment adviser to the Fund
since its inception. The Adviser provides investment
advice to 50 investment company portfolios.

4
<PAGE> 7

John Govett & Co. Limited (the "Subadviser") provides
advisory services to the Adviser with respect to the
Global Equity Portfolio's investments in foreign
securities. See "The Fund and Its Management."

Dividends and
Distributions....... Dividends from net investment income are declared each
business day for the Money Market Portfolio and the
Government Portfolio. Such dividends are distributed
monthly. The Government Portfolio may distribute any net
short-term capital gains and any net long-term capital
gains at least annually. The Common Stock, Domestic
Strategic Income, Emerging Growth, Global Equity and
Multiple Strategy Portfolios declare dividends and any
capital gains distributions annually.

Redemption............ At the next determined net asset value.

Distributor........... Van Kampen American Capital Distributors, Inc. (the
"Distributor").

5
<PAGE> 8

FINANCIAL HIGHLIGHTS

The following information for each of the five most recent fiscal years has
been audited by Price Waterhouse LLP, independent accountants, whose report
thereon was unqualified. This information should be read in conjunction with the
related financial statements and notes thereto included in the Statement of
Additional Information.

COMMON STOCK PORTFOLIO

<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31
PER SHARE OPERATING ------------------------------------------------------------------------------------------------
PERFORMANCE 1994 1993 1992 1991 1990 1989 1988 1987# 1986
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period....................... $14.21 $13.44 $10.09 $11.30 $8.70 $7.97 $9.33 $10.00*
-------- -------- -------- -------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS
Investment income.............. .30 .31 .335 .46 .46 .38 .25 .32
Expenses....................... (.11) (.10) (.10) (.101) (.10) (.095) (.10) (.06)
Expense reduction.............. .02 .02 .03 .036 .04 .035 .03 .04
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net investment income.......... .21 .23 .265 .395 .40 .32 .18 .30
Net realized and unrealized
gains or losses on
securities................... 1.0325 .77 3.37 (1.17) 2.57 .765 (1.1975) (.97)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total from investment
operations................... 1.2425 1.00 3.635 (.775) 2.97 1.085 (1.0175) (.67)
-------- -------- -------- -------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net investment
income....................... (.215) (.23) (.285) (.435) (.37) (.30) (.2575) --
Distributions from net realized
gain on securities........... (.6675) -- -- -- -- (.055) (.085) --
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total distributions............ (.8825) (.23) (.285) (.435) (.37) (.355) (.3425) --
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end of
period....................... $14.57 $14.21 $13.44 $10.09 $11.30 $8.70 $7.97 $9.33
========= ========= ========= ========= ========= ========= ========= ========= =========

TOTAL RETURN***................ 8.98% 7.48% 36.41% (6.84%) 34.23% 13.61% (11.12%) (6.70%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(millions)..................... $72.3 $65.6 $57.8 $27.2 $31.8 $24.0 $31.0 $12.0
Ratios to average net
assets****
Expenses..................... .60% .60% .60% .60% .60% .60% .60% .60% **
Expenses, without expense
reduction.................. .72% .74% .90% .93% .93% .95% .89% .95% **
Net investment income........ 1.41% 1.78% 2.33% 3.64% 3.74% 3.13% 1.65% 10.34% **
Net investment income,
without expense
reduction.................. 1.29% 1.64% 2.03% 3.31% 3.41% 2.78% 1.36% 9.99% **

Portfolio turnover rate........ 139% 116% 95% 122% 86% 63% 75% 268%
</TABLE>

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# Based on average month-end shares outstanding.

* As of April 4, 1986, commencement of operations.

** Annualized.

*** Total return for periods of less than one year are not annualized. Total
return does not consider the effect of sales loads.

**** See Note 2.

6
<PAGE> 9

FINANCIAL HIGHLIGHTS (CONTINUED)

DOMESTIC STRATEGIC INCOME PORTFOLIO

<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31
PER SHARE OPERATING ----------------------------------------------------------------------------------------------
PERFORMANCE 1994 1993 1992 1991 1990 1989 1988 1987
--------- --------- --------- --------- -------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period........................ $8.00 $7.74 $6.98 $8.64 $10.96 $10.15 $10.00*
--------- --------- --------- --------- -------- --------- ---------- ----------
INCOME FROM INVESTMENT
OPERATIONS
Investment income............... .77 .74 .725 1.085 1.805 .65 .09
Expenses........................ (.09) (.07) (.07) (.08) (.12) (.18) (.08)
Expense reduction............... .04 .02 .03 .03 .04 .15 .07
--------- --------- --------- --------- -------- --------- ---------- ----------
Net investment income........... .72 .69 .685 1.035 1.725 .62 .08
Net realized and unrealized
gains or losses on
securities.................... .5825 .2725 .7525 (1.64) (2.31) .8975 .1525
--------- --------- --------- --------- -------- --------- ---------- ----------
Total from investment
operations.................... 1.3025 .9625 1.4375 (.605) (.585) 1.5175 .2325
--------- --------- --------- --------- -------- --------- ---------- ----------
LESS DISTRIBUTIONS
Dividends from net investment
income........................ (.7225) (.7025) (.6775) (1.055) (1.725) (.61) (.0825)
Distributions from net realized
gain on securities............ -- -- -- -- (.01) (.0975) --
--------- --------- --------- --------- -------- --------- ---------- ----------
Total distributions............. (.7225) (.7025) (.6775) (1.055) (1.735) (.7075) (.0825)
--------- --------- --------- --------- -------- --------- ---------- ----------
Net asset value, end of
period........................ $8.58 $8.00 $7.74 $6.98 $8.64 $10.96 $10.15
========= ========= ========= ========= ======== ========= ========== ==========

TOTAL RETURN***................. 16.32% 12.50% 21.23% (7.23%) (5.44%) 14.95% 1.50%

RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(millions).................... $27.4 $21.1 $17.4 $6.3 $8.1 $8.1 $1.2
Ratios to average net assets****
Expenses...................... .60% .60% .60% .60% .60% .60% .60%**
Expenses, without expense
reduction................... .95% .95% .95% .95% .95% .95% .95%**
Net investment income......... 7.80% 8.89% 9.72% 11.99% 12.92% 10.88% 5.58%**
Net investment income, without
expense reduction........... 7.40% 8.54% 9.37% 11.64% 12.57% 10.53% 5.23%**

Portfolio turnover rate......... 130% 117% 90% 123% 56% 44% 42%
</TABLE>

- ---------------------
* As of November 4, 1987, commencement of operations.
** Annualized.
*** Total return for periods of less than one year are not annualized. Total
return does not consider the effect of sales loads.
**** See Note 2.

7
<PAGE> 10

FINANCIAL HIGHLIGHTS (CONTINUED)

GOVERNMENT PORTFOLIO

<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31
PER SHARE OPERATING ------------------------------------------------------------------------------------------------
PERFORMANCE 1994 1993 1992 1991 1990 1989 1988 1987 1986
------- ------- ------- ------- ------ ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period....................... $9.13 $9.29 $8.70 $8.80 $8.48 $8.68 $9.91 $10.00*
------- ------- ------- ------- ------ ------- ------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS
Investment income.............. .62 .72 .79 .835 .89 .94 .81 .55
Expenses....................... (.06) (.064) (.06) (.06) (.06) (.06) (.05) (.07)
Expense reduction.............. .01 .009 .01 .01 .01 -- -- .03
------- ------- ------- ------- ------ ------- ------- -------- --------
Net investment income.......... .57 .665 .74 .785 .84 .88 .76 .51
Net realized and unrealized
gains or losses on
securities................... .135 (.1575) .60 (.105) .325 (.215) (.97) .0516
------- ------- ------- ------- ------ ------- ------- -------- --------
Total from investment
operations................... .705 .5075 1.34 .68 1.165 .665 (.21) .5616
------- ------- ------- ------- ------ ------- ------- -------- --------
LESS DISTRIBUTIONS
Dividends from net investment
income....................... (.575) (.6675) (.75) (.78) (.845) (.865) (.7525) (.5041)
Distributions from net realized
gain on securities........... -- -- -- -- -- -- (.2675) (.1475)
------- ------- ------- ------- ------ ------- ------- -------- --------
Total distributions............ (.575) (.6675) (.75) (.78) (.845) (.865) (1.02) (.6516)
------- ------- ------- ------- ------ ------- ------- -------- --------
Net asset value, end of
period....................... $9.26 $9.13 $9.29 $8.70 $8.80 $8.48 $8.68 $9.91
======== ======== ======== ======== ====== ======== ======== ========= =========

TOTAL RETURN***................ 7.86% 5.73% 16.23% 8.31% 14.31% 6.74% (2.12%) 4.22%

RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(millions)..................... $80.6 $74.8 $77.0 $73.2 $81.2 $90.6 $108.8 $67.7
Ratios to average net
assets****
Expenses..................... .60% .60% .60% .60% .60% .60% .60% .60%**
Expenses, without expense
reduction.................. .70% .70% .70% .69% .66% .64% .64% .95%**
Net investment income........ 6.45% 7.29% 8.37% 9.19% 9.56% 9.29% 8.37% 6.80%**
Net investment income,
without expense
reduction.................. 6.35% 7.19% 8.27% 9.10% 9.50% 9.25% 8.33% 6.45%**

Portfolio turnover rate........ 91% 36% 57% 164% 42% 88% 65% 115%
</TABLE>

- ---------------------

* As of April 4, 1986, commencement of operations.

** Annualized.

*** Total return for periods of less than one year are not annualized. Total
return does not consider the effect of sales loads.

**** See Note 2.

8
<PAGE> 11

FINANCIAL HIGHLIGHTS (CONTINUED)

MONEY MARKET PORTFOLIO

<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31
PER SHARE OPERATING -----------------------------------------------------------------------------------------------
PERFORMANCE 1994 1993 1992 1991 1990 1989 1988 1987 1986
------- ------- ------- ------- ------ ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period........................ $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00*
------- ------- ------- ------- ------ ------- ------- -------- -------
INCOME FROM INVESTMENT
OPERATIONS
Investment income............... .0322 .0391 .0607 .082 .0937 .0773 .0684 .0429
Expenses........................ (.0095) (.009) (.0087) (.009) (.01) (.0104) (.0141) (.0093)
Expense reduction............... .0035 .003 .0026 .003 .004 .0045 .0081 .0052
------- ------- ------- ------- ------ ------- ------- -------- -------
Net investment income........... .0262 .0331 .0546 .076 .0877 .0714 .0624 .0388
Net realized and unrealized
gains or losses on
securities.................... -- -- -- -- -- -- (.00002) --
------- ------- ------- ------- ------ ------- ------- -------- -------
Total from investment
operations.................... .0262 .0331 .0546 .076 .0877 .0714 .06238 .0388
------- ------- ------- ------- ------ ------- ------- -------- -------
DIVIDENDS FROM NET INVESTMENT
INCOME........................ (.0262) (.0331) (.0546) (.076) (.0877) (.0714) (.06238) (.0388)
------- ------- ------- ------- ------ ------- ------- -------- -------
Net asset value, end of
period........................ $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
======== ======== ======== ======== ====== ======== ======== ========= ========
TOTAL RETURN***................. 2.66% 3.36% 5.60% 7.83% 9.13% 7.38% 6.41% 4.27%

RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(millions)...................... $30.0 $32.9 $38.0 $34.3 $29.0 $24.5 $18.6 $23.4
Ratios to average net assets****
Expenses...................... .60% .60% .60% .60% .60% .60% .60% .60% **
Expenses, without expense
reduction................... .95% .89% .87% .89% .95% .95% .95% .95% **
Net investment income......... 2.63% 3.32% 5.44% 7.59% 8.76% 7.22% 6.24% 5.70% **
Net investment income, without
expense reduction........... 2.28% 3.03% 5.17% 7.30% 8.41% 6.87% 5.89% 5.35% **
</TABLE>

- ---------------------

* As of April 4, 1986, commencement of operations.

** Annualized.

***Total return for periods of less than one year are not annualized. Total
return does not consider the effect of sales loads.

**** See Note 2.

9
<PAGE> 12

FINANCIAL HIGHLIGHTS (CONTINUED)

MULTIPLE STRATEGY PORTFOLIO

<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31
PER SHARE OPERATING ----------------------------------------------------------------------------------------
PERFORMANCE 1994 1993 1992 1991 1990 1989 1988 1987
-------- -------- -------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period............................ $11.92 $12.08 $10.43 $10.77 $9.67 $9.56 $10.00*
-------- -------- -------- -------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Investment income................... .37 .44 .54 .58 .65 .67 .20
Expenses............................ (.09) (.09) (.09) (.09) (.09) (.09) (.04)
Expense reduction................... .01 .02 .02 .03 .03 .03 .02
-------- -------- -------- -------- ------- ------- ------- -------
Net investment income............... .29 .37 .47 .52 .59 .61 .18
Net realized and unrealized gains or
losses on securities.............. .6025 .493 2.27 (.325) 1.13 .1125 (.445)
-------- -------- -------- -------- ------- ------- ------- -------
Total from investment operations.... .8925 .863 2.74 .195 1.72 .7225 (.265)
-------- -------- -------- -------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends from net investment
income............................ (.2925) (.3689) (.4825) (.535) (.595) (.6125) (.175)
Distributions from net realized gain
on securities..................... (.63) (.6541) (.6075) -- (.025) -- --
Distributions in excess of net
realized gains on securities...... (.09) -- -- -- -- -- --
-------- -------- -------- -------- ------- ------- ------- -------
Total distributions................. (1.0125) (1.023) (1.09) (.535) (.62) (.6125) (.175)
-------- -------- -------- -------- ------- ------- ------- -------
Net asset value, end of period...... $11.80 $11.92 $12.08 $10.43 $10.77 $9.67 $9.56
========= ========= ========= ========= ======== ======== ======== ========
TOTAL RETURN***..................... 7.71% 7.28% 27.05% 1.89% 17.82% 7.56% (5.23%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(millions)........................ $64.9 $59.6 $52.2 $40.3 $40.5 $31.4 $22.7
Ratios to average net assets****
Expenses.......................... .60% .60% .60% .60% .60% .60% .60%**
Expenses, without expense
reduction....................... .74% .77% .80% .80% .86% .90% .95%**
Net investment income............. 2.34% 3.05% 4.12% 4.70% 5.93% 6.36% 6.48%**
Net investment income, without
expense reduction............... 2.20% 2.88% 3.92% 4.50% 5.67% 6.06% 6.13%**
Portfolio turnover rate............. 150% 126% 88% 46% 50% 48% 27%
</TABLE>

- ---------------------
* As of June 30, 1987, commencement of operations.
** Annualized.
*** Total return for periods of less than one year are not annualized. Total
return does not consider the effect of sales loads.
**** See Note 2.

10
<PAGE> 13

INTRODUCTION

The Fund is a trust which presently consists of seven separate
Portfolios -- the Common Stock Portfolio, the Domestic Strategic Income
Portfolio, the Emerging Growth Portfolio, the Global Equity Portfolio, the
Government Portfolio, the Money Market Portfolio and the Multiple Strategy
Portfolio. Each Portfolio has separate assets and liabilities and a separate net
asset value per share. Shares of a Portfolio represent an interest only in that
Portfolio. Since market risks are inherent in all securities to varying degrees,
assurance cannot be given that the investment objectives of any of the
Portfolios will be met.

INVESTMENT OBJECTIVES AND POLICIES

Each Portfolio of the Fund has a different investment objective which it
pursues through separate investment policies as described below. See "Investment
Practices" for further discussion of investment techniques and strategies. The
differences in objectives and policies among the Portfolios can be expected to
affect the return of each Portfolio and the degree of market and financial risk
to which each Portfolio is subject.

COMMON STOCK PORTFOLIO

The Portfolio seeks capital appreciation through investments in securities
believed by the Adviser to have above average potential for capital
appreciation. Any income received on such securities is incidental to the
objective of capital appreciation.

The Portfolio invests principally in common stocks. The Portfolio generally
holds a portion of its assets in investment grade short-term debt securities and
investment grade corporate or government bonds in order to provide liquidity.
Such investments may be increased to up to 100% of the Portfolio's assets when
deemed appropriate by the Adviser for temporary defensive purposes. Short-term
investments may include repurchase agreements with banks or broker-dealers. See
"Investment Practices -- Repurchase Agreements."

The Portfolio's primary approach is to seek what the Adviser believes to be
attractive growth investments on an individual company basis. The Portfolio may
invest in securities that have above average volatility of price movement.
Because prices of common stocks and other securities fluctuate, the value of an
investment in the Portfolio will vary based upon the Portfolio's investment
performance. The Portfolio attempts to reduce overall exposure to risk from
declines in securities prices by spreading its investments over many different
companies in a variety of industries. There is, however, no assurance that the
Portfolio will be successful in achieving its objective. The Portfolio may also
invest in debt securities of foreign issuers, including non-U.S. dollar
denominated debt securities, Eurodollar securities and securities issued,
assumed or guaranteed by foreign governments or political subdivisions or
instrumentalities thereof. The Portfolio will limit its investment in foreign
securities to 10% of its total assets, taken at market value at the time of each
investment. The Portfolio may engage in portfolio management strategies and
techniques involving options, futures contracts and options on futures. Options,
futures contracts and options on futures contracts are described in "Investment
Practices and Restrictions -- Using Options, Futures Contracts and Options on
Futures Contracts." For a discussion of the Portfolio's practices regarding
investments in investment companies see "Investment Practices and
Restrictions -- Investment in Investment Companies."

11
<PAGE> 14

DOMESTIC STRATEGIC INCOME PORTFOLIO

The Portfolio's primary objective is to maximize current income. Capital
appreciation is a secondary objective which will be sought only when consistent
with its primary objective. The Portfolio attempts to achieve these investment
objectives by investing primarily in fixed-income securities, including both
convertible and non-convertible debt securities and preferred stocks. The
Portfolio may invest in investment grade securities and lower rated and nonrated
securities. There is no assurance that these objectives will be achieved and
yields may fluctuate over time. The Portfolio may also invest in debt securities
of foreign issuers, including non-U.S. dollar denominated debt securities,
Eurodollar securities and securities issued, assumed or guaranteed by foreign
governments or political subdivisions or instrumentalities thereof. The
Portfolio will limit its investment in foreign securities to 25% of its total
assets, taken at market value at the time of each investment. See "Investment
Practices and Restrictions -- Foreign Securities."

The Portfolio expects that at all times at least 80% of its assets will be
invested in fixed-income securities rated at the time of purchase B or higher by
Moody's or S&P, nonrated debt securities considered by the Adviser to be of
comparable quality, and U.S. Government securities. See the Appendix for a
description of corporate bond ratings. The Portfolio may also purchase or sell
U.S. Government securities on a forward commitment basis. See "Investment
Practices and Restrictions -- Forward Commitments."

The Portfolio may invest in debt securities rated below B by both Moody's
and S&P or nonrated debt securities considered by the Adviser to be of
comparable quality, common stocks or other equity securities and income bonds on
which interest is not accrued by the Portfolio when such investments are
consistent with the Portfolio's investment objectives or are acquired as part of
a unit consisting of a combination of fixed-income or equity securities. The
Portfolio may also invest in prime commercial paper, certificates of deposit,
bankers' acceptances and other obligations of domestic banks having total assets
of at least $500 million, and repurchase agreements. See "Investment
Practices -- Repurchase Agreements." Equity securities as referred to herein do
not include preferred stocks. The Portfolio will not purchase any such
securities which will cause more than 20% of its total assets to be so invested
or which would cause more than ten percent of its total assets to be invested in
common stocks or other equity securities.

In general, the prices of debt securities vary inversely with interest
rates. If interest rates rise, debt security prices generally fall; if interest
rates fall, debt security prices generally rise. In addition, for a given change
in interest rates, longer-maturity debt securities fluctuate more in price
(gaining or losing more in value) than shorter-maturity debt securities, and
generally offer higher yields than shorter-maturity debt securities, all other
factors, including credit quality, being equal. This potential for a decline in
prices of debt securities due to rising interest rates is referred to herein as
"market risk." While the Portfolio has no policy limiting the maturities of the
debt securities in which it may invest, the Adviser seeks to moderate market
risk by generally maintaining a portfolio duration within a range of four to six
years.

Duration is a measure of the expected life of a debt security that was
developed as a more precise alternative to the concept of "term to maturity."
Duration incorporates a debt security's yield, coupon interest payments, final
maturity and call features into one measure.

12
<PAGE> 15

payments are scheduled (or in the case of a callable bond, expected to be
received), weighing them by the present value of the cash to be received at each
future point in time. For any debt security with interest payments occurring
prior to the payment of principal, duration is always less than maturity, and
for zero coupon issues, duration and term to maturity are equal. In general, the
lower the coupon rate of interest or the longer the maturity, or the lower the
yield-to-maturity of a debt security, the longer its duration; conversely, the
higher the coupon rate of interest, the shorter the maturity or the higher the
yield-to-maturity of a debt security, the shorter its duration.

Duration allows an investment manager to make certain predictions regarding
how the value of a portfolio will generally respond to changes in interest
rates. For example, a portfolio consisting entirely of treasury notes yielding
5.6% with a remaining maturity of two years would have a duration of 1.8 years
and a 1% change in the interest rate earned on such securities would cause a
change of approximately 1.8% in the net asset value of the portfolio. A
portfolio consisting entirely of treasury notes yielding 6.9% with a remaining
maturity of ten years would have a duration of 7.2 years and a 1% change in the
interest rate earned on such securities would cause a change of between 6.5 and
8% in the net asset value of the portfolio. This example is intended for
demonstration purposes only, however, and is not intended to approximate how the
Portfolio's portfolio will respond to changes in interest rates. The Portfolio's
investment portfolio may include securities with differing maturities and
quality levels, and interest rates on those instruments may not all change by
the same amount at the same time as rates rise or fall generally in the
marketplace. Also, the treasury securities described in the example cannot be
retired prior to maturity, while some of the securities in the Portfolio's
portfolio can. These factors among others can cause the Portfolio's investment
portfolio to respond somewhat differently to changes in interest rates than
shown in the example.

There are some situations where even the standard duration calculation does
not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or more
years; however, their interest rate exposure corresponds to the frequency of the
coupon reset. Another example where the interest rate exposure is not properly
captured by duration is the case of mortgage pass-through securities. The stated
final maturity of such securities is generally 30 years, but current prepayment
rates are more critical in determining the securities' interest rate exposure.
In these and other similar situations, the Adviser will use more sophisticated
analytical techniques that incorporate the economic life of a security into the
determination of its interest rate exposure. At December 31, 1994, the average
maturity of the debt securities owned by the Portfolio, was approximately
years and the duration of the Portfolio was approximately years. The
duration is likely to vary from time to time as the Adviser pursues its strategy
of striving to maintain a balance between seeking to maximize income and
endeavoring to maintain the value of the Portfolio's capital. Thus the objective
of providing current return to shareholders is tempered by seeking to avoid
undue market risk. There is, of course, no assurance that the Adviser will be
successful in achieving such results for the Portfolio.

The higher yields sought by the Portfolio are generally obtainable from
securities rated in the lower categories by recognized rating services. These
securities generally are subordinated to the prior claims of banks and other
senior lenders. The lower rated debt securities in which the Portfolio may
invest are regarded as predominately speculative with respect to the issuers
continuing ability to meet principal and interest payments. The ratings of
Moody's and S&P represent their opinions of the quality of the debt securities
they undertake to rate, but not the market value risk of such securities. It
should be emphasized, however, that ratings are general and are not absolute
standards of quality. Consequently, debt securities with the same maturity,
coupon and rating may have different yields while debt securities of the same
maturity and coupon with different ratings may have the same yield.

13
<PAGE> 16

During the fiscal year ended December 31, 1994, the average percentage of
the Portfolio's assets invested in debt securities within the various rating
categories (based on the higher of the S&P or Moody's ratings), and the nonrated
debt securities, determined on a dollar weighted average, were as follows:

<TABLE>
<S> <C>
AAA/Aaa.......................................................................... %
AA/Aa............................................................................
A/A..............................................................................
BBB/Baa..........................................................................
BB/Ba............................................................................
B/B..............................................................................
CCC/Caa..........................................................................
*Nonrated........................................................................
Preferred Stocks/Common Stocks/Warrants..........................................
Cash and Equivalents.............................................................
-------
Total Net Assets............................................................ 100.00%
</TABLE>

* The nonrated debt securities as a percentage of total net assets were
considered by the Adviser to be comparable to securities rated by Moody's as
follows: AAA- %, BBB- %, B- %, and D- %.

The securities in which the Portfolio may invest include the following:

-- Straight fixed-income debt securities. These include bonds and other
debt obligations which bear a fixed or variable rate of interest payable at
regular intervals and have a fixed or resettable maturity date. The particular
terms of such securities vary and may include features such as call provisions
and sinking funds.

-- Pay-in-kind debt securities. These pay interest in additional debt
securities rather than in cash.

-- Zero-coupon debt securities. These bear no interest obligation but are
issued at a discount from their value at maturity. When held to maturity,
their entire return equals the difference between their issue price and their
maturity value. Interest is however accrued by the Portfolio each day for
accounting and Federal income tax purposes.

-- Zero-fixed-coupon debt securities. These are zero-coupon debt securities
which convert on a specified date to interest-bearing debt securities.

Fixed-income securities rated below B by both Moody's and S&P include debt
obligations or other securities of companies that are financially troubled, in
default or are in bankruptcy or reorganization ("Deep Discount Securities").
Debt obligations of such companies are usually available at a deep discount from
the face value of the instrument. The Portfolio will invest in Deep Discount
Securities when the Adviser believes that existing factors are likely to restore
the company to a healthy financial condition. Such factors include a
restructuring of debt, management changes, existence of adequate assets, or
other unusual circumstances.

A debt instrument purchased at a deep discount may currently pay a very
high effective yield. In addition, if the financial condition of the issuer
improves, the underlying value of the security may increase, resulting in a
capital gain. If the company defaults on its obligations or remains in default,
or if the plan of reorganization is insufficient for debtholders, the Deep
Discount Securities may stop generating income and lose value or become
worthless. The Adviser will balance the benefits of Deep Discount Securities
with their

14
<PAGE> 17

risks. While a diversified portfolio may reduce the overall impact of a Deep
Discount Security that is in default or loses its value, the risk cannot be
eliminated.

Risk Factors of Investing in Lower Rated Debt Securities. Past experience
may not provide an accurate indication of future performance of the market for
lower rated debt securities, particularly during periods of economic recession.
An economic downturn or increase in interest rates is likely to have a greater
negative effect on this market, the value of lower rated debt securities in the
Portfolio, the Portfolio's net asset value and the ability of the bonds' issuers
to repay principal and interest, meet projected business goals and obtain
additional financing than on higher rated securities. These circumstances also
may result in a higher incidence of defaults than with respect to higher rated
securities. An investment in this Portfolio may be considered more speculative
than investment in shares of a fund which invests primarily in higher rated debt
securities.

Prices of lower rated debt securities may be more sensitive to adverse
economic changes or corporate developments than higher rated investments. Debt
securities with longer maturities, which may have higher yields, may increase or
decrease in value more than debt securities with shorter maturities. Market
prices of lower rated debt securities structured as zero coupon or pay-in-kind
securities are affected to a greater extent by interest rate changes and may be
more volatile than securities which pay interest periodically and in cash. When
it deems it appropriate and in the best interests of Portfolio shareholders, the
Portfolio may incur additional expenses to seek recovery on a debt security on
which the issuer has defaulted and to pursue litigation to protect its interests
of security holders of its companies.

Because the market for lower rated securities may be thinner and less
active than for higher rated securities, there may be market price volatility
for these securities and limited liquidity in the resale market. Nonrated
securities are usually not as attractive to as many buyers as rated securities
are, a factor which may make nonrated securities less marketable. These factors
may have the effect of limiting the availability of the securities for purchase
by the Portfolio and may also limit the ability of the Portfolio to sell such
securities at their fair value either to meet redemption requests or in response
to changes in the economy or the financial markets. Adverse publicity and
investor perceptions, whether or not based on fundamental analysis, may decrease
the values and liquidity of lower rated debt securities, especially in a thinly
traded market. To the extent the Portfolio owns or may acquire illiquid or
restricted lower rated securities, these securities may involve special
registration responsibilities, liabilities and costs, and liquidity and
valuation difficulties. Changes in values of debt securities which the Portfolio
owns will affect its net asset value per share. If market quotations are not
readily available for the Portfolio's lower rated or nonrated securities, these
securities will be valued by a method that the Portfolio's Trustees believes
accurately reflects fair value. Judgment plays a greater role in valuing lower
rated debt securities than with respect to securities for which more external
sources of quotations and last sale information are available.

Special tax considerations are associated with investing in lower rated
debt securities structured as zero coupon or pay-in-kind securities. The
Portfolio accrues income on these securities prior to the receipt of cash
payments. The Portfolio must distribute substantially all of its income to its
shareholders to qualify for pass-through treatment under the tax laws and may,
therefore, have to dispose a portion of its portfolio securities to satisfy
distribution requirements.

While credit ratings are only one factor the Adviser relies on in
evaluating lower rated debt securities, certain risks are associated with using
credit ratings. Credit rating agencies may fail to timely change the credit
ratings to reflect subsequent events; however, the Adviser continuously monitors
the issuers of lower rated debt securities in its portfolio in an attempt to
determine if the issuers will have sufficient cash flow and profits to meet
required principal and interest payments. Achievement of the Portfolio's
investment objective

15
<PAGE> 18

may be more dependent upon the Adviser's credit analysis than is the case for
higher quality debt securities. Credit ratings for individual securities may
change from time to time and the Portfolio may retain a portfolio security whose
rating has been changed.

Investors should consider carefully the additional risks associated with
investment in securities which carry lower ratings, which are not generally
meant for short-term investment.

EMERGING GROWTH PORTFOLIO

The Portfolio seeks to provide capital appreciation for its shareholders;
any ordinary income received from portfolio securities is entirely incidental.

As a fundamental investment policy, the Portfolio under normal conditions
invests at least 65% of its total assets in common stocks of small and medium
sized companies, both domestic and foreign, in the early stages of their life
cycle, that the Adviser believes have the potential to become major enterprises.
Investments in such companies may offer greater opportunities for growth of
capital than larger, more established companies, but also may involve certain
special risks. Emerging growth companies often have limited product lines,
markets, or financial resources, and they may be dependent upon one or a few key
people for management. The securities of such companies may be subject to more
abrupt or erratic market movements than securities of larger, more established
companies or the market averages in general. While the Portfolio will invest
primarily in common stocks, to a limited extent it may invest in other
securities such as preferred stocks, convertible securities and warrants.

The Portfolio does not limit its investment to any single group or type of
security. The Portfolio may also invest in special situations involving new
management, special products and techniques, unusual developments, mergers or
liquidations. Investments in unseasoned companies and special situations often
involve much greater risks than are inherent in ordinary investments, because
securities of such companies may be more likely to experience unexpected
fluctuations in price.

The Portfolio's primary approach is to seek what the Adviser believes to be
unusually attractive growth investments on an individual company basis. The
Portfolio may invest in securities that have above average volatility of price
movement. Because prices of common stocks and other securities fluctuate, the
value of an investment in the Portfolio will vary based upon the Portfolio's
investment performance. The Portfolio attempts to reduce overall exposure to
risk from declines in securities prices by spreading its investments over many
different companies in a variety of industries. There is, however, no assurance
that the Portfolio will be successful in achieving its objective.

The Portfolio may invest up to 20% of its total assets in securities of
foreign issuers. Additionally, the Portfolio may invest up to ten percent of the
value of its assets in restricted securities (i.e., securities which may not be
sold without registration under the Securities Act of 1933) and in other
securities not having readily available market quotations. The Portfolio may
enter into repurchase agreements with domestic banks and broker-dealers which
involve certain risks. The Portfolio may invest in either warrants or restricted
securities so long as such investments aggregate less than five percent of the
Portfolio's total assets. The risks involved in investing in restricted
securities, warrants and repurchase agreements are described in the Statement of
Additional Information.

GLOBAL EQUITY PORTFOLIO

The investment objective of the Portfolio is to provide long-term growth of
capital through investments in an internationally diversified portfolio of
equity securities of companies of any nation including the United

16
<PAGE> 19

States. The Portfolio intends to be invested in equity securities of companies
of at least three countries including the United States. Under normal market
conditions, at least 65% of the Portfolio's total assets are so invested. Equity
securities include common stocks, preferred stocks and warrants or options to
acquire such securities. In selecting portfolio securities, the Portfolio
attempts to take advantage of the differences between economic trends and the
anticipated performance of securities markets in various countries.

Normally, the Portfolio invests in securities of issuers traded on markets
of at least three of the world's six largest countries by market capitalization
(United States, Japan, United Kingdom, Germany, France and Canada), but
securities of issuers traded on quoted markets of other countries are also
considered for investment. The next six largest countries, in terms of market
capitalization, are Switzerland, Italy, Netherlands, Australia, Sweden and
Spain.

The Adviser, subject to the direction of the Fund's Trustees, provides the
Portfolio with an overall investment program consistent with the Portfolio's
objective and policies. The Adviser is solely responsible for advising the
Portfolio with respect to investments in the United States. The Subadviser,
subject to overall review by the Adviser and the Fund's Trustees and other
authorized officers, is responsible for recommending an optimal geographic
equity allocation and is responsible for providing advice with respect to the
Portfolio's investment in countries other than the United States. Investments
may be shifted among the world's various capital markets and among different
types of securities in accordance with ongoing analysis provided by the Adviser
and the Subadviser of trends and developments affecting such markets and
securities. The Adviser and the Subadviser are sometimes referred to as the
"Advisers."

While the investment policy of the Portfolio is to be broadly diversified
as to both countries and individual issuers, the Advisers select individual
countries and securities on the basis of several factors. Investments are
allocated among issuers in countries selected based on a comparison of values
between the equity markets in those countries. This comparison is based upon
criteria such as return on equity, book value, earnings, dividends, and interest
rates in each market. After evaluating these factors and others for each country
and comparing opportunities among countries, the Advisers select those countries
which, in their opinion, have the most attractive equity markets. This
evaluation is influential in deciding the amount of investment in each equity
market. Individual equity securities are selected within each market. The
Advisers seek the most attractive individual equity securities based on factors
such as book value, earnings per share and other financial data. The Advisers'
approach to both country and individual security selection is characterized as a
quantitative method utilizing specific financial criteria to identify both value
and opportunity in the equity markets. The Advisers also endeavor to identify
industry, political, and geographical trends which may affect equity values
within individual countries or among a group of countries. The Advisers use
these financial criteria and analysis of industry, political, and geographical
trends to evaluate and compare equity investment opportunities among various
countries and among securities within each country with the objective of
identifying and investing in those securities which can best meet the
Portfolio's investment objective. Of course, there is no assurance that the
Advisers will be successful in this endeavor or that the investment objective
will be realized.

The Portfolio may purchase foreign securities in the form of American
Depositary Receipts ("ADRs") and European Depositary Receipts ("EDRs") or other
securities representing underlying shares of foreign companies. ADRs are
publicly traded on exchanges or over-the-counter in the United States and are
issued through "sponsored" or "unsponsored" arrangements. In a sponsored ADR
arrangement, the foreign issuer assumes the obligations to pay some or all of
the depositary's transaction fees, whereas under an unsponsored arrangement, the
foreign issuer assumes no obligations and the depositary's transaction fees are
paid by the ADR holders. In addition, less information is available in the
United States about an

17
<PAGE> 20

unsponsored ADR than about a sponsored ADR. The Portfolio may invest in ADRs
through both sponsored and unsponsored arrangements. For further information on
ADRs and EDRs, investors should refer to the Statement of Additional
Information.

The Portfolio may invest cash temporarily in short-term debt instruments.
Such temporary investments will only be made with cash held to maintain
liquidity or pending investment. See "Temporary Short-Term Investments" herein.

Risk Factors. An investment in the Portfolio involves risks similar to
those of investing in foreign common stocks generally. Investment in common
stocks of foreign issuers may subject the Portfolio to risk of foreign
political, economic and legal conditions and developments. Such conditions or
developments might include favorable or unfavorable changes in currency exchange
rates, exchange control regulations (including currency blockage), expropriation
of assets of companies, imposition of withholding taxes on dividend or interest
payments, and possible difficulty in obtaining and enforcing judgments against a
foreign issuer. Also, foreign common stocks may not be as liquid and may be more
volatile than comparable domestic common stocks.

Furthermore, issuers of foreign common stocks are subject to different,
often less comprehensive, accounting, reporting and disclosure requirements than
domestic issuers. The Portfolio, in connection with its purchases and sales of
foreign securities, other than securities purchased or sold in United States
dollars, will incur transaction costs in converting currencies. Also, brokerage
costs incurred in purchasing and selling securities in foreign securities
markets generally are higher than such costs in comparable transactions in
domestic securities markets, and foreign custodial costs relating to the
Portfolio securities are higher than domestic custodial costs. See also
"Investment Practices and Restrictions" for a discussion of certain additional
risks related to investment practices that may be utilized by the Portfolio,
including use of options, futures contracts and related options.

Foreign Currency Transactions. The value of the Portfolio's securities
that are traded in foreign markets may be affected by changes in currency
exchange rates and exchange control regulations. In addition, the Portfolio will
incur costs in connection with conversions between various currencies. The
Portfolio's foreign currency exchange transactions generally will be conducted
on a spot basis (that is, cash basis) at the spot rate for purchasing or selling
currency prevailing in the foreign currency exchange market. The Portfolio
purchases and sells foreign currency on a spot basis in connection with the
settlement of transactions in securities traded in such foreign currency. The
Portfolio does not purchase and sell foreign currencies as an investment.

The Portfolio also may enter into contracts with banks or other foreign
currency brokers or dealers to purchase or sell foreign currencies at a future
date ("forward contracts") and purchase and sell foreign currency futures
contracts to hedge against changes in foreign currency exchange rates. A foreign
currency forward contract is a negotiated agreement between the contracting
parties to exchange a specified amount of currency at a specified future time at
a specified rate. The rate can be higher or lower than the spot rate between the
currencies that are the subject of the contract.

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<PAGE> 21

the value of a foreign currency in the foregoing manner does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Furthermore, such hedging transactions reduce
or preclude the opportunity for gain if the value of the hedged currency should
move in the direction opposite to the hedged position. The Portfolio will not
speculate in foreign currency forward or futures contracts or through the
purchase and sale of foreign currencies.

Temporary Short-Term Investments. It is the Portfolio's policy to be fully
invested in common stocks and securities convertible into common stocks.
However, the Portfolio may hold a portion of its assets in cash to meet
redemptions and other day-to-day operating expenses. The Portfolio may invest
cash held for such purposes in obligations of the United States and of foreign
governments, including their political subdivisions, commercial paper, bankers'
acceptances, certificates of deposit, repurchase agreements collateralized by
these securities, and other short-term evidences of indebtedness. The Portfolio
will only purchase commercial paper if it is rated Prime-1 or Prime-2 by Moody's
or A-1 or A-2 by S&P. The Portfolio also may invest cash held for such purposes
in short-term, high grade foreign debt securities. High grade foreign debt
securities are those debt securities of foreign issuers which the Advisers
determine to have creditworthiness substantially equivalent to that of domestic
issuers of debt securities rated investment grade.

GOVERNMENT PORTFOLIO

GENERAL

The investment objective of the Portfolio is to seek to provide investors
with a high current return consistent with preservation of capital. The
Portfolio invests primarily in debt securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. Under normal circumstances, at
least 80% of the total assets of the Portfolio are invested in such securities.
The Portfolio may invest its remaining assets (up to 20%) in other government
related securities and in repurchase agreements fully collateralized by U.S.
Government securities. The other government related securities include
mortgage-related and mortgage-backed securities and certificates issued by
financial institutions or broker-dealers representing "stripped"
mortgage-related securities. See "Other Government Related Securities" below. In
order to hedge against changes in interest rates, the Portfolio may purchase or
sell options and engage in transactions involving interest rate futures
contracts and options on such contracts. See "Investment Practices -- Using
Options, Futures Contracts and Options on Futures Contracts" and the Statement
of Additional Information for discussion of options, futures contracts and
options on futures contracts. The Portfolio may also purchase or sell U.S.
Government securities on a forward commitment basis. See "Investment Practices
and Restrictions -- Forward Commitments." The Portfolio is not designed for
investors seeking capital appreciation. Shares of the Portfolio are not insured
or guaranteed by the U.S. Government, its agencies or instrumentalities or by
any other person or entity. There is no assurance that the Portfolio's objective
will be achieved.

Since the value of U.S. Government securities owned by the Portfolio will
fluctuate depending upon market factors and inversely with prevailing interest
rates, the net asset value of shares of the Portfolio will fluctuate. If
interest rates rise, debt security prices generally fall; if interest rates
fall, debt security prices generally rise. In addition, for a given change in
interest rates, longer-maturity debt securities fluctuate more in price (gaining
or losing more in value) than shorter-maturity debt securities, and generally
offer higher yields than shorter-maturity debt securities, all other factors,
including credit quality, being equal. This potential for a decline in prices of
debt securities due to rising interest rates is referred to herein as "market
risk." While the Portfolio has no policy limiting the maturities of the debt
securities in which it may invest, the

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<PAGE> 22

Adviser seeks to moderate market risk by generally maintaining a portfolio
duration within a range of four to six years. Duration is a measure of the
expected life of a debt security that was developed as a more precise
alternative to the concept of "term to maturity." Duration incorporates a debt
security's yield, coupon interest payments, final maturity and call features
into one measure.

Traditionally a debt security's "term to maturity" has been used as a proxy
for the sensitivity of the security's price to changes in interest rates (which
is the "interest rate risk" or "price volatility" of the security). However,
"term to maturity" measures only the time until a debt security provides its
final payment taking no account of the pattern of the security's payments of
interest or principal prior to maturity. Duration is a measure of the expected
life of a debt security on a present value basis expressed in years. It measures
the length of the time interval between the present and the time when the
interest and principal payments are scheduled (or in the case of a callable
bond, expected to be received), weighing them by the present value of the cash
to be received at each future point in time. For any debt security with interest
payments occurring prior to the payment of principal, duration is always less
than maturity, and for zero coupon issues, duration and term to maturity are
equal. In general, the lower the coupon rate of interest or the longer the
maturity, or the lower the yield-to-maturity of a debt security, the longer its
duration; conversely, the higher the coupon rate of interest, the shorter the
maturity or the higher the yield-to-maturity of a debt security, the shorter its
duration.

Duration allows an investment manager to make certain predictions regarding
how the value of a portfolio will generally respond to changes in interest
rates. For example, a portfolio consisting entirely of treasury notes yielding
5.6% with a remaining maturity of two years would have a duration of 1.8 years
and a 1% change in the interest rate earned on such securities would cause a
change of approximately 1.8% in the net asset value of the portfolio. A
portfolio consisting entirely of treasury notes yielding 6.9% with a remaining
maturity of ten years would have a duration of 7.2 years and a 1% change in the
interest rate earned on such securities would cause a change of between 6.5% and
8% in the net asset value of the portfolio. This example is intended for
demonstration purposes only, however, and is not intended to approximate how the
Portfolio's portfolio will respond to changes in interest rates. The Portfolio's
investment portfolio may include securities with differing maturities and
quality levels, and interest rates on those instruments may not all change by
the same amount at the same time as rates rise or fall generally in the
marketplace. Also, the treasury securities described in the example cannot be
retired prior to maturity, while some of the securities in the Portfolio's
portfolio can. These factors among others can cause the Portfolio's investment
portfolio to respond somewhat differently to changes in interest rates than
shown in the example.

There are some situations where even the standard duration calculation does
not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or more
years; however, their interest rate exposure corresponds to the frequency of the
coupon reset. Another example where the interest rate exposure is not properly
captured by duration is the case of mortgage pass-through securities. The stated
final maturity of such securities is generally 30 years, but current prepayment
rates are more critical in determining the securities' interest rate exposure.
In these and other similar situations, the Adviser will use more sophisticated
analytical techniques that incorporate the economic life of a security into the
determination of its interest rate exposure. At December 31, 1994, the average
maturity of the debt securities owned by the Portfolio, as adjusted for
investments in options, futures contracts and related options, was approximately
years and the duration of the Portfolio was approximately ___ years.

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<PAGE> 23

The Portfolio often purchases debt securities at a premium over the
principal or face value in order to obtain higher current income. The amount of
any premium declines during the term of the security to zero at maturity. Such
decline generally is reflected in the market price of the security and thus in
the Portfolio's net asset value. Any such decline is realized for accounting
purposes as a capital loss at maturity or upon resale. Prior to maturity or
resale, such decline in value could be offset, in whole or part, or increased by
changes in the value of the security due to changes in interest rate levels.

The principal reason for selling call or put options is to obtain, through
the receipt of premiums, a greater return than would be realized on the
underlying securities alone. By selling options, the Portfolio reduces its
potential for capital appreciation on debt securities if interest rates decline.
Thus if market prices of debt securities increase, the Portfolio receives less
total return from its optioned positions than it would have received if the
options had not been sold. The purpose of selling options is intended to improve
the Portfolio's total return and not to support or "enhance" monthly
distributions. During periods when the Portfolio has capital loss carry forwards
any capital gains generated from such transactions will be retained in the
Portfolio. See "Investment Practices and Restrictions -- Using Options, Futures
Contracts and Options on Futures Contracts" and "Dividends, Distributions and
Taxes" and the Statement of Additional Information for discussion of options,
futures contracts and options on futures contracts.

The purchase and sale of options may result in a high portfolio turnover
rate. The Portfolio's turnover rate is shown in the table of "Financial
Highlights." See "Investment Practices and Restrictions -- Portfolio Turnover."

The Adviser uses an "active balance" asset management approach in managing
the Portfolio. The Portfolio participates in securities and utilizes investment
strategies designed to provide investors with a high current return. In
addition, the Portfolio seeks to realize solid total rates of return. The
Adviser seeks to add investment value during times of rising prices and protect
assets during periods of high risk. There is no assurance that the Adviser's
management approach will achieve the Portfolio's investment objective.

The Portfolio is subject to the diversification requirements of Section
817(h) of the Internal Revenue Code (the "Code") which must be met at the end of
each quarter of the year (or within 30 days thereafter). Regulations issued by
the Secretary of the Treasury have the effect of requiring the Portfolio to
invest no more than 55% of its total assets in securities of any one issuer, no
more than 70% in the securities of any two issuers, no more than 80% in the
securities of any three issuers, and no more than 90% in the securities of any
four issuers. For this purpose, the United States Treasury and each U.S.
Government agency and instrumentality is considered to be a separate issuer.
Thus, the Portfolio intends to invest in U.S. Treasury securities and in
securities issued by at least four U.S. Government agencies or instrumentalities
in the amounts necessary to meet these diversification requirements at the end
of each quarter of the year (or within thirty days thereafter).

In the event the Portfolio does not meet the diversification requirements
of Section 817(h) of the Code, the policies funded by shares of the Portfolio
will not be treated as life insurance for Federal income tax purposes and the
owners of the policies will be subject to taxation on their share of the
dividends and distributions paid by the Portfolio.

U.S. GOVERNMENT SECURITIES

Securities issued or guaranteed as to principal and interest by the U.S.
Government, its agencies or instrumentalities include: (1) U.S. Treasury
obligations, which differ in their interest rates, maturities and times of
issuance: U.S. Treasury bills (maturity of one year or less), U.S. Treasury
notes (maturity of one to ten years), and U.S. Treasury bonds (generally
maturities of greater than ten years), all of which are backed by the full faith
and credit of the United States; and (2) obligations issued or guaranteed by
U.S.

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<PAGE> 24

Government agencies or instrumentalities, including government guaranteed
mortgage-related securities, some of which are backed by the full faith and
credit of the U.S. Treasury, some of which are supported by the right of the
issuer to borrow from the U.S. Government and some of which are backed only by
the credit of the issuer itself.

Mortgage loans made by banks, savings and loan institutions, and other
lenders are often assembled into pools, which are issued or guaranteed by an
agency or instrumentality of the U.S. Government, though not necessarily by the
U.S. Government itself. Interests in such pools are what this Prospectus calls
"mortgage-related securities."

Mortgage-related securities include, but are not limited to, obligations
issued or guaranteed by the Government National Mortgage Association ("GNMA"),
the Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC"). GNMA is a wholly owned corporate instrumentality
of the United States whose securities and guarantees are backed by the full
faith and credit of the United States. FNMA, a federally chartered and privately
owned corporation, and FHLMC, a federal corporation, are instrumentalities of
the United States. The securities and guarantees of FNMA and FHLMC are not
backed, directly or indirectly, by the full faith and credit of the United
States. Although the Secretary of the Treasury of the United States has
discretionary authority to lend FNMA up to $2.25 billion outstanding at any
time, neither the United States nor any agency thereof is obligated to finance
FNMA's or FHLMC's operations or to assist FNMA or FHLMC in any other manner.
Securities of FNMA and FHLMC include those issued in principal only or interest
only components.

Mortgage-related securities are characterized by monthly payments to the
holder, reflecting the monthly payments made by the borrowers who received the
underlying mortgage loans. The payments to the securityholders (such as the
Portfolio), like the payments on the underlying loans, represent both principal
and interest. Although the underlying mortgage loans are for specified periods
of time, such as 20 or 30 years, the borrowers can, and typically do, pay them
off sooner. Thus, the securityholders frequently receive prepayments of
principal, in addition to the principal which is part of the regular monthly
payment. A borrower is more likely to prepay a mortgage which bears a relatively
high rate of interest. This means that in times of declining interest rates,
some of the Portfolio's higher yielding securities might be converted to cash,
and the Portfolio will be forced to accept lower interest rates when that cash
is used to purchase additional securities. The increased likelihood of
prepayment when interest rates decline also limits market price appreciation of
mortgage-related securities. If the Portfolio buys mortgage-related securities
at a premium, mortgage foreclosures or mortgage prepayments may result in a loss
to the Portfolio of up to the amount of the premium paid since only timely
payment of principal and interest is guaranteed.

OTHER GOVERNMENT RELATED SECURITIES

The Portfolio may invest up to 20% of its assets in other government
related securities and in repurchase agreements fully collateralized by U.S.
Government securities. A principal type of government related security in which
the Portfolio may invest are mortgage-backed securities including collateralized
mortgage obligations ("CMOs") and real estate mortgage investment conduits
("REMICs").

CMOs are debt securities issued by U.S. Government agencies or by financial
institutions and other mortgage lenders and collateralized by a pool of
mortgages held under an indenture. CMOs are issued in a number of classes or
series with different maturities. The classes or series are retired in sequence
as the underlying mortgages are repaid. Prepayment may shorten the stated
maturity of the obligation and can result in a loss of premium, if any has been
paid. Certain of these securities may have variable or floating

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<PAGE> 25

interest rates and others may be stripped (securities which provide only the
principal or interest feature of the underlying security).

REMICs, which were authorized under the Tax Reform Act of 1986 (the "Tax
Reform Act"), are private entities formed for the purpose of holding a fixed
pool of mortgages secured by an interest in real property. REMICs are similar to
CMOs in that they issue multiple classes of securities.

CMOs and REMICs issued by private entities are not government securities
and are not directly guaranteed by any government agency. They are secured by
the underlying collateral of the private issuer. The Portfolio will invest in
such privately issued securities only if they are 100% collateralized at the
time of issuance by securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities. The Portfolio intends to invest in privately
issued CMOs and REMICs only if they are rated at the time of purchase in the two
highest grades by a nationally-recognized rating agency.

STRIPPED SECURITIES

Stripped mortgage-related securities (hereinafter referred to as "Stripped
Mortgage Securities") are derivative multiclass mortage securities. Stripped
Mortgage Securities may be issued by agencies or instrumentalities of the U.S.
Government, or by private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose subsidiaries of the foregoing.

Stripped Mortgage Securities are usually structured with two classes that
receive different proportions of the interest and principal distributions on a
pool of mortgage assets. A common type of Stripped Mortgage Securities will have
one class receiving some of the interest and most of the principal from the
mortgage assets, while the other class will receive most of the interest and the
remainder of the principal. In the most extreme case, one class will receive all
of the interest (the interest-only or "IO" class), while the other class will
receive all of the principal (the principal-only or "PO" class). The
yield-to-maturity on an IO class is extremely sensitive to the rate of principal
payments (including prepayments) on the related underlying mortgage assets, and
a rapid rate of principal payments may have a material adverse effect on the
securities' yield-to-maturity since interest payments cease as soon as the
related principal amount is repaid. If the underlying mortgage assets experience
greater than anticipated prepayments of principal, the Portfolio may fail to
fully recoup its initial investment in these securities even if the security is
rated AAA or Aaa. Holders of PO securities are not entitled to any periodic
payments of interest prior to maturity. Accordingly, such securities usually
trade at a deep discount from their face or par value and are subject to greater
fluctuations of market value in response to changing interest rates than debt
obligations of comparable maturities which make current distributions of
interest. Current federal tax law requires that a holder (such as the Portfolio)
of such securities accrue a portion of the discount at which the security was
purchased as income each year even though the holder receives no interest
payment in cash on the certificate during the year. Such securities may involve
greater risk than securities issued directly by the U.S. Government, its
agencies or instrumentalities.

Although the market for government-issued IO and PO securities backed by
fixed-rate mortgages is increasingly liquid, certain of such securities may not
be readily marketable and will be considered illiquid for purposes of the
Portfolio's limitation on investments in illiquid securities. The Trustees will
establish guidelines and standards for determining whether a particular
government-issued IO or PO backed by fixed-rate mortgages is liquid. Generally,
such a security may be deemed liquid if it can be disposed of promptly in the
ordinary course of business at a value reasonably close to that used in the
calculation of the net asset value per share. Stripped Mortgage Securities,
other than government-issued IO and PO securities backed

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<PAGE> 26

by fixed-rate mortgages, are presently considered by the staff of the SEC to be
illiquid securities and thus subject to the Portfolio's limitation on investment
in illiquid securities.

MONEY MARKET PORTFOLIO

The Portfolio seeks protection of capital and high current income through
investments in money market instruments. The investment policies, the percentage
limitations, and the kinds of securities in which the Portfolio can invest may
be changed by the Trustees, unless expressly governed by those limitations
stated under "Investment Practices and Restrictions -- Investment Restrictions"
which can be changed only by action of the shareholders of the Portfolio. It is
not the intention of the Trustees, however, to change these policies without
prior notice to shareholders.

The Portfolio seeks to maintain a constant net asset value of $1.00 per
share by investing in a diversified portfolio of money-market instruments
maturing within one year with a dollar-weighted average maturity of 90 days or
less. It seeks high current income from these short-term investments to the
extent consistent with protection of capital. Of course, there can be no
guarantee that the Portfolio will achieve its objective or be able at all times
to maintain its net asset value per share at $1.00. In addition, the daily
dividend rate paid by the Portfolio may be expected to fluctuate. The Portfolio
uses the amortized cost method for valuing portfolio securities purchased at a
discount. See "Determination of Net Asset Value." It may invest in instruments
of the following types, all of which will be U.S. dollar obligations:

OBLIGATIONS OF THE U.S. GOVERNMENT AND ITS AGENCIES

The Portfolio may invest in obligations issued or guaranteed as to
principal and interest by the U.S. Government, its agencies and
instrumentalities which are supported by any of the following: (a) the full
faith and credit of the U.S. Government, (b) the right of the issuer to borrow
an amount limited to a specific line of credit from the U.S. Government, (c)
discretionary authority of the U.S. Government agency or instrumentality or (d)
the credit of the instrumentality. Such agencies or instrumentalities include,
but are not limited to, the Federal National Mortgage Association, the
Government National Mortgage Association, Federal Land Banks, and the Farmer's
Home Administration.

BANK OBLIGATIONS

The Portfolio may invest in negotiable time deposits, certificates of
deposit and bankers' acceptances which are obligations of domestic banks having
total assets in excess of $1 billion as of the date of their most recently
published financial statements. The Portfolio is also authorized to invest up to
five percent of its total assets in certificates of deposit issued by domestic
banks having total assets of less than $1 billion, provided that the principal
amount of the certificate of deposit acquired by the Portfolio is insured in
full by the Federal Deposit Insurance Corporation.

COMMERCIAL PAPER

The Portfolio may invest in short-term obligations of companies which at
the time of investment are (a) rated in one of the two highest categories by at
least two nationally recognized statistical organizations (or one rating
organization if the obligation was rated by only one such organization), or (b)
if not rated, are of comparable quality as determined in accordance with
procedures established by the Trustees. See the Statement of Additional
Information. Commercial paper consists of short-term (usually from 1 to 270
days) unsecured promissory notes issued by corporations in order to finance
their current operations. (See

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<PAGE> 27

the Appendix in the Statement of Additional Information for an explanation of
these ratings). The Portfolio's current policy is to limit investments in
commercial paper to obligations rated in the highest rating category.

REPURCHASE AGREEMENTS

The Portfolio may enter into repurchase agreements with banks and
broker-dealers which involve certain risks in the event of a default by the
other party. See "Investment Practices and Restrictions -- Repurchase
Agreements."

MULTIPLE STRATEGY PORTFOLIO

The investment objective of the Multiple Strategy Portfolio is to seek a
high total investment return consistent with prudent risk through a fully
managed investment policy utilizing equity, intermediate and long-term debt and
money market securities. Total investment return consists of current income,
including dividends, interest, and discount accruals, and capital appreciation.
The Adviser may vary the composition of the Portfolio from time to time based
upon an evaluation of economic and market trends and the anticipated relative
total return available from a particular type of security. Accordingly, the
Multiple Strategy Portfolio may, at any given time, be substantially invested in
equity securities, bonds and notes or money market securities. Achieving this
objective depends on management's abilities to assess the effect of economic and
market trends on different sectors of the market. There can be no assurances
that the investment objective of the Portfolio will be achieved.

The Multiple Strategy Portfolio may invest in those money market securities
which are eligible investments for the Fund's Money Market Portfolio. It may
also invest in intermediate and long-term debt securities, including convertible
securities, and in preferred and convertible preferred stock which are rated at
the time of purchase BBB or better by S&P or Baa or better by Moody's, or in
nonrated securities determined by the Adviser to be of comparable quality. To
the extent investments are made in fixed-income securities, the Portfolio will
invest primarily in such securities which are rated A or better by either rating
agency. These ratings are described in the Appendix hereto. The Portfolio is not
limited as to the maturities of the debt securities it may purchase. Debt
securities with longer maturities generally tend to produce higher yields and
are subject to greater market fluctuation as a result of changes in interest
rates than debt securities with shorter maturities.

The common stocks in which the Portfolio may invest will be primarily
stocks of large-capitalization quality companies. Generally, the characteristics
of such companies include a strong balance sheet, good financial resources, a
satisfactory rate of return on capital, a good industry position and superior
management skills. The Adviser believes that companies that conform most closely
to these characteristics often tend to exhibit generally consistent earnings
growth.

The Portfolio may engage in portfolio management strategies and techniques
involving options, futures, contracts and options on futures contracts. Options,
futures contracts, and options on futures contracts are described in "Investment
Practices and Restrictions -- Using Options, Futures Contracts, and Options on
Futures Contracts."

The Multiple Strategy Portfolio may also invest in equity and debt
securities of foreign issuers, including non-U.S. dollar denominated debt
securities, Eurodollar securities and securities issued, assumed or guaranteed
by foreign governments or political subdivisions or instrumentalities thereof.
The Multiple Strategy Portfolio will limit its investment in foreign securities
to 25% of its total assets, taken at market value at the time of each
investment. See "Investment Practices and Restrictions -- Foreign Securities."

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<PAGE> 28

For a discussion of the Portfolio's practices regarding investment companies see
"Investment Practices and Restrictions -- Investment in Investment Companies."

Because of the fully managed approach of the Portfolio, portfolio turnover
may be greater resulting in increased brokerage charges to the Portfolio.

INVESTMENT PRACTICES AND RESTRICTIONS

Repurchase Agreements. Each Portfolio may enter into repurchase agreements
with broker-dealers or domestic banks (or a foreign branch or subsidiary
thereof) which are deemed creditworthy by the Adviser under guidelines approved
by the Trustees. A repurchase agreement is a short-term investment in which the
purchaser (i.e., the Portfolio) acquires ownership of a debt security and the
seller agrees to repurchase the obligation at a future time and set price,
thereby determining the yield during the purchaser's holding period. In the
event of a bankruptcy or other default of the seller of a repurchase agreement,
the Portfolio could experience delays and expenses in liquidating the underlying
securities and loss including: (a) possible decline in the value of the
underlying security during the period while the Fund seeks to enforce its rights
thereto, (b) possible lack of access to income on the underlying security during
this period, and (c) expenses of enforcing its rights. Each Portfolio will not
invest in repurchase agreements maturing in more than seven days if any such
investment, together with any other illiquid securities held by such Portfolio,
exceeds ten percent of the value of its net assets.

For the purpose of investing in repurchase agreements, the Adviser may
aggregate the cash that substantially all of the funds advised or subadvised by
the Adviser would otherwise invest separately into a joint account. The cash in
the joint account is then invested and the funds that contributed to the joint
account share pro rata in the net revenue generated. The Adviser believes that
the joint account produces greater efficiencies and economies of scale that may
contribute to reduced transaction costs, higher returns, higher quality
investments and greater diversity of investments for the Portfolios than would
be available to the Portfolios investing separately. The manner in which the
joint account is managed is subject to conditions set forth in the SEC order
obtained by the Fund authorizing this practice, which conditions are designed to
ensure the fair administration of the joint account and to protect the amounts
in that account.

Loans of Portfolio Securities. Each Portfolio may lend portfolio
securities to unaffiliated brokers, dealers and financial institutions provided
that (a) immediately after any such loan, the value of the securities loaned
does not exceed ten percent of the total value of that Portfolio's assets, and
(b) any securities loan is collateralized in accordance with applicable
regulatory requirements. See Statement of Additional Information.

Foreign Securities. The Common Stock Portfolio, the Domestic Strategic
Income Portfolio, the Emerging Growth Portfolio and the Multiple Strategy
Portfolio may invest up to 10%, 25%, 20% and 25%, respectively, of the value of
such Portfolios' total assets in securities of foreign governments and
companies. Such securities may be subject to foreign government taxes which
would reduce the income yield on such securities. Foreign investments involve
certain risks, such as political or economic instability of the issuer or of the
country of issue, the difficulty of predicting international trade patterns,
fluctuating exchange rates and the possibility of imposition of exchange
controls. Such securities may also be subject to greater fluctuations in price
than securities of domestic corporations or of the United States Government. In
addition, there may be less publicly available information about a foreign
company than about a domestic company. Foreign companies generally are not
subject to uniform accounting, auditing and financial reporting standards
comparable to those applicable to domestic companies. There is generally less
government regulation of stock exchanges, brokers and listed companies abroad
than in the United

26
<PAGE> 29

States, and, with respect to certain foreign countries, there is a possibility
of expropriation or confiscatory taxation, or diplomatic developments which
could affect investment in those countries. Finally, in the event of a default
on any such foreign debt obligations, it may be more difficult for the Fund to
obtain or to enforce a judgment against the issuers of such securities. With
respect to the Global Equity Portfolio, see "Investment Objectives and
Policies -- Global Equity Portfolio."

Restricted Securities. The Emerging Growth Portfolio and the Global Equity
Portfolio may invest up to fifteen percent of their net assets in restricted
securities and other illiquid assets. The other Portfolios may each invest up to
five percent of their net assets in restricted securities and other illiquid
assets. As used herein, restricted securities are those that have been sold in
the United States without registration under the Securities Act of 1933 and are
thus subject to restrictions on resale. Excluded from the limitation, however,
are any restricted securities which are eligible for resale pursuant to Rule
144A under the Securities Act of 1933 and which have been determined to be
liquid by the Trustees or by the Adviser pursuant to Board-approved guidelines.
The determination of liquidity is based on the volume of reported trading in the
institutional secondary market for each security. Since it is not possible to
predict with assurance how the markets for restricted securities sold and
offered under Rule 144A will develop, the Trustees will carefully monitor the
Portfolio's investment in these securities focusing on such factors, among
others, as valuation, liquidity and availability of information. This investment
practice could have the effect of increasing the level of illiquidity in the
Portfolio to the extent that qualified institutional buyers become for a time
uninterested in purchasing these restricted securities. These difficulties and
delays could result in the Portfolio's inability to realize a favorable price
upon disposition of restricted securities, and in some cases might make
disposition of such securities at the time desired by the Portfolio impossible.
Since market quotations are not readily available for restricted securities,
such securities will be valued by a method that the Portfolio's Trustees believe
accurately reflects fair value.

Short Sales Against the Box. The Global Equity Portfolio may from time to
time make short sales of securities it owns or has the right to acquire through
conversion or exchange of other securities it owns. A short sale is "against the
box" to the extent that the Portfolio contemporaneously owns or has the right to
obtain at no added cost securities identical to those sold short. In a short
sale, the Portfolio does not immediately deliver the securities sold and does
not receive the proceeds from the sale. The Portfolio is said to have a short
position in the securities sold until it delivers the securities sold, at which
time it receives the proceeds of the sale. The Portfolio may not make short
sales or maintain a short position if to do so would cause more than 25% of its
total assets, taken at market value, to be held as collateral for such sales.

To secure its obligation to deliver the securities sold short, the
Portfolio will deposit in escrow in a separate account with its Custodian an
equal amount of the securities sold short or securities convertible into or
exchangeable for such securities. The Portfolio may close out a short position
by purchasing and delivering an equal amount of the securities sold short,
rather than by delivering securities already held by the Portfolio, because the
Portfolio may want to continue to receive interest and dividend payments on
securities in its portfolio that are convertible into the securities sold short.
However, the Portfolio will not purchase and deliver new securities to satisfy
its short order if such purchase and sale would cause such Portfolio to derive
more than 30% of its gross income from the sale of securities held for less than
three months.

Forward Commitments. The Domestic Strategic Income Portfolio and the
Government Portfolio may purchase or sell U.S. Government securities on a
"when-issued" or "delayed delivery" basis ("Forward Commitments"). These
transactions occur when securities are purchased or sold by the Portfolio with
payment and delivery taking place in the future, frequently a month or more
after such transaction. The price

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is fixed on the date of the commitment, and the seller continues to accrue
interest on the securities covered by the Forward Commitment until delivery and
payment takes place. At the time of settlement, the market value of the
securities may be more or less than the purchase or sale price.

The Domestic Strategic Income Portfolio and the Government Portfolio may
either settle a Forward Commitment by taking delivery of the securities or may
resell or repurchase a Forward Commitment on or before the settlement date in
which event a Portfolio may reinvest the proceeds in another Forward Commitment.
A Portfolio's use of Forward Commitments may increase its overall investment
exposure and thus its potential for gain or loss. When engaging in Forward
Commitments, a Portfolio relies on the other party to complete the transaction;
should the other party fail to do so, a Portfolio might lose a purchase or sale
opportunity that could be more advantageous than alternative opportunities at
the time of the failure.

The Portfolios each maintain a segregated account (which is marked to
market daily) of cash, U.S. Government securities or the security covered by the
Forward Commitment with the Portfolio's custodian in an aggregate amount equal
to the amount of its commitment as long as the obligation to purchase or sell
continues.

Portfolio Turnover. Each Portfolio may purchase or sell securities without
regard to the length of time the security has been held and thus may experience
a high rate of portfolio turnover. A 100% turnover rate would occur, for
example, if all the securities in a portfolio were replaced in a period of one
year. Securities with maturities of less than one year are excluded in the
computation of the portfolio turnover rate. The portfolio turnover rate is not a
limiting factor when the Adviser deems it desirable to purchase or sell
securities or to engage in transactions in options, futures contracts and
options on futures contracts on behalf of the Common Stock, the Emerging Growth,
the Global Equity, the Government and the Multiple Strategy Portfolios. The
annual turnover rates of the Portfolios are shown under "Financial Highlights."
Higher portfolio turnover involves correspondingly greater transaction costs,
including any brokerage commissions, which are borne directly by the Portfolio.
In addition, higher portfolio turnover may increase the recognition of
short-term, rather than long-term, capital gains. See "Dividends, Distributions
and Taxes."

Using Options, Futures Contracts and Options on Futures Contracts. The
Common Stock Portfolio, the Emerging Growth Portfolio, the Global Equity
Portfolio, the Government Portfolio and the Multiple Strategy Portfolio may
purchase or sell options, futures contracts or options on futures contracts. The
Portfolios expect to utilize options, futures contracts and options thereon in
several different ways, depending upon the status of the Portfolio's portfolio
and the Adviser's expectations concerning the securities markets. See the
Statement of Additional Information for a discussion of options, futures
contracts and options on futures contracts.

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options are considered illiquid to the extent that the formula price exceeds the
intrinsic value of the option. A Portfolio may not purchase or sell futures
contracts or related options for which the aggregate initial margin and premiums
exceed five percent of the fair market value of the Portfolio's assets. In order
to prevent leverage in connection with the purchase of futures contracts by a
Portfolio, an amount of cash, cash equivalents or liquid high grade debt
securities equal to the market value of the obligation under the futures
contracts (less any related margin deposits) will be maintained in a segregated
account with the Custodian. A Portfolio may not invest more than ten percent of
its net assets in illiquid securities and repurchase agreements which have a
maturity of longer than seven days. A more complete discussion of the potential
risks involved in transactions in options, futures contracts and options on
futures contracts is contained in the Statement of Additional Information.

Investment in Investment Companies. Certain Portfolios of the Fund may
invest in a separate investment company, American Capital Small Capitalization
Fund, Inc. ("Small Cap Fund"), that invests in a broad selection of small
capitalization securities. The shares of the Small Cap Fund are available only
to investment companies advised by the Adviser. The Common Stock Portfolio and
the Multiple Strategy Portfolio may invest in the Small Cap Fund. The Adviser
believes that the use of the Small Cap Fund provides the Portfolios with the
most effective exposure to the performance of the small capitalization sector of
the stock market while at the same time minimizing costs. The Adviser charges no
advisory fee for managing the Small Cap Fund, nor is there any sales load or
other charges associated with distribution of its shares. Other expenses
incurred by the Small Cap Fund will be borne by it, and thus indirectly by the
American Capital funds that invest in it. With respect to such other expenses,
the Adviser anticipates that the efficiencies resulting from use of the Small
Cap Fund will result in cost savings for the Portfolios and other American
Capital funds. In large part these savings will be attributable to the fact that
administrative actions that would have to be performed multiple times if each
American Capital fund held its own portfolio of small capitalization stocks will
need to be performed only once. The Adviser expects that the Small Cap Fund will
experience trading costs that will be substantially less than the trading costs
that would be incurred if small capitalization stocks were purchased separately
for the Portfolios and other American Capital funds.

The securities of small and medium sized companies that the Small Cap Fund
may invest in may be subject to more abrupt or erratic market movements than
securities of larger, more established companies or the market averages in
general. In addition, small capitalization companies typically are subject to a
greater degree of change in earnings and business prospects than are larger,
more established companies. In light of these characteristics of small
capitalization companies and their securities, the Small Cap Fund may be subject
to greater investment risk than that assumed through investment in the equity
securities of larger capitalization companies.

The Common Stock and Multiple Strategy Portfolios will be deemed to own a
pro rata portion of each investment of the Small Cap Fund. For example, if a
Portfolio's investment in the Small Cap Fund were $10 million, and the Small Cap
Fund had five percent of its assets invested in the electronics industry, the
Portfolio would be considered to have an investment of $500,000 in the
electronics industry.

Brokerage Practices. The Advisers are responsible for the placement of
orders for the purchase and sale of portfolio securities for the Fund and the
negotiation of brokerage commissions on such transactions. Brokerage firms are
selected on the basis of their professional capability for the type of
transaction and the value and quality of execution services rendered on a
continuing basis. The Advisers are authorized to place portfolio transactions
with brokerage firms participating in the distribution of shares of the Fund and
other American Capital mutual funds if it reasonably believes that the quality
of the execution and the commission are comparable to that available from other
qualified brokerage firms. The Advisers are authorized to pay

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<PAGE> 32

higher commissions to brokerage firms that provide it with investment and
research information than to firms which do not provide such services if the
Advisers determine that such commissions are reasonable in relation to the
overall services provided. The information received may be used by the Advisers
in managing the assets of other advisory accounts as well as in the management
of the assets of the Fund.

Investment Restrictions. Each Portfolio has adopted a number of investment
restrictions which, like its investment objective, may not be changed without
the approval of the holders of a majority of the shares of such Portfolio. The
percentage limitations need only be met at the time the investment is made or
other relevant action taken. These restrictions provide, among other things,
that a Portfolio may not:

1. With respect to 75% of its assets, invest more than five percent of its
assets in the securities of any one issuer (except obligations of the United
States Government, its agencies or instrumentalities and repurchase agreements
secured thereby) or purchase more than ten percent of the outstanding voting
securities of any one issuer. With respect to the Common Stock Portfolio,
Emerging Growth Portfolio, Global Equity Portfolio and the Multiple Strategy
Portfolio, neither limitation shall apply to the acquisition of shares of other
open-end investment companies to the extent permitted by rule or order of the
Securities and Exchange Commission exempting the Portfolios from the limitation
imposed by Section 12(d)(1) of the Investment Company Act of 1940;

2. Invest more than 25% of the value of its total assets in securities of
issuers in any particular industry (except obligations of the United States
Government, its agencies or instrumentalities and repurchase agreements secured
thereby and except with respect to the Money Market Portfolio obligations of
domestic branches of United States banks); provided, however, that with respect
to the Common Stock Portfolio, Emerging Growth Portfolio, Global Equity
Portfolio and the Multiple Strategy Portfolio, this limitation excludes shares
of other open-end investment companies owned by the Portfolios but includes the
Portfolios' pro rata portion of the securities and other assets owned by any
such investment company;

3. Underwrite securities of other companies, except insofar as a Portfolio might
be deemed to be an underwriter for purposes of the Securities Act of 1933 in the
resale of any securities, owned by the Portfolio; and

4. Lend its portfolio securities in excess of ten percent of its total assets,
both taken at market value provided that any loans shall be in accordance with
the guidelines established for such loans by the Board of Trustees of the
Portfolio as described under "Loans of Portfolio Securities," including the
maintenance of collateral from the borrower equal at all times to the current
market value of the securities loaned.

THE FUND AND ITS MANAGEMENT

The Fund is an open-end, diversified management investment company,
generally known as a mutual fund, organized as a Massachusetts business trust on
June 3, 1985. A mutual fund provides, for those who have similar investment
goals, a practical and convenient way to invest in a diversified portfolio of
securities by combining their resources in an effort to achieve such goals.

The Fund's eight Trustees have the responsibility for overseeing the
affairs of the Fund. The Adviser, 2800 Post Oak Boulevard, Houston, Texas 77056,
is responsible for the provision of advisory services in relation to the Fund's
assets. The Adviser also provides administrative services and manages the Fund's
business and affairs. The Adviser, together with its predecessors, has been in
the investment advisory business since 1926. As of March 31, 1995, the Adviser
provides investment advice to 48 investment company portfolios with total net
assets of $ billion.

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The Adviser and the Distributor are wholly owned subsidiaries of Van Kampen
American Capital, Inc. ("VKAC"), which is a wholly owned subsidiary of VK/AC
Holding, Inc. VK/AC Holding, Inc. is controlled through the ownership of a
substantial majority of its common stock by The Clayton & Dubilier Private
Equity Fund IV Limited Partnership "C&D L.P."), a Connecticut limited
partnership. C&D L.P. is managed by Clayton, Dubilier & Rice, Inc., a New York
based private investment firm. The General Partner of C&D L.P. is Clayton &
Dubilier Associates IV Limited Partnership ("C&D Associates L.P."). The general
partners of C&D Associates L.P. are Joseph L. Rice, III, B. Charles Ames,
Alberto Cribiore, Donald J. Gogel and Hubbard C. Howe, each of whom is a
principal of Clayton, Dubilier & Rice, Inc. In addition, certain officers,
directors and employees of VKAC own, in the aggregate, not more than 6% of the
common stock of VK/AC Holding, Inc. and have the right to acquire, upon the
exercise of options, approximately an additional 10% of the common stock of
VK/AC Holding, Inc.

Mr. Don G. Powell is President and Director of the Fund, President, Chief
Executive Officer and Director of the Adviser, and Chief Executive Officer and
Chairman of the Distributor. Most other officers of the Fund are also officers
and/or directors of the Adviser.

The Subadviser is a United Kingdom-based investment management company
whose investment management activities originated in the 1920s, and was
incorporated in 1955 to provide a corporate structure for a management group.
Located at 4 Battle Bridge Lane, London SE1 2HR, England, the Subadviser is a
wholly-owned subsidiary of Govett & Company Limited, a corporation listed on the
London Stock Exchange with a current market valuation of approximately $440
million. The Govett Group, which manages or administers investment funds valued
at approximately $8.6 billion, maintains offices in London, Singapore, Jersey
(Channel Islands), Sacramento, Raleigh, and San Francisco.

The Fund and the Adviser are parties to an investment advisory agreement,
dated December 20, 1994 (the "Advisory Agreement I"), pursuant to which the Fund
retains the Adviser to manage the investment of assets and to place orders for
the purchase and sale of portfolio securities for the Common Stock Portfolio,
the Domestic Strategic Income Portfolio, the Government Portfolio, the Money
Market Portfolio and the Multiple Strategy Portfolio. The Fund and the Adviser
are also parties to two additional investment advisory agreements each dated
("Advisory Agreements -- II and III"), pursuant to which the Adviser
manages the investment of assets and places orders for the purchase and sale of
portfolio securities for the Emerging Growth Portfolio and the Global Equity
Portfolio, respectively (Advisory Agreements -- I, II and III are referred to
herein collectively as the "Advisory Agreements").

Under the Advisory Agreements, the Fund bears the cost of its accounting
services, which includes maintaining its financial books and records and
calculating the daily net asset value of each Portfolio. The costs of such
accounting services include the salaries and overhead expenses of a Treasurer or
other principal financial officer and the personnel operating under his
direction. The services are provided at cost which is allocated among the
investment companies advised by the Adviser. The Fund also pays shareholder
service agency fees, custodian fees, legal and auditing fees, trustees' fees,
the costs of registration of its shares and reports and proxies to shareholders
and all other ordinary expenses not specifically assumed by the Adviser or the
Distributor.

Under Advisory Agreement-I, the Fund pays to the Adviser as compensation
for the services rendered, facilities furnished, and expenses paid by it a fee
payable monthly computed on average daily net assets of the subject Portfolios
at an annual rate of 0.50% of the first $500 million of such Portfolios'
aggregate average net assets; 0.45% of the next $500 million of such Portfolios'
aggregate average net assets, and 0.40% of such Portfolios' aggregate average
net assets in excess of $1 billion. Each Portfolio pays its pro rata share of
the fee based upon its average daily net assets. For the fiscal year ended
December 31, 1994,

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<PAGE> 34

advisory fees plus the cost of accounting services payable by the Fund, before
expense reimbursements, equaled . %, . %, . %, . % and . % for the Common
Stock Portfolio, the Domestic Strategic Income Portfolio, the Government
Portfolio, the Money Market Portfolio and the Multiple Strategy Portfolio,
respectively, of each Portfolio's average net assets. For the same period, each
Portfolio's net total operating expenses were 0.60%. Such figure results from
the Adviser's agreement that so long as it serves as Adviser to such Portfolio
it will limit the ordinary business expenses of each Portfolio to 0.60% per year
of the average net assets of each such Portfolio by reducing the advisory fee
and/or bearing other expenses of a Portfolio in excess of such limitation.
Expenses subject to such limitation do not include (1) interest and taxes, (2)
brokerage commissions, (3) certain litigation and indemnification expenses as
described in the Advisory Agreement, and (4) any distribution expenses which may
be incurred by a Portfolio in the event a Distribution Plan is adopted. Any
required reduction or expense payment is computed and paid monthly, subject to
readjustment during the fiscal year.

Under Advisory Agreement-II, the Fund pays to the Adviser as compensation
for the services rendered, facilities furnished, and expenses paid by it a fee
payable monthly computed on average daily net assets of the Emerging Growth
Portfolio at an annual rate of 0.70%.

The Fund retains the Adviser to manage the investment of the Global Equity
Portfolio's assets and to place orders for the purchase and sale of its
portfolio securities. The Adviser has entered into a subadvisory agreement dated
, 1995, (the "Sub-advisory Agreement") with the Subadviser to assist
it in performing its investment advisory functions. The Subadviser will be
primarily responsible for recommending the allocation of investments among
various international markets and currencies; recommendation and selection of
particular securities in the international markets and placement of portfolio
transactions in the foreign equity markets. Under Advisory Agreement-III, the
Fund pays to the Adviser as compensation for the services rendered, facilities
furnished, and expenses paid by it a fee payable monthly, computed on average
daily net assets of the Global Equity Portfolio at the annual rate of 1.00%.
This fee is higher than that charged by most other mutual funds but the
Portfolio believes it is justified by the special international nature of the
Portfolio and is not necessarily higher than the fees charged by certain mutual
funds with investment objective and policies similar to those of the Portfolio.
Pursuant to the Sub-advisory Agreement, the Subadviser receives on an annual
basis 50% of the compensation received by the Adviser.

The Adviser and the Subadviser may, from time to time, agree to waive their
respective investment advisory fees or any portion thereof or elect to reimburse
the Global Equity Portfolio for ordinary business expenses in excess of an
agreed upon amount.

The Portfolios have different portfolio managers. B. Robert Baker is
primarily responsible for the day-to-day management of the Common Stock
Portfolio's investment portfolio. Mr. Baker is Vice President of the Fund and
has been primarily responsible for managing the Portfolio's investment portfolio
since May 2, 1994. Mr. Baker has been an Associate Portfolio Manager of the
Adviser since November, 1991. Prior to that, he was Vice President -- Portfolio
Manager with Variable Annuity Life Insurance Co. Walter W. Stabell, III is
primarily responsible for the day-to-day management of the Domestic Strategic
Income Portfolio's investment portfolio. Mr. Stabell is Vice President of the
Fund and Associate Portfolio Manager of the Adviser. From December, 1986 to
August, 1989 Mr. Stabell was Senior Securities Analyst of the Adviser. Mr.
Stabell has been primarily responsible for managing the Portfolio's investment
portfolio since March, 1990. Gary M. Lewis is primarily responsible for the
day-to-day management of the Emerging Growth Portfolio's investment portfolio.
Mr. Lewis is Vice President of the Fund and Vice President of the Adviser.
Mr. Lewis has been responsible for managing the Portfolio's investment
portfolio since its inception. Jeff New is primarily responsible for the
day-to-day management of the Global

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Equity Portfolio's investment portfolio with respect to investments in the
United States. Mr. New is Vice President of the Fund. He has been an associate
portfolio manager with the Adviser since April 1990. Prior to that he was a
securities analyst with Texas Commerce Investment Management Company. Mr. New
has been primarily responsible for managing the Fund's investment portfolio with
respect to investments in the United States since its inception. The Subadviser
has employed Peter Kysel since September 1994 as Director and Fund Manager. He
is primarily responsible for allocating the Fund's investments between United
States and non-United States equity securities and day-to-day management of the
Fund's investments in counties other than the United States. Mr. Kysel has
provided such services since the Portfolio's inception. Mr. Kysel was previously
a managing director of the investment banking division of Komercni Bank. John R.
Reynoldson is primarily responsible for the day-to-day management of the
Government Portfolio's investment portfolio. Mr. Reynoldson is Vice President of
the Fund and has been Senior Vice President of the Adviser since July, 1991. Mr.
Reynoldson has been primarily responsible for managing the Portfolio's
investment portfolio since December, 1989. David R. Troth is primarily
responsible for the day-to-day management of the Money Market Portfolio's
investment portfolio. Mr. Troth is Vice President of the Fund and has been
Senior Vice President of the Adviser since March, 1978. Mr. Troth has been
primarily responsible for managing the Portfolio's investment portfolio since
its inception. Ralph P. Goldsticker is responsible for allocating the Multiple
Strategy Portfolio's investments among the various categories in which the
Portfolio invests. B. Robert Baker manages the Multiple Strategy Portfolio's
equity investments and Cindee Burkitt manages the Portfolio's fixed-income
investments. Mr. Goldsticker and Ms. Burkitt are vice presidents of the Fund and
have managed the Portfolio's investment portfolio since the Portfolio's
inception. Mr. Baker began managing the Portfolio's investment portfolio May 2,
1994. Mr. Goldsticker is Vice President, Director of Equity Research of the
Adviser. Ms. Burkitt has been Associate Portfolio Manager of the Adviser since
July, 1992. Prior to that she was a senior securities analyst with the Adviser.

PURCHASE OF SHARES

The Fund is offering its shares only to Separate Accounts of various
insurance companies to fund the benefits of variable annuity or variable life
insurance contracts. The Fund does not foresee any disadvantage to holders of
Contracts arising out of the fact that the interests of the holders may differ
from the interests of holders of life insurance policies and that holders of one
insurance policy may differ from holders of other insurance policies.
Nevertheless, the Fund's Trustees intend to monitor events in order to identify
any material irreconcilable conflicts which may possibly arise and to determine
what action, if any, should be taken. The Contracts are described in the
separate prospectuses issued by the Participating Insurance Companies. The Fund
continuously offers shares in each of its Portfolios to the Accounts at prices
equal to the respective per share net asset value of the Portfolio. Van Kampen
American Capital Distributor, Inc., One Park View Plaza, Oakbrook Terrace,
Illinois 60181, acts as the distributor of the shares. Net asset value is
determined in the manner set forth below under "Determination of Net Asset
Value."

DETERMINATION OF NET ASSET VALUE

Net asset value per share is computed for each Portfolio as of the close of
trading (currently 4:00 p.m., New York time) each day the New York Stock
Exchange is open. See the accompanying Prospectus for the policies for
information regarding holidays observed by the insurance company. Net asset
value of each Portfolio is determined by adding the total market value of all
portfolio securities held by the Portfolio, cash and other assets, including
accrued interest. All liabilities, including accrued expenses, of the Portfolio
are subtracted. The resulting amount is divided by the total number of
outstanding shares of the Portfolio to

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<PAGE> 36

arrive at the net asset value of each share. See "Determination of Net Asset
Value" in the Statement of Additional Information for further information.

Securities listed or traded on a national securities exchange are valued at
the last sale price. Unlisted securities and listed securities for which the
last sales price is not available are valued at the most recent bid price. U.S.
Government and agency obligations are valued at the last reported bid price.
Listed options are valued at the last reported sale price in the exchange on
which such option is traded or, if no sales are reported, at the mean between
the last reported bid and asked prices. Options for which market quotations are
not readily available are valued at a fair value calculated under a method
approved by the Trustees. Short-term investments for all Portfolios other than
the Money Market Portfolio are valued as described in the Notes to Financial
Statements in the Statement of Additional Information.

The Money Market Portfolio's assets are valued on the basis of amortized
cost, which involves valuing a portfolio security at its cost, assuming a
constant amortization to maturity of any discount or premium, regardless of the
impact of fluctuating interest rates on the market value of the security. While
this method provides certainty in valuation, it may result in periods in which
value as determined by amortized cost is higher or lower than the price the
Portfolio would receive if it sold the security. During such periods, the yield
to investors in the Portfolio may differ somewhat from that obtained in a
similar fund which uses available market quotations to value all of its
portfolio securities.

REDEMPTION OF SHARES

Payment for shares tendered for redemption by the insurance company is made
ordinarily in cash within seven days after tender in proper form, except under
unusual circumstances as determined by the SEC. The redemption price will be the
net asset value next determined after the receipt of a request in proper form.
The market value of the securities in each Portfolio is subject to daily
fluctuations and the net asset value of each Portfolio's shares will fluctuate
accordingly. Therefore, the redemption value may be more or less than the
investor's cost.

DIVIDENDS, DISTRIBUTIONS AND TAXES

All dividends and capital gains distributions of each Portfolio are
automatically reinvested by the Account in additional shares of such Portfolio.

Shares of the Money Market and Government Portfolios become entitled to
income distributions declared on the day the shareholder service agent receives
payment of the purchase price in the form of federal funds. Such shares do not
receive income distributions declared on the date of redemption.

Dividends of the Money Market Portfolio. The Money Market Portfolio
declares income dividends each business day. The Portfolio's net income for
dividend purposes is calculated daily and consists of interest accrued or
discount earned, plus or minus any net realized gains or losses on portfolio
securities, less any amortization of premium and the expenses of the Portfolio.

Dividends and Distributions of the Common Stock Portfolio, the Emerging
Growth Portfolio, the Global Equity Portfolio and the Multiple Strategy
Portfolio. Dividends from stocks and interest earned from other investments are
the main source of income for these Portfolios. Substantially all of this
income, less expenses, is distributed on an annual basis. When a Portfolio sells
portfolio securities, it may realize capital gains or losses, depending on
whether the prices of the securities sold are higher or lower than the prices
the Portfolio paid to purchase them. Net realized capital gains represent the
total profit from sales of securities minus total

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losses from sales of securities including any losses carried forward from prior
years. Each of these Portfolios distributes any net realized capital gains to
the Account no less frequently than annually.

Dividends and Distributions of the Government Portfolio. The Government
Portfolio declares income dividends each business day. Such dividends are
distributed monthly. The daily dividend is a fixed amount determined at least
monthly which is expected not to exceed the net income of the Portfolio for the
month divided by the number of business days in the month. The Government
Portfolio intends to distribute monthly, or on such other basis as may be
determined from time to time by the Trustees, its net realized short-term
capital gains, including such gains realized from net premiums received from
expired options, net gains from closing purchase transactions and net short-term
gains from securities sold upon the exercise of options or otherwise, less any
net realized long-term capital loss. Net realized long-term capital gains, if
any, are generally distributed at least annually.

Tax Status of the Portfolios. Each Portfolio has elected to be taxed as a
"regulated investment company" under the Code. By maintaining its qualification
as a "regulated investment company," a Portfolio will not incur any liability
for federal income taxes to the extent its taxable ordinary income and any
capital gain net income is distributed in accordance with Subchapter M of the
Code. By qualifying as a regulated investment company, a Portfolio is not
subject to Federal income taxes to the extent it distributes its taxable net
investment income and taxable net realized capital gains. If for any taxable
year a Portfolio does not qualify for the special tax treatment afforded
regulated investment companies, all of its taxable income, including any net
realized capital gains, would be subject to tax at regular corporate rates
(without any deduction for distributions to shareholders). Each Portfolio is
subject to the diversification requirements of Section 817(h) of the Code. See
also "Government Portfolio -- General" for information regarding Section 817(h)
of the Code.

Dividends and interest received by the Global Equity Portfolio may give
rise to withholding and other taxes imposed by foreign countries. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. Investors may be entitled to claim United States foreign
tax credits with respect to such taxes, subject to certain provisions and
limitations contained in the Code. If more than 50% in value of the Global
Equity Portfolio's total assets at the close of its fiscal year consists of
securities of foreign issuers, the Global Equity Portfolio will be eligible, and
may file elections with the Internal Revenue Service pursuant to which
shareholders of the Global Equity Portfolio will be required to include their
respective pro rata portions of such taxes in their United States income tax
returns as gross income, treat such respective pro rata portions as taxes paid
by them, and deduct such respective pro rata portions in computing their taxable
incomes or, alternatively, use them as foreign tax credits against their United
States income taxes. The Global Equity Portfolio will report annually to its
shareholders the amount per share of such withholding.

Under Code Section 988, foreign currency gains or losses from certain
forward contracts not traded in the Interbank market generally are treated as
ordinary income or loss. Such Code Section 988 gains or losses will increase or
decrease the amount of the Global Equity Portfolio's investment company taxable
income available to be distributed to shareholders as ordinary income, rather
than increasing or decreasing the amount of the Global Equity Portfolio's net
capital gain. Additionally, if Code Section 988 losses exceed other investment
company taxable income during a taxable year, the Global Equity Portfolio would
not be able to make any ordinary dividend distributions, and any distributions
made before the losses were realized but in the same taxable year would be
recharacterized as a return of capital to shareholders, thereby reducing each
shareholder's basis in Global Equity Portfolio shares.

35
<PAGE> 38

Tax Treatment to Insurance Company as Shareholder. Dividends paid by each
Portfolio from its ordinary income and distributions of each Portfolio's net
realized short-term capital gains are includable in the insurance company's
gross income. The tax treatment of such dividends and distributions depends on
the insurance company's tax status. To the extent that income of a Portfolio
represents dividends on equity securities rather than interest income, its
distributions are eligible for the 70% dividends received deduction applicable
in the case of a life insurance company as provided in the Code. The Fund will
send to the Account a written notice required by the Code designating the amount
and character of any distributions made during such year.

Under the Code, any distribution designated as being made from a
Portfolio's net realized long-term capital gains are taxable to the insurance
company as long-term capital gains. Such distributions of long-term capital
gains will be designated as a capital gains distribution in a written notice to
the Account which accompanies the distribution payment. Long-term capital gains
distributions are not eligible for the dividends received deduction. Dividends
and capital gain distributions to the insurance company may also be subject to
state and local taxes.

As described in the accompanying Prospectus for the Contracts, the
insurance company reserves the right to assess the Account a charge for any
taxes paid by it.

Tax Treatment of Options and Futures Transactions. Gains or losses on the
Common Stock Portfolio's, the Emerging Growth Portfolio's, the Global Equity
Portfolio's, the Government Portfolio's or the Multiple Strategy Portfolio's
transactions in listed options on securities, futures and options on futures
generally are treated as 60% long-term and 40% short-term, ("60/40"), and
positions held by a Portfolio at the end of its fiscal year generally are
required to be marked to market, with the result that unrealized gains and
losses are treated as though they were realized. Gains and losses realized by a
Portfolio on transactions in over-the-counter options generally are short-term
capital gains or losses unless the option is exercised, in which case the gain
or loss is determined by the holding period of the underlying security. The Code
contains certain "straddle" rules which require deferral of losses incurred in
certain transactions involving hedged positions to the extent a Portfolio has
unrealized gains in offsetting positions and generally terminate the holding
period of the subject position. Additional information is set forth in the
Statement of Additional Information.

PRIOR PERFORMANCE INFORMATION

From time to time all the Portfolios, except the Money Market Portfolio,
may advertise their total return for prior periods. Any such advertisement would
include at least average annual total return quotations for one five and
ten-year periods or for the life of the Portfolio. Other total return
quotations, aggregate or average, over other time periods may also be included.

The total return of a Portfolio for a particular period represents the
increase (or decrease) in the value of a hypothetical investment in the
Portfolio from the beginning to the end of the period. Total return is
calculated by subtracting the value of the initial investment from the ending
value and showing the difference as a percentage of the initial investment; the
calculation assumes the initial investment is made at the maximum public
offering price and that all income dividends or capital gains distributions
during the period are reinvested in Portfolio shares at net asset value. Total
return is based on historical earnings and asset value fluctuations and is not
intended to indicate future performance. No adjustments are made to reflect any
income taxes payable by shareholders on dividends and distributions paid by the
Portfolio.

36
<PAGE> 39

Average annual total return quotations for periods of two or more years are
computed by finding the average annual compounded rate of return over the period
that would equate the initial amount invested to the ending redeemable value.

In addition to total return information, the Government Portfolio and the
Domestic Strategic Income Portfolio may also advertise their current "yield."
Yield figures are based on historical earnings and are not intended to indicate
future performance. Yield is determined by analyzing the Portfolio's net income
per share for a thirty-day (or one-month) period (which period will be stated in
the advertisement), and dividing by the maximum offering price per share on the
last day of the period. A "bond equivalent" annualization method is used to
reflect a semiannual compounding.

For purposes of calculating yield quotations, net income is determined by a
standard formula prescribed by the SEC to facilitate comparison with yields
quoted by other investment companies. Net income computed for this formula
differs from net income reported by a Portfolio in accordance with generally
accepted accounting principles and from net income computed for federal income
tax reporting purposes. Thus the yield computed for a period may be greater or
lesser than a Portfolio's then current dividend rate.

A Portfolio's yield is not fixed and will fluctuate in response to
prevailing interest rates and the market value of portfolio securities, and as a
function of the type of securities owned by a Portfolio, portfolio maturity and
a Portfolio's expenses.

Yield quotations should be considered relative to changes in the net asset
value of a Portfolio's shares, a Portfolio's investment policies, and the risks
of investing in shares of a Portfolio. The investment return and principal value
of an investment in a Portfolio will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.

The Adviser, for an indefinite period has agreed to absorb a certain amount
of the ordinary business expenses of the Common Stock Portfolio, Domestic
Strategic Income Portfolio, Government Portfolio, Money Market Portfolio, and
Multiple Strategy Portfolio. Absorption of a portion of the expenses will
increase the yield or total return of a Portfolio.

From time to time the Money Market Portfolio advertises its "yield" and
"effective yield." Both yield figures are based on historical earnings and are
not intended to indicate future performance. The "yield" of the Portfolio refers
to the income generated by an investment in the Portfolio over a seven-day
period (which period will be stated in the advertisement). This income is then
"annualized." That is, the amount of income generated by the investment during
that week is assumed to be generated each week over a 52-week period and is
shown as a percentage of the investment. The "effective yield" is calculated
similarly but, when annualized, the income earned by an investment in the
Portfolio is assumed to be reinvested. The "effective yield" will be slightly
higher than the "yield" because of the compounding effect of this assumed
reinvestment. The current and effective yields for the seven-day period ending
December 31, 1994, and a description of the method by which the yield was
calculated is contained in the Statement of Additional Information.

Since yield fluctuates, yield data cannot necessarily be used to compare an
investment in the Portfolio's shares with bank deposits, savings accounts and
similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a stated period of time. Shareholders should remember that yield
is generally a function of the kind and quality of the instrument held in a
portfolio, portfolio maturity, operating expenses and market conditions.

37
<PAGE> 40

ADDITIONAL INFORMATION

Organization of the Fund. The Fund was organized under the laws of the
Commonwealth of Massachusetts and is a business entity commonly known as a
"Massachusetts business trust." It is a diversified, open-end management
investment company. The Fund is authorized to issue an unlimited number of
shares of beneficial interest of $.01 par value, in eight or more Portfolios.
Shares issued are fully paid, non-assessable and have no preemptive or
conversion rights. In the event of liquidation of any Portfolio, shareholders of
such Portfolio are entitled to share pro rata in the net assets of the Portfolio
available for distribution to shareholders.

Voting Rights. Shareholders are entitled to one vote for each full share
held and to fractional votes for fractional shares held in the election of
Trustees (to the extent hereafter provided) and on other matters submitted to
the vote of shareholders. All shares have equal voting rights, except that only
shares of the respective Portfolio are entitled to vote on matters concerning
only that Portfolio. There will normally be no meetings of shareholders for the
purpose of electing Trustees unless and until such time as less than a majority
of the Trustees holding office have been elected by shareholders, at which time
the Trustees then in office will call a shareholders' meeting for the election
of Trustees. Shareholders may, in accordance with the Declaration of Trust,
cause a meeting of shareholders to be held for the purpose of voting on the
removal of Trustees. Except as set forth above, the Trustees shall continue to
hold office and appoint successor Trustees.

The Declaration of Trust establishing the Fund, dated June 3, 1985, a copy
of which together with all amendments thereto (the "Declaration"), is on file in
the office of the Secretary of the Commonwealth of Massachusetts, provides that
the name "American Capital Life Investment Trust" refers to the Trustees under
the Declaration collectively as Trustees, not as individuals or personally; and
no Trustee, officer or shareholder of the Fund shall be held to any personal
liability, nor shall resort be had to their private property for the
satisfaction of any obligation or liability of any Portfolio but the assets of
the applicable Portfolio only shall be liable.

Shareholder Inquiries. Shareholder inquiries should be directed to the
Fund at 2800 Post Oak Boulevard, Houston, Texas 77056, (800) 421-5666.

Shareholder Service Agent. ACCESS Investor Services, Inc., ("ACCESS") P.O.
Box 418256, Kansas City, Missouri 64141-9256, serves as transfer agent,
shareholder service agent and dividend disbursing agent for the Fund. ACCESS, a
wholly owned subsidiary of the Adviser's parent, provides these services at cost
plus a profit.

Legal Counsel. O'Melveny & Myers, 400 South Hope Street, Los Angeles,
California 90071, is legal counsel to the Fund.

Independent Accountants. Price Waterhouse LLP, 1201 Louisiana, Suite 2900,
Houston, Texas 77002 are the independent accountants for the Fund.

38
<PAGE> 41

APPENDIX

DESCRIPTION OF CORPORATE BOND RATINGS

MOODY'S INVESTORS SERVICE'S CORPORATE BOND RATINGS:

AAA -- Bonds which are rated Aaa are judged to be of the best quality and
carry the smallest degree of investment risk. Interest payments are protected by
a large or by an exceptionally stable margin, and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.

AA -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.

A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.

BAA -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great period of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.

BA -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.

B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.

CAA -- Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.

CA -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.

STANDARD & POOR'S CORPORATION CORPORATE BOND RATINGS:

AAA -- This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.

AA -- Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the majority of
instances they differ from AAA issues only in small degree.

A -- Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.

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<PAGE> 42

BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.

BB -- B -- CCC -- CC -- Bonds rated BB, B, CCC and CC are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the obligation.
BB indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.

CI -- The rating CI is reserved for income bonds on which no interest is
being paid.

D -- Debt rated D is in default, and payment of interest and/or repayment
of principal is in arrears.

Plus (+) or Minus (-): The ratings from AA to B may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.

PREFERRED STOCK RATINGS:

Both Moody's and S&P use the same designations for corporate bonds as they
do for preferred stock except in the case of Moody's preferred stock ratings the
initial letter rating is not capitalized. While the descriptions are tailored
for preferred stocks and relative quality distinctions are comparable to those
described above for corporate bonds.

40
<PAGE> 43

STATEMENT OF ADDITIONAL INFORMATION

MAY 1, 1995

AMERICAN CAPITAL LIFE INVESTMENT TRUST
2800 POST OAK BLVD.
HOUSTON, TEXAS 77056
(800) 421-5666

American Capital Life Investment Trust (the "Fund") is a diversified,
open-end management investment company with eight separate Portfolios, seven of
which are offered under this Statement of Additional Information: American
Capital Common Stock Portfolio ("Common Stock Portfolio"), American Capital
Domestic Strategic Income Portfolio ("Domestic Strategic Income Portfolio"),
American Capital Emerging Growth Portfolio ("Emerging Growth Portfolio"),
American Capital Global Equity Portfolio ("Global Equity Portfolio"), American
Capital Government Portfolio ("Government Portfolio"), American Capital Money
Market Portfolio ("Money Market Portfolio") and American Capital Multiple
Strategy Portfolio ("Multiple Strategy Portfolio"). Each Portfolio is in effect
a separate portfolio issuing its own shares.

---------------------

This Statement of Additional Information is not a Prospectus but contains
information in addition to and more detailed than that set forth in the
Prospectus and should be read in conjunction with the Prospectus. The Statement
of Additional Information and the related Prospectus are both dated May 1, 1995.
A Prospectus may be obtained without charge by calling or writing American
Capital Marketing, Inc. (the "Distributor") at 2800 Post Oak Blvd., Houston,
Texas 77056 at (800) 421-5666.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GENERAL INFORMATION................................................................... 2
INVESTMENT OBJECTIVES AND POLICIES.................................................... 3
REPURCHASE AGREEMENTS................................................................. 9
FORWARD COMMITMENTS................................................................... 10
OPTIONS, FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS........................... 10
LOANS OF PORTFOLIO SECURITIES......................................................... 16
INVESTMENT RESTRICTIONS............................................................... 17
TRUSTEES AND EXECUTIVE OFFICERS....................................................... 24
INVESTMENT ADVISORY AGREEMENT......................................................... 27
DISTRIBUTOR........................................................................... 29
TRANSFER AGENT........................................................................ 29
PORTFOLIO TRANSACTIONS AND BROKERAGE.................................................. 29
DETERMINATION OF NET ASSET VALUE...................................................... 32
PURCHASE AND REDEMPTION OF SHARES..................................................... 34
DISTRIBUTIONS AND TAXES............................................................... 34
PRIOR PERFORMANCE INFORMATION......................................................... 35
MONEY MARKET PORTFOLIO YIELD INFORMATION.............................................. 36
OTHER INFORMATION..................................................................... 37
FINANCIAL STATEMENTS.................................................................. 37
APPENDIX.............................................................................. 38
</TABLE>

<PAGE> 44

GENERAL INFORMATION

The Fund was organized under the laws of the Commonwealth of Massachusetts
on June 3, 1985.

Van Kampen American Capital Asset Management, Inc. (the "Adviser"), Van
Kampen American Capital Distributors, Inc. (the "Distributor"), and Access
Investor Services, Inc. ("ACCESS") are wholly-owned subsidiaries of Van Kampen
American Capital, Inc. ("VKAC"), which is a wholly owned subsidiary of VK/AC
Holding, Inc. VK/AC Holding, Inc. is controlled, through the ownership of a
substantial majority of its common stock, by The Clayton & Dubilier Private
Equity Fund IV Limited Partnership ("C&D L.P."), a Connecticut limited
partnership. C&D L.P. is managed by Clayton, Dubilier & Rice, Inc. a New York
based private investment firm. The General Partner of C&D L.P. is Clayton &
Dubilier Associates IV Limited Partnership ("C&D Associates L.P."). The general
partners of C&D Associates L.P. are Joseph L. Rice, III, B. Charles Ames,
Alberto Cribiore, Donald J. Gogel and Hubbard C. Howe, each of whom is a
principal of Clayton, Dubilier & Rice, Inc. In addition, certain officers,
directors and employees of VKAC own, in the aggregate, not more than 6% of the
common stock of VK/AC Holding, Inc. and have the right to acquire, upon the
exercise of options, approximately an additional 10% of the common stock of
VK/AC Holding, Inc. Advantage Capital Corporation, a retail broker-dealer
affiliate of the Distributor, is a wholly owned subsidiary of VK/AC Holding,
Inc.

As of , 1995 no person was known by management to own
beneficially or of record as much as five percent of the outstanding shares of
any portfolio except the following record owners:

MONEY MARKET PORTFOLIO

<TABLE>
<CAPTION>
AMOUNT OF RECORD OWNERSHIP
NAME AND ADDRESS OF OF THE PORTFOLIO
RECORD HOLDER AT , 1995 PERCENT
----------------------------------------------- -------------------------- -------
<S> <C> <C>
American General Life Insurance Company
P.O. Box 1591
Houston, Texas 77251-1591
Nationwide VLI -- separate account of
Nationwide
Life Insurance Company
P.O. Box 182029
Columbus, Ohio 43218-2029
Nationwide Variable Account -- 3
c/o IPO Investments Co 69
P.O. Box 182029
Columbus, Ohio 43218-2029
COMMON STOCK PORTFOLIO
American General Life Insurance Company
separate account -- D
P.O. Box 1591
Houston, Texas 77251-1591
American General Life Insurance Company
Variety Plus
P.O. Box 1591
Houston, Texas 77251-1591
Nationwide VLI -- separate account of
Nationwide
Life Insurance Company
P.O. Box 182029
Columbus, Ohio 43218-2029
</TABLE>

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<PAGE> 45

GOVERNMENT PORTFOLIO
Nationwide VLI -- separate account of
Nationwide
Life Insurance Company
P.O. Box 182029
Columbus, Ohio 43218-2029
Nationwide Variable Account -- 3
c/o IPO Investments Co 69
P.O. Box 182029
Columbus, Ohio 43218-2029

MULTIPLE STRATEGY PORTFOLIO
Nationwide VLI -- separate account of
Nationwide
Life Insurance Company
P.O. Box 182029
Columbus, Ohio 43218-2029
Nationwide Variable Account -- 3
c/o IPO Investments Co 69
P.O. Box 182029
Columbus, Ohio 43218-2029

DOMESTIC STRATEGIC INCOME PORTFOLIO
American General Life Insurance Company
P.O. Box 1591
Houston, Texas 77251-1591
Nationwide VLI -- separate account of
Nationwide
Life Insurance Company
P.O. Box 182029
Columbus, Ohio 43218-2029
Nationwide Variable Account -- 3
c/o IPO Investments Co 69
P.O. Box 182029
Columbus, Ohio 43218-2029
</TABLE>

INVESTMENT OBJECTIVES AND POLICIES

The following disclosures supplement disclosures set forth under an
identical caption in the Prospectus and do not, standing alone, present a
complete or accurate explanation of the matters disclosed. Readers must refer
also to this caption in the Prospectus for a complete presentation of the
matters disclosed below.

COMMON STOCK PORTFOLIO

The Portfolio seeks capital appreciation by investing in a portfolio of
securities consisting principally of common stocks. Any income received on such
securities is incidental to the objective of capital appreciation. When, in the
opinion of the Adviser, the then prevailing market conditions dictate a
defensive position, the Portfolio may temporarily hold a significant percentage
of its assets in cash, U.S. Government securities, or

3
<PAGE> 46

investment grade debt securities. The Portfolio may enter into repurchase
agreements with banks and broker-dealers. See "Repurchase Agreements."

In seeking to obtain capital appreciation, the Portfolio may trade to a
substantial degree in securities for the short term. To this extent, the
Portfolio would be engaged essentially in trading operations based on
expectation of short-term market movements. However, the Portfolio also seeks
investments which are expected to appreciate over a longer period of time. See
"Portfolio Transactions and Brokerage".

DOMESTIC STRATEGIC INCOME PORTFOLIO

The primary objective of the Portfolio is to maximize current income
through investment primarily in a diversified portfolio of fixed-income
securities. Capital appreciation is a secondary objective which is sought only
when consistent with the primary objective. There is, of course, no assurance
that the Portfolio will be successful in achieving its investment objective.

Capital appreciation may result, for example, from an improvement in the
credit standing of an issuer whose securities are held in the Portfolio's
portfolio or from a general lowering of interest rates, or a combination of
both. Conversely, a reduction in the credit rating of an issuer whose securities
are held in the Portfolio's portfolio or a general increase in interest rates
would be expected to reduce the value of the Portfolio's investments.

The Portfolio expects that at all times at least 80% of its assets will be
invested in fixed-income securities rated at the time of purchase B or higher by
Moody's Investor Services, Inc. ("Moody's") or Standard & Poor's Corporation
("S&P"), nonrated securities considered by the Adviser to be of comparable
quality, and U.S. Government securities (as defined herein).

Lower rated and comparable nonrated securities tend to offer higher yields
than higher rated securities with the same maturities because the historical
conditions of the issuers of lower rated securities may not have been as strong
as that of other issuers. The Adviser, however, believes that such ratings are
not necessarily an accurate reflection of the current financial condition of the
issuers because they may be based upon considerations taken into account at the
time such ratings were assigned, rather than upon subsequent developments
affecting such issuers. Moreover, ratings categories tend to be broad, so that
there may be significant variations among the financial condition of issuers
within the same category. For these reasons, the Adviser may rely more on its
own analysis in determining which securities offer the best opportunities for
higher yields without unreasonable risks; therefore, the achievement of the
Portfolio's objectives will depend more on the Adviser's analytical and
portfolio management skills than would be the case if greater reliance were
placed on ratings assigned by the rating services. The Adviser's analysis will
focus on a number of factors affecting the financial condition of a company;
including the strength of its management; the financial soundness of the company
and the outlook of its industry; the security's responsiveness to changes in
interest rates and business conditions; the cash flow of the company; dividend
or interest coverage; and the fair market value of the company's assets. In
making portfolio decisions for the Portfolio, the Adviser will attempt to
identify higher yielding securities of companies whose financial condition has
improved since the issuance of such securities, or is anticipated to improve in
the future.

The Portfolio may invest up to 20% of its total assets in debt securities
rated below B by Moody's and S&P or nonrated securities considered by the
Adviser to be of comparable quality, common stocks or other equity securities
and in non-income producing securities, prime commercial paper, certificates of
deposit, bankers' acceptances and other obligations of domestic banks having
total assets of at least $500 million, and repurchase agreements. The Portfolio
will not cause more than ten percent of its total assets to be invested in
common stocks or other equity securities. See "Investment Objectives and
Policies -- Domestic Strategic Income Portfolio," in the Prospectus.

Certain of the lower rated debt securities in which the Portfolio may
invest may be purchased at a discount. Such securities, when held to maturity or
retired, may include an element of capital gain. Capital losses may be realized
when securities purchased at a premium are held to maturity or are called or
redeemed at a price lower than the purchase price. Capital gains or losses are
also realized upon the sale of securities at

4
<PAGE> 47

prices that differ from their cost. The market prices of fixed-income securities
generally fall when interest rates rise. Conversely, the market prices of
fixed-income securities generally rise when interest rates fall.

The Portfolio may invest in securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities which are supported by any of the
following: (a) the full faith and credit of the U.S. Government, (b) the right
of the issuer to borrow an amount limited to a specific line of credit from the
U.S. Government, (c) discretionary authority of the U.S. Government agency or
instrumentality, or (d) the credit of the instrumentality. Such agencies or
instrumentalities include, but are not limited to, the Federal National Mortgage
Association, the Government National Mortgage Association, Federal Land Banks,
and the Farmer's Home Administration. Such securities are referred to as "U.S.
Government securities".

Additional Risks of Investing in Lower Rated Debt Securities. Additional
risks of lower rated securities include limited liquidity and secondary market
support. As a result, the prices of debt securities may decline rapidly in the
event a significant number of holders decide to sell. Changes in expectations
regarding an individual issuer, an industry or lower rated debt securities
generally could reduce market liquidity for such securities and make their sale
by the Portfolio more difficult, at least in the absence of price concessions.
Reduced liquidity could also create difficulties in accurately valuing such
securities at certain times. The lower rated debt market has grown primarily
during a period of long economic expansion and it is uncertain how it would
perform during an economic downturn. An economic downturn or an increase in
interest rates could severely disrupt the market for lower rated debt and
adversely affect the value of outstanding securities and the ability of the
issuers to repay principal and interest. See "Investment Objectives and
Policies" in the Prospectus for a further discussion of risk factors associated
with investments in lower rated debt securities, which are not generally meant
for short-term investment.

EMERGING GROWTH PORTFOLIO

The Portfolio seeks capital appreciation.

The following investment techniques, subject to the Investment Restrictions
below, may be employed by the Portfolio. These techniques inherently involve the
assumption of a higher degree of risk than normal and the possibility of more
volatile price fluctuations.

Restricted Securities. The Portfolio may invest up to fifteen percent
of the value of its net assets in restricted securities (i.e., securities
which may not be sold without registration under the Securities Act of 1933)
and in other securities that are not readily marketable, including repurchase
agreements maturing in more than seven days. Restricted securities are
generally purchased at a discount from the market price of unrestricted
securities of the same issuer. Investments in restricted securities are not
readily marketable without some time delay. Investments in securities which
have no readily available market value are valued at fair value as determined
in good faith by the Fund's Trustees. Ordinarily, the Portfolio would invest in
restricted securities only when it receives the issuer's commitment to register
the securities without expense to the Portfolio. However, registration and
underwriting expenses (which may range from seven percent to 15% of the gross
proceeds of the securities sold) may be paid by the Portfolio. A Portfolio
position in restricted securities might adversely affect the liquidity and
marketability of such securities, and the Portfolio might not be able to
dispose of its holdings in such securities at reasonable price levels.

Warrants. 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 within certain periods of time. The purchaser of a warrant
expects that the market price of the security will exceed the purchase price of
the warrant plus the exercise price of the warrant, thus giving him a profit. Of
course, since 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.

5
<PAGE> 48

GLOBAL EQUITY PORTFOLIO

The investment objective of the Portfolio is to provide long-term growth of
capital.

The Portfolio may invest in the securities of foreign issuers in the form
of American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs")
or other securities convertible into securities of foreign issuers. These
securities may not necessarily be denominated in the same currency as the
securities into which they may be converted but rather in the currency of the
market in which they are traded. ADRs are receipts typically issued by an
American bank or trust company which evidence ownership of underlying securities
issued by a foreign corporation. EDRs are receipts issued in Europe by banks or
depositories which evidence a similar ownership arrangement. Generally, ADRs in
registered form, are designed for use in United States securities markets and
EDRs, in bearer form, are designed for use in European securities markets.

GOVERNMENT PORTFOLIO

The Portfolio seeks to provide investors with a high current return
consistent with preservation of capital. The Portfolio invests primarily in U.S.
Government securities, related options, futures contracts and options on futures
contracts. The Portfolio may invest in other government related securities and
in repurchase agreements fully collateralized by U.S. Government securities. The
other government related securities include mortgage-related and mortgage-backed
securities and certificates issued by financial institutions or broker-dealers
representing "stripped" mortgage-related securities. Repurchase agreements will
be entered into with domestic banks or broker-dealers deemed creditworthy by the
Portfolio's Adviser solely for purposes of investing the Portfolio's cash
reserves or when the Portfolio is in a temporary defensive posture.

One type of mortgage-related securities in which the Portfolio invests are
those which are issued or guaranteed by an agency or instrumentality of the U.S.
Government, though not necessarily by the U.S. Government itself. One such type
of mortgage-related security is a Government National Mortgage Association
("GNMA") Certificate. GNMA Certificates are backed as to principal and interest
by the full faith and credit of the U.S. Government. Another type is a Federal
National Mortgage Association ("FNMA") Certificate. Principal and interest
payments of FNMA Certificates are guaranteed only by FNMA itself, not by the
full faith and credit of the U.S. Government. A third type of mortgage-related
security in which the Portfolio may invest is a Federal Home Loan Mortgage
Association ("FHLMC") Participation Certificate. This type of security is backed
by FHMLC as to payment of principal and interest but, like a FNMA security, it
is not backed by the full faith and credit of the U.S. Government.

The Portfolio seeks to obtain a high return from the following sources:

- interest paid on the Portfolio's portfolio securities;

- premiums earned upon the expiration of options written;

- net profits from closing transactions; and

- net gains from the sale of portfolio securities on the exercise of
options or otherwise.

The Portfolio is not designed for investors seeking long-term capital
appreciation. Moreover, varying economic and market conditions may affect the
value of and yields on debt securities and opportunities for gains from an
option writing program. Accordingly, there is no assurance that the Portfolio's
investment objective will be achieved.

GNMA Certificates

Government National Mortgage Association. The Government National Mortgage
Association is a wholly-owned corporate instrumentality of the United States
within the U.S. Department of Housing and Urban Development. GNMA's principal
programs involve its guarantees of privately issued securities backed by pools
of mortgages.

Nature of GNMA Certificates. GNMA Certificates are mortgage-backed
securities. The Certificates evidence part ownership of a pool of mortgage
loans. The Certificates which the Portfolio purchases are of the

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modified pass-through type. Modified pass-through Certificates entitle the
holder to receive all interest and principal payments owed on the mortgage pool,
net of fees paid to the GNMA Certificate issuer and GNMA, regardless of whether
or not the mortgagor actually makes the payment.

GNMA Certificates are backed by mortgages and, unlike most bonds, their
principal amount is paid back by the borrower over the length of the loan rather
than in a lump sum at maturity. Principal payments received by the Portfolio
will be reinvested in additional GNMA Certificates or in other permissible
investments.

GNMA Guarantee. The National Housing Act authorizes GNMA to guarantee the
timely payment of principal of and interest on securities backed by a pool of
mortgages insured by the Federal Housing Administration ("FHA") or the Farmers
Home Administration or guaranteed by the Veterans Administration ("VA"). The
GNMA guarantee is backed by the full faith and credit of the United States. GNMA
is also empowered to borrow without limitation from the U.S. Treasury if
necessary to make any payments required under its guarantee.

Life of GNMA Certificates. The average life of a GNMA Certificate is likely
to be substantially less than the original maturity of the mortgage pools
underlying the securities. Prepayments of principal by mortgagors and mortgage
foreclosures will result in the return of a portion of principal invested before
the maturity of the mortgages in the pool.

As prepayment rates of individual mortgage pools will vary widely, it is
not possible to predict accurately the average life of a particular issue of
GNMA Certificates. However, statistics published by the FHA are normally used as
an indicator of the expected average life of GNMA Certificates. These statistics
indicate that the average life of single-family dwelling mortgages with 25-30
year maturities (the type of mortgages backing the vast majority of GNMA
Certificates) is approximately twelve years. For this reason, it is customary
for pricing purposes to consider GNMA Certificates as 30-year mortgage-backed
securities which prepay fully in the twelfth year.

Yield Characteristics of GNMA Certificates. The coupon rate of interest of
GNMA Certificates is lower than the interest rate paid on the VA-guaranteed or
FHA-insured mortgages underlying the Certificates, but only by the amount of the
fees paid to GNMA and the GNMA Certificate issuer. For the most common type of
mortgage pool, containing single-family dwelling mortgages, GNMA receives an
annual fee of 0.06 of one percent of the outstanding principal for providing its
guarantee, and the GNMA Certificate issuer is paid an annual servicing fee of
0.44 of one percent for assembling the mortgage pool and for passing through
monthly payments of interest and principal to Certificate holders.

The coupon rate by itself, however, does not indicate the yield which will
be earned on the Certificates for the following reasons:

1.Certificates are usually issued at a premium or discount, rather than at
par.

2.After issuance, Certificates usually trade in the secondary market at a
premium or discount.

3.Interest is paid monthly rather than semi-annually as is the case for
traditional bonds. Monthly compounding has the effect of raising the
effective yield earned on GNMA Certificates.

4.The actual yield of each GNMA Certificate is influenced by the prepayment
experience of the mortgage pool underlying the Certificate. If mortgagors
prepay their mortgages, the principal returned to Certificate holders may
be reinvested at higher or lower rates.

In quoting yields for GNMA Certificates, the customary practice is to
assume that the Certificates will have a twelve-year life. Compared on this
basis, GNMA Certificates have historically yielded roughly 1/4 of one percent
more than high grade corporate bonds and 1/2 of one percent more than U.S.
Government and U.S. Government agency bonds. As the life of individual pools may
vary widely, however, the actual yield earned on any issue of GNMA Certificates
may differ significantly from the yield estimated on the assumption of a
twelve-year life.

Market for GNMA Certificates. Since the inception of the GNMA
mortgage-backed securities program in 1970, the amount of GNMA Certificates
outstanding has grown rapidly. The size of the market and the

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<PAGE> 50

active participation in the secondary market by securities dealers and many
types of investors make GNMA Certificates highly liquid instruments. Quotes for
GNMA Certificates are readily available from securities dealers and depend on,
among other things, the level of market rates, the Certificate's coupon rate and
the prepayment experience of the pool of mortgages backing each Certificate.

FNMA Securities

The Federal National Mortgage Association ("FNMA") was established in 1938
to create a secondary market in mortgages insured by the FHA. 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 principal and interest payments made and owed on the
underlying pool. FNMA guarantees timely payment of interest and principal on
FNMA Certificates. The FNMA guarantee is not backed by the full faith and credit
of the United States.

FHLMC Securities

The Federal Home Loan Mortgage Corporation ("FHLMC") was created in 1970 to
promote development of a nationwide secondary market in conventional residential
mortgages. The FHLMC issues two types of mortgage pass-through securities
("FHLMC Certificates"): 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. The FHLMC guarantees timely monthly
payment of interest on PCs and the ultimate payment of principal. GMCs also
represent a pro rata interest in a pool of mortgages. However, these instruments
pay interest semiannually and return principal once a year in guaranteed minimum
payments. The expected average life of these securities is approximately ten
years. The FHLMC guarantee is not backed by the full faith and credit of the
United States.

Collateralized Mortgage Obligations

Collateralized mortgage obligations are debt obligations issued generally
by finance subsidiaries or trusts which are secured by mortgage-backed
certificates, including GNMA Certificates, FHLMC Certificates and FNMA
Certificates, together with certain portfolios and other collateral. Scheduled
distributions on the mortgage-backed certificates pledged to secure the
collateralized mortgage obligations, together with certain portfolios and other
collateral and reinvestment income thereon at an assumed reinvestment rate, will
be sufficient to make timely payments of interest on the obligations and to
retire the obligations not later than their stated maturity. Since the rate of
payment of principal of any collateralized mortgage obligation will depend on
the rate of payment (including prepayments) of the principal of the mortgage
loans underlying the mortgage-backed certificates; the actual maturity of the
obligation could occur significantly earlier than its stated maturity.
Collateralized mortgage obligations may be subject to redemption under certain
circumstances. The rate of interest borne by collateralized mortgage obligations
may be either fixed or floating. In addition, certain collateralized mortgage
obligations do not bear interest and are sold at a substantial discount (i.e., a
price less than the principal amount). Purchases of collateralized mortgage
obligations at a substantial discount involves a risk that the anticipated yield
on the purchase may not be realized if the underlying mortgage loans prepay at a
slower than anticipated rate, since the yield depends significantly on the rate
of prepayment of the underlying mortgages. Conversely, purchases of
collateralized mortgage obligations at a premium involve additional risk of loss
of principal in the event of unanticipated prepayments of the mortgage loans
underlying the mortgage-backed certificates since the premium may not have been
fully amortized at the time the obligation is repaid. The market value of
collateralized mortgage obligations purchased at a substantial premium of
discount is extremely volatile and the effects of prepayments on the underlying
mortgage loans may increase such volatility.

Although payment of the principal of and interest on the mortgage-backed
certificates pledged to secure collateralized mortgage obligations may be
guaranteed by GNMA, FHLMC or FNMA, the collateralized mortgage obligations
represent obligations solely of their issuers and are not insured or guaranteed
by GNMA, FHLMC, FNMA or any other governmental agency or instrumentality, or by
any other person or entity. The

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issuers of collateralized mortgage obligations typically have no significant
assets other than those pledged as collateral for the obligations.

MONEY MARKET PORTFOLIO

The Portfolio seeks protection of capital and high current income by
investing in money market instruments.

The Portfolio seeks to maintain a net asset value of $1.00 per share for
purchases and redemptions. To do so, the Portfolio uses the amortized cost
method of valuing the Portfolio's securities pursuant to Rule 2a-7 under the
Investment Company Act of 1940 (the "1940 Act"), certain requirements of which
are summarized below.

In accordance with Rule 2a-7, the Portfolio is required to maintain a
dollar-weighted average portfolio maturity of 90 days or less, purchase only
instruments having remaining maturities of 13 months or less and invest only in
U.S. dollar denominated securities determined in accordance with procedures
established by the Trustees to present minimal credit risks and which are rated
in one of the two highest rating categories for debt obligations by at least two
nationally recognized statistical rating organizations (or one rating
organization if the instrument was rated by only one such organization) or, if
unrated, are of comparable quality as determined in accordance with procedures
established by the Trustees. The nationally recognized statistical rating
organizations currently rating instruments of the type the Portfolio may
purchase are Moody's Investors Service, Inc., Standard & Poor's Corporation,
Fitch Investors Services, Inc., Duff and Phelps, Inc. and IBCA Limited and IBCA
Inc. See Appendix hereto. See the Prospectus for the Portfolio's maturity
requirements.

In addition, the Portfolio will not invest more than five percent of its
total assets in the securities (including the securities collateralizing a
repurchase agreement) of, or subject to puts issued by, a single issuer, except
that (i) the Portfolio may invest more than five percent of its total assets in
a single issuer for a period of up to three business days in certain limited
circumstances, (ii) the Portfolio may invest in obligations issued or guaranteed
by the U.S. Government without any such limitation, and (iii) the limitation
with respect to puts does not apply to unconditional puts if no more than ten
percent of the Portfolio's total assets is invested in securities issued or
guaranteed by the issuer of the unconditional put. Investments in rated
securities not rated in the highest category by at least two rating
organizations (or one rating organization if the instrument was rated by only
one such organization), and unrated securities not determined by the Trustees to
be comparable to those rated in the highest category, will be limited to five
percent of the Portfolio's total assets, with the investment in any one such
issuer being limited to no more than the greater of one percent of the
Portfolio's total assets or $1,000,000. As to each security, these percentages
are measured at the time the Portfolio purchases the security. There can be no
assurance that the Portfolio will be able to maintain a stable net asset value
of $1.00 per share.

MULTIPLE STRATEGY PORTFOLIO

The Portfolio seeks a high total investment return consistent with prudent
risk through a fully managed investment policy utilizing equity securities,
primarily common stocks of large capitalization companies, as well as investment
grade intermediate and long term debt securities and money market securities.

REPURCHASE AGREEMENTS

Each Portfolio may enter into repurchase agreements with broker-dealers or
domestic banks (or a foreign branch or subsidiary thereof). A repurchase
agreement is a short-term investment in which the purchaser (i.e., the
Portfolio) acquires ownership of a debt security and the seller agrees to
repurchase the obligation at a future time and set price, usually not more than
seven days from the date of purchase, thereby determining the yield during the
purchaser's holding period. Repurchase agreements are collateralized by the
underlying debt securities and may be considered to be loans under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Portfolio will
make payment for such securities only upon physical delivery or evidence of book
entry transfer to the account of a custodian or bank acting as agent. The seller
under a repurchase agreement is required to maintain the value of the underlying
securities marked to market daily at not less

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than the repurchase price. The underlying securities (normally securities of the
U.S. Government, or its agencies and instrumentalities), may have maturity dates
exceeding one year. The Portfolio does not bear the risk of a decline in value
of the underlying security unless the seller defaults under its repurchase
obligation. See the Prospectus for further information.

FORWARD COMMITMENTS

The Government Portfolio and the Domestic Strategic Income Portfolio may
engage in Forward Commitment purchases and sales. Relative to a Forward
Commitment purchase, the Portfolio maintains a segregated account (which is
marked to market daily) of cash or U.S. Government securities (which may have
maturities which are longer than the term of the Forward Commitment) with the
Portfolio's custodian in an aggregate amount equal to the amount of its
commitment as long as the obligation to purchase continues. Since the market
value of both the securities subject to the Forward Commitment and the
securities held in the segregated account may fluctuate, the use of Forward
Commitments may magnify the impact of interest rate changes on the Portfolio's
net asset value.

A Forward Commitment sale is covered if the Portfolio owns or has the right
to acquire the underlying securities subject to the Forward Commitment. A
Forward Commitment sale is for cross-hedging purposes if it is not covered, but
is designed to provide a hedge against a decline in value of a security which
the Portfolio owns or has the right to acquire. Only the Government Portfolio
may engage in forward commitment transactions for cross-hedging purposes. In
either circumstance, the Portfolio maintains in a segregated account (which is
marked to market daily) either the security covered by the Forward Commitment or
cash or U.S. Government securities (which may have maturities which are longer
than the term of the Forward Commitment) with the Portfolio's custodian in an
aggregate amount equal to the amount of its commitment as long as the obligation
to sell continues. By entering into a Forward Commitment sale transaction, the
Portfolio foregoes or reduces the potential for both gain and loss in the
security which is being hedged by the Forward Commitment sale.

OPTIONS, FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS

The Common Stock Portfolio, Emerging Growth Portfolio, Global Equity
Portfolio, Government Portfolio and Multiple Strategy Portfolio may engage in
transactions in options, futures contracts and options on futures contracts. Set
forth below is certain additional information regarding options, futures
contracts and options on futures contracts.

WRITING CALL AND PUT OPTIONS

Purpose. The principal reason for writing options is to obtain, through
receipt of premiums, a greater current return than would be realized on the
underlying securities alone. A Portfolio's current return can be expected to
fluctuate because premiums earned from an option writing program and dividend or
interest income yields on portfolio securities vary as economic and market
conditions change. Writing options on portfolio securities also is likely to
result in a higher portfolio turnover.

Writing Options. The purchaser of a call option pays a premium to the
writer (i.e., the seller) for the right to buy the underlying security from the
writer at a specified price during a certain period. The Common Stock Portfolio,
Emerging Growth Portfolio, Global Equity Portfolio and the Multiple Strategy
Portfolio write call options only on a covered basis. The Government Portfolio
writes call options either on a covered basis or for cross-hedging purposes. A
call option is covered if at all times during the option period the Portfolio
owns or has the right to acquire securities of the type that it would be
obligated to deliver if any outstanding option were exercised. Thus, the
Government Portfolio may write options on mortgage-related or other U.S.
Government securities or forward commitments of such securities. An option is
for cross-hedging purposes if it is not covered, but is designed to provide a
hedge against a security which the Portfolio owns or has the right to acquire.
In such circumstances, the Government Portfolio maintains in a segregated
account with the Portfolio's Custodian, cash or U.S. Government securities in an
amount not less than the market value of the underlying security, marked to
market daily, while the option is outstanding.

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The purchaser of a put option pays a premium to the writer (i.e., the
seller) for the right to sell the underlying security to the writer at a
specified price during a certain period. A Portfolio would write put options
only on a secured basis, which means that, at all times during the option
period, the Portfolio would maintain in a segregated account with its Custodian
cash, cash equivalents or U.S. Government securities in an amount of not less
than the exercise price of the option, or would hold a put on the same
underlying security at an equal or greater exercise price.

Closing Purchase Transactions and Offsetting Transactions. In order to
terminate its position as a writer of a call or put option, a Portfolio could
enter into a "closing purchase transaction," which is the purchase of a call
(put) on the same underlying security and having the same exercise price and
expiration date as the call (put) previously written by the Portfolio. The
Portfolio would realize a gain (loss) if the premium plus commission paid in the
closing purchase transaction is less (greater) than the premium it received on
the sale of the option. A Portfolio would also realize a gain if an option it
has written lapses unexercised.

A Portfolio could write options that are listed on an exchange as well as
options which are privately negotiated in over-the-counter transactions. A
Portfolio could close out its position as writer of an option only if a liquid
secondary market exists for options of that series, but there is no assurance
that such a market will exist, particularly in the case of over-the-counter
options, since they can be closed out only with the other party to the
transaction. Alternatively, a Portfolio could purchase an offsetting option,
which would not close out its position as a writer, but would provide an asset
of equal value to its obligation under the option written. If a Portfolio is not
able to enter into a closing purchase transaction or to purchase an offsetting
option with respect to an option it has written, it will be required to maintain
the securities subject to the call or the collateral underlying the put until a
closing purchase transaction can be entered into (or the option is exercised or
expires), even though it might not be advantageous to do so.

The exercise price of call options may be below ("in-the-money"), equal to
("at-the-money"), or above ("out-of-the-money") the current market value of the
underlying securities or futures contracts at the time the options are written.
The converse applies to put options.

Risks of Writing Options. By writing a call option, a Portfolio loses the
potential for gain on the underlying security above the exercise price while the
option is outstanding; by writing a put option a Portfolio might become
obligated to purchase the underlying security at an exercise price that exceeds
the then current market price.

PURCHASING CALL AND PUT OPTIONS

A Portfolio could purchase call options to protect (i.e., hedge) against
anticipated increases in the prices of securities it wishes to acquire. In
addition, the Common Stock Portfolio, Emerging Growth Portfolio, Global Equity
Portfolio and Multiple Strategy Portfolio may purchase call options for capital
appreciation. Since the premium paid for a call option is typically a small
fraction of the price of the underlying security, a given amount of funds will
purchase call options covering a much larger quantity of such security than
could be purchased directly. By purchasing call options, a Portfolio could
benefit from any significant increase in the price of the underlying security to
a greater extent than had it invested the same amount in the security directly.
However, because of the very high volatility of option premiums, a Portfolio
would bear a significant risk of losing the entire premium if the price of the
underlying security did not rise sufficiently, or if it did not do so before the
option expired.

Conversely, put options could be purchased to protect (i.e., hedge) against
anticipated declines in the market value of either specific portfolio securities
or of a Portfolio's assets generally. In addition, the Common Stock Portfolio,
Emerging Growth Portfolio, Global Equity Portfolio and Multiple Strategy
Portfolio may purchase put options for capital appreciation in anticipation of a
price decline in the underlying security and a corresponding increase in the
value of the put option. The purchase of put options for capital appreciation
involves the same significant risk of loss as described above for call options.

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In any case, the purchase of options for capital appreciation would
increase a Portfolio's volatility by increasing the impact of changes in the
market price of the underlying securities on the Portfolio's net asset value.

The Government Portfolio will not purchase call or put options on
securities if as a result, more than ten percent of its net assets would be
invested in premiums on such options.

A Portfolio may purchase either listed or over-the-counter options.

RISK FACTORS APPLICABLE TO OPTIONS ON U.S. GOVERNMENT SECURITIES (GOVERNMENT
PORTFOLIO ONLY)

Treasury Bonds and Notes. Because trading interest in options written on
Treasury bonds and notes tends to center on the most recently auctioned issues,
the exchanges will not continue indefinitely to introduce options with new
expirations to replace expiring options on particular issues. Instead, the
expirations introduced at the commencement of options trading on a particular
issue will be allowed to run their course, with the possible addition of a
limited number of new expirations as the original ones expire. Options trading
on each issue of bonds or notes will thus be phased out as new options are
listed on more recent issues, and options representing a full range of
expirations will not ordinarily be available for every issue on which options
are traded.

Treasury Bills. Because the deliverable Treasury bill changes from week to
week, writers of Treasury bill calls cannot provide in advance for their
potential exercise settlement obligations by acquiring and holding the
underlying security. However, if the Portfolio holds a long position in Treasury
bills with a principal amount of the securities deliverable upon exercise of the
option, the position may be hedged from a risk standpoint by the writing of a
call option. For so long as the call option is outstanding, the Portfolio will
hold the Treasury bills in a segregated account with its Custodian so that it
will be treated as being covered.

Mortgage-Related Securities. The following special considerations will be
applicable to options on mortgage-related securities. Currently such options are
only traded over-the-counter. Since the remaining principal balance of a
mortgage-related security declines each month as a result of mortgage payments,
the Portfolio as a writer of a mortgage-related call holding mortgage-related
securities as "cover" to satisfy its delivery obligation in the event of
exercise may find that the mortgage-related securities it holds no longer have a
sufficient remaining principal balance for this purpose. Should this occur, the
Portfolio will purchase additional mortgage-related securities from the same
pool (if obtainable) or replacement mortgage-related securities in the cash
market in order to maintain its cover. A mortgage-related security held by the
Portfolio to cover an option position in any but the nearest expiration month
may cease to represent cover for the option in the event of a decline in the
coupon rate at which new pools are originated under the FHA/VA loan ceiling in
effect at any given time. If this should occur, the Portfolio will no longer be
covered, and the Portfolio will either enter into a closing purchase transaction
or replace such mortgage-related security with a mortgage-related security which
represents cover. When the Portfolio closes its position or replaces such
mortgage-related security, it may realize an unanticipated loss and incur
transaction costs.

OPTIONS ON STOCK INDEXES (COMMON STOCK, EMERGING GROWTH PORTFOLIO, GLOBAL EQUITY
AND MULTIPLE STRATEGY PORTFOLIOS ONLY)

Options on stock indexes are similar to options on stock, but the delivery
requirements are different. Instead of giving the right to take or make delivery
of stock at a specified price, an option on a stock index gives the holder the
right to receive an amount of cash upon exercise of the option. Receipt of this
cash amount will depend upon the closing level of the stock index upon which the
option is based being greater than (in the case of a call) or less than (in the
case of a put) the exercise price of the option. The amount of cash received
will be the difference between the closing price of the index and the exercise
price of the option, multiplied by a specified dollar multiple. The writer of
the option is obligated, in return for the premium received, to make delivery of
this amount.

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are also based on an industry or market segment such as the AMEX Oil and Gas
Index or the Computer and Business Equipment Index. A stock index fluctuates
with changes in the market values of the stocks included in the index. Options
are currently traded on The Chicago Board Options Exchange, the American Stock
Exchange and other exchanges.

Gain or loss to a Portfolio on transactions in stock index options will
depend on price movements in the stock market generally (or in a particular
industry or segment of the market) rather than price movements of individual
securities. As with stock options, the Portfolio may offset its position in
stock index options prior to expiration by entering into a closing transaction
on an exchange, or it may let the option expire unexercised.

FOREIGN CURRENCY OPTIONS (GLOBAL EQUITY PORTFOLIO ONLY)

The Portfolio may purchase put and call options on foreign currencies to
reduce the risk of currency exchange fluctuation. Premiums paid for such put and
call options will be limited to no more than five percent of the Portfolio's net
assets at any given time. Options on foreign currencies operate similarly to
options on securities, and are trade primarily in the over-the-counter market,
although options on foreign currencies are traded on United States and foreign
exchanges. Exchange-traded options are expected to be purchased by the Portfolio
from time to time and over-the-counter options may also be purchased, but only
when the Adviser believes that a liquid secondary market exists for such
options, although there can be no assurance that a liquid secondary market will
exist for a particular option at any specific time. Options on foreign
currencies are affected by all of those factors which influence foreign exchange
rates and investment generally. See "Investment Practices -- Using Options,
Futures Contracts and Related Options" in the Prospectus.

The value of a foreign currency option is dependent upon the value of the
underlying foreign currency relative to the U.S. dollar. As a result, the price
of the option position may vary with changes in the value of either or both
currencies and has no relationship to the investment merits of a foreign
security. Because foreign currency transactions occurring in the interbank
market (conducted directly between currency traders, usually large commercial
banks, and their customers) involve substantially larger amounts than those that
may be involved in the use of foreign currency options, investors may be
disadvantaged by having to deal in an odd lot market (generally consisting of
transactions of less than $1 million) for the underlying foreign currencies at
prices that are less favorable than for round lots.

There is no systematic reporting of last sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Quotation information available is generally representative of very large
transactions in the interbank market and thus may not reflect relatively smaller
transactions (i.e., less than $1 million) where rates may be less favorable. The
interbank market in foreign currencies is a global, around-the-clock market. To
the extent that the U.S. options markets are closed while the markets for the
underlying currencies remain open, significant price and rate movements may take
place in the underlying markets that cannot be reflected in the options markets.

FUTURES CONTRACTS

The Portfolios may engage in transactions involving futures contracts and
related options in accordance with rules and interpretations of the Commodity
Futures Trading Commission ("CFTC") under which the Fund and its Portfolios are
exempt from registration as a "commodity pool."

Types of Contracts. An interest rate futures contract is an agreement
pursuant to which a party agrees to take or make delivery of a specified debt
security (such as U.S. Treasury bonds, U.S. Treasury notes, U.S. Treasury bills
and GNMA Certificates) at a specified future time and at a specified price.
Interest rate futures contracts also include cash settlement contracts based
upon a specified interest rate such as the London interbank offering rate for
dollar deposits, LIBOR.

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time and the price at which the futures contract is originally struck. No
physical delivery of the underlying stocks in the index is made.

Initial and Variation Margin. In contrast to the purchase or sale of a
security, no price is paid or received upon the purchase or sale of a futures
contract. Initially, a Portfolio is required to deposit with its Custodian in an
account in the broker's name an amount of cash, cash equivalents or liquid high
grade debt securities equal to a percentage (which will normally range between
two and ten percent) of the contract amount. This amount is known as initial
margin. The nature of initial margin in futures transactions is different from
that of margin in securities transactions in that futures contract margin does
not involve the borrowing of funds by the customer to finance the transaction.
Rather, the initial margin is in the nature of a performance bond or good faith
deposit on the contract, which is returned to the Portfolio upon termination of
the futures contract and satisfaction of its contractual obligations. Subsequent
payments to and from the broker, called variation margin, are made on a daily
basis as the price of the underlying securities or index fluctuates, making the
long and short positions in the futures contract more or less valuable, a
process known as marking to market.

For example, when a Portfolio purchases a futures contract and the price of
the underlying security or index rises, that position increases in value, and
the Portfolio receives from the broker a variation margin payment equal to that
increase in value. Conversely, where the Portfolio purchases a futures contract
and the value of the underlying security or index declines, the position is less
valuable, and the Portfolio is required to make a variation margin payment to
the broker.

At any time prior to expiration of the futures contract, the Portfolio may
elect to terminate the position by taking an opposite position. A final
determination of variation margin is then made, additional cash is required to
be paid by or released to the Portfolio, and the Portfolio realizes a loss or a
gain.

Futures Strategies. When a Portfolio anticipates a significant market or
market sector advance, the purchase of a futures contract affords a hedge
against not participating in the advance at a time when the Portfolio is not
fully invested ("anticipatory hedge"). Such purchase of a futures contract
serves as a temporary substitute for the purchase of individual securities,
which may be purchased in an orderly fashion once the market has stabilized. As
individual securities are purchased, an equivalent amount of futures contracts
could be terminated by offsetting sales. A Portfolio may sell futures contracts
in anticipation of or in a general market or market sector decline that may
adversely affect the market value of the Portfolio's securities ("defensive
hedge"). To the extent that the Portfolio's portfolio of securities changes in
value in correlation with the underlying security or index, the sale of futures
contracts substantially reduces the risk to the Portfolio of a market decline
and, by so doing, provides an alternative to the liquidation of securities
positions in the Portfolio with attendant transaction costs. Relative to the
Government Portfolio, ordinarily commissions on futures transactions are lower
than transaction costs incurred in the purchase and sale of mortgage-related and
U.S. Government securities.

In the event of the bankruptcy of a broker through which a Portfolio
engages in transactions in options, futures or related options, the Portfolio
could experience delays and/or losses in liquidating open positions purchased
and/or incur a loss of all or part of its margin deposits with the broker.
Transactions are entered into by a Portfolio only with brokers or financial
institutions deemed creditworthy by the Adviser.

Special Risks Associated with Futures Transactions. There are several risks
connected with the use of futures contracts as a hedging device. These include
the risk of imperfect correlation between movements in the price of the futures
contracts and of the underlying securities, the risk of market distortion, the
illiquidity risk and the risk of error in anticipating price movement.

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<PAGE> 57

Conversely, a Portfolio could buy or sell futures contracts in a lesser dollar
amount than the dollar amount of the securities being hedged if the historical
volatility of the securities being hedged is less than the historical volatility
of the securities underlying the futures contract. It is also possible that the
value of futures contracts held by a Portfolio could decline at the same time as
portfolio securities being hedged; if this occurred, the Portfolio would lose
money on the futures contract in addition to suffering a decline in value in the
portfolio securities being hedged.

There is also the risk that the price of futures contracts may not
correlate perfectly with movements in the securities or index underlying the
futures contract due to certain market distortions. First, all participants in
the futures market are subject to margin depository and maintenance
requirements. Rather than meet additional margin depositary requirements,
investors may close futures contracts through offsetting transactions, which
could distort the normal relationship between the futures market and the
securities or index underlying the futures contract. Second, from the point of
view of speculators, the deposit requirements in the futures market are less
onerous than margin requirements in the securities markets. Therefore, increased
participation by speculators in the futures markets may cause temporary price
distortions. Due to the possibility of price distortion in the futures markets
and because of the imperfect correlation between movements in futures contracts
and movements in the securities underlying them, a correct forecast of general
market trends by the Adviser may still not result in a successful hedging
transaction judged over a very short time frame.

There is also the risk that futures markets may not be sufficiently liquid.
Futures contracts may be closed out only on an exchange or board of trade that
provides a market for such futures contracts. Although a Portfolio intends to
purchase or sell futures only on exchanges and boards of trade where there
appears to be an active secondary market, there can be no assurance that an
active secondary market will exist for any particular contract or at any
particular time. In the event of such illiquidity, it might not be possible to
close a futures position and, in the event of adverse price movement, a
Portfolio would continue to be required to make daily payments of variation
margin. Since the securities being hedged would not be sold until the related
futures contract is sold, an increase, if any, in the price of the securities
may to some extent offset losses on the related futures contract. In such event,
the Portfolio would lose the benefit of the appreciation in value of the
securities.

Successful use of futures is also subject to the Advisers' ability
correctly to predict the direction of movements in the market. For example, if
the Portfolio hedges against a decline in the market, and market prices instead
advance, the Portfolio will lose part or all of the benefit of the increase in
value of its securities holdings because it will have offsetting losses in
futures contracts. In such cases, if the Portfolio has insufficient cash, it may
have to sell portfolio securities at a time when it is disadvantageous to do so
in order to meet the daily variation margin.

CFTC regulations require, among other things, (i) that futures and related
options be used solely for bona fide hedging purposes (or meet certain other
conditions specified in CFTC regulations) and (ii) that a Portfolio not enter
into futures and related options for which the aggregate initial margin and
premiums exceed five percent of the fair market value of a Portfolio's assets.
In order to prevent leverage in connection with the purchase of futures
contracts by a Portfolio, an amount of cash, cash equivalents or liquid high
grade debt securities equal to the market value of the obligation under the
futures contracts (less any related margin deposits) will be maintained in a
segregated account with the Custodian.

Additional Risks to Options and Futures Transactions. Each of the Exchanges
has established limitations governing the maximum number of call or put options
on the same underlying security or futures contract (whether or not covered)
which may be written by a single investor, whether acting alone or in concert
with others (regardless of whether such options are written on the same or
different Exchanges or are held or written on one or more accounts or through
one or more brokers). Option positions of all investment companies advised by
the Adviser are combined for purposes of these limits. An exchange may order the
liquidation of positions found to be in violation of these limits and it may
impose other sanctions or restrictions. These position limits may restrict the
number of listed options which the Portfolio may write.

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<PAGE> 58

Although a Portfolio intends to enter into futures contracts only if there
is an active market for such contracts, there is no assurance that an active
market will exist for the contracts at any particular time. Most U.S. futures
exchanges and boards of trade limit the amount of fluctuation permitted in
futures contract prices during a single trading day. Once the daily limit has
been reached in a particular contract, no trades may be made that day at a price
beyond that limit. It is possible that futures contract prices would move to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses. In such event, and in the event of
adverse price movements, a Portfolio would be required to make daily cash
payments of variation margin. In such circumstances, an increase in the value of
the portion of the portfolio being hedged, if any, may partially or completely
offset losses on the futures contract. However, there is no guarantee that the
price of the securities being hedged will, in fact, correlate with the price
movements in a futures contract and thus provide an offset to losses on the
futures contract.

OPTIONS ON FUTURES CONTRACTS

A Portfolio could also purchase and write options on futures contracts. An
option on a futures contract gives the purchaser the right, in return for the
premium paid, to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put), at a specified
exercise price at any time during the option period. As a writer of an option on
a futures contract, a Portfolio is subject to initial margin and maintenance
requirements similar to those applicable to futures contracts. In addition, net
option premiums received by a Portfolio are required to be included as initial
margin deposits. When an option on a futures contract is exercised, delivery of
the futures position is accompanied by cash representing the difference between
the current market price of the futures contract and the exercise price of the
option. A Portfolio could purchase put options on futures contracts in lieu of,
and for the same purposes as, the sale of a futures contract; at the same time,
it could write put options at a lower strike price (a "put bear spread") to
offset part of the cost of the strategy to the Portfolio. The purchase of call
options on futures contracts in intended to serve the same purpose as the actual
purchase of the futures contract.

Risks of Transactions in Options on Futures Contracts. In addition to the
risks described above which apply to all options transactions, there are several
special risks relating to options on futures. The Advisers will not purchase
options on futures on any exchange unless, in the Advisers' opinion, a liquid
secondary exchange market for such options exists. Compared to the use of
futures, the purchase of options on futures involves less potential risk to a
Portfolio because the maximum amount at risk is the premium paid for the options
(plus transaction costs). However there may be circumstances, such as when there
is no movement in the level of the index, when the use of an option on a future
would result in a loss to the Portfolio when the use of a future would not.

LOANS OF PORTFOLIO SECURITIES

Each of the Portfolios may lend portfolio securities to unaffiliated
brokers, dealers and financial institutions provided that cash equal to 100% of
the market value of the securities loaned is deposited by the borrower with the
particular Portfolio and is maintained each business day. While such securities
are on loan, the borrower is required to pay the Portfolio any income accruing
thereon. Furthermore, the Portfolio may invest the cash collateral in portfolio
securities thereby increasing the return to the Portfolio as well as increasing
the market risk to the Portfolio.

Loans would be made for short-term purposes and subject to termination by
the Portfolio in the normal settlement time, currently five business days after
notice, or by the borrower on one day's notice. Borrowed securities must be
returned when the loan is terminated. Any gain or loss in the market price of
the borrowed securities which occurs during the term of the loan inures to the
Portfolio and its shareholders, but any gain can be realized only if the
borrower does not default. Each Portfolio may pay reasonable finders',
administrative and custodial fees in connection with a loan.

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<PAGE> 59

INVESTMENT RESTRICTIONS

Each Portfolio has adopted the following restrictions which may not be
changed without the approval of the holders of a majority of the outstanding
shares of such Portfolio. Such majority is defined by the 1940 Act as the lesser
of (i) 67% or more of the voting securities present at a meeting, if the holders
of more than 50% of the outstanding voting securities of the Portfolio are
present or represented by proxy; or (ii) more than 50% of the Portfolio's
outstanding voting securities. The percentage limitations need only be met at
the time the investment is made or after relevant action is taken. In addition
to the fundamental investment restrictions set forth in the Prospectus, the
Portfolios are subject to the restrictions set forth below (Those restrictions
that are only applicable to certain Portfolios are noted as such).

THE FOLLOWING RESTRICTIONS ARE APPLICABLE TO THE COMMON STOCK PORTFOLIO, THE
DOMESTIC STRATEGIC INCOME PORTFOLIO, THE EMERGING GROWTH PORTFOLIO, THE GLOBAL
EQUITY PORTFOLIO, THE GOVERNMENT PORTFOLIO, THE MONEY MARKET PORTFOLIO AND THE
MULTIPLE STRATEGY PORTFOLIO:

A Portfolio shall not:

1. Invest in securities of any company if any officer or trustee of the
Portfolio or of the Adviser owns more than one-half of one percent of
the outstanding securities of such company, and such officers and
trustees own more than five percent of the outstanding securities of
such issuer;

2. Invest in companies for the purpose of acquiring control or management
thereof;

3. Underwrite securities of other companies, except insofar as a Portfolio
might be deemed to be an underwriter for purposes of the Securities Act
of 1933 in the resale of any securities owned by the Portfolio; or

4. Lend its portfolio securities in excess of ten percent of its total
assets, both taken at market value provided that any loans shall be in
accordance with the guidelines established for such loans by the Board
of Trustees of the Portfolio as described under "Loans of Portfolio
Securities," including the maintenance of collateral from the borrower
equal at all times to the current market value of the securities loaned.

THE FOLLOWING ADDITIONAL RESTRICTIONS ARE APPLICABLE TO THE DOMESTIC STRATEGIC
INCOME PORTFOLIO:

The Portfolio shall not:

2. Invest in securities of other investment companies except as part of a
merger, consolidation or other acquisition;

3. Make any investment in real estate, commodities or commodities
contracts, except that the Portfolio may purchase securities secured by
real estate or interests therein; or issued by companies, including real
estate investment trusts, which invest in real estate or interests
therein;

4. Invest in interests in oil, gas, or other mineral exploration or
development programs;

6. Lend money, except that the Portfolio may invest in repurchase
agreements in accordance with applicable requirements set forth in the
Prospectus and may acquire debt securities which the Portfolio's
investment policies permit. The Portfolio will not invest in repurchase
agreements maturing in more than seven days (unless subject to a demand
feature) if any such investment, together with any illiquid securities
(including securities which are subject to legal or contractual

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<PAGE> 60

restrictions on resale) held by the Portfolio, exceeds ten percent of
the market or other fair value of its total net assets. See "Repurchase
Agreements";

8. Make short sales of securities, unless at the time of the sale the
Portfolio owns or has the right to acquire an equal amount of such
securities;

9. Purchase securities on margin, except that the Portfolio may obtain
such short-term credits as may be necessary for the clearance of
purchases and sales of securities;

10. Invest more than five percent of its assets in companies having a
record, together with predecessors, of less than three years continuous
operation;

11. Write put or call options;

12. Borrow in excess of ten percent of the market or other fair value of
its total assets, or pledge its assets to an extent greater than five
percent of the market or other fair value of its total assets. Any such
borrowings shall be from banks and shall be undertaken only as a
temporary measure for extraordinary or emergency purposes. Deposits in
escrow in connection with the writing of covered call or secured put
options, or in connection with the purchase or sale of futures contracts
and related options are not deemed or to be a pledge or other
encumbrance; or

13. Invest in the securities of a foreign issuer if, at the time of
acquisition, more than 25% of the value of the Portfolio's total assets
would be invested in such securities.

THE FOLLOWING RESTRICTIONS ARE APPLICABLE TO THE EMERGING GROWTH PORTFOLIO:

The Portfolio shall not:

1. Invest directly in real estate interests of any nature, although the
Portfolio may invest indirectly through media such as real estate
investment trusts;

2. Invest in commodities or commodity contracts, except that the Portfolio
may enter into transactions in futures contracts or related options;

3. Issue any of its securities for (a) services or (b) property other than
cash or securities (including securities of which the Portfolio is the
issuer), except as a dividend or distribution to its shareholders in
connection with a reorganization;

4. Issue senior securities and shall not borrow money except from banks as
a temporary measure for extraordinary or emergency purposes and in an
amount not exceeding five percent of the Portfolio's total assets.
Notwithstanding the foregoing, the Portfolio may enter into transactions
in options, futures contracts and related options and may make margin
deposits and payments in connection therewith;

5. Invest more than 25% of the value of its total assets in securities of
issuers in any particular industry (except obligations of the United
States Government, its agencies or instrumentalities and repurchase
agreements secured hereby); provided, however, that this limitation
excludes shares of other open-end investment companies owned by the
Portfolio but includes the Portfolio's pro rata portion of the
securities and other assets owned by any such investment company;

6. Invest in the securities of investment companies, except (a) that the
Portfolio may invest up to ten percent of its assets in the securities
of registered closed-end investment companies, provided that the
Portfolio acquires no more than five percent of the voting stock of any
such company which has a policy of concentrating investments in a
particular industry or group of industries or more than three percent of
the voting stock of such a company which does not have this policy; and
(b) to acquire shares of other open-end investment companies to the
extent permitted by rule or order of the

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<PAGE> 61

Securities and Exchange Commission exempting the Portfolio from the
limitation imposed by Section 12(d)(1) of the Investment Company Act of
1940;

7. Sell short or borrow for short sales. Short sales "against the box" are
not subject to this limitation;

8. With respect to 75% of its assets, invest more than five percent of its
assets in the securities of any one issuer (except obligations of the
United States Government, it agencies or instrumentalities and
repurchase agreements secured thereby) or purchase more than ten percent
of the outstanding voting securities of any one issuer. Neither
limitation shall apply to the acquisition of shares of other open-end
investment companies to the extent permitted by rule or order of the
Securities and Exchange Commission exempting the Portfolio from the
limitation imposed by Section 12(d)(1) of the Investment Company Act of
1940;

9. Invest in warrants in excess of five percent of its net assets
(including, but not to exceed two percent in warrants which are not
listed on the New York or American Stock Exchanges);

10. Purchase securities of issuers which have a record of less than three
years continuous operation if such purchase would cause more than five
percent of the Portfolio's total assets to be invested in securities of
such issuers; provided, however, that this limitation excludes shares of
other open-end investment companies owned by the Portfolio but includes
the Portfolio's pro rata portion of the securities and other assets
owned by any such investment company;

11. Invest more than fifteen percent of its net assets in illiquid
securities, including securities that are not readily marketable,
restricted securities and repurchase agreements that have a maturity
of more than seven days. Notwithstanding the foregoing, this
limitation excludes shares of other open-end investment companies
owned by the Portfolio but includes the Portfolio's pro rata portion
of the securities and other assets owned by any such investment company;

12. Invest in interests in oil, gas, or other mineral exploration or
developmental programs, except through the purchase of liquid securities
of companies which engage in such businesses; or

13. Pledge, mortgage or hypothecate its portfolio securities or other
assets to the extent that the percentage of pledged assets plus the
sales load exceeds ten percent of the offering price of the Portfolio's
shares.

THE FOLLOWING RESTRICTIONS ARE APPLICABLE TO THE GLOBAL EQUITY PORTFOLIO:

The Portfolio shall not:

1. Invest more than 25% of the value of its total assets in securities of
issuers in any particular industry (except obligations of the United
States Government, its agencies or instrumentalities and repurchase
agreements secured thereby); provided, however, that this limitation
excludes shares of other open-end investment companies owned by the
Portfolio but includes the Portfolio's pro rata portion of the
securities and other assets owned by any such investment company;

2. With respect to 75% of its assets, invest more than five percent of its
assets in the securities of any one issuer (except obligations of the
United States Government, its agencies or instrumentalities and
repurchase agreements secured thereby) or purchase more than ten percent
of the outstanding voting securities of any one issuer. Neither
limitation shall apply to the acquisition of shares of other open-end
investment companies to the extent permitted by rule or order of the
Securities and Exchange Commission exempting the Portfolio from the
limitation imposed by Section 12(d)(1) of the Investment Company Act of
1940;

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<PAGE> 62

writing of options or in connection with the purchase or sale of forward
contracts, futures, foreign currency futures and related options are not
deemed to be a pledge or other encumbrance;

4. Lend money except through the purchase of (i) United States and foreign
government securities, commercial paper, bankers' acceptances,
certificates of deposit similar evidences of indebtedness, both foreign
and domestic, and (ii) repurchase agreements; or lend securities in an
amount exceeding 15% of the total assets of the Portfolio. The purchase
of a portion of an issue of securities described under (i) above
distributed publicly, whether or not the purchase is made on the
original issuance, is not considered the making of a loan;

5. Make short sales of securities, unless at the time of the sale it owns
or has the right to acquire an equal amount of such securities; provided
that this prohibition does not apply to the writing of options or the
sale of forward contracts, futures, foreign currency futures or related
options;

6. Purchase securities on margin but the Portfolio may obtain such
short-term credits as may be necessary for the clearance of purchases
and sales of securities. The deposit or payment by the Portfolio of
initial or maintenance margin in connection with forward contracts,
futures, foreign currency futures or related options is not considered
the purchase of a security on margin;

7. Buy or sell real estate or interests in real estate including real
estate limited partnerships, provided that the foregoing prohibition
does not apply to a purchase and sale of publicly traded (i) securities
which are secured by real estate, (ii) securities representing interests
in real estate, and (iii) securities of companies principally engaged in
investing or dealing in real estate;

8. Invest in commodities or commodity contracts, except that the Portfolio
may enter into transactions in options, futures contracts or related
options including foreign currency futures contracts and related options
and forward contracts;

9. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Portfolio from (i)
making and collateralizing any permitted borrowings, (ii) making any
permitted loans of its portfolio securities or (iii) entering into
repurchase agreements, utilizing options, futures contracts, options on
futures contracts, forward contracts, forward commitments and other
investment strategies and instruments that would be considered "senior
securities" but for the maintenance by the Portfolio of a segregated
account with its custodian or some other form of "cover";

10. Invest in the securities of other open-end investment companies, or
invest in the securities of closed-end investment companies except (a)
through purchase in the open market in a transaction involving no
commission or profit to a sponsor or dealer (other than the customary
broker's commission) or as part of a merger, consolidation or other
acquisition; or (b) to acquire shares of other open-end investment
companies to the extent permitted by rule or order of the Securities and
Exchange Commission exempting the Portfolio from the limitation imposed
by Section 12(d)(1) of the Investment Company Act of 1940;

11. Invest more than five percent of its net assets in warrants or rights
valued at the lower of cost or market, nor more than two percent of its
net assets in warrants or rights (valued on such basis) which are not
listed on the New York or American Stock Exchanges. Warrants or rights
acquired in units or attached to other securities are not subject to the
foregoing limitation;

12. Invest in interests in oil, gas, or other mineral exploration or
development programs or invest in oil, gas, or mineral leases, except
that the Portfolio may acquire securities of public companies which
themselves are engaged in such activities;

13. Invest more than five percent of its total assets in securities of
unseasoned issuers which have been in operation directly or through
predecessors for less than three years; provided, however, that this
limitation excludes shares of other open-end investment companies owned
by the Portfolio but includes the Portfolio's pro rata portion of the
securities and other assets owned by any such investment company; or

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<PAGE> 63

14. Purchase or otherwise acquire any security if, as a result, more than
fifteen percent of its net assets (taken at current value) would be
invested in securities that are illiquid by virtue of the absence of a
readily available market. This policy includes repurchase agreements
maturing in more than seven days and over-the-counter options held by
the Portfolio and that portion of assets used to cover such options.
This policy does not apply to restricted securities eligible for
resale pursuant to Rule 144A under the Securities Act of 1933 which
the Trustees or the Adviser under Board approved guidelines, may
determine are liquid nor does it apply to other securities, for which,
notwithstanding legal or contractual restrictions on resale, a liquid
market exists. Notwithstanding the foregoing, this limitation excludes
shares of other open-end investment companies owned by the Portfolio
but includes the Portfolio's pro rata portion of the securities and
other assets owned by any such investment company.

THE FOLLOWING ADDITIONAL RESTRICTIONS ARE APPLICABLE TO THE MONEY MARKET
PORTFOLIO:

The Portfolio shall not:

2. Invest in securities of other investment companies except as part of a
merger, consolidation or other acquisition;

4. Invest in interests in oil, gas, or other mineral exploration or
development programs;

8. Make short sales of securities, unless at the time of the sale the
Portfolio owns or has the right to acquire an equal amount of such
securities;

9. Purchase securities on margin, except that the Portfolio may obtain such
short-term credits as may be necessary for the clearance of purchases
and sales of securities;

10. Invest more than five percent of its assets in companies having a
record, together with predecessors, of less than three years continuous
operation;

11. Write put or call options;

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<PAGE> 64

13. Purchase any security which matures more than one year from the date of
purchase.

THE FOLLOWING ADDITIONAL RESTRICTIONS ARE APPLICABLE TO THE GOVERNMENT
PORTFOLIO:

The Portfolio shall not:

2. Invest in securities of other investment companies except as part of a
merger, consolidation or other acquisition;

3. Make any investment in real estate, commodities or commodities
contracts, except that the Portfolio may invest in interest rate futures
and related options and may purchase securities secured by real estate
or interests therein; or issued by companies, including real estate
investment trusts, which invest in real estate or interests therein;

4. Invest in interests in oil, gas, or other mineral exploration or
development programs;

8. Make short sales of securities, unless at the time of the sale the
Portfolio owns or has the right to acquire an equal amount of such
securities. Notwithstanding the foregoing, the Portfolio may make short
sales by entering into forward commitments for hedging or cross-hedging
purposes and the Portfolio may engage in transactions in options, future
contracts and related options;

9. Purchase securities on margin, except that the Portfolio may obtain such
short-term credits as may be necessary for the clearance of purchases
and sales of securities. The deposit or payment by the Portfolio of
initial or maintenance margin in connection with interest rate futures
contracts or related options transactions is not considered the purchase
of a security on margin;

10. Invest more than five percent of its assets in companies having a
record, together with predecessors, of less than three years continuous
operation;

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<PAGE> 65

borrowings shall be from banks and shall be undertaken only as a
temporary measure for extraordinary or emergency purposes. Deposits in
escrow in connection with the writing of options, or in connection with
the purchase or sale of futures contracts and related options are not
deemed to be a pledge or other encumbrance; or

12. Write, purchase or sell puts, calls or combinations thereof, except
that the Portfolio may (a) write covered or fully collateralized call
options, write secured put options, and enter into closing or offsetting
purchase transactions with respect to such options, (b) purchase options
to the extent that the premiums paid for all such options owned at any
time do not exceed ten percent of its total assets, and enter into
closing or offsetting transactions with respect to such options, and (c)
engage in transactions in interest rate futures contracts and related
options provided that such transactions are entered into for bona fide
hedging purposes (or that the underlying commodity value of the
Portfolio's long positions do not exceed the sum of certain identified
liquid investments as specified in CFTC regulations), provided further
that the aggregate initial margin and premiums do not exceed five
percent of the fair market value of the Portfolio's total assets, and
provided further that the Portfolio may not purchase futures contracts
or related options if more than 30% of the Portfolio's total assets
would be so invested.

THE FOLLOWING ADDITIONAL RESTRICTIONS ARE APPLICABLE TO THE COMMON STOCK
PORTFOLIO AND THE MULTIPLE STRATEGY PORTFOLIO:

A Portfolio shall not:

1. With respect to 75% of its assets, invest more than five percent of its
assets in the securities of any one issuer (except obligations of the
United States Government, its agencies or instrumentalities and
repurchase agreements secured thereby) or purchase more than ten percent
of the outstanding voting securities of any one issuer. Neither
limitation shall apply to the acquisition of shares of other open-end
investment companies to the extent permitted by rule or order of the
Securities and Exchange Commission exempting the Portfolio from the
limitation imposed by Section 12(d)(1) of the Investment Company Act of
1940;

2. Invest in securities of other investment companies except as part of a
merger, consolidation or other acquisition and except to acquire shares
of other open-end investment companies to the extent permitted by rule
or order of the Securities and Exchange Commission exempting the
Portfolio from the limitation imposed by Section 12(d)(1) of the
Investment Company Act of 1940;

3. Make any investment in real estate, commodities or commodities
contracts, except that the Portfolio may enter into transactions in
options, futures contracts or options on futures contracts and may
purchase securities secured by real estate or interests therein; or
issued by companies, including real estate investment trusts, which
invest in real estate or interests therein;

4. Invest in interests in oil, gas, or other mineral exploration or
development programs;

5. Purchase a restricted security or a security for which market quotations
are not readily available if as a result of such purchase more than five
percent of the Portfolio's assets would be invested in such securities.
Notwithstanding the foregoing, this limitation excludes shares of other
open-end investment companies owned by the Portfolio but includes the
Portfolio's pro rata portion of the securities and other assets owned by
any such investment company;

6. Lend money, except that a Portfolio may invest in repurchase agreements
in accordance with applicable requirements set forth in the Prospectus
and may acquire debt securities which the Portfolio's investment
policies permit. A Portfolio will not invest in repurchase agreements
maturing in more than seven days (unless subject to a demand feature) if
any such investment, together with any illiquid securities (including
securities which are subject to legal or contractual restrictions on
resale) held by the Portfolio, exceeds ten percent of the market or
other fair value of its total net assets; provided, however, that this
limitation excludes shares of other open-end investment

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<PAGE> 66

companies owned by the Portfolio but includes the Portfolio's pro rata
portion of the securities and other assets owned by any such investment
company. See "Repurchase Agreements";

7. Invest more than 25% of the value of its total assets in securities of
issuers in any particular industry (except obligations of the United
States Government, its agencies or instrumentalities and repurchase
agreements secured thereby); provided, however, that this limitation
excludes shares of other open-end investment companies owned by the
Portfolio but includes the Portfolio's pro rata portion of the
securities and other assets owned by any such investment company;

8. Make short sales of securities, unless at the time of the sale the
Portfolio owns or has the right to acquire an equal amount of such
securities. Notwithstanding the foregoing, the Portfolio may engage in
transactions in options, futures contracts and options on futures
contracts;

9. Purchase securities on margin, except that a Portfolio may obtain such
short-term credits as may be necessary for the clearance of purchases
and sales of securities. The deposit or payment by the Portfolio of
initial or maintenance margin in connection with transactions in
options, futures contracts or options on futures contracts is not
considered the purchase of a security on margin;

10. Invest more than five percent of its assets in companies having a
record, together with predecessors, of less than three years continuous
operation; provided, however, that this limitation excludes shares of
other open-end investment companies owned by the Portfolio but includes
the Portfolio's pro rata portion of the securities and other assets
owned by any such investment company; or

11. Borrow in excess of ten percent of the market or other fair value of
its total assets, or pledge its assets to an extent greater than five
percent of the market or other fair value of its total assets. Any such
borrowings shall be from banks and shall be undertaken only as a
temporary measure for extraordinary or emergency purposes. Deposits in
escrow in connection with the writing of covered call or secured put
options, or in connection with the purchase or sale of futures contracts
and related options are not deemed or to be a pledge or other
encumbrance.

In addition, the following restrictions apply to, and may not be changed
without the approval of the holders of a majority of the shares of, the
Portfolio indicated:

The Common Stock Portfolio may not invest more than five percent of
its net assets in warrants or rights valued at the lower of cost or market,
nor more than two percent of its net assets in warrants or rights (valued
on such basis) which are not listed on the New York or American Stock
Exchanges. Warrants or rights acquired in units or attached to other
securities are not subject to the foregoing limitation. Furthermore, the
Common Stock Portfolio may not invest in the securities of a foreign issuer
if, at the time of acquisition, more than ten percent of the value of the
Common Stock Portfolio's total assets would be invested in such securities.
Foreign investments may be subject to special risks, including future
political and economic developments, the possible imposition of additional
withholding taxes on dividend or interest income payable on the securities,
or the seizure or nationalization of companies, or establishment of
exchange controls or adoption of other restrictions which might adversely
affect the investment.

The Multiple Strategy Portfolio may not invest in the securities of a
foreign issuer if, at the time of acquisition, more than 25% of the value
of the Multiple Strategy Portfolio's total assets would be invested in such
securities.

TRUSTEES AND EXECUTIVE OFFICERS

The Fund's Trustees and executive officers and their principal occupations
for the past five years are listed below. All persons named as Trustees also
serve in similar capacities for other funds advised by the Adviser as indicated
below.

FERNANDO SISTO, Chairman of the Board and Trustee. Stevens Institute of
Technology, Hoboken, New Jersey 07030-5991. George M. Bond Professor and
formerly Dean of Graduate School and Chairman,

24
<PAGE> 67

Department of Mechanical Engineering, Stevens Institute of Technology; Director,
Dynalysis of Princeton (engineering research).(1)

J. MILES BRANAGAN, Trustee. 2300 205th Street, Torrence, California
90501-1452. Co-Founder, Chairman and President, MDT Corporation (medical
equipment).(1)

RICHARD E. CARUSO, Trustee. Two Radnor Station, Suite 314, 290 King of
Prussia Road, Radnor, Pennsylvania 19087. Chairman and Chief Executive Officer,
Integra LifeSciences Corporation; (biotech-nology/life science) Trustee,
Susquehanna University; Trustee and First Vice President, The Baum School of Art
(community art school); Founder and Director, Uncommon Individual Foundation
(youth development); Director, International Board of Business Performance
Group, London School of Economics; formerly Director, First Sterling Bank;
formerly Director and Executive Vice President, and Executive Vice President,
LFC Financial Corporation (leasing financing)(1)

ROGER HILSMAN, Trustee. 251-1 Hamburg Cove, Lyme, Connecticut 06371, New
York, New York 10027. Formerly Professor of Government and International
Affairs, Columbia University.(1)

*DON G. POWELL, President and Trustee. 2800 Post Oak Blvd., 45th Floor,
Houston, Texas 77056. President, Chief Executive Officer and Director of VK/AC
Holding, Inc. VKAC and; President, Chief Executive Officer and Director of the
Adviser; Chairman, Chief Executive Officer and Director of the
Distributor.(1)(2)(4)

DAVID REES, Trustee. 1601 Country Club Drive, Glendale, California 91208.
Senior Editor, Los Angeles Business Journal.(1)(3)

**LAWRENCE J. SHEEHAN, Trustee. 1999 Avenue of the Stars, Suite 700, Los
Angeles, California 90067-6035. Of Counsel to, and formerly Partner
(1969 -- 1994) of, the law firm of O'Melveny & Myers, legal counsel to the
Fund.(1)(3)(5)

*WILLIAM S. WOODSIDE, Director. Sky Chefs, Inc., 712 Fifth Avenue, 40th
Floor, New York, New York 10019. Chairman of the Board, Sky Chefs, Inc. (airline
food catering); formerly Director, Primerica Corporation (currently known as The
Travelers Inc.); formerly Chairman of the Board and Chief Executive Officer, old
Primerica Corporation (American Can Company); formerly Director, James River
Corporation (paper products); Trustee and formerly President, Whitney Museum of
American Art; Chairman, Institute for Educational Leadership, Inc., Board of
Visitors, Graduate School and University of The City University of New York,
Academy of Political Science; Vice Chairman of the Board of Trustees, Committee
for Economic Development; Director, Public Education Fund Network, Fund for New
York City Public Education; Trustee, Barnard College; Member, Dean's Council,
Harvard School of Public Health; Member, Mental Health Task Force, Carter
Center.(1)

B. ROBERT BAKER, Vice President. 2800 Post Oak Blvd., Houston, Texas 77056.
Associate Portfolio Manager of the Adviser. Formerly, Vice
President -- Portfolio Manager, Variable Annuity Life Insurance Company.

CINDEE BURKITT, Vice President. 2800 Post Oak Blvd., Houston, Texas 77056.
Associate Portfolio Manager of the Adviser. Formerly, Senior Securities
Analyst.(4)

NORI L. GABERT, Vice President and Secretary. 2800 Post Oak Blvd., Houston,
Texas 77056. Vice President, Associate General Counsel and Corporate Secretary
of the Adviser.(4)

PAUL A. HILSTAD, Vice President. 2800 Post Oak Blvd., Houston, Texas 77056.
Senior Vice President, General Counsel and Director of ACMR; Senior Vice
President and General Counsel of the Adviser; Vice President of the Distributor;
formerly Vice President and Deputy General Counsel, IDS Financial Services
Inc.(4)

GARY M. LEWIS, Vice President. 2800 Post Oak Blvd., Houston, Texas 77056.
Investment Vice President of the Adviser.(4)

25
<PAGE> 68

TANYA M. LODEN, Vice President and Controller. 2800 Post Oak Blvd.,
Houston, Texas 77056. Vice President and Controller of most of the investment
companies advised by the Adviser; formerly Tax Manager/Assistant Controller.(4)

CURTIS W. MORELL, Vice President and Treasurer. 2800 Post Oak Blvd.,
Houston, Texas 77056. Vice President and Treasurer of most of the investment
companies advised by the Adviser.(4)

JEFF NEW, Vice President, 2800 Post Oak Blvd., Houston, Texas 77056.
Associate Portfolio Manager of the Adviser since April 1990; prior to that he
was a securities analyst with Texas Commerce Investment Management Company.(4)

ROBERT C. PECK, JR., Vice President. 2800 Post Oak Blvd., Houston, Texas
77056. Senior Vice President -- Chief Investment Officer/Fixed Income Department
and Director of the Adviser.(4)

JOHN R. REYNOLDSON, Vice President. 2800 Post Oak Blvd., Houston, Texas
77056. Senior Vice President of the Adviser; also serves as Vice President of
Common Sense Trust-Government Portfolio, American Capital Government Securities,
Inc., the '97 and '98 Portfolios of American Capital Government Target Series;
American Capital World Portfolio Series, Inc. -- Global Government Securities
Fund; and American Capital U.S. Government Trust for Income.(4)

ALAN T. SACHTLEBEN, Vice President. 2800 Post Oak Blvd., Houston, Texas
77056. Senior Vice President -- Chief Investment Officer/Equity and Director of
the Adviser; Executive Vice President and Director, ACMR.(4)

WALTER W. STABELL, III, Vice President. 2800 Post Oak Blvd., Houston, Texas
77056. Investment Vice President/Associate Portfolio Manager of the Adviser;
formerly Senior Securities Analyst.

DAVID R. TROTH, Vice President. 2800 Post Oak Blvd., Houston, Texas 77056.
Senior Investment Vice President of the Adviser; Vice President of American
Capital Bond Fund, Inc., American Capital Corporate Bond Fund, Inc.; American
Capital Reserve Fund, Inc. and Common Sense Trust-Money Market Fund.(4)

J. DAVID WISE, Vice President and Assistant Secretary. 2800 Post Oak Blvd.,
Houston, Texas 77056. Vice President, Associate General Counsel, Compliance
Review Officer and Assistant Corporate Secretary of the Adviser.(4)

PAUL R. WOLKENBERG, Vice President, 2800 Post Oak Blvd., Houston, Texas
77056. President and Senior Vice President of the Adviser; President, Chief
Operating Officer and Director of Van Kampen American Capital Services, Inc.;
Chief Operating Officer and Director of Van Kampen American Capital Trust
Company; Executive Vice President and Director of Access.(4)

- ---------------

* Trustee who is an interested person of the Adviser and of the Fund as
defined in the 1940 Act by virtue of an affiliation with the Adviser.

** Trustee who is an interested person of the Adviser and of the Fund within
the meaning of the 1940 Act, by virtue of his affiliation with the Adviser.

(1) A director or trustee of American Capital Comstock Fund, Inc., American
Capital Corporate Bond Fund, Inc., American Capital Emerging Growth Fund,
Inc., American Capital Enterprise Fund, Inc., American Capital Equity
Income Fund, Inc., American Capital Federal Mortgage Trust, American
Capital Global Managed Assets Fund, Inc., American Capital Government
Securities, Inc., American Capital Government Target Series, American
Capital Growth and Income Fund, Inc., American Capital Harbor Fund, Inc.,
American Capital High Yield Investments, Inc., American Capital Life
Investment Trust, American Capital Municipal Bond Fund, Inc., American
Capital Pace Fund, Inc., American Capital Real Estate Securities Fund,
Inc., American Capital Reserve Fund, Inc., American Capital Small
Capitalization Fund, Inc., American Capital Tax-Exempt Trust, American
Capital Texas Municipal Securities, Inc., American Capital U.S. Government
Trust for Income, American Capital Utilities Income Fund, Inc. and American
Capital World Portfolio Series, Inc.

26
<PAGE> 69

(2) A director/trustee/managing general partner of American Capital Bond Fund,
Inc., American Capital Convertible Securities, Inc., American Capital
Exchange Fund and American Capital Income Trust, investment companies
advised by the Adviser and a trustee of Common Sense Trust, an open-end
investment company for which the Adviser serves as adviser for eight of the
portfolios.

(3) A director of Source Capital, Inc., a closed-end investment company not
advised by the Adviser.

(4) An officer of other investment companies advised or subadvised by the
Adviser.

(5) A director of FPA Capital Fund, Inc., FPA New Income, Inc., and FPA
Perennial Fund, Inc., investment companies not advised by the Adviser, and
TCW Convertible Securities Fund, Inc., a closed-end investment company not
advised by the Adviser.

The Executive Committee, consisting of Messrs. Hilsman, Powell, Sheehan and
Sisto, may act for the Trustees between meetings except where board action is
required by law.

The Trustees and officers of the Fund as a group do not own any outstanding
shares of the Fund because such shares are sold only to separate accounts (the
"Accounts") of various insurance companies to fund the benefits of variable
annuity or variable life insurance policies (the "Contracts"). During the year
ended December 31, 1994, the Trustees who were not affiliated with the Adviser
received as a group $ , $ , $ , $ , and $ in Trustees' fees
from the Common Stock, Domestic Strategic Income, Government, Money Market and
Multiple Strategy Portfolios, respectively, in addition to certain out-of-pocket
expenses. Such trustees also receive compensation for serving as directors of
other investment companies advised by the Adviser as identified in the notes to
the foregoing table. For legal services rendered during the fiscal year ended
December 31, 1994, the Fund paid legal fees of $ , $ , $ , $ ,
and $ from the Common Stock, Domestic Strategic Income, Government, Money
Market and Multiple Strategy Portfolios, respectively, to the law firm of
O'Melveny & Myers, of which Mr. Sheehan is of counsel. The firm also serves as
legal counsel to the American Capital Funds listed in Footnote 1 above.

INVESTMENT ADVISORY AGREEMENT

The Fund and the Adviser are parties to an investment advisory agreement,
dated December 20, 1994 ("Advisory Agreement - I"), pursuant to which the Fund
retains the Adviser to manage the investment of assets and to place orders for
the purchase and sale of portfolio securities for the Common Stock Portfolio,
the Domestic Strategic Income Portfolio, the Government Portfolio, the Money
Market Portfolio and the Multiple Strategy Portfolio. The Fund and the Adviser
are also parties to an investment advisory agreement dated ___________________
_______________________ ("Advisory Agreement - II") and an Investment Advisory
Agreement dated ________________________ ("Advisory Agreement - III") pursuant
to which the Adviser manages the investment of assets and places orders for the
purchase and sale of portfolio securities for the Emerging Growth Portfolio and
the Global Equity Portfolio, respectively, (Advisory Agreement - I, Advisory
Agreement - II and Advisory Agreement - III are referred to herein collectively
as the "Advisory Agreements"). Under the Advisory Agreements, the Adviser is
responsible for obtaining and evaluating economic, statistical, and financial
data and for formulating and implementing investment programs in furtherance of
each Portfolio's investment objectives. The Adviser also furnishes at no cost to
the Fund (except as noted herein) the services of sufficient executive and
clerical personnel for the Fund as are necessary to prepare registration
statements, prospectuses, shareholder reports, and notices and proxy
solicitation materials. In addition, the Adviser furnishes at no cost to the
Fund the services of a President of the Fund, one or more Vice Presidents as
needed, and a Secretary.

Under the Advisory Agreements, the Fund bears the cost of its accounting
services, which includes maintaining its financial books and records and
calculating the daily net asset value of each Portfolio. The costs of such
accounting services include the salaries and overhead expenses of a Treasurer or
other principal financial officer and the personnel operating under his
direction. The services are provided at cost which is allocated among the
investment companies advised by the Adviser. The Fund also pays shareholder
service agency fees, custodian fees, legal fees, the costs of reports to
shareholders and all other ordinary expenses not specifically assumed by the
Adviser.

27
<PAGE> 70

Under Advisory Agreement - I, the Fund pays to the Adviser as compensation
for the services rendered, facilities furnished, and expenses paid by it a fee
payable monthly computed on average daily net assets of the subject Portfolios
at an annual rate of 0.50% of the first $500 million of such Portfolios'
aggregate average net assets; 0.45% of the next $500 million of such Portfolios'
aggregate average net assets, and 0.40% of such Portfolios' aggregate average
net assets in excess of $1 billion.

Under Advisory Agreements - II and III, this Fund pays to the Adviser as
compensation for the services rendered, facilities furnished, and expenses paid
by it a fee payable monthly computed on average daily net assets of 0.70% for
the Emerging Growth Portfolio and 1.00% for the Global Equity Portfolio,
respectively.

The average daily net assets of a Portfolio is determined by taking the
average of all of the determinations of net assets of that Portfolio for each
business day during a given calendar month. The fee is payable for each calendar
month as soon as practicable after the end of that month. The fee payable to the
Adviser is reduced by any commissions, tender solicitation and other fees,
brokerage or similar payments received by the Adviser or any other direct or
indirect majority owned subsidiary of ACMR, in connection with the purchase and
sale of portfolio investments of the Fund, less any direct expenses incurred by
such subsidiary of ACMR in connection with obtaining such payments. Although
Smith Barney Shearson Inc., ("Smith Barney Shearson") and Robinson Humphrey,
Inc. ("Robinson Humphrey") are affiliates, they are not subsidiaries of ACMR and
thus are not subject to the foregoing sentence. The Adviser agrees to use its
best efforts to recapture tender solicitation fees and exchange offer fees for
the Fund's benefit, and to advise the Trustees of the Fund of any other
commissions, fees, brokerage or similar payments which may be possible under
applicable laws for the Adviser or any other direct or indirect majority owned
subsidiary of ACMR, to receive in connection with the Fund's portfolio
transactions or other arrangements which may benefit the Fund.

Advisory Agreement - I also provides that, in the event the ordinary
business expenses of the Common Stock Portfolio, the Domestic Strategic Income
Portfolio, the Government Portfolio, the Money Market Portfolio and the Multiple
Strategy Portfolio for any fiscal year exceed 0.95% of the average daily net
assets, the compensation due the Adviser will be reduced by the amount of such
excess and that, if a reduction in and refund of the advisory fee is
insufficient, the Adviser will pay the Fund monthly an amount sufficient to make
up the deficiency, subject to readjustment during the year. Ordinary business
expenses do not include (1) interest and taxes, (2) brokerage commissions, (3)
any distribution expenses which may be incurred in the event the Fund's
Distribution Plan is implemented, and (4) certain litigation and indemnification
expenses as described in the Advisory Agreement. No such limit applies with
respect to Advisory Agreement - II and Advisory Agreement - III.

In addition to the contractual expense limitation, the Adviser elected to
reimburse the Common Stock Portfolio, the Domestic Strategic Income Portfolio,
the Government Portfolio, the Money Market Portfolio and the Multiple Strategy
Portfolio for all ordinary business expenses in excess of .60% of the average
daily net assets.

The following table shows expenses paid under the Advisory Agreement during
the periods ended December 31, 1992, December 31, 1993 and December 31, 1994.
The Emerging Growth Portfolio and the Global Equity Portfolio did not commence
operations until May 1, 1995.

<TABLE>
<CAPTION>
DOMESTIC
COMMON STRATEGIC MONEY MULTIPLE
PERIOD ENDING STOCK INCOME GOVERNMENT MARKET STRATEGY
DECEMBER 31, 1992: PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ---------------------------------------- --------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Advisory fees $ 290,101 $ 93,803 $373,147 $ 181,232 $ 273,991
Accounting Services $ 44,713 $ 47,520 $ 52,072 $ 40,931 $ 48,242
Contractual expense reimbursement $ -0- $ 58,070 $ -0- $ -0- $ -0-
Voluntary expense reimbursement $ 79,392 $ 65,662 $ 75,744 $ 104,803 $ 94,458
</TABLE>

28
<PAGE> 71

<TABLE>
<CAPTION>
DOMESTIC
COMMON STRATEGIC MONEY MULTIPLE
PERIOD ENDING STOCK INCOME GOVERNMENT MARKET STRATEGY
DECEMBER 31, 1993: PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ---------------------------------------- --------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Advisory fees $ 345,093 $132,513 $393,050 $ 144,373 $ 319,607
Accounting Services $ 66,688 $ 63,008 $ 68,628 $ 59,477 $ 68,254
Contractual expense reimbursement $ -- $ 14,128 $ -- $ 445 $ --
Voluntary expense reimbursement $ 84,676 $ 93,319 $ 80,855 $ 101,061 $ 90,379
</TABLE>

<TABLE>
<CAPTION>
DOMESTIC
COMMON STRATEGIC MONEY MULTIPLE
PERIOD ENDING STOCK INCOME GOVERNMENT MARKET STRATEGY
DECEMBER 31, 1994: PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ---------------------------------------- --------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Advisory fees
Accounting Services
Contractual expense reimbursement
Voluntary expense reimbursement
</TABLE>

The Advisory Agreements with respect to each subject Portfolio may be
continued from year to year if specifically approved at least annually (a)(i) by
the Fund's Trustees or (ii) by vote of a majority of the Portfolio's outstanding
voting securities and (b) by the affirmative vote of a majority of the Trustees
who are not parties to the agreement or interested persons of any such party by
votes cast in person at a meeting called for such purpose. The Advisory
Agreement provides that it shall terminate automatically if assigned and that it
may be terminated without penalty by either party on 60 days' written notice.

DISTRIBUTOR

Van Kampen American Capital Distributors, Inc., acts as the principal
underwriter of the shares of the Fund pursuant to a written agreement, dated
December 20, 1994 (the "Underwriting Agreement"). The Distributor is owned by
the Adviser's parent company. The Distributor's obligation is an agency or "best
efforts" arrangement under which the Distributor is not obligated to sell any
stated number of shares. The Underwriting Agreement is renewable from year to
year if approved (a) by the Fund's Trustees or by a vote of a majority of the
Fund's outstanding voting securities and (b) by the affirmative vote of a
majority of Trustees who are not parties to the Underwriting Agreement or
interested persons of any party, by votes cast in person at a meeting called for
that purpose. The Underwriting Agreement provides that it will terminate if
assigned, and that it may be terminated without penalty by either party on 60
days' written notice.

The Distributor bears the cost of printing (but not typesetting)
prospectuses used in connection with this offering and the cost and expense of
supplemental sales literature, promotion and advertising and any costs of
qualification of shares for sales under state blue sky laws. The Fund pays all
expenses attributable to the registrations of its shares under federal law,
including registration and filing fees, the cost of preparation of the
prospectuses, related legal and auditing expenses, and the cost of printing
prospectuses for current shareholders.

TRANSFER AGENT

For the fiscal years ended December 31, 1992, 1993, and 1994, ACCESS
Investor Services, Inc. ("ACCESS"), shareholder service agent and dividend
disbursing agent for the Fund, received fees aggregating $17,160, $18,000 and
$____________, respectively, from each Portfolio, for these services. These
services are provided at cost plus a profit.

PORTFOLIO TRANSACTIONS AND BROKERAGE

The Advisers are responsible for decisions to buy and sell securities for
the Fund and for the placement of its portfolio business and the negotiation of
the commissions, if any, paid on such transactions. It is the policy of the
Advisers to seek the best security price available with respect to each
transaction. In over-the-counter

29
<PAGE> 72

transactions, orders are placed directly with a principal market maker unless it
is believed that a better price and execution can be obtained by using a broker.
Except to the extent that the Fund may pay higher brokerage commissions for
brokerage and research services (as described below) on a portion of its
transactions executed on securities exchanges, the Adviser seeks the best
security price at the most favorable commission rate. In selecting dealers and
in negotiating commissions, the Advisers consider the firm's reliability, the
quality of its execution services on a continuing basis and its financial
condition. When more than one firm is believed to meet these criteria,
preference may be given to firms which also provide research services to the
Fund or the Adviser.

Section 28(e) of the Securities Exchange Act of 1934 ("Section 28(e)")
permits an investment adviser, under certain circumstances, to cause an account
to pay a broker or dealer who supplies brokerage and research services, a
commission for effecting a securities transaction in excess of the amount of
commission another broker or dealer would have charged for effecting the
transaction. Brokerage and research services include (a) furnishing advice as to
the value of securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities or purchasers or sellers of
securities, (b) furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy, and the performance
of accounts, and (c) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement and custody).

Pursuant to provisions of the Advisory Agreements, the Fund's Trustees have
authorized the Advisers to cause the Fund to incur brokerage commissions in an
amount higher than the lowest available rate in return for research services
provided to the Advisers. The Advisers are of the opinion that the continued
receipt of supplemental investment research services from dealers is essential
to its provision of high quality portfolio management services to the Fund. The
Advisers undertake that such higher commissions will not be paid by the Fund
unless (a) the Advisers determine in good faith that the amount is reasonable in
relation to the services in terms of the particular transaction or in terms of
the Advisers' overall responsibilities with respect to the accounts as to which
it exercises investment discretion, (b) such payment is made in compliance with
the provisions of Section 28(e) and other applicable state and federal laws, and
(c) in the opinion of the Advisers, the total commissions paid by the Fund are
reasonable in relation to the expected benefits to the Fund over the long term.
The investment advisory fee paid by the Fund under the Advisory Agreements is
not reduced as a result of the Advisers' receipt of research services.

Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and subject to seeking best execution and such other
policies as the Trustees may determine, the Advisers may consider sales of
shares of the Fund and of the other American Capital mutual funds as a factor in
the selection of dealers to execute portfolio transactions for the Fund.

The Fund has in the past placed brokerage transactions with brokers that
may be considered affiliated persons of the Adviser's then parent, Travelers.
Such affiliated persons included Smith Barney Shearson until December 20, 1993,
Robinson Humphrey from August 2, 1993, until December 20, 1994, and the
Foxx-Pitt, Kelton Group S.A. from September 10, 1987 until March 27, 1992. No
brokers are currently affiliated persons of the Adviser. The negotiated
commission paid to an affiliated broker on any transaction would be comparable
to that payable to a non-affiliated broker in a similar transaction.

The Fund paid the following commissions to affiliated brokers during the
periods shown:

Commissions Paid:

<TABLE>
<CAPTION>
SMITH BARNEY ROBINSON
JEFFERIES SHEARSON HUMPHREY
--------- ------------ --------
<S> <C> <C> <C>
Fiscal 1992
Money Market Portfolio -- --
Common Stock Portfolio $ 1,008 $ 21,675 --
Government Portfolio -- $ 1,128 --
Multiple Strategy Portfolio $ 525 $ 9,903 --
Domestic Strategic Income Portfolio -- -- --
</TABLE>

30
<PAGE> 73

<TABLE>
<CAPTION>
SMITH BARNEY ROBINSON
JEFFERIES SHEARSON HUMPHREY
--------- ------------ --------
<S> <C> <C> <C>
Fiscal 1993
Money Market Portfolio -- -- --
Common Stock Portfolio -- $ 32,295 --
Government Portfolio -- $ 2,739
Multiple Strategy Portfolio -- $ 18,185 $455
Domestic Strategic Income Portfolio -- -- --
Fiscal 1994
Money Market Portfolio
Common Stock Portfolio
Government Portfolio
Multiple Strategy Portfolio
Domestic Strategic Income Portfolio
Fiscal 1994 Percentages:
Commissions with affiliates to total commissions
Money Market Portfolio -- -- --
Common Stock Portfolio -- --
Government Portfolio -- --
Multiple Strategy Portfolio --
Domestic Strategic Income Portfolio -- -- --
Value of transactions with affiliates to total
transactions
Money Market Portfolio -- -- --
Common Stock Portfolio -- -- --
Government Portfolio -- -- --
Multiple Strategy Portfolio -- -- --
Domestic Strategic Income Portfolio -- -- --
</TABLE>

The Adviser places portfolio transactions for other advisory accounts
including other investment companies. Research services furnished by firms
through which the Fund effects its securities transactions may be used by the
Adviser in servicing all of its accounts; not all of such services may be used
by the Adviser in connection with the Fund. In the opinion of the Adviser, the
benefits from research services to each of the accounts (including the Fund)
managed by the Adviser cannot be measured separately. Because the volume and
nature of the trading activities of the accounts are not uniform, the amount of
commissions in excess of the lowest available rate paid by each account for
brokerage and research services will vary. However, in the opinion of the
Adviser, such costs to the Fund will not be disproportionate to the benefits
received by the Fund on a continuing basis.

The Adviser seeks to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities by the Fund and
another advisory account. In some cases, this procedure could have an adverse
effect on the price or the amount of securities available to the Fund. In making
such allocations among the Fund and other advisory accounts, the main factors
considered by the Adviser are the respective investment objectives, the relative
size of portfolio holdings of the same or comparable securities, the
availability of cash for investment, the size of investment commitments
generally held, and opinions of the persons responsible for recommending the
investment.

31
<PAGE> 74

The following table summarizes for each portfolio the total brokerage
commissions paid, the amount of commissions paid to brokers selected primarily
on the basis of research services provided to the Adviser and the value of these
specific transactions. The Adviser's brokerage practices are monitored on a
quarterly basis
by the Brokerage Review Committee composed of Fund Trustees who are not
interested persons (as defined in the 1940 Act) of the Adviser. The Emerging
Growth Portfolio and the Global Equity Portfolio commenced operations after the
end of 1994.

<TABLE>
<CAPTION>
DOMESTIC
COMMON MULTIPLE STRATEGIC MONEY
STOCK GOVERNMENT STRATEGY INCOME MARKET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
----------- ---------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
1992
Total brokerage commissions $ 208,445 $ 27,704 $ 160,398 $ 951 --
Commissions for research services $ 102,780 -- $ 69,903 $ 595 --
Value of research transactions $58,028,320 -- $40,053,381 $ 325,081 --
1993
Total brokerage commissions $ 283,795 $ 12,198 $ 259,924 -- --
Commissions for research services $ 146,345 0 $ 155,243 -- --
Value of research transactions $84,070,654 0 $83,666,168 -- --

1994
Total brokerage commissions
Commissions for research services
Value of research transactions
</TABLE>

DETERMINATION OF NET ASSET VALUE

The net asset value of the shares of each Portfolio is computed by dividing
the value of all securities held by the Portfolio plus other assets, less
liabilities, by the number of shares outstanding. This computation is made for
each Portfolio as of the close of business each day the New York Stock Exchange
is open (currently 4:00 p.m., New York time). The New York Stock Exchange is
currently closed on weekends and on the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.

MONEY MARKET PORTFOLIO NET ASSET VALUATION

The valuation of the Portfolio's portfolio securities is based upon their
amortized cost, which does not take into account unrealized capital gains or
losses. Amortized cost valuation involves initially valuing an instrument at its
cost and thereafter, assuming a constant amortization to maturity of any
discount or premium, regardless of the impact of fluctuating interest rates on
the market value of the instrument. While this method provides certainty in
valuation, it may result in periods during which value, as determined by
amortized cost, is higher or lower than the price that the Portfolio would
receive if it sold the instrument.

The Portfolio's use of the amortized cost method of valuing its portfolio
securities is permitted by a rule adopted by the Securities and Exchange
Commission ("SEC"). Under this rule, the Portfolio must maintain a
dollar-weighted average portfolio maturity of 90 days or less, purchase only
instruments having remaining maturities of 13 months or less and invest only in
securities determined by the Adviser to be of eligible quality with minimal
credit risks.

The Portfolio has established procedures reasonably designed, taking into
account current market conditions and the Portfolio's investment objective, to
stabilize the net asset value per share for purposes of sales and redemptions at
$1.00. These procedures include review by the Trustees, at such intervals as the
Portfolio or the Trustees deem appropriate, to determine the extent, if any, to
which the new asset value per share calculated by using available market
quotations deviates from $1.00 per share based on amortized cost. In the event
such deviation should exceed four tenths of one percent, the Trustees are
required to promptly consider what action, if any, should be initiated. If the
Trustees believe that the extent of any deviation from a

32
<PAGE> 75

$1.00 amortized cost price per share may result in material dilution or other
unfair results to new or existing shareholders, it will take such steps as it
considers appropriate to eliminate or reduce these consequences to the extent
reasonably practicable. Such steps may include selling portfolio securities
prior to maturity; shortening the average maturity of the portfolio; withholding
or reducing dividends; or utilizing a net asset value per share determined by
using available market quotations.

DOMESTIC STRATEGIC INCOME PORTFOLIO NET ASSET VALUATION

COMMON STOCK PORTFOLIO; EMERGING GROWTH, GLOBAL EQUITY AND MULTIPLE STRATEGY
PORTFOLIO NET ASSET VALUATION

The net asset value of these Portfolios is computed by (i) valuing
securities listed or traded on a national securities exchange at the last
reported sale price, or if there has been no sale that day at the last reported
bid price, using prices as of the close of trading on the New York Stock
Exchange, (ii) valuing unlisted securities for which over-the-counter market
quotations are readily available at the most recent bid price as supplied by the
National Association of Securities Dealers Automated Quotations ("NASDAQ") or by
broker-dealers, and (iii) valuing any securities for which market quotations are
readily available, and any other assets at fair value as determined in good
faith by the Fund's Trustees. Options, futures contracts and options thereon,
which are traded on exchanges, are valued at their last sale or settlement price
as of the close of such exchanges or if no sales are reported, at the mean
between the last reported bid and asked prices. Securities with a remaining
maturity of 60 days or less are valued on an amortized cost basis, which
approximates market value. Securities for which market quotations are not
readily available, and any other assets are valued at fair value as determined
in good faith by the Fund's Trustees.

With respect to the Global Equity Portfolio, trading in securities on
European and Far Eastern securities exchanges and over-the-counter markets is
normally completed well before the close of business on each business day in New
York (i.e., a day on which the New York Stock Exchange is open). In addition,
European or Far Eastern securities trading generally or in a particular country
or countries may not take place on all business days in New York. Furthermore,
trading takes place on all business days in Japanese markets, on certain
Saturdays, and in various foreign markets on days which are not business days in
New York, and on which the Portfolio's net asset value is not calculated, and on
which the Portfolio does not effect sales, redemptions and repurchases of its
shares. There may be significant variations in the net asset value of Portfolio
shares on days when net asset value is not calculated and on which shareholders
cannot redeem on account of changes in prices of stocks traded in foreign stock
markets.

GOVERNMENT PORTFOLIO NET ASSET VALUATION

U.S. Government securities are traded in the over-the-counter market and
are valued at the last available bid price. Such valuations are based on
quotations of one or more dealers that make markets in the securities as
obtained from such dealers or from a pricing service. Options, interest rate
futures contracts and options thereon, which are traded on exchanges, are valued
at their last sale or settlement price as of the close of such exchanges or if
no sales are reported, at the mean between the last reported bid and asked
prices. Securities with a remaining maturity of 60 days or less are valued on an
amortized cost basis, which approximates market value. Securities and assets for
which market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Fund's Trustees. Such
valuations and procedures will be reviewed periodically by the Trustees.

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<PAGE> 76

PURCHASE AND REDEMPTION OF SHARES

The purchase of shares of the Portfolios is currently limited to the
Accounts as explained on the cover page and in the Prospectus. Such shares are
sold and redeemed at their respective net asset values as described in the
Prospectus.

Redemptions are not made on days during which the New York Stock Exchange
is closed, including those holidays listed under "Determination of Net Asset
Value." The right of redemption may be suspended and the payment therefor may be
postponed for more than seven days during any period when (a) the New York Stock
Exchange is closed for other than customary weekends or holidays; (b) trading on
the New York Stock Exchange is restricted; (c) an emergency exists as a result
of which disposal by the Fund of securities owned by it is not reasonably
practicable or it is not reasonably practicable for the Fund to fairly determine
the value of its net assets; or (d) the Securities and Exchange Commission, by
order, so permits.

DISTRIBUTIONS AND TAXES

Each Portfolio intends to qualify as a "regulated investment company" under
Subchapter M of the Internal Revenue Code (the "Code"). By so qualifying, a
Portfolio will not be subject to Federal income taxes on amounts paid by it as
dividends and distributions to the Account. Each Portfolio expects to be treated
as a separate entity for purposes of determining Federal tax treatment.
Accordingly, in order to qualify as a "regulated investment company" at the end
of each quarter of its taxable year, at least 50% of the aggregate value of each
Portfolio's net assets must consist of cash, cash items, government securities
and other securities, limited with respect to each issuer at the time of
purchase to not more than five percent of that Portfolio's total assets. Similar
but slightly different investment requirements apply to each Portfolio because
it provides benefits under variable life insurance policies. Additional
requirements applicable to the Government Portfolio are described in the
Prospectus under "Government Portfolio-General." The Trust will endeavor to
ensure that each Portfolio's assets are so invested so that all such
requirements are satisfied, but there can be no assurance that it will be
successful in doing so.

Each Portfolio is subject to a four percent excise tax to the extent it
fails to distribute to its shareholders during any calendar year at least (1)
98% of its ordinary income for the twelve months ended December 31, plus (2) 98%
of its capital gains net income for the twelve months ended October 31 of such
year. Each Portfolio intends to distribute sufficient amounts to avoid liability
for the excise tax.

Dividends and distributions declared to shareholders of record after
September 30 of any year and paid before February 1 of the following year, are
considered taxable income to shareholders on the record date even though paid in
the next year.

The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and these regulations
are subject to change by legislative or administrative action.

Dividends and capital gains distributions may also be subject to state and
local taxes. Shareholders are urged to consult their attorneys or tax advisors
regarding specific questions as to federal, state or local taxes.

With respect to the Global Equity Portfolio, the Fund may qualify for and
may make the election permitted under Section 853 of the Code so that
shareholders will be able to claim a credit or deduction on their income tax
returns for, and will be required to treat as part of the amounts distributed to
them, their pro rata portion of qualified taxes paid by the Portfolio to foreign
countries (which taxes relate primarily to investment income). The shareholders
of the Portfolio may claim a foreign tax credit by reason of the Fund's election
under Section 853 of the Code subject to the certain limitations imposed by
Section 904 of the Code. Also under Section 63 of the Code, no deduction for
foreign taxes may be claimed by shareholders who do not itemize deductions on
their federal income tax returns, although any such shareholder may claim a
credit for foreign taxes and in any event will be treated as having taxable
income in respect of the shareholder's pro rata share of foreign taxes paid by
the Portfolio. It should also be noted that a tax-exempt shareholder, like other
shareholders, will be required to treat as part of the amounts distributed to it
a pro rata portion of the income

34
<PAGE> 77

taxes paid by the Portfolio to foreign countries. However, that income will
generally be exempt from United States taxation by virtue of such shareholder's
tax-exempt status and such a shareholder will not be entitled to either a tax
credit or a deduction with respect to such income.

BACK-UP WITHHOLDING

The Fund is required to withhold and remit to the United States Treasury
31% of (i) reportable taxable dividends and distributions and (ii) the proceeds
of any redemptions of Portfolio shares with respect to any shareholder who is
not exempt from withholding and who fails to furnish the Fund with a correct
taxpayer identification number, who fails to report fully dividend or interest
income, or who fails to certify to the Fund that he has provided a correct
taxpayer identification number and that he is not subject to withholding. (An
individual's taxpayer identification number is his social security number.) The
31% "Back-up withholding tax" is not an additional tax and may be credited
against a taxpayer's regular federal income tax liability.

TAX TREATMENT OF OPTION AND FUTURES TRANSACTIONS

The Code includes special rules applicable to the listed options, futures
contracts, and options on futures contracts which the Common Stock Portfolio,
the Emerging Growth Portfolio, the Global Equity Portfolio, the Government
Portfolio and the Multiple Strategy Portfolio may write, purchase or sell. Such
options and contracts are classified as Section 1256 contracts under the Code.
The character of gain or loss resulting from the sale, disposition, closing out,
expiration or other termination of Section 1256 contracts is generally treated
as long-term capital gain or loss to the extent of 60 percent thereof and
short-term capital gain or loss to the extent of 40 percent thereof ("60/40 gain
or loss"). Such contracts, when held by a Portfolio at the end of a fiscal year,
generally are required to be treated as sold at market value on the last day of
such fiscal year for Federal income tax purposes ("marked-to-market").
Over-the-counter options are not classified as Section 1256 contracts and are
not subject to the mark-to-market rule or to 60/40 gain or loss treatment. Any
gains or losses recognized by a Portfolio from transactions in over-the-counter
options generally constitute short-term capital gains or losses. If
over-the-counter call options written, or over-the-counter put options
purchased, by a Portfolio are exercised, the gain or loss realized on the sale
of the underlying securities may be either short-term or long-term, depending on
the holding period of the securities. In determining the amount of gain or loss,
the sales proceeds are reduced by the premium paid for over-the-counter puts or
increased by the premium received for over-the-counter calls.

Certain of the Portfolios' transactions in options, futures contracts, and
options on futures contracts, particularly hedging transactions, may constitute
"straddles" which are defined in the Internal Revenue Code as offsetting
positions with respect to personal property. A straddle in which at least one
(but not all) of the positions are Section 1256 contracts is a "mixed straddle"
under the Code if certain identification requirements are met.

The Code generally provides with respect to straddles (i) "loss deferral"
rules which may postpone recognition for tax purposes of losses from certain
closing purchase transactions or other dispositions of a position in the
straddle to the extent of unrealized gains in the offsetting position, (ii)
"wash sale" rules which may postpone recognition for tax purposes of losses
where a position is sold and a new offsetting position is acquired within a
prescribed period and (iii) "short sale" rules which may terminate the holding
period of securities owned by the Portfolio when offsetting positions are
established and which may convert certain losses from short-term to long-term.

The Code provides that certain elections may be made for mixed straddles
that can alter the character of the capital gain or loss recognized upon
disposition of positions which form part of a straddle. Certain other elections
are also provided in the Code. No determination has been reached to make any of
these elections.

PRIOR PERFORMANCE INFORMATION

The Adviser has agreed so long as it serves as adviser to the Fund to limit
the ordinary business expenses of the Common Stock Portfolio, the Domestic
Strategic Income Portfolio, the Government Portfolio, the Money Market Portfolio
and the Multiple Strategy Portfolio to 0.60% per year of the average net assets
of

35
<PAGE> 78

each such Portfolio by reducing the advisory fee and/or bearing other expenses
of a Portfolio in excess of such limitation.

The Government Portfolio's average annual total returns (computed in the
manner described in the Prospectus) for the one-year and the five-year periods
ended December 31, 1994 and the life of the Portfolio were _____%, _____% and
_____%, respectively.

The Domestic Strategic Income Portfolio's average annual total returns
(computed in the manner described in the Prospectus) for the one-year, and the
five-year periods ended December 31, 1994, and the life of the Portfolio were
_____%, _____% and _____%, respectively. These results are based on historical
earnings and asset value fluctuations and are not intended to indicate future
performance. Such information should be considered in light of the Portfolio's
investment objectives and policies as well as the risks incurred in the
Portfolio's investment practices.

The Common Stock Portfolio's average annual total returns (computed in the
manner described in the Prospectus) for the one-year and the five-year periods
ended December 31, 1994 and for the life of the Portfolio were _____%, _____%
and _____%, respectively.

The Multiple Strategy Portfolio's average annual total returns (computed in
the manner described in the Prospectus) for the one-year, and the five-year
periods ended December 31, 1994 and for the life of the Portfolio were _____%,
_____% and _____%, respectively. Future results will be affected by changes in
the general level of prices of securities available for purchase. These periods
have been ones of fluctuating common stock prices.

The Government Portfolio's and the Domestic Strategic Income Portfolio's
annualized current yields for the 30-day period ending December 31, 1994
were _____% and _____%, respectively. The Portfolios' yields are not fixed and
will fluctuate in response to prevailing interest rates and the market value of
portfolio securities, and as a function of the type of securities owned by the
Portfolio, portfolio maturity and the Portfolio's expenses.

The Emerging Growth Portfolio and Global Equity Portfolio did not commence
operations until May 1, 1995.

MONEY MARKET PORTFOLIO YIELD INFORMATION

The Money Market Portfolio's annualized current yield for the seven-day
period ending December 31, 1994 was _____%. Its compound effective yield for the
same period was _____%.

The yield of the Portfolio is its net income expressed in annualized terms.
The Securities and Exchange Commission requires by rule that a yield quotation
set forth in an advertisement for a "money market" fund be computed by a
standardized method based on a historical seven calendar day period. The
standardized yield is computed by determining the net change (exclusive of
realized gains and losses and unrealized appreciation and depreciation) in the
value of a hypothetical pre-existing account having a balance of one share at
the beginning of the period, dividing the net change in account value by the
value of the account at the beginning of the base period to obtain the base
period return, and multiplying the base period return by 365/7. The
determination of net change in account value reflects the value of additional
shares purchased with dividends from the original share, dividends declared on
both the original share and such additional shares, and all fees that are
charged to all shareholder accounts, in proportion to the length of the base
period and the Portfolio's average account size. The Portfolio may also
calculate its effective yield by compounding the unannualized base period return
(calculated as described above) by adding 1 to the base period return, raising
the sum to a power equal to 365 divided by 7, and subtracting one.

The yield quoted at any time represents the amount being earned on a
current basis for the indicated period and is a function of the types of
instruments in the Portfolio, their quality and length of maturity, and the
Portfolio's operating expenses. The length of maturity for the Portfolio is the
average dollar weighted maturity of the Portfolio. This means that the Portfolio
has an average maturity of a stated number of days for all of its issues. The
calculation is weighted by the relative value of the investment.

36
<PAGE> 79

The yield fluctuates daily as the income earned on the investments of the
Portfolio fluctuates. Accordingly, there is no assurance that the yield quoted
on any given occasion will remain in effect for any period of time. It should
also be emphasized that the Fund is an open-end investment company and that
there is no guarantee that the net asset value will remain constant. A
shareholder's investment in the Fund is not insured. Investors comparing results
of the Fund with investment results and yields from other sources such as banks
or savings and loan associations should understand this distinction. The yield
quotation may be of limited use for comparative purposes because it does not
reflect charges imposed at the Account level which, if included, would decrease
the yield.

Other portfolios of the money market type as well as banks and savings and
loan associations may calculate their yield on a different basis, and the yield
quoted by the Fund could vary upwards or downwards if another method of
calculation or base period were used.

OTHER INFORMATION

CUSTODY OF ASSETS -- All securities owned by the Fund and all cash, including
proceeds from the sale of shares of the Fund and of securities in the Fund's
investment portfolio, are held by State Street Bank and Trust Company, 225
Franklin Street, Boston, Massachusetts 02110, as Custodian. With respect to
investments in foreign securities, the custodian enters into agreements with
foreign sub-custodians which are approved by the Trustees pursuant to Rule 17f-5
under the 1940 Act. The Custodian and sub-custodians generally domestically, and
frequently abroad, do not actually hold certificates for the securities in their
custody, but instead have book records with domestic and foreign securities
depositories, which in turn have book records with the transfer agents of the
issuers of the securities.

SHAREHOLDER REPORTS -- Semiannual statements are furnished to shareholders, and
annually such statements are audited by the independent accountants whose
selection is ratified annually by shareholders.

INDEPENDENT ACCOUNTANTS -- Price Waterhouse, 1201 Louisiana, Houston, Texas
77002, the independent accountants for the Fund, perform an annual audit of the
Fund's financial statements.

FINANCIAL STATEMENTS

Financial statements including Investment Portfolio, Statement of Assets
and Liabilities, Statement of Operations, Statement of Changes in Net Assets,
Notes to Financial Statements, Financial Highlights and Report of Independent
Accountants on such financial statements, are hereby incorporated by reference
to the Fund's Annual Report previously filed with the SEC on or about March 1,
1995.

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<PAGE> 80

APPENDIX

Description of the highest commercial paper, bond and other short- and
long-term rating categories assigned by Standard & Poor's Corporation ("S&P"),
Moody's Investors Services, Inc ("Moody's"), Fitch Investors Service, Inc.
("Fitch"), Duff and Phelps, Inc. ("Duff") and IBCA Limited and IBCA Inc.
("IBCA");

COMMERCIAL PAPER AND SHORT-TERM RATINGS

The designation A-1 by S&P indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+)
designation. Capacity for timely payment on issues with an A-2 designation is
strong. However, the relative degree of safety is not as high as for issues
designated A-1.

The rating Prime-1 (P-1) is the highest commercial paper rating assigned by
Moody's. Issuers of P-1 paper must have a superior capacity for repayment of
short-term promissory obligations and ordinarily will established industries,
high rates of return of portfolios employed, conservative well established
industries, high rates of return of portfolios employed, conservative
capitalization structures with moderate reliance on debt and ample asset
protection, broad margins in earnings coverage of fixed financial charges and
high internal cash generation, and well established access to a range of
financial markets and assured sources of alternate liquidity. Issues rated
Prime-2 (P-2) have a strong capacity for repayment of short-term promissory
obligations. This ordinarily will be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and coverage ratios, while
sound, will be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.

The rating Fitch-1 (Highest Grade) is the highest commercial paper rating
assigned by Fitch. Paper rated Fitch-1 is regarded as having the strongest
degree of assurance for timely payment. The rating Fitch-2 (Very Good Grade) is
the second highest commercial paper rating assigned by Fitch which reflects an
assurance of timely payment only slightly less in degree than the strongest
issues.

The rating Duff-1 is the highest commercial paper rating assigned by Duff,
Paper rated Duff-1 is regarded as having very high certainty of timely payment
with excellent liquidity factors which are supported by ample asset protection.
Risk factors are minor. Paper rated Duff-2 is regarded as having good certainty
of timely payment, good access to capital markets and sound liquidity factors
and company fundamentals. Risk factors small.

The designation A1 by IBCA indicates that the obligation is supported by a
very strong capacity for timely repayment. Those obligations rated A1+ are
supported by the highest capacity for timely repayment. The designation A2 by
IBCA indicates that the obligation is supported by a strong capacity for timely
repayment, although such capacity may be susceptible to adverse changes in
business, economic, or financial conditions.

BOND AND LONG-TERM RATINGS

Bonds rated AAA are considered by S&P to be the highest grade obligations
and possess an extremely strong capacity to pay principal and interest. Bonds
rated AA by S&P are judged by S&P to have a very strong capacity to pay
principal and interest and, in the majority of instances, differ only in small
degrees from issues rated AAA.

Bonds which are rated Aaa by Moody's are judged to be of the best quality.
Bonds are rated Aa by Moody's are judged by Moody's to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than Aaa bonds because margins of
protection may not be as large or fluctuations of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger. Moody's applies numerical modifiers 1, 2
and 3 in the Aa rating category. The modifier 1 indicates a ranking for the
security in

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<PAGE> 81

the higher end of this rating category, the modifier 2 indicates a mid-range
ranking, and the modifier 3 indicates a ranking in the lower end of the rating
category.

Bonds rated AAA by Fitch are judged by Fitch to be strictly high grade,
broadly marketable, suitable for investment by trustees and fiduciary
institutions and liable to but slight market fluctuation other than through
changes in the money rate. The prime feature of an AAA bond is a showing of
earnings several times or many times interest requirements, with such stability
of applicable earnings that safety is beyond reasonable question whatever
changes occur in conditions. Bonds rated AA by Fitch are judged by Fitch to be
of safety virtually beyond question and are readily salable, whose merits are
not unlike those of the AAA class, but whose margin of safety is less strikingly
broad. The issue may be the obligation of a small company, strongly secured but
influenced as to rating by the lesser financial power of the enterprise and more
local type of market.

Bonds rated Duff-1 are judged by Duff to be of the highest credit quality
with negligible risk factors; only slightly more than U.S. Treasury debt. Bonds
rated Duff-2, 3 and 4 are judged by Duff to be of high credit quality with
strong protection factors. Risk is modest but may vary slightly from time to
time because of economic conditions.

Obligations rated AAA by IBCA have the lowest expectation of investment
risk. Capacity for timely repayment of principal and interest is substantial,
such that adverse changes in business, economic or financial conditions are
unlikely to increase investment risk significantly. Obligations rated AA have a
very low expectation of investment risk. Capacity for timely repayment of
principal and interest is substantial. Adverse changes in business, economic or
financial conditions may increase investment risk albeit not very significantly.

IBCA also assigns a rating to certain international and U.S. banks. An IBCA
bank rating represents IBCA's current assessment of the strength of the bank and
whether such bank would receive support should it experience difficulties. In
its assessment of a bank, IBCA uses a dual rating system comprised of Legal
Rating and Individual Ratings. In addition, IBCA assigns banks Long- and
Short-Term Ratings as used in the corporate ratings discussed above. Legal
Ratings, which range in gradation from 1 through 5, address the question of
whether the bank would receive support by central banks or shareholders if it
experienced difficulties, and such ratings are considered by IBCA to be a prime
factor in its assessment of credit risk. Individual Ratings, which range in
gradations from A through E, represent IBCA's assessment of a bank's economic
merits and address the question of how the bank would be viewed if it were
entirely independent and could not rely on support from state authorities or its
owners.

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<PAGE> 82

***************************************************************************
* *
* Information contained herein is subject to completion or amendment. A *
* registration statement relating to these securities has been filed *
* with the Securities and Exchange Commission. Those securities may not *
* be sold nor may offers to buy be accepted prior to the time the *
* registration statement becomes effective. This prospectus shall not *
* constitute an offer to sell or the solicitation of an offer to buy *
* nor shall there be any sale of these securities in any State in which *
* such offer, solicitation or sale would be unlawful prior to *
* registration or qualification under the securities laws of any such *
* State. *
* *
***************************************************************************

SUBJECT TO COMPLETION DATED FEBRUARY 15, 1995

AMERICAN CAPITAL LIFE INVESTMENT TRUST
2800 Post Oak Boulevard
Houston, Texas 77056
(800) 421-5666

May 1, 1995

American Capital Life Investment Trust (the "Fund") is an open-end
diversified management investment company which offers shares in eight separate
Portfolios, one of which is described in this Prospectus. Shares are sold only
to separate accounts (the "Accounts") of various insurance companies to fund the
benefits of variable annuity or variable life insurance policies (the
"Contracts"). The Accounts invest in shares of the Portfolios in accordance with
allocation instructions received from Contractowners. Such allocation rights are
further described in the accompanying Prospectus for the Contracts. The
investment objectives of one of the Portfolios is as follows:

American Capital Real Estate Securities Portfolio (the "Portfolio") seeks
as its primary objective long-term growth of capital by investing
principally in securities of companies operating in the real estate
industry ("Real Estate Securities"). Current income is a secondary
consideration. A "real estate industry company" is a company that derives
at least 50% of its assets (marked to market), gross income or net profits
from the ownership, construction, management or sale of residential,
commercial or industrial real estate. Under normal market conditions, at
least 65% of the Portfolio's total assets will be invested in Real Estate
Securities, primarily equity securities of real estate investment trusts.
There can be no assurance that the Portfolio will achieve its investment
objectives.

THE SHARES OF THIS FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY, ANY BANK AND ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
AGENCY AND ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF
PRINCIPAL.
- --------------------------------------------------------------------------------

A Statement of Additional Information dated the same date as this
Prospectus has been filed with the Securities and Exchange Commission ("SEC")
and contains further information about the Fund. A copy of the Statement of
Additional Information may be obtained without charge by calling or writing the
Fund at the telephone number and address printed above. The Statement of
Additional Information is hereby incorporated by reference into this Prospectus.

AMERICAN CAPITAL LIFE INVESTMENT TRUST

<TABLE>
<S> <C>
CUSTODIAN: State Street Bank and Trust
Company
225 Franklin Street
Boston, Massachusetts 02110

SHAREHOLDER Van Kampen American Capital
SERVICE AGENT: Shareholder Services, Inc.
P.O. Box 418256
Kansas City, Missouri 64141-9256

DISTRIBUTOR: Van Kampen American Capital
Distributors, Inc.
2800 Post Oak Boulevard
Houston, Texas 77056

INVESTMENT Van Kampen American Capital
ADVISER: Asset Management, Inc.
2800 Post Oak Boulevard
Houston, Texas 77056

INVESTMENT Hines Interests Realty
SUBADVISER: Advisors Limited Partnership
2800 Post Oak Boulevard
Houston, Texas 77056

</TABLE>

TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary.......................... 3
Investment Objectives and Policies.......... 5
Risk Factors................................ 7
Investment Practices and Restrictions....... 8
The Fund and Its Management................. 11
Purchase of Shares.......................... 13

<CAPTION>
Page
<S> <C>
Determination of Net Asset Value............ 13
Redemption of Shares........................ 14
Dividends, Distributions and Taxes.......... 14
Prior Performance Information............... 15
Additional Information...................... 16
Appendix.................................... 18
</TABLE>

- -------------------------------------------------------------------------------

No dealer, salesperson, or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus or in the Statement of Additional Information, and, if given or made,
such other information or representations must not be relied upon as having been
authorized by the Fund or by the Distributor. This Prospectus does not
constitute an offering by the Distributor in any jurisdiction in which such
offering may not lawfully be made.

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PROSPECTUS SUMMARY

Shares Offered....... Shares of beneficial interest.

Type of Company...... Diversified, open-end management investment company.

Investment Objectives The Portfolio's primary investment objective is to seek
long-term growth of capital. Current income is a
secondary consideration. There is, however, no assurance
that the Portfolio will be successful in achieving its
objectives.

Investment Policy and
Risks.............. The Portfolio will seek to achieve its investment
objectives by investing in a portfolio of securities of
companies operating in the real estate industry ("Real
Estate Securities"). Real Estate Securities include
equity securities, including common stocks and
convertible securities, as well as non-convertible
preferred stocks and debt securities of real estate
industry companies. A "real estate industry company" is a
company that derives at least 50% of its assets (marked
to market), gross income or net profits from the
ownership, construction, management or sale of
residential, commercial or industrial real estate. Under
normal market conditions, at least 65% of the Portfolio's
total assets will be invested in Real Estate Securities,
primarily equity securities of real estate investment
trusts. The Portfolio's investment in debt securities
will be rated, at the time of investment, at least Baa by
Moody's Investors Service ("Moody's") or BBB by Standard
& Poor's Corporation ("S&P"), a comparable rating by any
other nationally recognized statistical rating
organization or if unrated, determined by Van Kampen
American Capital Asset Management, Inc. (the "Adviser")
to be of comparable quality. Under normal market
conditions, the Portfolio may invest up to 35% of its
total assets in equity and debt securities of companies
outside the real estate industry, U.S. Government
securities, cash and money market instruments. There can
be no assurance that the Portfolio will achieve its
investment objectives.

Because of the Portfolio's policy of concentrating its
investments in Real Estate Securities, the Portfolio may
be more susceptible than an investment company without
such a policy to any single economic, political or
regulatory occurrence affecting the real estate industry.
In addition, the Portfolio will be affected by general
changes in interest rates which will result in increases
or decreases in the market value of the debt securities
(and, to a lesser degree, equity securities) held by the
Portfolio; the market value of such securities tends to
have an inverse relationship to the movement of interest
rates. For additional information regarding the risk
connected with investment in Real Estate Securities, see
"Risk Factors."

The Portfolio may invest up to 25% of its total assets in
securities issued by foreign issuers, some or all of
which may also be Real Estate Securities. Investments in
foreign securities involve certain risks not ordinarily
associated with investments in securities of domestic
issuers, including fluctuations in foreign exchange
rates, future political and economic developments, and
the

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possible imposition of exchange controls or other foreign
governmental laws or restrictions. See "Investment
Objectives and Policies -- Foreign Securities."

The Portfolio may purchase or sell debt securities on a
forward commitment basis. See "Investment Practices and
Restrictions -- Forward Commitments." The Portfolio may
use portfolio management techniques and strategies
involving options, futures contracts and options on
futures. The utilization of options, futures contracts
and options on futures contracts may involve greater than
ordinary risks and the likelihood of more volatile price
fluctuation. See "Investment Practices and
Restrictions -- Using Options, Futures Contracts and
Options on Futures Contracts."

Investment Advisers.. The Adviser has served as investment adviser to the
Portfolio since its inception. The Adviser serves as
investment adviser to 50 investment company portfolios.
Hines Interests Realty Advisors Limited Partnership
(hereinafter referred to either as the "Subadviser" or
"Hines Realty Advisors") provides advisory services to
the Adviser of the Portfolio with respect to the real
estate industry. See "The Fund and Its Management."

Dividends and
Distributions...... Dividends and any capital gains are distributed at least
annually. All dividends and distributions are
automatically reinvested by the Account in shares of the
Portfolio at net asset value per share. See "Dividends,
Distributions and Taxes."

Redemption........... At the next determined net asset value.

Distributor.......... Van Kampen American Capital Distributors, Inc. (the
"Distributor").

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INVESTMENT OBJECTIVES AND POLICIES

General. The Portfolio's primary investment objective is to provide
shareholders with long-term growth of capital. Current income is a secondary
consideration. The Portfolio will seek to achieve its investment objectives by
investing principally in a diversified portfolio of Real Estate Securities which
include equity securities, including common stocks and convertible securities,
as well as non-convertible preferred stocks and debt securities of real estate
industry companies. A "real estate industry company" is a company that derives
at least 50% of its assets (marked to market), gross income or net profits from
the ownership, construction, management or sale of residential, commercial or
industrial real estate. Real estate industry companies may include among others:
equity real estate investment trusts, which pool investors' funds for investment
primarily in commercial real estate properties, mortgage real estate investment
trusts, which invest pooled funds in real estate related loans; brokers or real
estate developers; and companies with substantial real estate holdings, such as
paper and lumber products and hotel and entertainment companies. Under normal
market conditions, at least 65% of the Portfolio's total assets will be invested
in Real Estate Securities, primarily equity securities of real estate investment
trusts. The Portfolio's investment in debt securities will be rated, at the time
of investment, at least Baa by Moody's or BBB by S&P, a comparable rating by any
other nationally recognized statistical rating organization or if unrated,
determined by the Adviser to be of comparable quality. Ratings at the time of
purchase determine which securities may be acquired, and a subsequent reduction
in ratings does not require the Portfolio to dispose of a security. Securities
rated Baa by Moody's or BBB by S&P are considered to be medium grade obligations
which possess speculative characteristics so that changes in economic conditions
or other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than in the case of higher rated securities. The
rating of the ratings agencies represent their opinions of the quality of the
debt securities they undertake to rate, but not the market value risk of such
securities. It should be emphasized, however, that ratings are general and are
not absolute standards of quality. The Portfolio may invest more than 25% of its
total assets in the real estate industry.

Under normal market conditions, the Portfolio may invest up to 35% of its
total assets in equity and debt securities of companies outside the real estate
industry, U.S. Government securities, cash and money market instruments.

The Portfolio may invest up to 25% of its assets in securities issued by
foreign issuers. See "Investment Objectives and Policies -- Foreign Securities."
The Portfolio may engage in portfolio management strategies and techniques
involving options, futures contracts and options on futures. Options, futures
contracts and related options are described in "Investment Practices and
Restrictions -- Using Options, Futures Contracts and Options on Futures
Contracts" and the Statement of Additional Information.

For temporary defensive purposes, the Portfolio may invest up to 100% of
its total assets in short-term investments as described below. The Portfolio
will assume a temporary defensive posture only when economic and other factors
affect the real estate industry market to such an extent that the Adviser
believes there to be extraordinary risks in being primarily in Real Estate
Securities.

There can be no assurance that the Portfolio will achieve its investment
objectives.

The investment objectives and policies, the percentage limitations, and the
kinds of securities in which the Portfolio may invest are generally not
fundamental policies and may be changed by the Trustees, unless expressly
governed by certain limitations as described under "Investment Practices and
Restrictions -- Investment Restrictions" which can be changed only by action of
the shareholders. If there is a change in

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the objectives of the Portfolio, shareholders should consider whether the
Portfolio remains an appropriate investment in light of their then current
financial position and needs.

Short-Term Investments. The Portfolio may invest in obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, commercial
paper, bankers' acceptances, certificates of deposit, repurchase agreements
collateralized by these securities, and other short-term evidences of
indebtedness. The Portfolio will only purchase commercial paper if it is rated
Prime-1 or Prime-2 by Moody's or A-1 or A-2 by S&P. Such temporary investments
may be made either for liquidity purposes, to meet shareholder redemption
requirements or as a temporary defensive measure.

Foreign Securities. The Portfolio may invest up to 25% of its assets in
securities issued by foreign issuers of developed countries of similar quality
as the securities described above as determined by the Adviser. Some of such
securities may also be Real Estate Securities. Investments in securities of
foreign entities and securities denominated in foreign currencies involve risks
not typically involved in domestic investment, including fluctuations in foreign
exchange rates, future foreign political and economic developments, and the
possible imposition of exchange controls or other foreign or United States
governmental laws or restrictions applicable to such investments. Since the
Portfolio may invest in securities denominated or quoted in currencies other
than the United States dollar, changes in foreign currency exchange rates may
affect the value of investments in the portfolio and the accrued income and
unrealized appreciation or depreciation of investments. Changes in foreign
currency exchange rates relative to the U.S. dollar will affect the U.S. dollar
value of the Portfolio's assets denominated in that currency and the Portfolio's
yield on such assets.

The Portfolio may also purchase foreign securities in the form of American
Depositary Receipts ("ADRs") and European Depositary Receipts ("EDRs") or other
securities representing underlying shares of foreign companies. ADRs are
publicly traded on exchanges or over-the-counter in the United States and are
issued through "sponsored" or "unsponsored" arrangements. In a sponsored ADR
arrangement, the foreign issuer assumes the obligation to pay some or all of the
depositary's transaction fees, whereas under an unsponsored arrangement, the
foreign issuer assumes no obligation and the depositary's transaction fees are
paid by the ADR holders. In addition, less information is available in the
United States about an unsponsored ADR than about a sponsored ADR and the
financial information about a company may not be as reliable for an unsponsored
ADR as it is for a sponsored ADR. The Portfolio may invest in ADRs through both
sponsored and unsponsored arrangements. For further information on ADRs and
EDRs, investors should refer to the Statement of Additional Information.

With respect to certain foreign countries, there is the possibility of
expropriation of assets, confiscatory taxation, political or social instability
or diplomatic developments which could affect investment in those countries.
There may be less publicly available information about a foreign security than
about a United States security, and foreign entities may not be subject to
accounting, auditing and financial reporting standards and requirements
comparable to those of United States entities. In addition, certain foreign
investments made by the Portfolio may be subject to foreign withholding taxes,
which would reduce the Portfolio's total return on such investments and the
amounts available for distributions by the Portfolio to its shareholders. See
"Dividends, Distributions and Taxes." Foreign financial markets, while growing
in volume, have, for the most part, substantially less volume than United States
markets, and securities of many foreign companies are less liquid and their
prices more volatile than securities of comparable domestic companies. The
foreign markets also have different clearance and settlement procedures and in
certain markets there have been times when settlements have been unable to keep
pace with the volume of securities transactions making it difficult to conduct
such transactions. Delays in settlement could result in

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<PAGE> 88

temporary periods when assets of the Portfolio are not invested and no return is
earned thereon. The inability of the Portfolio to make intended security
purchases due to settlement problems could cause the Portfolio to miss
attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result either in losses to the
Portfolio due to subsequent declines in value of the portfolio security or, if
the Portfolio has entered into a contract to sell the security, could result in
possible liability to the purchaser. Costs associated with transactions in
foreign securities, including custodial costs and foreign brokerage commissions,
are generally higher than with transactions in United States securities. In
addition, the Portfolio will incur costs in connection with conversions between
various currencies. There is generally less government supervision and
regulation of exchanges, financial institutions and issuers in foreign countries
than there is in the United States.

Foreign Currency Transactions. The value of the Portfolio's portfolio
securities that are traded in foreign markets may be affected by changes in
currency exchange rates and exchange control regulations. In addition, the
Portfolio will incur costs in connection with conversions between various
currencies. The Portfolio's foreign currency exchange transactions generally
will be conducted on a spot basis (that is, cash basis) at the spot rate for
purchasing or selling currency prevailing in the foreign currency exchange
market. The Portfolio purchases and sells foreign currency on a spot basis in
connection with the settlement of transactions in securities traded in such
foreign currency. The Portfolio does not purchase and sell foreign currencies as
an investment.

The Portfolio also may enter into contracts with banks or other foreign
currency brokers and dealers to purchase or sell foreign currencies at a future
date ("forward contracts") and purchase and sell foreign currency futures
contracts to hedge against changes in foreign currency exchange rates. A foreign
currency forward contract is a negotiated agreement between the contracting
parties to exchange a specified amount of currency at a specified future time at
a specified rate. The rate can be higher or lower than the spot rate between the
currencies that are the subject of the contract.

The Portfolio may attempt to hedge against changes in the value of the
United States dollar in relation to a foreign currency by entering into a
forward contract for the purchase or sale of the amount of foreign currency
invested or to be invested, or by buying or selling a foreign currency futures
contract for such amount. Such hedging strategies may be employed before the
Portfolio purchases a foreign security traded in the hedged currency which the
Portfolio anticipates acquiring or between the date the foreign security is
purchased or sold and the date on which payment therefore is made or received.
Hedging against a change in the value of a foreign currency in the foregoing
manner does not eliminate fluctuations in the price of portfolio securities or
prevent losses if the prices of such securities decline. Furthermore, such
hedging transactions reduce or preclude the opportunity for gain if the value of
the hedged currency should move in the direction opposite to the hedged
position. The Portfolio will not speculate in foreign currency forward or
futures contracts or through the purchase and sale of foreign currencies.

RISK FACTORS

Although the Portfolio does not invest directly in real estate, an
investment in the Portfolio will generally be subject to the risks associated
with real estate because of its policy of concentration in the securities of
companies in the real estate industry. These risks include, among others:
declines in the value of real estate; risks related to general and local
economic conditions; overbuilding and increased competition; increases in
property taxes and operating expenses; changes in zoning laws; casualty or
condemnation losses; variations in rental income; changes in neighborhood
values; the appeal of properties of tenants and changes in interest rates. The
value of securities of companies which service the real estate industry will

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<PAGE> 89

also be affected by such risks. If the Portfolio has rental income or income
from the disposition of real property acquired as a result of a default on
securities the Portfolio owns, the receipt of such income may adversely affect
its ability to retain its tax status as a regulated investment company.

In addition, equity real estate investment trusts may be affected by
changes in the value of the underlying property owned by the trusts, while
mortgage real estate investment trusts may be affected by the quality of credit
extended. Equity and mortgage real estate investment trusts are dependent upon
management skill, may not be diversified and are subject to the risks of
financing projects. Such real estate investment trusts are also subject to heavy
cash flow dependency, defaults by borrowers, self-liquidation and the
possibility of failing to qualify for tax-free pass-through of income under the
Internal Revenue Code (the "Code") and to maintain exemption from the Investment
Company Act of 1940. Changes in interest rates may also affect the value of the
debt securities in the Portfolio's portfolio. Like investment companies such as
the Portfolio, real estate investment trusts are not taxed on income distributed
to shareholders provided they comply with several requirements of the Code. The
Portfolio will indirectly bear its proportionate share of any expenses paid by
the real estate investment trusts in which it invests in addition to the
expenses paid by the Portfolio.

Additional information about the Portfolio's investment practices and the
risks associated with such practices are contained in "Investment Objectives and
Policies" and "Investment Practices and Restrictions" herein and in the
Statement of Additional Information.

INVESTMENT PRACTICES AND RESTRICTIONS

Repurchase Agreements. The Portfolio may enter into repurchase agreements
with domestic or foreign banks or broker-dealers in order to earn a return on
temporarily available cash. A repurchase agreement is a short-term investment in
which the purchaser, (i.e., the Portfolio) acquires ownership of a debt security
and the seller agrees to repurchase the obligation at a future time and set
price, thereby determining the yield during the holding period. The Portfolio
will not invest more than 15% of its net assets in repurchase agreements that do
not mature within seven days and in any other illiquid securities. In the event
of the bankruptcy of the seller of a repurchase agreement, the Portfolio could
experience delays in liquidating the underlying securities, and the Portfolio
could incur a loss including: (a) possible decline in the value of the
underlying security during the period while the Portfolio seeks to enforce its
rights thereto, (b) possible lack of access to income on the underlying security
during this period, and (c) expenses of enforcing its rights. See the Statement
of Additional Information.

For the purpose of investing in repurchase agreements, the Adviser may
aggregate the cash that substantially all of the funds advised or subadvised by
the Adviser would otherwise invest separately into a joint account. The cash in
the joint account is then invested and the funds that contributed to the joint
account share pro rata in the net revenue generated. The Adviser believes that
the joint account produces greater efficiencies and economies of scale that may
contribute to reduced transaction costs, higher returns, higher quality
investments and greater diversity of investments for the Portfolio than would be
available to the Portfolio investing separately. The manner in which the joint
account is managed is subject to conditions set forth in the SEC order
authorizing this practice, which conditions are designed to ensure the fair
administration of the joint account and to protect the amounts in that account.

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Portfolio Transactions and Brokerage Practices. The Adviser is responsible
for the placement of orders for the purchase and sale of portfolio securities
for the Portfolio and the negotiation of brokerage commissions on such
transactions. Brokerage firms are selected on the basis of their professional
capability for the type of transaction and the value and quality of execution
services rendered on a continuing basis. The debt securities in the Portfolio's
portfolio generally are traded in the over-the-counter market through dealers. A
dealer is a securities firm or bank which makes a market for securities by
opening a position at one price and closing the position at a slightly more
favorable price. The difference between the prices is known as a spread. Foreign
currency and forward currency exchange contracts are traded in a similar fashion
in a dealer market maintained primarily by large commercial banks. The Portfolio
will pay brokerage commissions in connection with transactions in
exchange-traded options, futures contracts and related options. Spreads or
commissions for transactions executed in foreign markets often are higher than
in the United States. The Adviser is authorized to place portfolio transactions
with brokerage firms participating in the distribution of shares of the
Portfolio and other American Capital mutual funds if it reasonably believes that
the quality of the execution and the commission are comparable to that available
from other qualified brokerage firms. The Adviser is authorized to pay higher
commissions to brokerage firms that provide it with investment and research
information than to firms which do not provide such services if the Adviser
determines that such commissions are reasonable in relation to the overall
services provided. The Information received may be used by the Adviser in
managing the assets of other advisory accounts as well as in the management of
the assets of the Portfolio.

Portfolio Turnover. The Portfolio may purchase and sell securities without
regard to the length of time the security is to be, or has been held. The annual
portfolio turnover rate may exceed 100%, which is higher than that of many other
investment companies. A 100% turnover rate would occur, for example, if all the
securities held by the Portfolio were replaced in a period of one year. High
portfolio turnover involves correspondingly greater brokerage commissions and
other transaction costs, which are borne directly by the Portfolio, and may
result in realization of short-term capital gains if securities are held for one
year or less which may be subject to applicable income taxes. See "Dividends,
Distributions and Taxes."

Restricted Securities. The Portfolio may invest up to 15% of its net
assets in restricted securities and other illiquid assets (see herein for
information regarding state restrictions). As used herein, restricted securities
are those that have been sold in the United States without registration under
the Securities Act of 1933 ("1933 Act") and are thus subject to restrictions on
resale. Excluded from the limitation, however, are any restricted securities
which are eligible for resale pursuant to Rule 144A under the 1933 Act and which
have been determined to be liquid by the Trustees or by the Adviser pursuant to
guidelines approved by the Trustees. The determination of liquidity is based on
the volume of reported trading in the institutional secondary market for each
security. Since it is not possible to predict with assurance how the markets for
restricted securities sold and offered under Rule 144A will develop, the
Trustees will carefully monitor the Portfolio's investment in these securities
focusing on such factors, among others, as valuation, liquidity and availability
of information. This investment practice could have the effect of increasing the
level of illiquidity in the Portfolio to the extent that qualified institutional
buyers become for a time uninterested in purchasing these restricted securities.
These difficulties and delays could result in the Portfolio's inability to
realize a favorable price upon disposition of restricted securities, and in some
cases might make disposition of such securities at the time desired by the
Portfolio impossible. Since market quotations are not readily available for
restricted securities, such securities will be valued by a method that the
Portfolio's Trustees believes accurately reflects fair value.

Using Options, Futures Contracts and Options on Futures Contracts. The
Portfolio expects to utilize opinions, futures contracts and options on futures
contracts in several different ways, depending upon the

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status of the Portfolio's portfolio and the Adviser's expectations concerning
the securities markets. See the Statement of Additional information for a
discussion of options, futures contracts and options on futures contracts.

Potential Risks of Options, Futures Contracts and Options on Futures
Contracts. The purchase and sale of options and futures contracts involve risks
different from those involved with direct investments in securities. While
utilization of options, futures contracts and similar instruments may be
advantageous to the Portfolio, if the Adviser is not successful in employing
such instruments in managing the Portfolio's investments, the Portfolio's
performance will be worse than if the Portfolio did not make such investments.
In addition, the Portfolio would pay commissions and other costs in connection
with such investments, which may increase the Portfolio's expenses and reduce
its return. The Portfolio may write or purchase options in privately negotiated
transactions ("OTC Options") as well as listed options. OTC Options can be
closed out only by agreement with the other party to the transaction. Any OTC
Option purchased by the Portfolio is considered an illiquid security. Any OTC
Option written by the Portfolio is with a qualified dealer pursuant to an
agreement under which the Portfolio may repurchase the option at a formula
price. Such options are considered illiquid to the extent that the formula price
exceeds the intrinsic value of the option. The Portfolio may not purchase or
sell futures contracts or related options for which the aggregate initial margin
and premiums exceed five percent of the fair market value of the Portfolio's
assets. In order to prevent leverage in connection with the purchase of futures
contracts or call options thereon by the Portfolio, an amount of cash, cash
equivalents or liquid high-grade debt securities equal to the market value of
the obligation under the futures contract or option (less any related margin
deposits) will be maintained in a segregated account with the Custodian. The
Portfolio may not invest more than 15% of its net assets in illiquid securities
and repurchase agreements which have a maturity of longer than seven days. A
more complete discussion of the potential risks involved in transactions
involving options or futures contracts and options on futures contracts is
contained in the Statement of Additional Information.

Forward Commitments. The Portfolio may purchase or sell debt securities on
a "when-issued" or "delayed delivery" basis ("Forward Commitments"). These
transactions occur when securities are purchased or sold by the Portfolio with
payment and delivery taking place in the future, frequently a month or more
after such transaction. This price is fixed on the date of the commitment, and
the seller continues to accrue interest on the securities covered by the Forward
Commitment until delivery and payment take place. At the time of settlement, the
market value of the securities may be more or less than the purchase or sale
price.

The Portfolio may either settle a Forward Commitment by taking delivery of
the securities or may either resell or repurchase a Forward Commitment on or
before the settlement date in which event the Portfolio may reinvest the
proceeds in another Forward Commitment. The Portfolio's use of Forward
Commitments may increase its overall investment exposure and thus its potential
for gain or loss. When engaging in Forward Commitments, the Portfolio relies on
the other party to complete the transaction. Should the other party fail to do
so, the Portfolio might lose a purchase or sale opportunity that could be more
advantageous than alternative opportunities at the time of the failure.

The Portfolio maintains a segregated account (which is marked to market
daily) of cash, U.S. Government securities or the security covered by the
Forward Commitment with the Portfolio's custodian in an aggregate amount equal
to the amount of its commitment as long as the obligation to purchase or sell
continues.

Investment Restrictions. The Portfolio has adopted a number of investment
restrictions that may not be changed without the approval of the holders of a
majority of the Portfolio's shares. See the Statement of

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<PAGE> 92

Additional Information. The percentage limitations need only be met at the time
the investment is made or other relevant action taken. These restrictions
provide, among other things, that the Portfolio may not:

1. Borrow money except temporarily from banks to facilitate payment of
redemption requests and then only in amounts not exceeding 33 1/3% of its
net assets, or pledge more than ten percent of its net assets in connection
with permissible borrowings or purchase additional securities when money
borrowed exceeds five percent of its net assets. Margin deposits or
payments in connection with the writing of options, or in connection with
the purchase or sale of forward contracts, futures, foreign currency
futures and related options, are not deemed to be a pledge or other
encumbrance.

2. With respect to 75% of its total assets, invest more than five
percent of its assets in the securities of any one issuer (except the U.S.
Government, its agencies and instrumentalities and repurchase agreements
secured thereby) or purchase more than ten percent of the outstanding
voting securities of any one issuer. Neither limitation shall apply to the
acquisition of shares of other open-end investment companies to the extent
permitted by rule or order of the SEC exempting the Portfolio from the
limitations imposed by Section 12(d)(1) of the 1940 Act.

3. Lend money or securities except by the purchase of a portion of an
issue of bonds, debentures or other obligations of types commonly
distributed to institutional investors publicly or privately (in the latter
case the investment will be subject to the stated limits on investments in
"restricted securities"), and except by the purchase of securities subject
to repurchase agreements.

4. Concentrate its investment in any one industry, except that the
Portfolio will invest more than 25% of its total assets in the real estate
industry. This limitation excludes shares of other open-end investment
companies owned by the Portfolio but includes the Portfolio's pro rata
portion of the securities and other assets owned by such company.

The Portfolio may, notwithstanding any other fundamental investment policy
or limitation, invest all of its assets in the securities of a single open-end
management investment company with substantially the same fundamental investment
objectives, policies and restrictions as the Portfolio.

THE FUND AND ITS MANAGEMENT

The Fund is an open-end, diversified management investment company,
organized as a Massachusetts business trust on June 3, 1985. A mutual fund
provides, for those who have similar investment goals, a practical and
convenient way to invest in a more diversified portfolio of securities by
combining their resources in an effort to achieve such goals.

The Fund's eight Trustees have the responsibility for overseeing the
affairs of the Portfolio. The Adviser and the Subadviser are responsible for the
provision of advisory services in relation to the Portfolio's assets. The
Adviser also provides administrative services and manages the Portfolio's
business and affairs. The Adviser, together with its predecessors, has been in
the investment advisory business since 1926 and has served as investment adviser
to the Portfolio since its inception. As of March 31, 1995, the Adviser provided
investment advice to 48 investment company portfolios with total net assets of
approximately $ billion.

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Clayton Dubilier & Rice, Inc. a New York based private investment firm. The
General Partner of C&D L.P. is Clayton & Dubilier Associates IV Limited
Partnership ("C&D Associates L.P."). The general partners of C&D Associates L.P.
are Joseph L. Rice, III, B. Charles Ames, Alberto Cribiore, Donald J. Gogel and
Hubbard C. Howe, each of whom is a principal of Clayton, Dubilier & Rice, Inc.
In addition, certain officers, directors and employees of VKAC own, in the
aggregate, not more than 6% of the common stock of VK/AC Holding, Inc. and have
the right to acquire, upon the exercise of options, approximately an additional
10% of the common stock of VK/AC Holding, Inc.

Mr. Don G. Powell is President and Trustee of the Fund, President, Chief
Executive Officer and Director of the Adviser, and Chief Executive Officer and
Chairman of the Distributor. Most other officers of the Fund are also officers
and/or directors of the Adviser.

Hines Realty Advisors provides real estate advisory services to the Adviser
of the Portfolio. Hines Realty Advisers is a limited partnership among Hines
Holdings, Inc. (as general partner), and Hines 1980 A, Ltd. and Gerald D. Hines
(as limited partners). Mr. William S. Wardrop, Jr. is President and Mr. Glenn I.
Lowenstein is Vice President of the Subadviser. Hines Realty Advisors has had
limited previous experience as an investment adviser to mutual funds (since mid
May 1994). Affiliates of the Subadviser have extensive domestic and
international experience in owning and managing real estate. Hines Realty
Advisors, an affiliate of the Hines real estate organization ("Hines"), provides
a comprehensive evaluation of the real estate market. Founded in 1957, Hines has
proven experience in a full range of real estate services: strategic asset
management, property management development, marketing and leasing, acquisition/
disposition and financing. Headquartered in Houston, Texas, Hines has regional
offices in New York, San Francisco, Atlanta and Chicago as well as 29 additional
submarkets. The firm also has offices in Mexico City, Berlin and Moscow. Hines
Interests owns and/or manages more than 61 million square feet of prime office,
retail and industrial space representing more than 451 projects. Major projects
include: Pennzoil Place in Houston, the Gallerias in Houston and Dallas, 53rd At
Third in New York, 101 California in San Francisco, One Ninety One Peachtree in
Atlanta, Three First National Plaza in Chicago and Huntington Center in
Columbus.

Associates in field offices nationwide generate regional economic analysis
based on demographic factors such as job growth and population movement. Hines
also provides a regional property-type analysis determining whether the
property -- outlet mall, strip shopping center or apartment complex, among
others -- makes sense in the area.

The Fund retains the Adviser to manage the investment of its assets and to
place orders for the purchase and sale of its portfolio securities. Under an
investment advisory agreement dated , 1995 (the "Advisory
Agreement"), the Fund pays the Adviser a monthly fee computed on average daily
net assets of the Portfolio at the annual rate of 1.00% of the Portfolio's
average daily net assets. This fee is higher than that charged by most other
mutual funds but the Trustees believe it is justified by the special nature of
the Portfolio and is not necessarily higher than the fees charged by certain
mutual funds with investment objectives and policies similar to those of the
Portfolio. Under the Advisory Agreement, the Fund also reimburses the Adviser
for the cost of the Portfolio's accounting services, which include maintaining
its financial books and records and calculating its daily net asset value.
Operating expenses paid by the Portfolio include shareholder service agency
fees, custodial fees, legal and accounting fees, the costs of reports and
proxies to shareholders, trustees' fees, and all other business expenses not
specifically assumed by the Adviser. The Adviser has entered into an investment
sub-advisory agreement dated , 1995 (the "Sub-advisory Agreement")
with the Subadviser to assist it in performing its investment advisory
functions. The Subadviser is primarily responsible for the following areas: (i)
providing

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regional economic analysis of the areas in which properties owned by real estate
investment trusts are located; (ii) analyzing attractiveness of the
property-type within the geographic region; (iii) evaluating and assessing real
estate valuation and the condition of property; (iv) evaluating property
managers and sponsors of real estate investment trusts; and (v) continuously
reviewing and monitoring the real estate investments in the Portfolio's
portfolio. Pursuant to the Sub-advisory Agreement, the Subadviser receives on an
annual basis 50% of the compensation received by the Adviser. The Adviser and
the Subadviser may, from time to time, agree to waive their respective
investment advisory fees or any portion thereof or elect to reimburse the
Portfolio for ordinary business expenses in excess of an agreed upon amount.

Mary Jayne Byrne is primarily responsible for the day-to-day management of
the Portfolio's investment portfolio. She has served in that capacity since the
inception of the Portfolio. Ms. Byrne is Vice President of the Fund and has been
a portfolio manager with the Adviser since 1994. Prior to that time, Ms. Byrne
was an associate portfolio manager with the Adviser and was formerly a senior
equity analyst at Texas Commerce Management Company.

PURCHASE OF SHARES

The Fund is offering its shares only to Separate Accounts of various
insurance companies to fund the benefits of variable annuity or variable life
insurance contracts. The Fund does not foresee any disadvantage to holders of
Contracts arising out of the fact that the interests of the holders may differ
from the interests of holders of life insurance policies and that holders of one
insurance policy may differ from holders of other insurance policies.
Nevertheless, the Fund's Trustees intend to monitor events in order to identify
any material irreconcilable conflicts which may possibly arise and to determine
what action, if any, should be taken. The Contracts are described in the
separate prospectuses issued by the Participating Insurance Companies. The Fund
continuously offers shares in the Portfolio to the Accounts at prices equal to
the respective per share net asset value of the Portfolio. Van Kampen American
Capital Distributors, Inc., One Parkview Plaza, Oakbrook Terrace, Illinois
60181, acts as the distributor of the shares. Net asset value is determined in
the manner set forth below under "Determination of Net Asset Value."

DETERMINATION OF NET ASSET VALUE

Net asset value per share is computed for the Portfolio as of the close of
trading (currently 4:00 p.m., New York time) each day the New York Stock
Exchange is open. See the accompanying Prospectus for the policies for
information regarding holidays observed by the insurance company.

Net asset value per share is determined by dividing the value of the
Portfolio's securities, cash and other assets (including accrued interest)
attributable to such class less all liabilities (including accrued expenses)
attributable to such class, by the total number of shares of the class
outstanding. Such computation is made by using prices as of the close of trading
on the Exchange and (i) valuing securities listed or traded on a national
securities exchange at the last reported sale price, (ii) valuing over-the-
counter securities for which the last sale price is available from the National
Association of Securities Dealers Automated Quotations ("NASDAQ") at that price,
(iii) unlisted securities and listed securities for which the last sale price is
not available are valued at the last reported bid price, (iv) options and
futures contracts are valued at the last sale price or if no sales are reported,
at the mean between the bid and asked prices, and (v) valuing any securities for
which market quotations are not readily available, and any other assets at fair
value as determined in good faith by the Trustees of the Fund. Short-term
investments with a maturity of 60 days or less when purchased are valued at
amortized cost, which approximates market value. Short-term investments with a
maturity of more than 60 days when purchased are valued based on market

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<PAGE> 95

quotations until the remaining days to maturity becomes less than 61 days. From
such time, until maturity, the investments are valued at amortized cost using
the value of the investment on the 61st day.

REDEMPTION OF SHARES

Payment for shares tendered for redemption by the insurance company is made
ordinarily in cash within seven days after tender in proper form, except under
unusual circumstances as determined by the SEC. The redemption price will be the
net asset value next determined after the receipt of a request in proper form.
The market value of the securities in the Portfolio is subject to daily
fluctuations and the net asset value of the Portfolio's shares will fluctuate
accordingly. Therefore, the redemption value may be more or less than the
investor's cost.

DIVIDENDS, DISTRIBUTIONS AND TAXES

All dividends and capital gains distributions of the Portfolio are
automatically reinvested by the Account in additional shares of the Portfolio.

Dividends and Distributions. Dividends from stocks and interest earned
from other investments are the main source of income for the Portfolio.
Substantially all of this income, less expenses, is distributed on an annual
basis. When the Portfolio sells portfolio securities, it may realize capital
gains or losses, depending on whether the prices of the securities sold are
higher or lower than the prices the Portfolio paid to purchase them. Net
realized capital gains represent the total profit from sales of securities minus
total losses from sales of securities including any losses carried forward from
prior years. The Portfolio distributes any net realized capital gains to the
Account no less frequently than annually.

The Portfolio intends to qualify as a "regulated investment company" under
the Code. By maintaining its qualification as a "regulated investment company,"
the Portfolio will not incur any liability for federal income taxes to the
extent its taxable ordinary income and any capital gain net income is
distributed in accordance with Subchapter M of the Code. By qualifying as a
regulated investment company, the Portfolio is not subject to Federal income
taxes to the extent it distributes its taxable net investment income and taxable
net realized capital gains. If for any taxable year the Portfolio does not
qualify for the special tax treatment afforded regulated investment companies,
all of its taxable income, including any net realized capital gains, would be
subject to tax at regular corporate rates (without any deduction for
distributions to shareholders). The Portfolio is subject to the diversification
requirements of Section 817(h) of the Code.

Dividends and distributions paid by the Portfolio have the effect of
reducing net asset value per share on the record date by the amount of the
payment. Therefore, a dividend or distribution paid shortly after the purchase
of shares by an investor would represent, in substance, a return of capital to
the shareholder (to the extent it is paid on the shares so purchased) even
though subject to income taxes as discussed above.

Dividends and interest received by the Portfolio may give rise to
withholding and other taxes imposed by foreign countries. Tax conventions
between certain countries and the United States may reduce or eliminate such
taxes. Investors may be entitled to claim United States foreign tax credits with
respect to such taxes, subject to certain provisions and limitations contained
in the Code. If more than 50% in value of the Portfolio's total assets at the
close of its fiscal year consists of securities of foreign issuers, the
Portfolio will be eligible, and may file elections with the Internal Revenue
Service pursuant to which shareholders of the Fund will be required to include
their respective pro rata portions of such taxes in their United States income
tax returns as gross income, treat such respective pro rata portions as taxes
paid by them, and deduct such respective pro rata portions in computing their
taxable incomes or, alternatively, use them as

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<PAGE> 96

foreign tax credits against their United States income taxes. The Portfolio will
report annually to its shareholders the amount per share of such withholding.

Under Code Section 988, foreign currency gains or losses from certain
forward contracts not traded in the interbank market are typically treated as
ordinary income or loss. Such income or loss may increase or decrease (or
possibly eliminate) the Portfolio's income available for distribution. If, under
the rules governing the tax treatment of foreign currency gains and losses, the
Portfolio's income available for distribution is decreased or eliminated, all or
a portion of the dividends declared by the Portfolio may be treated for federal
income tax purposes as a return of capital or, in some circumstances, as capital
gain. Generally, your tax basis in your Portfolio shares will be reduced to the
extent that an amount distributed to you is treated as a return of capital.

Tax Treatment to Insurance Company as Shareholder. Dividends paid by the
Portfolio from its ordinary income and distributions of the Portfolio's net
realized short-term capital gains are includable in the insurance company's
gross income. The tax treatment of such dividends and distributions depends on
the insurance company's tax status. To the extent that income of the Portfolio
represents dividends on equity securities rather than interest income, its
distributions are eligible for the 70% dividends received deduction applicable
in the case of a life insurance company as provided in the Code. However, a
dividend received from a real estate investment trust does not qualify for the
dividend received deduction. The Fund will send to the Account a written notice
required by the Code designating the amount and character of any distributions
made during such year.

Under the Code, any distribution designated as being made from the
Portfolio's net realized long-term capital gains are taxable to the insurance
company as long-term capital gains. Such distributions of long-term capital
gains will be designated as a capital gains distribution in a written notice to
the Account which accompanies the distribution payment. Long-term capital gains
distributions are not eligible for the dividends received deduction. Dividends
and capital gain distributions to the insurance company may also be subject to
state and local taxes.

As described in the accompanying Prospectus for the Contracts, the
insurance company reserves the right to assess the Account a charge for any
taxes paid by it.

Tax Treatment of Options and Futures Transactions. Gains or losses on
transactions in listed options on securities, futures and options on futures
generally are treated as 60% long-term and 40% short-term, ("60/40"), and
positions held by the Portfolio at the end of its fiscal year generally are
required to be marked to market, with the result that unrealized gains and
losses are treated as though they were realized. Gains and losses realized by
the Portfolio on transactions in over-the-counter options generally are short-
term capital gains or losses unless the option is exercised, in which case the
gain or loss is determined by the holding period of the underlying security. The
Code contains certain "straddle" rules which require deferral of losses incurred
in certain transactions involving hedged positions to the extent the Portfolio
has unrealized gains in offsetting positions and generally terminate the holding
period of the subject position. Additional information is set forth in the
Statement of Additional Information.

PRIOR PERFORMANCE INFORMATION

From time to time the Portfolio may advertise its total return for prior
periods. Any such advertisement would include at least average annual total
return quotations for one, five and ten-year periods or for the life of the
Portfolio. Other total return quotations, aggregate or average, over other time
periods may also be included.

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<PAGE> 97

The total return of the Portfolio for a particular period represents the
increase (or decrease) in the value of a hypothetical investment in the
Portfolio from the beginning to the end of the period. Total return is
calculated by subtracting the value of the initial investment from the ending
value and showing the difference as a percentage of the initial investment; the
calculation assumes the initial investment is made at the maximum public
offering price and that all income dividends or capital gains distributions
during the period are reinvested in Portfolio shares at net asset value. Total
return is based on historical earnings and asset value fluctuations and is not
intended to indicate future performance. No adjustments are made to reflect any
income taxes payable by shareholders on dividends and distributions paid by the
Portfolio.

To increase the Portfolio's yield the Adviser may, from time to time,
absorb a certain amount of the future ordinary business expenses. The Adviser
may stop absorbing these expenses at any time without prior notice.

ADDITIONAL INFORMATION

Organization of the Fund. The Fund was organized under the laws of the
Commonwealth of Massachusetts and is a business entity commonly known as a
"Massachusetts business trust." It is a diversified, open-end management
investment company. The Portfolio is authorized to issue an unlimited number of
shares of beneficial interest of $.01 par value, in the Portfolio. Shares issued
are fully paid, non-assessable and have no preemptive or conversion rights. In
the event of liquidation of the Portfolio, shareholders of the Portfolio are
entitled to share pro rata in the net assets of the Portfolio available for
distribution to shareholders.

Voting Rights. Shareholders are entitled to one vote for each full share
held and to fractional votes for fractional shares held in the election of
Trustees (to the extent hereafter provided) and on other matters submitted to
the vote of shareholders. All shares have equal voting rights. There will
normally be no meetings of shareholders for the purpose of electing Trustees
unless and until such time as less than a majority of the Trustees holding
office have been elected by shareholders, at which time the Trustees then in
office will call a shareholders' meeting for the election of Trustees.
Shareholders may, in accordance with the Declaration of Trust, cause a meeting
of shareholders to be held for the purpose of voting on the removal of Trustees.
Except as set forth above, the Trustees shall continue to hold office and
appoint successor Trustees.

The Declaration of Trust establishing the Portfolio, dated June 3, 1985, a
copy of which together with all amendments thereto (the "Declaration"), is on
file in the office of the Secretary of the Commonwealth of Massachusetts,
provides that the name "American Capital Life Investment Trust" refers to the
Trustees under the Declaration collectively as Trustees, not as individuals or
personally; and no Trustee, officer or shareholder of the Portfolio shall be
held to any personal liability, nor shall resort be had to their private
property for the satisfaction of any obligation or liability of any Portfolio
but the assets of the applicable Portfolio only shall be liable.

Shareholder Inquiries. Shareholder inquiries should be directed to the
Portfolio at 2800 Post Oak Boulevard, Houston, Texas 77056, (800) 421-5666.

Shareholder Service Agent. [Van Kampen American Capital Companies
Shareholder Services, Inc.,] ("ACCESS") P.O. Box 418256, Kansas City, Missouri
64141-9256, serves as transfer agent, shareholder

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<PAGE> 98

service agent and dividend disbursing agent for the Portfolio. ACCESS, a wholly
owned subsidiary of the Adviser's parent, provides these services at cost plus a
profit.

Legal Counsel. O'Melveny & Myers, 400 South Hope Street, Los Angeles,
California 90071, is legal counsel to the Portfolio.

Independent Accountants. Price Waterhouse LLP, 1201 Louisiana, Suite 2900,
Houston, Texas 77002 are the independent accountants for the Portfolio.

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<PAGE> 99

APPENDIX

DESCRIPTION OF BOND RATINGS

MOODY'S INVESTORS SERVICE

AAA -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge.". Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.

AA -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.

BAA -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact, have speculative characteristics as well.

BA -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during other good and bad times over the future. Uncertainty of
position characterizes bonds in this class.

CAA -- Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.

CA -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.

C -- Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.

NONRATED -- Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.

Should no rating be assigned, the reason may be one of the following:

1. An application for rating was not received or accepted.

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<PAGE> 100

2. The issue or issuer belongs to a group of securities that are not rated
as a matter of policy.

3. There is a lack of essential data pertaining to the issue or issuer.

4. The issue was privately placed, in which case the rating is not
published in Moody's publications.

Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.

Note: Those bonds in the Aa, A, Baa and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa 1,
A 1, Baa 1, Ba 1 and B 1.

STANDARD & POOR'S CORPORATION

AAA -- Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.

AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in a small degree.

A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.

BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.

BB -- B -- CCC -- CC -- C -- Debt rated BB, B, CCC, CC and C is regarded,
on balance, as predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.

CI -- The rating CI is reserved for income bonds on which no interest is
being paid.

Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.

NR -- Indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular type of obligation as a matter of policy.

PREFERRED STOCK RATINGS:

Both Moody's and Standard & Poor's use the same designations for corporate
bonds as they do for preferred stock, except in the case of Moody's preferred
stock ratings, the initial letter rating is not capitalized. While the
descriptions are tailored for preferred stocks, the relative quality
distinctions are comparable to those described above for corporate bonds.

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<PAGE> 101

STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1995

AMERICAN CAPITAL LIFE INVESTMENT TRUST

2800 POST OAK BLVD.
HOUSTON, TEXAS 77056
(800) 421-5666

American Capital Life Investment Trust (the "Fund") is a diversified,
open-end management investment company with eight separate Portfolios, one of
which is discussed herein: American Capital Real Estate Securities Portfolio
(the "Portfolio").

---------------------

This Statement of Additional Information is not a Prospectus but contains
information in addition to and more detailed than that set forth in the
Prospectus and should be read in conjunction with the Prospectus. The Statement
of Additional Information and the related Prospectus are both dated May 1, 1995.
A Prospectus may be obtained without charge by calling or writing Van Kampen
American Capital Distributors, Inc. (the "Distributor") at One Parkview Plaza,
Oakbrook Terrace, Illinois 60181 at (800) 225-2222.

TABLE OF CONTENTS

GENERAL INFORMATION

The Fund was organized under the laws of the Commonwealth of Massachusetts
on June 3, 1985.

Van Kampen American Capital Asset Management, Inc. (the "Adviser"), Van
Kampen American Capital Distributors, Inc. (the "Distributor") and Van Kampen
American Capital Shareholder Services, Inc. ("ACCESS") are wholly owned
subsidiaries of Van Kampen American Capital, Inc. ("VKAC"), which is a wholly
owned subsidiary of VK/AC Holding, Inc. VK/AC Holding, Inc. is controlled,
through the ownership of a substantial majority of its common stock, by The
Clayton & Dubilier Private Equity Fund IV Limited Partnership ("C&D L.P."), a
Connecticut limited partnership. C&D L.P. is managed by Clayton, Dubilier &
Rice, Inc. a New York based private investment firm. The General Partner of C&D
L.P. is Clayton & Dubilier Associates IV Limited Partnership ("C&D Associates
L.P."). The general partners of C&D Associates L.P. are Joseph L. Rice, III, B.
Charles Ames, Alberto Cribiore, Donald J. Gogel and Hubbard C. Howe, each of
whom is a principal of Clayton, Dubilier & Rice, Inc. In addition, certain
officers, directors and employees of VKAC own, in the aggregate, not more than
6% of the common stock of VK/AC Holding, Inc. and have the right to acquire,
upon the exercise of options, approximately an additional 10% of the common
stock of VK/AC Holding, Inc. Advantage Capital Corporation, a retail
broker-dealer affiliate of the Distributor, is a wholly owned subsidiary of
VK/AC Holding, Inc. See "The Fund and Its Management" in the Prospectus.

As of January 31, 1995 no person was known by management to own
beneficially or of record as much as five percent of the outstanding shares of
the Portfolio.

INVESTMENT OBJECTIVES AND POLICIES

As its primary objective, the Portfolio seeks long-term growth of capital
by investing principally in securities of companies operating in the real estate
industry. Current income is a secondary consideration. The following disclosures
supplement disclosures set forth in the Prospectus. Readers must refer also to
the Prospectus for a complete presentation.

DEPOSITARY RECEIPTS

The Portfolio may invest in the securities of foreign issuers in the form
of American Depositary Receipts (ADRs), European Depositary Receipts (EDRs) or
other securities convertible into securities of foreign issuers. These
securities may not necessarily be denominated in the same currency as the
securities into which they may be converted but rather in the currency of the
market in which they are traded. ADRs are receipts typically issued by an
American bank or trust company which evidence ownership of underlying securities
issued by a foreign corporation. EDRs are receipts issued in Europe by banks or
depositories which evidence a similar ownership arrangement. Generally, ADRs in
registered form, are designed for use in United States securities markets and
EDRs, in bearer form, are designed for use in European securities markets.

OPTIONS, FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS

The Portfolio may engage in transactions in options, futures contracts and
options on futures contracts. Set forth below is certain additional information
regarding options, futures contracts and options on futures contracts. See
Prospectus for further information.

SELLING CALL AND PUT OPTIONS

Purpose. The principal reason for selling options is to obtain, through
receipt of premiums, a greater current return or total return than would be
realized on the underlying securities alone.

Selling Options. The purchaser of a call option pays a premium to the
seller (i.e., the writer) for the right to buy the underlying security from the
writer at a specified price during a certain period. The Portfolio sells call
options either on a covered basis or for cross hedging purposes. A call option
is covered if, at all times during the option period, the Portfolio would own or
have the right to acquire securities of the type that it would be obligated to
deliver if any outstanding option were exercised. An option is for cross-hedging
purposes

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<PAGE> 103

if it is not covered but is designed to provide a hedge against a security which
the Portfolio owns or has the right to acquire. In such circumstances, the
Portfolio collateralizes the option by maintaining in a segregated account with
the Portfolio's Custodian, cash, cash equivalents or high quality, liquid debt
securities in an amount not less than the market value of the underlying
security, marked to market daily, while the option is outstanding.

The purchaser of a put option pays a premium to the seller (i.e., the
writer) for the right to sell the underlying security to the writer at a
specified price during a certain period. The Portfolio sells put options only on
a secured basis, which means that, at all times during the option period, the
Portfolio would maintain in a segregated account with its Custodian cash, cash
equivalents or high quality, liquid debt securities in an amount of not less
than the exercise price of the option, or would hold a put on the same
underlying security at an equal or greater exercise price.

Closing Purchase Transactions and Offsetting Transactions. In order to
terminate its position as a seller of a call or put option, the Portfolio could
enter into a "closing purchase transaction," which is the purchase of a call
(put) on the same underlying security and having the same exercise price and
expiration date as the call (put) previously written by the Portfolio. The
Portfolio would realize a gain (loss) if the premium plus commission paid in the
closing purchase transaction is less (greater) than the premium it received on
the sale of the option. The Portfolio would also realize a gain if an option it
has written lapses unexercised.

The Portfolio could sell options that are listed on an exchange as well as
options which are privately negotiated in over-the-counter transactions. The
Portfolio could close out its position as seller of an option only if a liquid
secondary market exists for options of that series, but there is no assurance
that such a market will exist, particularly in the case of over-the-counter
options, since they can be closed out only with the other party to the
transaction. Alternatively, the Portfolio could purchase an offsetting option,
which would not close out its position as a seller, but would provide an asset
of equal value to its obligation under the option written. If the Portfolio is
not able to enter into a closing purchase transaction or to purchase an
offsetting option with respect to an option it has written, it will be required
to maintain the securities subject to the call or the collateral underlying the
put until a closing purchase transaction can be entered into (or the option is
exercised or expires), even though it might not be advantageous to do so.

Risks of Selling Options. By selling a call option, the Portfolio loses the
potential for gain on the underlying security above the exercise price while the
option is outstanding; by selling a put option the Portfolio might become
obligated to purchase the underlying security at an exercise price that exceeds
the then current market price.

PURCHASING CALL AND PUT OPTIONS

The Portfolio could purchase call options to protect (i.e., hedge) against
anticipated increases in the prices of securities it wishes to acquire. In
addition, the Portfolio may purchase call options for capital appreciation.
Since the premium paid for a call option is typically a small fraction of the
price of the underlying security, a given amount of funds will purchase call
options covering a much larger quantity of such security than could be purchased
directly. By purchasing call options, the Portfolio could benefit from any
significant increase in the price of the underlying security to a greater extent
than had it invested the same amount in the security directly. However, because
of the very high volatility of option premiums, the Portfolio would bear a
significant risk of losing the entire premium if the price of the underlying
security did not rise sufficiently, or if it did not do so before the option
expired.

Conversely, put options could be purchased to protect (i.e., hedge) against
anticipated declines in the market value of either specific portfolio securities
or of the Portfolio's assets generally. In addition, the Portfolio may purchase
put options for capital appreciation in anticipation of a price decline in the
underlying

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<PAGE> 104

security and a corresponding increase in the value of the put option. The
purchase of put options for capital appreciation involves the same significant
risk of loss as described above for call options.

In any case, the purchase of options for capital appreciation would
increase the Portfolio's volatility by increasing the impact of changes in the
market price of the underlying securities on the Portfolio's net asset value.

OPTIONS ON STOCK INDEXES

Options on stock indexes are similar to options on stock, but the delivery
requirements are different. Instead of giving the right to take or make delivery
of stock at a specified price, an option on a stock index gives the holder the
right to receive an amount of cash upon exercise of the option. Receipt of this
cash amount will depend upon the closing level of the stock index upon which the
option is based being greater than (in the case of a call) or less than (in the
case of a put) the exercise price of the option. The amount of cash received
will be the difference between the closing price of the index and the exercise
price of the option, multiplied by a specified dollar multiple. The seller of
the option is obligated, in return for the premium received, to make delivery of
this amount.

Some stock index options are based on a broad market index such as the
Standard & Poor's 500 or the New York Stock Exchange Composite Index, or a
narrower index such as the Standard & Poor's 100. Indexes are also based on an
industry or market segment such as the AMEX Oil and Gas Index or the Computer
and Business Equipment Index. A stock index fluctuates with changes in the
market values of the stocks included in the index. Options are currently traded
on The Chicago Board Options Exchange, the American Stock Exchange and other
exchanges. The Portfolio may sell or purchase options which are listed on an
exchange as well as options which are traded over-the-counter.

Gain or loss to the Portfolio on transactions in stock index options will
depend on price movements in the stock market generally (or in a particular
industry or segment of the market) rather than price movements of individual
securities. As with stock options, the Portfolio may offset its position in
stock index options prior to expiration by entering into a closing transaction
on an exchange, or it may let the option expire unexercised.

RISK FACTORS APPLICABLE TO OPTIONS ON U.S. GOVERNMENT SECURITIES

Treasury Bonds and Notes. Because trading interest in options written on
Treasury bonds and notes tends to center on the most recently auctioned issues,
the Exchanges will not continue indefinitely to introduce options with new
expirations to replace expiring options on particular issues. Instead, the
expirations introduced at the commencement of options trading on a particular
issue will be allowed to run their course, with the possible addition of a
limited number of new expirations as the original ones expire. Options trading
on each issue of bonds or notes will thus be phased out as new options are
listed on more recent issues, and options representing a full range of
expirations will not ordinarily be available for every issue on which options
are traded.

Treasury Bills. Because the deliverable Treasury bill changes from week to
week, sellers of Treasury bill calls cannot provide in advance for their
potential exercise settlement obligations by acquiring and holding the
underlying security. However, if the Portfolio holds a long position in Treasury
bills with a principal amount of the securities deliverable upon exercise of the
option, the position may be hedged from a risk standpoint by the writing of a
call option. For so long as the call option is outstanding, the Portfolio will
hold the Treasury bills in a segregated account with its Custodian so that it
will be treated as being covered.

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securities in the cash market in order to maintain its cover. A mortgage-related
security held by the Portfolio to cover an option position in any but the
nearest expiration month may cease to represent cover for the option in the
event of a decline in the coupon rate at which new pools are originated under
the FHA/VA loan ceiling in effect at any given time. If this should occur, the
Portfolio will no longer be covered, and the Portfolio will either enter into a
closing purchase transaction or replace such mortgage-related security with a
mortgage-related security which represents cover. When the Portfolio closes its
position or replaces such mortgage-related security, it may realize an
unanticipated loss and incur transaction costs.

FOREIGN CURRENCY OPTIONS

The Portfolio may purchase put and call options on foreign currencies to
reduce the risk of currency exchange fluctuation. Premiums paid for such put and
call options will be limited to no more than five percent of the Portfolio's net
assets at any given time. Options on foreign currencies operate similarly to
options on securities, and are traded primarily in the over-the-counter market,
although options on foreign currencies are traded on United States and foreign
exchanges. Exchange-traded options are expected to be purchased by the Portfolio
from time to time and over-the-counter options may also be purchased, but only
when the Adviser believes that a liquid secondary market exists for such
options, although there can be no assurance that a liquid secondary market will
exist for a particular option at any specific time. Options on foreign
currencies are affected by all of those factors which influence foreign exchange
rates and investment generally. See "Investment Practices and
Restrictions -- Using Options, Futures Contracts and Options on Futures
Contracts" in the Prospectus.

FUTURES CONTRACTS

The Portfolio may engage in transactions involving futures contracts and
related options in accordance with rules and interpretations of the Commodity
Futures Trading Commission ("CFTC") under which the Portfolio is exempt from
registration as a "commodity pool."

A stock index futures contract is an agreement pursuant to which a party
agrees to take or make delivery of cash equal to a specified dollar amount times
the difference between the stock index value at a specified time and the price
at which the futures contract is originally struck. No physical delivery of the
underlying stocks in the index is made.

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Foreign stock index futures traded outside the United States include the
Nikkei Index of 225 Japanese stocks traded on the Singapore International
Monetary Exchange ("Nikkei Index"), Osaka Index of 50 Japanese stocks traded on
the Osaka Exchange, Financial Times Stock Exchange Index of the 100 largest
stocks on the London Stock Exchange, the All Ordinaries Share Price Index of 307
stocks on the Sydney, Melbourne Exchanges, Hang Seng Index of 33 stocks on the
Hong Kong Stock Exchange, Barclays Share Price Index of 40 stocks on the New
Zealand Stock Exchange and Toronto Index of 35 stocks on the Toronto Stock
Exchange. Futures and futures options on the Nikkei Index are traded on the
Chicago Mercantile Exchange and United States commodity exchanges may develop
futures and futures options on other indices of foreign securities. Futures and
options on United States devised index of foreign stocks are also being
developed.

Initial and Variation Margin. In contrast to the purchase or sale of a
security, no price is paid or received upon the purchase or sale of a futures
contract. Initially, the Portfolio is required to deposit with its Custodian in
an account in the broker's name an amount of cash, cash equivalents or liquid
high grade debt securities equal to a percentage (which will normally range
between two and ten percent) of the contract amount. This amount is known as
initial margin. The nature of initial margin in futures transactions is
different from that of margin in securities transactions in that futures
contract margin does not involve the borrowing of funds by the customer to
finance the transaction. Rather, the initial margin is in the nature of a
performance bond or good faith deposit on the contract, which is returned to the
Portfolio upon termination of the futures contract and satisfaction of its
contractual obligations. Subsequent payments to and from the broker, called
variation margin, are made on a daily basis as the price of the underlying
securities or index fluctuates, making the long and short positions in the
futures contract more or less valuable, a process known as marking to market.

For example, when the Portfolio purchases a futures contract and the price
of the underlying security or index rises, that position increases in value, and
the Portfolio receives from the broker a variation margin payment equal to that
increase in value. Conversely, where the Portfolio purchases a futures contract
and the value of the underlying security or index declines, the position is less
valuable, and the Portfolio is required to make a variation margin payment to
the broker.

Futures Strategies. When the Portfolio anticipates a significant market or
market sector advance, the purchase of a futures contract affords a hedge
against not participating in the advance at a time when the Portfolio is not
fully invested ("anticipatory hedge"). Such purchase of a futures contract
serves as a temporary substitute for the purchase of individual securities,
which may be purchased in an orderly fashion once the market has stabilized. As
individual securities are purchased, an equivalent amount of futures contracts
could be terminated by offsetting sales. The Portfolio may sell futures
contracts in anticipation of or in a general market or market sector decline
that may adversely affect the market value of the Portfolio's securities
("defensive hedge"). To the extent that the Portfolio's portfolio of securities
changes in value in correlation with the underlying security or index, the sale
of futures contracts substantially reduces the risk to the Portfolio of a market
decline and, by so doing, provides an alternative to the liquidation of
securities positions in the Portfolio with attendant transaction costs.
Ordinarily commissions on futures transactions are lower than transaction costs
incurred in the purchase and sale of securities.

In the event of the bankruptcy of a broker through which the Portfolio
engages in transactions in options, futures or related options, the Portfolio
could experience delays and/or losses in liquidating open positions purchased
and/or incur a loss of all or part of its margin deposits with the broker.
Transactions are entered into by the Portfolio only with brokers or financial
institutions deemed creditworthy by the Adviser.

Special Risks Associated with Futures Transactions. There are several risks
connected with the use of futures contracts as a hedging device. These include
the risk of imperfect correlation between movements in the price of the futures
contracts and of the underlying securities, currency or index the risk of market
distortion, the illiquidity risk and the risk of error in anticipating price
movement.

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There may be an imperfect correlation (or no correlation) between movements
in the price of the futures contracts and of the securities being hedged. The
risk of imperfect correlation increases as the composition of the securities
being hedged diverges from the securities, currency or index upon which the
futures contract is based. If the price of the futures contract moves less than
the price of the securities being hedged, the hedge will not be fully effective.
To compensate for this imperfect correlation, the Portfolio could buy or sell
futures contracts in a greater dollar amount than the dollar amount of
securities being hedged if the historical volatility of the securities being
hedged is greater than the historical volatility of the securities, currency or
index underlying the futures contract. Conversely, the Portfolio could buy or
sell futures contracts in a lesser dollar amount than the dollar amount of the
securities being hedged if the historical volatility of the securities being
hedged is less than the historical volatility of the securities, currency or
index underlying the futures contract. It is also possible that the value of
futures contracts held by the Portfolio could decline at the same time as
portfolio securities being hedged; if this occurred, the Portfolio would lose
money on the futures contract in addition to suffering a decline in value in the
portfolio securities being hedged.

There is also the risk that the price of futures contracts may not
correlate perfectly with movements in the securities, currency or index
underlying the futures contract due to certain market distortions. First, all
participants in the futures market are subject to margin depository and
maintenance requirements. Rather than meet additional margin depositary
requirements, investors may close futures contracts through offsetting
transactions, which could distort the normal relationship between the futures
market and the securities or index underlying the futures contract. Second, from
the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities markets. Therefore,
increased participation by speculators in the futures markets may cause
temporary price distortions. Due to the possibility of price distortion in the
futures markets and because of the imperfect correlation between movements in
futures contracts and movements in the securities underlying them, a correct
forecast of general market trends by the Adviser may still not result in a
successful hedging transaction judged over a very short time frame.

There is also the risk that futures markets may not be sufficiently liquid.
Futures contracts may be closed out only on an exchange or board of trade that
provides a market for such futures contracts. Although the Portfolio intends to
purchase or sell futures only on exchanges and boards of trade where there
appears to be an active secondary market, there can be no assurance that an
active secondary market will exist for any particular contract or at any
particular time. In the event of such illiquidity, it might not be possible to
close a futures position and, in the event of adverse price movement, the
Portfolio would continue to be required to make daily payments of variation
margin. Since the securities being hedged would not be sold until the related
futures contract is sold, an increase, if any, in the price of the securities
may to some extent offset losses on the related futures contract. In such event,
the Portfolio would lose the benefit of the appreciation in value of the
securities.

Successful use of futures is also subject to the Adviser's ability
correctly to predict the direction of movements in the market. For example, if
the Portfolio hedges against a decline in the market, and market prices instead
advance, the Portfolio will lose part or all of the benefit of the increase in
value of its securities holdings because it will have offsetting losses in
futures contracts. In such cases, if the Portfolio has insufficient cash, it may
have to sell portfolio securities at a time when it is disadvantageous to do so
in order to meet the daily variation margin.

CFTC regulations require, among other things, (i) that futures and related
options be used solely for bona fide hedging purposes (or meet certain
conditions as specified in CFTC regulations) and (ii) that the Portfolio not
enter into futures and related options for which the aggregate initial margin
and premiums exceed five percent of the fair market value of the Portfolio's
assets. In order to prevent leverage in connection with the purchase of futures
contracts by the Portfolio, an amount of cash, cash equivalents or liquid high
grade debt securities equal to the market value of the obligation under the
futures contracts (less any related margin deposits) will be maintained in a
segregated account with the Custodian.

Additional Risks to Options and Futures Transactions. Each of the United
States exchanges has established limitations governing the maximum number of
call or put options on the same underlying security

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or futures contract (whether or not covered) which may be sold by a single
investor, whether acting alone or in concert with others (regardless of whether
such options are written on the same or different exchanges or are held or
written on one or more accounts or through one or more brokers). Option
positions of all investment companies advised by the Adviser are combined for
purposes of these limits. An exchange may order the liquidation of positions
found to be in violation of these limits and it may impose other sanctions or
restrictions. These position limits may restrict the number of listed options
which the Portfolio may write.

Although the Portfolio intends to enter into futures contracts only if
there is an active market for such contracts, there is no assurance that an
active market will exist for the contracts at any particular time. Most U.S.
futures exchanges and boards of trade limit the amount of fluctuation permitted
in futures contract prices during a single trading day. Once the daily limit has
been reached in a particular contract, no trades may be made that day at a price
beyond that limit. It is possible that futures contract prices would move to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses. In such event, and in the event of
adverse price movements, the Portfolio would be required to make daily cash
payments of variation margin. In such circumstances, an increase in the value of
the portion of the portfolio being hedged, if any, may partially or completely
offset losses on the futures contract. However, there is no guarantee that the
price of the securities being hedged will, in fact, correlate with the price
movements in a futures contract and thus provide an offset to losses on the
futures contract. Option on futures contracts to be sold or purchased by the
Portfolio will be traded on United States or foreign exchange or
over-the-counter.

OPTIONS ON FUTURES CONTRACTS

The Portfolio could also purchase and sell options on futures contracts.
Options on futures contracts to be sold or purchased by the Portfolio will be
traded on United States or foreign exchanges or over-the-counter. An option on a
futures contract gives the purchaser the right, in return for the premium paid,
to assume a position in a futures contract (a long position if the option is a
call and a short position if the option is a put), at a specified exercise price
at any time during the option period. As a writer of an option on a futures
contract, the Portfolio is subject to initial margin and maintenance
requirements similar to those applicable to futures contracts. In addition, net
option premiums received by the Portfolio are required to be included as initial
margin deposits. When an option on a futures contract is exercised, delivery of
the futures position is accompanied by cash representing the difference between
the current market price of the futures contract and the exercise price of the
option. The Portfolio could purchase put options on futures contracts in lieu
of, and for the same purposes as, the sale of a futures contract; at the same
time, it could sell put options at a lower strike price (a "put bear spread") to
offset part of the cost of the strategy to the Portfolio. The purchase of call
options on futures contracts is intended to serve the same purpose as the actual
purchase of the futures contract.

Risks of Transactions in Options on Futures Contracts. In addition to the
risks described above which apply to all options transactions, there are several
special risks relating to options on futures. The Adviser will not purchase
options on futures on any exchange unless, in the Adviser's opinion, a liquid
secondary exchange market for such options exists. Compared to the use of
futures, the purchase of options on futures involves less potential risk to the
Portfolio because the maximum amount at risk is the premium paid for the options
(plus transaction costs). However there may be circumstances, such as when there
is no movement in the level of the index or in the price of the underlying
security, when the use of an option on a future would result in a loss to the
Portfolio when the use of a future would not.

ADDITIONAL RISKS OF OPTIONS ON FUTURES CONTRACTS, FORWARD CONTRACTS AND OPTIONS
ON FOREIGN CURRENCIES

Unlike transactions entered into by the 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 Securities and Exchange Commission ("SEC"). To the contrary,
such instruments are traded through financial institutions acting as
market-makers, although foreign currency options are also traded on certain
national securities exchanges, such as the Philadelphia Stock Exchange and the
Chicago Board Options Exchange, subject to SEC regulation. Similarly, options on
currencies may be

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traded over-the-counter. In an over-the-counter 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 purchaser of an option cannot lose more than the amount of
the premium plus related transaction costs, this entire amount could be lost.
Moreover, the option seller and a trader of forward contracts could lose amounts
substantially in excess of their initial investments, due to the 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 will be 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 Options Clearing Corporation ("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 over-the-counter market, potentially permitting the
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 involve certain risks not presented by the over-the-counter 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 governmental 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, futures contracts, options on futures contracts, forward
contracts and options on foreign currencies may be traded on foreign exchanges.
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 the
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) lesser trading volume.

FORWARD COMMITMENTS

Relative to a Forward Commitment purchase, the Portfolio maintains a
segregated account (which is marked to market daily) of cash, cash equivalents,
liquid high grade debt securities or U.S. Government securities (which may have
maturities which are longer than the term of the Forward Commitment) with the
Portfolio's custodian in an aggregate amount equal to the amount of its
commitment as long as the obligation to purchase continues. Since the market
value of both the securities or currency subject to the Forward Commitment and
the securities or currency held in the segregated account may fluctuate, the use
of Forward Commitments may magnify the impact of interest rate changes on the
Portfolio's net asset value.

A Forward Commitment sale is covered if the Portfolio owns or has the right
to acquire the underlying securities or currency subject to the Forward
Commitment. A Forward Commitment sale is for cross-hedging purposes if it is not
covered, but is designed to provide a hedge against a decline in value of a
security or currency which the Portfolio owns or has the right to acquire. In
either circumstance, the Portfolio maintains in a segregated account (which is
marked to market daily) either the security or currency covered by the Forward
Commitment or cash, cash equivalents, liquid high grade debt securities or U.S.
Government securities (which may have maturities which are longer than the term
of the Forward Commitment) with the

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Portfolio's custodian in an aggregate amount equal to the amount of its
commitment as long as the obligation to sell continues. By entering into a
Forward Commitment sale transaction, the Portfolio forgoes or reduces the
potential for both gain and loss in the security which is being hedged by the
Forward Commitment sale. See the Prospectus for further information.

REPURCHASE AGREEMENTS

The Portfolio may enter into repurchase agreements with domestic or foreign
banks or broker-dealers deemed to be creditworthy by the Adviser under
guidelines approved by the Trustees. A repurchase agreement is a short-term
investment in which the purchaser (i.e., the Portfolio) acquires ownership of a
debt security and the seller agrees to repurchase the obligation at a future
time and set price, usually not more than seven days from the date of purchase,
thereby determining the yield during the purchaser's holding period. Repurchase
agreements are fully collateralized by the underlying debt securities and are
considered to be loans under the Investment Company Act of 1940, as amended
("1940 Act"). The Portfolio pays for such securities only upon physical delivery
or evidence of book entry transfer to the account of a custodian or bank acting
as agent. The seller under a repurchase agreement will be required to maintain
the value of the underlying securities marked to market daily at not less than
the repurchase price. The underlying securities (normally securities of the U.S.
Government, or its agencies and instrumentalities), may have maturity dates
exceeding one year. The Portfolio does not bear the risk of a decline in value
of the underlying securities unless the seller defaults under its repurchase
obligation. See "Investment Practices and Restrictions -- Repurchase Agreements"
in the Prospectus for further information.

INVESTMENT RESTRICTIONS

The Portfolio has adopted the following restrictions which may not be
changed without the approval of the holders of a majority of the outstanding
shares of the Portfolio. Such majority is defined by the Investment Company Act
of 1940 ("1940 Act") as the lesser of (i) 67% or more of the voting securities
present at a meeting, if the holders of more than 50% of the outstanding voting
securities of the Portfolio are present or represented by proxy; or (ii) more
than 50% of the Portfolio's outstanding voting securities. The percentage
limitations need only be met at the time the investment is made or after
relevant action is taken. In addition to the fundamental investment restrictions
set forth in the Prospectus, the Portfolio is subject to the restrictions set
forth below.

The Portfolio shall not:

1. Engage in the underwriting of securities of other issuers, except that
the Portfolio may sell an investment position even though it may be
deemed to be an underwriter under the federal securities laws.

2. With respect to 75% of its total assets, invest more than five percent
of its assets in the securities of any one issuer (except the U.S.
Government, its agencies and instrumentalities and repurchase agreements
secured thereby) or purchase more than ten percent of the outstanding
voting securities of any one issuer. Neither limitation shall apply to
the acquisition of shares of other open-end investment companies to the
extent permitted by rule or order of the SEC exempting the Portfolio
from the limitations imposed by Section 12(d)(1) of the 1940 Act.

3. Borrow money except temporarily from banks to facilitate payment of
redemption requests and then only in amounts not exceeding 33 1/3% of
its net assets, or pledge more than ten percent of its net assets in
connection with permissible borrowings or purchase additional securities
when money borrowed exceeds five percent of its net assets. Margin
deposits or payments in connection with the writing of options, or in
connection with the purchase or sale of forward contracts, futures,
foreign currency futures and related options, are not deemed to be a
pledge or other encumbrance.

4. Lend money or securities except by the purchase of a portion of an issue
of bonds, debentures or other obligations of types commonly distributed
to institutional investors publicly or privately (in the

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latter case the investment will be subject to the stated limits on
investments in "restricted securities"), and except by the purchase of
securities subject to repurchase agreements.

5. Buy or sell real estate including real estate limited partnerships,
provided that the foregoing prohibition does not apply to a purchase and
sale of (i) securities which are secured by real estate, (ii) securities
representing interests in real estate, and (iii) securities of companies
operating in the real estate industry, including real estate investment
trusts. The Portfolio may hold and sell real estate acquired as a result
of the ownership of its securities.

6. Invest in commodities or commodity contracts, except that the Portfolio
may enter into transactions in options, futures contracts or related
options including foreign currency futures contracts and related options
and forward contracts.

7. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Portfolio from (i)
making and collateralizing any permitted borrowings, (ii) making any
permitted loans of its portfolio securities or (iii) entering into
repurchase agreements, utilizing options, futures contracts, options on
futures contracts, forward contracts, forward commitments and other
investment strategies and instruments that would be considered "senior
securities" but for the maintenance by the Portfolio of a segregated
account with its custodian or some other form of "cover".

8. Concentrate its investment in any one industry, except that the
Portfolio will invest more than 25% of its total assets in the real
estate industry. This limitation excludes shares of other open-end
investment companies owned by the Portfolio but includes the Portfolio's
pro rata portion of the securities and other assets owned by any such
company.

9. Write, purchase or sell puts, calls or combinations thereof, except that
the Portfolio may (a) write covered or fully collateralized call
options, write secured put options, and enter into closing or offsetting
purchase transactions with respect to such options, (b) purchase and
sell options to the extent that the premiums paid for all such options
owned at any time do not exceed ten percent of its total assets and (c)
engage in transactions in futures contracts and related options
transactions provided that such transactions are entered into for bona
fide hedging purposes (or meet certain conditions as specified in CFTC
regulations), and provided further that the aggregate initial margin and
premiums do not exceed five percent of the fair market value of the
Portfolio's total assets.

10. The Portfolio may not make short sales of securities, unless at the
time of the sale it owns or has the right to acquire an equal amount of
such securities; provided that this prohibition does not apply to the
writing of options or the sale of forward contracts, futures, foreign
currency futures or related options.

In addition to the foregoing fundamental policies which may not be changed
without shareholder approval, the Portfolio is subject to the following policies
which may be amended by the Fund's Trustees and which apply at the time of
purchase of portfolio securities.

1. The Portfolio may not make investments for the purpose of exercising
control or management although the Portfolio retains the right to vote
securities held by it.

2. The Portfolio may not purchase securities on margin but the Portfolio
may obtain such short-term credits as may be necessary for the clearance
of purchases and sales of securities. The deposit or payment by the
Portfolio of initial or maintenance margin in connection with forward
contracts, futures, foreign currency futures or related options is not
considered the purchase of a security on margin.

3. The Portfolio may not invest in the securities of other open-end
investment companies, or invest in the securities of closed-end
investment companies except through purchase in the open market in a
transaction involving no commission or profit to a sponsor or dealer
(other than the customary broker's commission) or as part of a merger,
consolidation or other acquisition except to acquire

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<PAGE> 112

shares of other open-end investment companies to the extent permitted by
rule or order of the SEC exempting the Portfolio from the limitations
imposed by Section 12(d)(1) of the 1940 Act.

4. The Portfolio may not invest more than five percent of its net assets in
warrants or rights valued at the lower of cost or market, nor more than
two percent of its net assets in warrants or rights (valued on such
basis) which are not listed on the New York or American Stock Exchanges.
Warrants or rights acquired in units or attached to other securities are
not subject to the foregoing limitation.

5. The Portfolio may not invest in securities of any company if any officer
or Trustee of the Fund or of the Adviser owns more than one-half of one
percent of the outstanding securities of such company, and such officers
and Trustees who own more than one-half of one percent own in the
aggregate more than five percent of the outstanding securities of such
issuer.

6. The Portfolio may not invest in interests in oil, gas, or other mineral
exploration or development programs or invest in oil, gas, or mineral
leases, except that the Portfolio may acquire securities of public
companies which themselves are engaged in such activities.

7. The Portfolio may not invest more than five percent of its total assets
in securities of unseasoned issuers which have been in operation
directly or through predecessors for less than three years, provided,
however, that this limitation excludes shares of other open-end
investment companies owned by the Portfolio but includes the Portfolio's
pro rata portion of the securities and other assets owned by any such
company.

8. The Portfolio may not purchase or otherwise acquire any security if, as
a result, more than fifteen percent of its net assets (taken at current
value) would be invested in securities that are illiquid by virtue of
the absence of a readily available market. This policy does not apply to
restricted securities eligible for resale pursuant to Rule 144A under
the Securities Act of 1933 which the Trustees or the Adviser under
approved guidelines, may determine are liquid nor does it apply to other
securities for which, notwithstanding legal or contractual restrictions
on resale, a liquid market exists.

TRUSTEES AND EXECUTIVE OFFICERS

FERNANDO SISTO, Chairman of the Board and Trustee. Stevens Institute of
Technology, Hoboken, New Jersey 07030-5991. Dean of Graduate School, George M.
Bond Professor and formerly Dean of Graduate School and Chairman, Department of
Mechanical Engineering, Stevens Institute of Technology; Director, Dynalysis of
Princeton (engineering research).(1)

J. MILES BRANAGAN, Trustee. 2300 205th Street, Torrence, California
90501-1452. Co Founder, Chairman and President, MDT Corporation (medical
equipment).(1)

RICHARD E. CARUSO, Trustee. Two Radnor Station, Suite 314, 290 King of
Prussia Road, Radnor, Pennsylvania 19087. Chairman and Chief Executive Officer,
Integra LifeSciences Corporation (biotechnology/life sciences); Trustee,
Susquehanna University; Trustee and First Vice President, The Baum School of Art
(community art school); Founder and Director, Uncommon Individual Foundation
(youth development); Director, International Board of Business Performance
Group, London School of Economics; formerly Director, First Sterling Bank;
formerly Director and Executive Vice President, LFC Financial Corporation
(leasing/financial).(1)

ROGER HILSMAN, Trustee. 251-1 Hamburg Cove, Lyme, Connecticut 06371.
Formerly Professor of Government and International Affairs, Columbia
University.(1)

12
<PAGE> 113

*DON G. POWELL, President and Trustee. 2800 Post Oak Blvd., 45th Floor,
Houston, Texas 77056. President, Chief Executive Officer and Director of VK/AC
Holding, Inc., VKAC and the Adviser; Chairman, Chief Executive Officer and
Director of the Distributor.(1)(2)(4)

DAVID REES, Trustee. 1601 Country Club Drive, Glendale, California 91208.
Senior Editor, Los Angeles Business Journal.(1)(3)

**LAWRENCE J. SHEEHAN, Trustee. 1999 Avenue of the Stars, Suite 700, Los
Angeles, California 90067-6035. Of Counsel to and formerly Partner (1969-1994)
of the law firm of O'Melveny & Myers, legal counsel to the Fund.(1)(3)(5)

WILLIAM S. WOODSIDE, Director. 712 Fifth Avenue, 40th Floor, New York, New
York 10019. Vice Chairman of the Board, Sky Chefs, Inc. (airline food catering);
formerly Director, Primerica Corporation (currently known as Travelers);
formerly Chairman of the Board and Chief Executive Officer, old Primerica
Corporation (American Can Company); formerly Director, James River Corporation
(paper products); Trustee and formerly President, Whitney Museum of American
Art; Chairman, Institute for Educational Leadership, Inc., Board of Visitors,
Graduate School of The City University of New York, Academy of Political
Science; Committee for Economic Development; Director, Public Education Fund
Network, Fund for New York City Public Education; Trustee, Barnard College;
Member, Dean's Council, Harvard School of Public Health; Member, Mental Health
Task Force, Carter Center.(1)

MARY JAYNE BYRNE, Vice President. 2800 Post Oak Blvd., Houston, Texas
77056. Portfolio Manager of the Adviser; formerly associate Portfolio Manager of
the Adviser; formerly senior equity analyst at Texas Commerce Management
Company.(4)

HUEY P. FALGOUT, JR. Assistant Secretary. 2800 Post Oak Blvd., Houston,
Texas 77056. Staff Attorney of the Adviser; formerly associate with Johnson and
Gibbs.(4)

CINDEE BURKITT, Vice President. 2800 Post Oak Blvd., Houston, Texas 77056.
Associate Portfolio Manager of the Adviser. Formerly, Senior Securities
Analyst.(4)

NORI L. GABERT, Vice President and Secretary. 2800 Post Oak Blvd., Houston,
Texas 77056. Vice President, Associate General Counsel and Corporate Secretary
of the Adviser.(4)

JAMES GILLIGAN, Vice President. 2800 Post Oak Blvd., Houston, Texas 77056.
Vice President -- Portfolio Manager of the Adviser. Mr. Gilligan also serves as
Vice President of American Capital Growth and Income Fund, Inc. Formerly
Security Analyst of the Adviser.(4)

CURTIS W. MORELL, Vice President and Treasurer. 2800 Post Oak Blvd.,
Houston, Texas 77056. Vice President and Treasurer of most of the investment
companies advised by the Adviser.(4)

ROBERT C. PECK, JR., Vice President. 2800 Post Oak Blvd., Houston, Texas
77056. Senior Vice President -- Chief Investment Officer/Fixed Income Department
and Director of the Adviser; Executive Vice President and Director, ACMR.(4)

13
<PAGE> 114

WALTER W. STABELL, III, Vice President. 2800 Post Oak Blvd., Houston, Texas
77056. Investment Vice President/Associate Portfolio Manager of the Adviser;
formerly Senior Securities Analyst.

PAUL R. WOLKENBERG, Vice President, 2800 Post Oak Blvd., Houston, Texas
77056. Senior Vice President and Director, ACMR; Senior Vice President of the
Adviser; Executive Vice President and Chief Operating Officer of American
Capital Services, Inc. and American Capital Trust Company; Vice President and
Director of the Distributor.
- ---------------

- Trustee who is an interested person of the Adviser and of the Fund within
the meaning of the 1940 Act by virtue of an affiliation with the Adviser.

- -- Trustee who is an interested person of the Fund and may be an interested
person of the Adviser within the meaning of the 1940 Act by virtue of his
affiliation with the legal counsel of the Fund.

(2) A director/trustee/managing general partner of American Capital Bond Fund,
Inc., American Capital Convertible Securities, Inc., American Capital
Exchange Fund, and American Capital Income Trust, investment companies
advised by the Adviser and a trustee of Common Sense Trust, an open-end
investment company for which the Adviser serves as adviser for ten of the
portfolios.

(3) A director of Source Capital, Inc., a closed-end investment company not
advised by the Adviser.

(4) An officer of other investment companies advised or subadvised by the
Adviser.

(5) A director of FPA Capital Fund, Inc., FPA New Income, Inc. and FPA Perennial
Fund, Inc., investment companies not advised by the Adviser and TCW
Convertible Securities Fund, Inc., a closed-end investment company not
advised by the Adviser.

The Executive Committee, consisting of Messrs. Hilsman, Powell, Sheehan and
Sisto, may act for the Trustees between meetings except where board action is
required by law.

The Trustees and officers of the Fund as a group do not own any outstanding
shares of the Portfolio because such shares are sold only to separate accounts
(the "Accounts") of various insurance companies to fund the benefits of variable
annuity or variable life insurance policies (the "Contracts"). The Trustees who
were not affiliated with the Adviser or its parent shall be compensated by the
Fund at an annual rate of $_________ plus a fee of $_________ per day for Board
and Committee meetings attended, in addition to certain

14
<PAGE> 115

out-of-pocket expenses. Such trustees also receive compensation for serving as
directors of other investment companies advised by the Adviser as identified in
the notes to the foregoing table. The firm also serves as legal counsel to the
American Capital Funds listed in Footnote 1 above.

INVESTMENT ADVISORY AGREEMENTS

The Fund and the Adviser are parties to an investment advisory agreement,
dated , 1995 (the "Advisory Agreement") with respect to the
Portfolio. Under the Advisory Agreement, the Fund retains the Adviser to manage
the investment of the Portfolio's assets and to place orders for the purchase
and sale of the Portfolio's securities. The Adviser is responsible for obtaining
and evaluating economic, statistical, and financial data and for formulating and
implementing investment programs in furtherance of the Portfolio's investment
objectives. The Adviser also furnishes at no cost to the Fund (except as noted
herein) the services of sufficient executive and clerical personnel for the Fund
as are necessary to prepare registration statements, prospectuses, shareholder
reports, and notices and proxy solicitation materials. In addition, the Adviser
furnishes at no cost to the Fund the services of a President of the Fund, one or
more Vice Presidents as needed, and a Secretary. Under the Advisory Agreement,
the Fund pays to the Adviser as compensation for the services rendered,
facilities furnished, and expenses paid by it a fee payable monthly computed on
average daily net assets of the Portfolio at an annual rate of 1.00% of the
average daily net assets of the Portfolio.

The Adviser has entered into an investment sub-advisory agreement dated
, 1995 (the "Sub-advisory Agreement"), with the Subadviser to assist
it in performing its investment advisory functions. The Subadviser will be
primarily responsible for the following areas: (i) providing regional economic
analysis of the areas in which properties owned by real estate investment trusts
are located; (ii) analyzing attractiveness of the property-type within the
geographic region; (iii) evaluating and assessing real estate valuation and
condition of property; (iv) evaluating property managers and sponsors of real
estate investment trusts; and (v) continuously reviewing and monitoring the
investments in the Portfolio's portfolio. For its services, the Subadviser
receives from the Adviser a fee at the annual rate of 50% of the compensation
received by the Adviser. The Adviser and Subadviser are hereinafter sometimes
referred to as the "Advisers".

Under the Advisory Agreement, the Fund bears the cost of its accounting
services, which includes maintaining its financial books and records and
calculating the daily net asset value of the Portfolio. The costs of such
accounting services include the salaries and overhead expenses of a Treasurer or
other principal financial officer and the personnel operating under his
direction. Charges are allocated among the investment companies advised or
subadvised by the Adviser. A portion of these amounts were paid to the Adviser
or its parent in reimbursement of personnel, office space, facilities and
equipment costs attributable to the provision of accounting services to the
Fund. The services provided by the Adviser are at cost. The Fund also pays
shareholder service agency fees, custodian fees, legal and auditing fees, the
costs of reports to shareholders and all other ordinary expenses not
specifically assumed by the Adviser. The Advisory Agreement also provides that
the Adviser shall not be liable to the company for any actions or omissions if
it acted without willful misfeasance, bad faith, negligence or reckless
disregard of its obligations.

The average net asset value of the Portfolio for purposes of computing the
advisory fee is determined by taking the average of all of the determinations of
net asset value for each business day during a given calendar month. Such fee is
payable for each calendar month as soon as practicable after the end of that
month. The fee payable to the Adviser is reduced by any commissions, tender
solicitation and other fees, brokerage or similar payments received by the
Adviser or any direct or indirect majority owned subsidiary of VKAC, in
connection with the purchase and sale of portfolio investments of the Portfolio,
less any direct expenses incurred by such subsidiary of VKAC in connection with
obtaining such payments. The Adviser agrees to use its best efforts to recapture
tender solicitation fees and exchange offer fees for the Portfolio's benefit,
and to advise the Trustees of the Fund of any other commissions, fees, brokerage
or similar payments which may be possible under applicable laws for the Adviser
or any direct or indirect majority owned subsidiary of VKAC to receive in
connection with the Fund's portfolio transactions or other arrangements which
may benefit the Fund.

The Advisory Agreement with respect to the Portfolio may be continued from
year to year if specifically approved at least annually (a)(i) by the Fund's
Trustees or (ii) by vote of a majority of the Portfolio's

15
<PAGE> 116

outstanding voting securities and (b) by the affirmative vote of a majority of
the Trustees who are not parties to the agreement or interested persons of any
such party by votes cast in person at a meeting called for such purpose. The
Advisory Agreement provides that it shall terminate automatically if assigned
and that it may be terminated without penalty by either party on 60 days'
written notice.

DISTRIBUTOR

Van Kampen American Capital Distributors, Inc., acts as the principal
underwriter of the shares of the Portfolio pursuant to a written agreement,
dated December 20, 1994, as supplemented , 1995 (the "Underwriting
Agreement"). The Distributor's obligation is an agency or "best efforts"
arrangement under which the Distributor is not obligated to sell any stated
number of shares. The Underwriting Agreement is renewable from year to year if
approved (a) by the Fund's Trustees or by a vote of a majority of the
Portfolio's outstanding voting securities and (b) by the affirmative vote of a
majority of Trustees who are not parties to the Underwriting Agreement or
interested persons of any party, by votes cast in person at a meeting called for
that purpose. The Underwriting Agreement provides that it will terminate if
assigned, and that it may be terminated without penalty by either party on 60
days' written notice.

The Distributor bears the cost of printing (but not typesetting)
prospectuses used in connection with this offering and the cost and expense of
supplemental sales literature, promotion and advertising and any costs of
qualification of shares for sales under state blue sky laws. The Fund pays all
expenses attributable to the registrations of the Portfolio's shares under
federal law, including registration and filing fees, the cost of preparation of
the prospectuses, related legal and auditing expenses, and the cost of printing
prospectuses for current shareholders.

PORTFOLIO TRANSACTIONS AND BROKERAGE

The Adviser is responsible for decisions to buy and sell securities for the
Fund and for the placement of its portfolio business and the negotiation of the
commissions, if any, paid on such transactions. It is the policy of the Adviser
to seek the best security price available with respect to each transaction. In
over-the-counter transactions, orders are placed directly with a principal
market maker unless it is believed that a better price and execution can be
obtained by using a broker. Except to the extent that the Fund may pay higher
brokerage commissions for brokerage and research services (as described below)
on a portion of its transactions executed on securities exchanges, the Adviser
seeks the best security price at the most favorable commission rate. In
selecting dealers and in negotiating commissions, the Adviser considers the
firm's reliability, the quality of its execution services on a continuing basis
and its financial condition. When more than one firm is believed to meet these
criteria, preference may be given to firms which also provide research services
to the Fund or the Adviser.

Pursuant to provisions of the Advisory Agreement, the Fund's Trustees have
authorized the Adviser to cause the Fund to incur brokerage commissions in an
amount higher than the lowest available rate in return for research services
provided to the Adviser. The Adviser is of the opinion that the continued
receipt of supplemental investment research services from dealers is essential
to its provision of high quality portfolio management services to the Fund. The
Adviser undertakes that such higher commissions will not be paid by the Fund
unless (a) the Adviser determines in good faith that the amount is reasonable in
relation to the services in terms of the particular transaction or in terms of
the Adviser's overall responsibilities with respect

16
<PAGE> 117

to the accounts as to which it exercises investment discretion, (b) such payment
is made in compliance with the provisions of Section 28(e) and other applicable
state and federal laws, and (c) in the opinion of the Adviser, the total
commissions paid by the Fund are reasonable in relation to the expected benefits
to the Fund over the long term. The investment advisory fee paid by the Fund
under the Advisory Agreement is not reduced as a result of the Adviser's receipt
of research services.

Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and subject to seeking best execution and such other
policies as the Trustees may determine, the Adviser may consider sales of shares
of the Fund and of the other American Capital mutual funds as a factor in the
selection of dealers to execute portfolio transactions for the Fund.

DETERMINATION OF NET ASSET VALUE

The net asset value of the shares of the Portfolio is computed by dividing
the value of all securities held by the Portfolio plus other assets, less
liabilities, by the number of shares outstanding. This computation is made for
the Portfolio as of the close of business each day the New York Stock Exchange
is open (currently 4:00 p.m., New York time). The New York Stock Exchange is
currently closed on weekends and on the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.

Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
on each business day in New York (i.e., a day on which the Exchange is open). In
addition, European or Far Eastern securities trading generally or in a
particular country or countries may not take place on all business days in New
York. Furthermore, trading takes place on all business days in Japanese markets
on certain Saturdays and in various foreign markets on days which are not
business days in New York and on which the Portfolio's net asset value is not
calculated and on which the Portfolio does not effect sales, redemptions and
repurchases of its shares. There may be significant variations in the net asset
value of Portfolio shares on days when net asset value is not calculated and on
which shareholders cannot redeem on account of changes in prices of stocks
traded in foreign stock markets.

PURCHASE AND REDEMPTION OF SHARES

The purchase of shares of the Portfolio is currently limited to the
Accounts as explained on the cover page and in the Prospectus. Such shares are
sold and redeemed at their respective net asset values as described in the
Prospectus.

Redemptions are not made on days during which the New York Stock Exchange
is closed, including those holidays listed under "Determination of Net Asset
Value." The right of redemption may be suspended

17
<PAGE> 118

and the payment therefor may be postponed for more than seven days during any
period when (a) the New York Stock Exchange is closed for other than customary
weekends or holidays; (b) trading on the New York Stock Exchange is restricted;
(c) an emergency exists as a result of which disposal by the Fund of securities
owned by it is not reasonably practicable or it is not reasonably practicable
for the Fund to fairly determine the value of its net assets; or (d) the
Securities and Exchange Commission, by order, so permits.

DISTRIBUTIONS AND TAXES

The Portfolio intends to qualify as a "regulated investment company" under
Subchapter M of the Internal Revenue Code (the "Code"). By so qualifying, a
Portfolio will not be subject to Federal income taxes on amounts paid by it as
dividends and distributions to the Account. The Portfolio expects to be treated
as a separate entity for purposes of determining Federal tax treatment.
Accordingly, in order to qualify as a "regulated investment company" at the end
of each quarter of its taxable year, at least 50% of the aggregate value of the
Portfolio's net assets must consist of cash, cash items, government securities
and other securities, limited with respect to each issuer at the time of
purchase to not more than five percent of the Portfolio's total assets. Similar
but slightly different investment requirements apply to the Portfolio because it
provides benefits under variable life insurance policies. The Trust will
endeavor to ensure that the Portfolio's assets are so invested so that all such
requirements are satisfied, but there can be no assurance that it will be
successful in doing so.

The Portfolio is subject to a four percent excise tax to the extent it
fails to distribute to its shareholders during any calendar year at least (1)
98% of its ordinary income for the twelve months ended December 31, plus (2) 98%
of its capital gains net income for the twelve months ended October 31 of such
year. The Portfolio intends to distribute sufficient amounts to avoid liability
for the excise tax.

The Portfolio may qualify and may make an election permitted under Section
853 of the Code so that shareholders will be able to claim a credit or deduction
on their income tax returns for, and will be required to treat as part of the
amounts distributed to them, their pro rata portion of qualified taxes paid by
the Portfolio to foreign countries (which taxes relate primarily to investment
income). The shareholders of the Portfolio may claim a foreign tax credit by
reason of the Portfolio's election under Section 853 of the Code subject to the
certain limitations imposed by Section 904 of the Code. Also under Section 63 of
the Code, no deduction for foreign taxes may be claimed by shareholders who do
not itemize deductions on their Federal income tax returns, although any such
shareholder may claim a credit for foreign taxes and in any event will be
treated as having taxable income in respect to the shareholder's pro rata share
of foreign taxes paid by the Portfolio. It should also be noted that a
tax-exempt shareholder, like other shareholders, will be required to treat as
part of the amounts distributed to it a pro rata portion of the income taxes
paid by the Portfolio to foreign countries. However, that income will generally
be exempt from United States taxation by virtue of such shareholder's tax-exempt
status and such a shareholder will not be entitled to either a tax credit or a
deduction with respect to such income.

BACK-UP WITHHOLDING

18
<PAGE> 119

shareholder who is not exempt from withholding and who fails to furnish the Fund
with a correct taxpayer identification number, who fails to report fully
dividend or interest income, or who fails to certify to the Fund that he has
provided a correct taxpayer identification number and the he is not subject to
withholding. (An individual's taxpayer identification number is his social
security number.) The 31% "Back-up withholding tax" is not an additional tax and
may be credited against a taxpayer's regular federal income tax liability.

TAX TREATMENT OF OPTION AND FUTURES TRANSACTIONS

The Code includes special rules applicable to the listed options, futures
contracts, and options on futures contracts which the Portfolio, may write,
purchase or sell. Such options and contracts are classified as Section 1256
contracts under the Code. The character of gain or loss resulting from the sale,
disposition, closing out, expiration or other termination of Section 1256
contracts is generally treated as long-term capital gain or loss to the extent
of 60 percent thereof and short-term capital gain or loss to the extent of 40
percent thereof ("60/40 gain or loss"). Such contracts, when held by a Portfolio
at the end of a fiscal year, generally are required to be treated as sold at
market value on the last day of such fiscal year for Federal income tax purposes
("marked-to-market"). Over-the-counter options are not classified as Section
1256 contracts and are not subject to the mark-to-market rule or to 60/40 gain
or loss treatment. Any gains or losses recognized by the Portfolio from
transactions in over-the-counter options generally constitute short-term capital
gains or losses. If over-the-counter call options written, or over-the-counter
put options purchased, by the Portfolio are exercised, the gain or loss realized
on the sale of the underlying securities may be either short-term or long-term,
depending on the holding period of the securities. In determining the amount of
gain or loss, the sales proceeds are reduced by the premium paid for
over-the-counter puts or increased by the premium received for over-the-counter
calls.

Certain of the Portfolio's transactions in options, futures contracts, and
options on futures contracts, particularly hedging transactions, may constitute
"straddles" which are defined in the Code as offsetting positions with respect
to personal property. A straddle in which at least one (but not all) of the
positions are Section 1256 contracts is a "mixed straddle" under the Code if
certain identification requirements are met.

OTHER INFORMATION

CUSTODY OF ASSETS -- All securities owned by the Portfolio and all cash,
including proceeds from the sale of shares of the Portfolio and of securities in
the Portfolio's investment portfolio, are held by State Street Bank and Trust
Company, 225 Franklin Street, Boston, Massachusetts 02110, as Custodian. With
respect to investments in foreign securities, the custodian enters into
agreements with foreign sub-custodians which are approved by the Trustees
pursuant to Rule 17f-5 under the 1940 Act. The Custodian and sub-custodians
generally domestically, and frequently abroad, do not actually hold certificates
for the securities in their custody, but instead have book records with domestic
and foreign securities depositories, which in turn have book records with the
transfer agents of the issuers of the securities.

INDEPENDENT ACCOUNTANTS -- Price Waterhouse LLP, 1201 Louisiana, Houston, Texas
77002, the independent accountants for the Fund, perform an annual audit of the
Fund's financial statements.

19
<PAGE> 120

PART C. OTHER INFORMATION

ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.

(a) Financial Statements

<TABLE>
<CAPTION>
INCLUDED IN PART B FOR
AMERICAN CAPITAL COMMON STOCK PORTFOLIO
AMERICAN CAPITAL DOMESTIC STRATEGIES INCOME PORTFOLIO
AMERICAN CAPITAL GOVERNMENT PORTFOLIO
AMERICAN CAPITAL MONEY MARKET PORTFOLIO
AMERICAN CAPITAL MULTIPLE STRATEGY PORTFOLIO
-----------------------------------------------------
<S> <C>
Report of Independent Accountants *
Statement of Net Assets
Year ended December 31, 1994 *
Statement of Operations
Year ended December 31, 1994 *
Statement of Changes in Net Assets
Year ended December 31, 1993 *
Year ended December 31, 1994 *
</TABLE>

- ---------------

*Not Included in this Filing

All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and, therefore, have been omitted.

(b) Exhibits

<TABLE>
<C> <S>
1 -- Agreement and Declaration of Trust dated June 3, 1985 -- Note 1
1.1 -- Certificate of Designation . . . [of] "Multiple Strategy
Portfolio" -- Note 4
1.2 -- Amendment to Certificate of Designation . . . [of] "Multiple Strategy
Portfolio" -- Note 11
1.3 -- Certificate of Designation . . . [of] "Corporate Bond
Portfolio" -- Note 11
1.4 -- Amendment to Certificate of Designation . . . [of] "Corporate Bond
Portfolio" -- Note 11
1.5 -- Amendment to Certificate of Designation . . . [of] "Corporate Bond
Portfolio" -- Note 11
1.6 -- Form of Certificate of Designation of American Capital Real Estate
Securities Portfolio, American Capital Global Equity Portfolio, and
American Capital Emerging Growth Portfolio
2 -- Bylaws
4.1 -- Specimen copy of Share of Beneficial Interest in American Capital
Life Investment Trust -- Money Market Portfolio -- Note 1
4.2 -- Specimen copy of Share of Beneficial Interest in American Capital
Life Investment Trust -- Common Stock Portfolio -- Note 1
4.3 -- Specimen copy of Share of Beneficial Interest in American Capital
Life Investment Trust -- Government Portfolio -- Note 2
4.4 -- Specimen copy of Share of Beneficial Interest in American Capital
Life Investment Trust -- Multiple Strategy Portfolio -- Note 5
4.5 -- Specimen copy of Share of Beneficial Interest in American Capital
Life Investment Trust -- Corporate Bond Portfolio -- Note 5
</TABLE>

C-1
<PAGE> 121

<TABLE>
<C> <S>
4.6 -- Specimen copy of Share of Beneficial Interest in American Capital
Life Investment Trust -- Global Equity Portfolio
4.7 -- Specimen copy of Share of Beneficial Interest in American Capital
Life Investment Trust -- Emerging Growth Portfolio
4.8 -- Specimen copy of Share of Beneficial Interest in American Capital
Life Investment Trust -- Real Estate Securities Portfolio
5 -- Investment Advisory Agreement dated December 20, 1994
5.1 -- Notification under the Investment Advisory Agreement as to American
Capital Life Investment Trust -- Multiple Strategy Portfolio -- Note
4
5.2 -- Notification under the Investment Advisory Agreement as to American
Capital Life Investment Trust -- Corporate Bond Portfolio -- Note 5
5.3 -- Form of Investment Advisory Agreement for American Capital Real
Estate Securities Portfolio dated April __, 1995.
5.4 -- Form of Investment Sub-Advisory Agreement for American Capital Real
Estate Securities Portfolio dated April __, 1995.
5.5 -- Form of Investment Advisory Agreement for American Capital Global
Equity Portfolio dated April __, 1995.
5.6 -- Form of Investment Sub-Advisory Agreement for American Capital Global
Equity Portfolio dated April __, 1995.
5.7 -- Form of Investment Advisory Agreement for American Capital Emerging
Growth Portfolio dated April __, 1995.
6 -- Underwriting Agreement dated December 20, 1994
6.1 -- Form of Addendum to Underwriting Agreement for American Capital Real
Estate Securities Portfolio dated April __, 1995.
6.2 -- Form of Addendum to Underwriting Agreement for American Capital
Emerging Growth Portfolio dated April __, 1995.
6.3 -- Form of Addendum to Underwriting Agreement for American Capital
Global Equity Portfolio dated April __, 1995.
8.1a -- Custodian Agreement between Registrant and State Street Bank and
Trust Company -- Note 2
8.1b -- Amendment to Custodian Contract (January 19, 1989) -- Note 7
8.2 -- Transfer Agency Agreement between Registrant and Access Investor
Services, Inc. -- Note 10
10 -- Opinions of Counsel*
13 -- Investment Letter dated October 7, 1987 -- Note 3
15.2 -- Copy of Servicing Agreement -- Note 3
16 -- Computation Measure for Performance Information*
17 -- Financial Data Schedule*
18.1 -- Powers of Attorney for Messrs. Branagan, Hilsman, Powell, Rees,
Sisto, and Woodside -- Note 8
18.2 -- Powers of Attorney for Messrs. Caruso and Sheehan -- Note 9
</TABLE>

- ---------------

* To follow later.

C-2
<PAGE> 122

<TABLE>
<S> <C>
Note 1 -- Included in Registrant's Registration Statement on Form N-1A (File No. 33-628)
filed on or about September 14, 1985.
Note 2 -- Included in Pre-Effective Amendment No. 2 to Registrant's Registration Statement
on Form N-1A (File No. 33-628) filed on or about March 3, 1986.
Note 3 -- Included in Pre-Effective Amendment No. 3 to Registrant's Registration Statement
on Form N-1A (File No. 33-628) filed on or about April 11, 1986.
Note 4 -- Included in Post-Effective Amendment No. 3 to Registrant's Registration Statement
on Form N-1A (File No. 33-628) filed on or about May 4, 1987.
Note 5 -- Included in Post-Effective Amendment No. 4 to Registrant's Registration Statement
on Form N-1A (File No. 33-628) filed on or about July 31, 1987.
Note 6 -- Included in Post-Effective Amendment No. 9 to Registrant's Registration Statement
on Form N-1A (File No. 33-628) filed on or about February 28, 1989.
Note 7 -- Included in Post-Effective Amendment No. 10 to Registrant's Registration
Statement on Form N-1A (File No. 33-628) filed on or about May 1, 1990.
Note 8 -- Included in Registrant's Registration Statement on Form N-1A (File No. 33-628)
filed on or about February 28, 1991.
Note 9 -- Included in Registrant's Registration Statement on Form N-1A (File No. 33-628)
filed on or about May 1, 1992.
Note 10 -- Included in Registrant's Registration Statement on Form N-1A (File No. 33-628)
filed on or about August 9, 1993.
Note 11 -- Included in Registrant's Registration Statement on Form N-1A (File No. 33-628)
filed on or about October 7, 1993.
</TABLE>

ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.

None.

ITEM 26. NUMBER OF HOLDERS OF SECURITIES.

AS OF JANUARY 31, 1995

<TABLE>
<CAPTION>
NUMBER OF RECORD
TITLE OF CLASS HOLDERS
----------------------------------------------------- ----------------
<S> <C>
American Capital Money
Market Portfolio Shares
of Beneficial Ownership 4
American Capital Common
Stock Portfolio Shares
of Beneficial Ownership 5
American Capital Domestic
Strategic Income Portfolio Shares
of Beneficial Ownership 4
American Capital Multiple
Strategy Portfolio Shares
of Beneficial Ownership 3
American Capital Government
Portfolio Shares of
Beneficial Ownership 3
American Capital Emerging Growth Portfolio
Shares of Beneficial Ownership 0
</TABLE>

C-3
<PAGE> 123

<TABLE>
<CAPTION>
NUMBER OF RECORD
TITLE OF CLASS HOLDERS
----------------------------------------------------- ----------------
<S> <C>
American Capital Global Equity Portfolio
Shares of Beneficial Ownership 0
American Capital Real Estate Securities Portfolio
Shares of Beneficial Ownership 0
</TABLE>

ITEM 27. INDEMNIFICATION.

Item 27 is incorporated herein by reference to form N-1A of Registrant's
Original Registration Statement, filed on September 28, 1985.

ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.

During the last two fiscal years, the investment adviser has not engaged in
any business of a substantial nature except as investment adviser to the
American Capital Funds Group (listed below) and to the Emerging Growth Portfolio
of the Smith Barney Series Fund, and as subadviser to Common Sense Trust,
Western Reserve Life -- Emerging Growth Portfolio and Smith Barney/Travelers
Series Fund Inc. -- American Capital Enterprise Portfolio, all registered
open-end investment companies. The American Capital Funds Group and Common Sense
Trust are all located at 2800 Post Oak Blvd., Houston, Texas 77056. The Emerging
Growth Portfolio of the Smith Barney Series Fund and the American Capital
Enterprise Portfolio of the Smith Barney/Travelers Series Fund Inc. are located
at Two World Trade Center, New York, New York 10048. Western Reserve
Life -- Emerging Growth Portfolio is located at 201 Highland Avenue, Largo,
Florida 34640.

The American Capital Funds Group of registered investment companies for
which Van Kampen American Capital Asset Management, Inc. (formerly American
Capital Asset Management, Inc.) currently serves as investment adviser are
listed below:

American Capital Bond Fund, Inc.
American Capital Comstock Fund, Inc.
American Capital Convertible Securities, Inc.
American Capital Corporate Bond Fund, Inc.
American Capital Emerging Growth Fund, Inc.
American Capital Enterprise Fund, Inc.
American Capital Equity Income Fund, Inc.
American Capital Exchange Fund
American Capital Federal Mortgage Trust
American Capital Global Managed Assets Fund, Inc.
American Capital Government Securities, Inc.
American Capital Government Target Series
American Capital Growth and Income Fund, Inc.
American Capital Harbor Fund, Inc.
American Capital High Yield Investments, Inc.
American Capital Income Trust
American Capital Life Investment Trust
American Capital Municipal Bond Fund, Inc.
American Capital Pace Fund, Inc.
American Capital Real Estate Securities Fund, Inc.
American Capital Reserve Fund, Inc.
American Capital Small Capitalization Fund, Inc.
American Capital Tax-Exempt Trust
American Capital Texas Municipal Securities, Inc.
American Capital U.S. Government Trust for Income

C-4
<PAGE> 124

American Capital Utilities Income Fund, Inc.
American Capital World Portfolio Series, Inc.
Mosher, Inc.

During the last two fiscal years, no officer or director of the investment
adviser has engaged in any other business, profession, vocation or employment of
a substantial nature except as follows:

William N. Brown; Senior Vice President

Vice President and Director;
Advantage Capital Corporation
American Capital Shareholders Corporation
Van Kampen American Capital Advisors, Inc.
Van Kampen American Capital Custodial Services, Inc.
Van Kampen American Capital Exchange Corp.
Van Kampen American Capital Services, Inc.
Van Kampen American Capital Shareholder Services, Inc.
Van Kampen American Capital T.A., Inc.
Van Kampen American Capital Trust Company

Vice President;
Advantage Capital Credit Services, Inc.
American Capital Contractual Services, Inc.

Huey P. Falgout, Jr.; Vice President and Assistant Secretary

Vice President and Assistant Corporate Secretary;
Advantage Capital Corporation
Advantage Capital Credit Services, Inc.
Advantage Capital Insurance Agency, Inc.
Advantage Capital Insurance Agency of Alabama, Inc.
Advantage Capital Insurance Agency of Hawaii, Inc.
Advantage Capital Insurance Agency of Massachusetts, Inc.
Advantage Capital Insurance Agency of Ohio, Inc.
Advantage Capital Insurance Agency of Oklahoma, Inc.
Advantage Capital Insurance Agency of Texas, Inc.
American Capital Contractual Services, Inc.
American Capital Shareholders Corporation
Van Kampen American Capital Advisors, Inc.
Van Kampen American Capital Custodial Services, Inc.
Van Kampen American Capital Exchange Corp.
Van Kampen American Capital Services, Inc.
Van Kampen American Capital Shareholder Services, Inc.
Van Kampen American Capital T.A., Inc.
Van Kampen American Capital Trust Company

Nori L. Gabert; Vice President, Associate General Counsel and Secretary

Vice President, Corporate Secretary and Counsel;
American Capital Contractual Services, Inc.

Vice President and Corporate Secretary;
American Capital Shareholders Corporation
Van Kampen American Capital Advisors, Inc.
Van Kampen American Capital Custodial Services, Inc.
Van Kampen American Capital Exchange Corp.
Van Kampen American Capital T.A., Inc.

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<PAGE> 125

Vice President and Assistant Corporate Secretary;
Advantage Capital Corporation
Advantage Capital Credit Services, Inc.
Van Kampen American Capital Services, Inc.
Van Kampen American Capital Shareholder Services, Inc.

Van Kampen American Capital Trust Company

Wayne D. Godlin; Vice President -- Portfolio Manager

Vice President;

Van Kampen American Capital Advisors, Inc.

Ronald A. Nyberg; Senior Vice President and General Counsel

Executive Vice President, General Counsel and Corporate Secretary;
Van Kampen American Capital, Inc.
VK/AC Holding, Inc.

Executive Vice President, General Counsel and Director;
Van Kampen American Capital Distributors, Inc.
Van Kampen American Capital Investment Advisory Corp.
Van Kampen American Capital Management, Inc.

Vice President, General Counsel and Assistant Corporate Secretary;
American Capital Shareholders Corporation
Van Kampen American Capital Custodial Services, Inc.
Van Kampen American Capital Advisors, Inc.
Van Kampen American Capital Exchange Corp.

Vice President and Assistant Corporate Secretary;
American Capital Contractual Services, Inc.

Vice President;
Advantage Capital Corporation
Advantage Capital Credit Services, Inc.
Van Kampen American Capital Services, Inc.
Van Kampen American Capital Shareholder Services, Inc.
Van Kampen American Capital T.A., Inc.
Van Kampen American Capital Trust Company

General Counsel and Assistant Secretary;
McCarthy, Crisanti & Maffei, Inc.
McCarthy, Crisanti & Maffei Acquisition Corporation

Robert C. Peck, Jr.; Senior Vice President, Chief Investment
Officer -- Fixed-Income Department and Director

Senior Vice President, Chief Investment Officer -- Fixed-Income Department
and Director;
Van Kampen American Capital Advisors, Inc.

Don G. Powell; President, Chief Executive Officer and Director

President, Chief Executive Officer and Director;
Van Kampen American Capital, Inc.
Van Kampen American Capital Advisors, Inc.
Van Kampen American Capital Custodial Services, Inc.
Van Kampen American Capital Exchange Corp.
Van Kampen American Capital Holding, Inc.
VK/AC Holding, Inc.

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<PAGE> 126

Chairman, Chief Executive Officer and Director;
Van Kampen American Capital Distributors, Inc.
Van Kampen American Capital Investment Advisory Corp.
Van Kampen American Capital Management, Inc.

Executive Vice President and Director;
Advantage Capital Corporation
Advantage Capital Credit Services, Inc.
American Capital Contractual Services, Inc.
American Capital Shareholders Corporation
Van Kampen American Capital Services, Inc.
Van Kampen American Capital Shareholder Services, Inc.
Van Kampen American Capital T.A., Inc.
Van Kampen American Capital Trust Company

Director;
McCarthy, Crisanti & Maffei, Inc.

McCarthy, Crisanti & Maffei Acquisition Corporation

William R. Rybak; Senior Vice President, Chief Financial Officer and Treasurer

Executive Vice President, Chief Financial Officer and Director;
Van Kampen American Capital Distributors, Inc.
Van Kampen American Capital Investment Advisory Corp.
Van Kampen American Capital Management, Inc.

Executive Vice President and Chief Financial Officer;
Van Kampen American Capital, Inc.
VK/AC Holding, Inc.

Vice President, Chief Financial Officer and Treasurer;
American Capital Shareholder Services, Inc.
Van Kampen American Capital Advisors, Inc.
Van Kampen American Capital Custodial Services, Inc.
Van Kampen American Capital Exchange Corp.
Van Kampen American Capital Services, Inc.
Van Kampen American Capital Shareholders Corporation
Van Kampen American Capital T.A., Inc.
Van Kampen American Capital Trust Company

Vice President and Chief Financial Officer;
Advantage Capital Corporation
American Capital Contractual Services, Inc.

Vice President and Treasurer;
Advantage Capital Credit Services, Inc.

Treasurer;
Advantage Capital Insurance Agency, Inc.
Advantage Capital Insurance Agency of Alabama, Inc.
Advantage Capital Insurance Agency of Hawaii, Inc.
Advantage Capital Insurance Agency of Massachusetts, Inc.
Advantage Capital Insurance Agency of Ohio, Inc.
Advantage Capital Insurance Agency of Oklahoma, Inc.

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Alan T. Sachtleben; Senior Vice President, Chief Investment Officer -- Equity
Department and Director

Executive Vice President;
Van Kampen American Capital, Inc.
VK/AC Holding, Inc.

Senior Vice President, Chief Investment Officer -- Equity Department and
Director;

Van Kampen American Capital Advisors, Inc.

J. David Wise; Vice President, Associate General Counsel, Compliance Review
Officer and Assistant Secretary

Vice President, General Counsel and Corporate Secretary;
Van Kampen American Capital Trust Company

Vice President and Assistant Corporate Secretary;
Van Kampen American Capital Services, Inc.

Vice President;
Van Kampen American Capital Shareholder Services, Inc.

Paul R. Wolkenberg; Senior Vice President

President, Chief Operating Officer and Director;
Van Kampen American Capital Services, Inc.

Executive Vice President, Chief Operating Officer and Director;
Van Kampen American Capital Trust Company

Executive Vice President and Chief Operating Officer;
Van Kampen American Capital Custodial Services, Inc.

Executive Vice President and Director;
Van Kampen American Capital Shareholder Services, Inc.

Executive Vice President;
American Capital Shareholders Corporation

Vice President and Director;
Van Kampen American Capital T.A., Inc.

Director;
Advantage Capital Corporation
Advantage Capital Credit Services, Inc.
American Capital Contractual Services, Inc.

Lea S. Zeitman; Assistant Secretary

Senior Vice President, Chief Administrative Officer, General Counsel and
Corporate Secretary;
Advantage Capital Corporation

Vice President, General Counsel and Corporate Secretary;
Advantage Capital Credit Services, Inc.
Advantage Capital Insurance Agency, Inc.
Advantage Capital Insurance Agency of Alabama, Inc.
Advantage Capital Insurance Agency of Hawaii, Inc.
Advantage Capital Insurance Agency of Ohio, Inc.
Advantage Capital Insurance Agency of Oklahoma, Inc.

Vice President and Assistant Corporate Secretary;
Van Kampen American Capital T.A., Inc.

C-8
<PAGE> 128

Vice President;
American Capital Contractual Services, Inc.
Van Kampen American Capital Trust Company

Assistant Corporate Secretary;
Van Kampen American Capital Advisors, Inc.

Clerk;
Advantage Capital Insurance Agency of Massachusetts, Inc.

ITEM 29. PRINCIPAL UNDERWRITERS.

(a) Van Kampen American Capital Distributors, Inc. acts as principal
underwriter for the following registered investment companies:

American Capital Comstock Fund, Inc.
American Capital Corporate Bond Fund, Inc.
American Capital Emerging Growth Fund, Inc.
American Capital Enterprise Fund, Inc.
American Capital Equity Income Fund, Inc.
American Capital Federal Mortgage Trust
American Capital Global Managed Assets Fund, Inc.
American Capital Government Securities, Inc.
American Capital Government Target Series
American Capital Growth and Income Fund, Inc.
American Capital Harbor Fund, Inc.
American Capital High Yield Investments, Inc.
American Capital Life Investment Trust
American Capital Municipal Bond Fund, Inc.
American Capital Pace Fund, Inc.
American Capital Real Estate Securities Fund, Inc.
American Capital Reserve Fund, Inc.
American Capital Tax-Exempt Trust
American Capital Texas Municipal Securities, Inc.
American Capital U.S. Government Trust for Income
American Capital Utilities Income Fund, Inc.
American Capital World Portfolio Series, Inc.

*Van Kampen Merritt California Tax Free Income Fund

Van Kampen Merritt Equity Trust

*Van Kampen Merritt Michigan Tax Free Income Fund

*Van Kampen Merritt Missouri Tax Free Income Fund

Van Kampen Merritt Money Market Trust

*Van Kampen Merritt Ohio Tax Free Income Fund

Van Kampen Merritt Pennsylvania Tax Free Income Fund

Van Kampen Merritt Prime Rate Income Trust

Van Kampen Merritt Series Trust

Van Kampen Merritt Tax Free Fund

Van Kampen Merritt Tax Free Money Fund

Van Kampen Merritt Trust

Van Kampen Merritt U.S. Government Trust

Van Kampen Merritt Insured Tax Free Income Fund

Van Kampen Merritt Tax Free High Income Fund

Van Kampen Merritt California Insured Tax Free Fund

Van Kampen Merritt Municipal Income Fund

Van Kampen Merritt Limited Term Municipal Income Fund

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Van Kampen Merritt Florida Insured Tax Free Income Fund

Van Kampen Merritt New Jersey Tax Free Income Fund

Van Kampen Merritt New York Tax Free Income Fund

Van Kampen Merritt High Yield Fund

Van Kampen Merritt Short-Term Global Income Fund

Van Kampen Merritt Adjustable Rate U.S. Government Fund

Van Kampen Merritt Strategic Income Fund

Van Kampen Merritt Emerging Markets Income Fund

Van Kampen Merritt Growth Fund

Van Kampen Merritt Growth and Income Fund

Van Kampen Merritt Utility Fund

Van Kampen Merritt Balanced Fund

Van Kampen Merritt Total Return Fund

Van Kampen Merritt Pennsylvania Tax Free Income Fund

Van Kampen Merritt Money Market Fund

Van Kampen Merritt Tax Free Money Fund

Van Kampen Merritt Prime Rate Income Trust

<TABLE>
<S> <C>
Emerging Markets Municipal Income Trust Series 1
Insured Municipals Income Trust Series 1 through 342
Insured Municipals Income Trust (Discount) Series 5 through 13
Insured Municipals Income Trust (Short Intermediate Term) Series 1 through 96
Insured Municipals Income Trust (Intermediate Term) Series 5 through 81
Insured Municipals Income Trust (Limited Term) Series 9 through 78
Insured Municipals Income Trust (Premium Bond Series) Series 1 through 3
Insured Municipals Income Trust (Intermediate Laddered Maturity) Series 1 and 2
Insured Tax Free Bond Trust Series 1 through 6
Insured Tax Free Bond Trust (Limited Term) Series 1
Investors' Quality Tax-Exempt Trust Series 1 through 88
Investors' Quality Tax-Exempt Trust-Intermediate Series 1
Investors' Corporate Income Trust Series 1 through 12
Investors' Governmental Securities Income Trust Series 1 through 7
Van Kampen Merritt International Bond Income Trust Series 1 through 21
Alabama Investors' Quality Tax-Exempt Trust Series 1
Alabama Insured Municipals Income Trust Series 1 through 8
Arizona Investors' Quality Tax-Exempt Trust Series 1 through 16
Arizona Insured Municipals Income Trust Series 1 through 12
Arkansas Insured Municipals Income Trust Series 1 through 2
Arkansas Investors' Quality Tax-Exempt Trust Series 1
California Insured Municipals Income Trust Series 1 through 136
California Insured Municipals Income Trust (Premium Bond Series) Series 1
California Insured Municipals Income Trust (1st Intermediate
Series) Series 1 through 3
California Investors' Quality Tax-Exempt Trust Series 1 through 20
California Insured Municipals Income Trust (Intermediate
Laddered) Series 1 through 16
Colorado Insured Municipals Income Trust Series 1 through 73
Colorado Investors' Quality Tax-Exempt Trust Series 1 through 18
Connecticut Insured Municipals Income Trust Series 1 through 26
Connecticut Investors' Quality Tax-Exempt Trust Series 1
Delaware Investor's Quality Tax-Exempt Trust Series 1 and 2
Florida Insured Municipal Income Trust -- Intermediate Series 1 and 2
Florida Insured Municipals Income Trust Series 1 through 88
Florida Investors' Quality Tax-Exempt Trust Series 1 and 2
Florida Insured Municipals Income Trust (Intermediate Laddered) Series 1 through 14
Georgia Insured Municipals Income Trust Series 1 through 73
</TABLE>

C-10
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<TABLE>
<S> <C>
Georgia Investors' Quality Tax-Exempt Trust Series 1 through 16
Hawaii Investors' Quality Tax-Exempt Trust Series 1
Investors' Quality Municipals Trust (AMT) Series 1 through 9
Kansas Investors' Quality Tax-Exempt Trust Series 1 through 11
Kentucky Investors' Quality Tax-Exempt Trust Series 1 through 53
Louisiana Insured Municipals Income Trust Series 1 through 13
Maine Investor's Quality Tax-Exempt Trust Series 1
Maryland Investors' Quality Tax-Exempt Trust Series 1 through 69
Massachusetts Insured Municipals Income Trust Series 1 through 30
Massachusetts Insured Municipals Income Trust
(Premium Bond Series) Series 1
Michigan Insured Municipals Income Trust Series 1 through 124
Michigan Insured Municipals Income Trust (Premium Bond Series) Series 1
Michigan Insured Municipals Income Trust (1st Intermediate
Series) Series 1 through 3
Michigan Investors' Quality Tax-Exempt Trust Series 1 through 30
Minnesota Insured Municipals Income Trust Series 1 through 54
Minnesota Investors' Quality Tax-Exempt Trust Series 1 through 21
Missouri Insured Municipals Income Trust Series 1 through 88
Missouri Insured Municipals Income Trust (Premium Bond Series) Series 1
Missouri Investors' Quality Tax-Exempt Trust Series 1 through 15
Missouri Insured Municipals Income Trust
(Intermediate Laddered Maturity) Series 1
Nebraska Investors' Quality Tax-Exempt Trust Series 1 through 9
New Mexico Insured Municipals Income Trust Series 1 through 16
New Jersey Insured Municipals Income Trust Series 1 through 98
New Jersey Investors' Quality Tax-Exempt Trust Series 1 through 22
New Jersey Insured Municipals Income Trust
(Intermediate Laddered Maturity) Series 1 and 4
New York Insured Municipals Income Trust -- Intermediate Series 1 through 6
New York Insured Municipals Income Trust (Limited Term) Series 1
New York Insured Municipals Income Trust Series 1 through 123
New York Insured Tax-Free Bond Trust Series 1
New York Insured Municipals Income Trust
(Intermediate Laddered Maturity) Series 1 through 14
New York Investors' Quality Tax-Exempt Trust Series 1
North Carolina Investors' Quality Tax-Exempt Trust Series 1 through 80
Ohio Insured Municipals Income Trust Series 1 through 94
Ohio Insured Municipals Income Trust (Premium Bond Series) Series 1 and 2
Ohio Insured Municipals Income Trust (Intermediate Term) Series 1
Ohio Insured Municipals Income Trust
(Intermediate Laddered Maturity) Series 3 through 6
Ohio Investors' Quality Tax-Exempt Trust Series 1 through 16
Oklahoma Insured Municipal Income Trust Series 1 through 14
Oregon Investors' Quality Tax-Exempt Trust Series 1 through 53
Pennsylvania Insured Municipals Income Trust -- Intermediate Series 1 through 6
Pennsylvania Insured Municipals Income Trust Series 1 through 196
Pennsylvania Insured Municipals Income Trust (Premium Bond
Series) Series 1
Pennsylvania Investors' Quality Tax-Exempt Trust Series 1 through 14
South Carolina Investors' Quality Tax-Exempt Trust Series 1 through 78
Tennessee Insured Municipals Income Trust Series 1-3 and 5-30
Texas Insured Municipals Income Trust Series 1 through 39
Texas Insured Municipals Income Trust (Intermediate Ladder) Series 1
Virginia Investors' Quality Tax-Exempt Trust Series 1 through 63
</TABLE>

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<TABLE>
<S> <C>
Van Kampen Merritt Utility Income Trust Series 1 through 6
Van Kampen Merritt Insured Income Trust Series 1 through 36
Van Kampen Merritt Insured Income Trust (Intermediate Term) Series 1 through 33
Van Kampen Merritt Select Equity Trust Series 1
Van Kampen Merritt Select Equity and Treasury Trust Series 1
Washington Insured Municipals Income Trust Series 1
West Virginia Insured Municipals Income Trust Series 1 through 5
</TABLE>

- ---------------

*Has not yet commenced investment operations.

Van Kampen American Capital Distributors, Inc. also acts as principal
underwriter or depositor for American Capital Monthly Accumulation Plans, a
registered unit investment trust, and the unit investment trusts set forth in
Exhibit 19 hereto.

(b) The following information is furnished with respect to each officer and
director of Van Kampen American Capital Distributors, Inc.

<TABLE>
<S> <C> <C>
Robert J. Froehlich(2) Sr. Vice President --
Keith K. Furlong(2) Sr. Vice President --
Robert S. West(2) Sr. Vice President --
John H. Zimmermann, III(2) Sr. Vice President --
Timothy K. Brown(2) 1st Vice President --
James S. Fosdick(2) 1st Vice President --
Edward F. Lynch(2) 1st Vice President --
Scott E. Martin(2) 1st Vice President, Deputy --
General Counsel and Secretary
Mark R. McClure(2) 1st Vice President --
Mark T. McGannon(2) 1st Vice President --
Charles G. Millington(2) 1st Vice President, Controller --
and Treasurer
Michael L. Stallard(2) 1st Vice President --
David M. Swanson(2) 1st Vice President --
Patricia A. Bettlach(2) Vice President --
Carol S. Biegel(2) Vice President --
Linda Mae Brown(2) Vice President --
William F. Burke, Jr.(2) Vice President --
Thomas M. Byron(2) Vice President --
Glenn M. Cackovic(2) Vice President --
Joseph N. Caggiano(2) Vice President --
Richard J. Charlino(2) Vice President --
Eleanor M. Cloud(2) Vice President --
</TABLE>

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<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITIONS AND OFFICES WITH POSITIONS AND OFFICES
BUSINESS ADDRESS PRINCIPAL UNDERWRITER WITH REGISTRANT
- --------------------------- ------------------------------- ----------------------
<S> <C> <C>
Dominick Cogliandro(2) Vice President and Assistant --
Treasurer
David B. Dibo(2) Vice President --
Howard A. Doss(2) Vice President --
Charles Edward Fisher(2) Vice President --
William J. Fow(2) Vice President --
Erich P. Gerth(2) Vice President --
John A. Hanhauser(2) Vice President --
Eric J. Hargens(2) Vice President --
J. Christopher Jackson(2) Vice President, Associate --
General Counsel and Assistant
Secretary
Dana R. Klein(2) Vice President --
Ann Marie Klingenhagen(2) Vice President --
David R. Kowalski(2) Vice President and Director of --
Compliance
S. William Lehew III(2) Vice President --
Walter Lynn(2) Vice President --
Deborah A. Lysacek(2) Vice President --
Michele L. Manley(2) Vice President --
Kevin S. Marsh(2) Vice President --
Ruth L. McKeel(2) Vice President --
Ronald E. Pratt(2) Vice President --
Craig S. Prichard(2) Vice President --
Michael W. Rohr(2) Vice President --
James B. Ross(2) Vice President --
James J. Ryan(2) Vice President --
Heather R. Sabo(2) Vice President --
Lisa A. Schomer(2) Vice President --
Ronald J. Schuster(2) Vice President --
Diane H. Snowden(2) Vice President --
Darren D. Stabler(2) Vice President --
Christopher J. Vice President --
Staniforth(2)
William C. Strafford(2) Vice President --
James C. Taylor(2) Vice President --
John F. Tierney(2) Vice President --
Curtis L. Ulvestad(2) Vice President --
Jeffrey A. Urbina(2) Vice President --
Sandra A. Waterworth(2) Vice President and Assistant --
Secretary
Steven T. West(2) Vice President --
Weston B. Wetherell(2) Vice President, Associate --
General Counsel and Assistant
Secretary
James R. Yount(2) Vice President --
Richard P. Zgonina(2) Vice President --
</TABLE>

- ---------------

(1) 2800 Post Oak Blvd., Houston, Texas 77056

(2) One Parkview Plaza, Oakbrook Terrace, IL 60181

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<PAGE> 133

(c) Commissions and other compensation received by each principal
underwriter who is not an affiliated person of the Registrant or an affiliated
person of such an affiliated person, directly or indirectly, from the Registrant
during the Registrant's last fiscal year:

Inapplicable.

ITEM 30. LOCATION OF BOOKS AND RECORDS.

Unless otherwise stated below, the books or other documents required to be
maintained by Section 31(a) of the Investment Company Act of 1940 and the Rules
promulgated thereunder are in the physical possession of:

Fund Treasurer
Mutual Fund Accounting
2800 Post Oak Blvd.
Houston, Texas 77056

<TABLE>
<CAPTION>
RULE LOCATION OF REQUIRED RECORDS
- ------ ---------------------------------------------------------
<S> <C> <C>
31a-1 (b)(2)(i)(i)(iii), Van Kampen American Capital Asset Management, Inc.
(3)(7)(8)(9)(10)(12) 2800 Post Oak Blvd.
Houston, Texas 77056

(b)(2)(iv) Van Kampen American Capital Companies Shareholder
Services, Inc.
7501 Tiffany Springs Parkway
Kansas City, Missouri 64153
</TABLE>

<TABLE>
<CAPTION>
RULE LOCATION OF REQUIRED RECORDS
- ------ ---------------------------------------------------------
<S> <C> <C>
(b)(5)(6)(11) John Govett & Co. Limited
Shackleton House
4 Battle Bridge Lane
London SE1 2HR
England
</TABLE>

ITEM 31. MANAGEMENT SERVICES.

There are no management related services contracts not discussed in Part A.

ITEM 32. UNDERTAKINGS.

Registrant hereby undertakes to furnish to each person to whom a prospectus
is delivered a copy of the Registrant's latest annual report to shareholders,
upon request and without charge.

Registrant hereby undertakes to file a post effective amendment on behalf
of American Capital Real Estate Portfolio, American Capital Emerging Growth
Portfolio and American Capital Global Equity Portfolio using financial
statements, which need not be certified, within four to six months from the
effective date of Registrant's 1933 Act Registration Statement.

Registrant hereby undertakes, if requested to do so by the holders of at
least 10% of the Registrant's outstanding shares, to call a meeting of
shareholders for the purpose of voting upon the question of removal of a trustee
or trustees and to assist in communications with other shareholders as required
by Section 16(c) of the Investment Company Act of 1940.

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<PAGE> 134

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of Houston, and State of Texas, on the 15th day of
February, 1995.

AMERICAN CAPITAL LIFE INVESTMENT TRUST

/s/ DON G. POWELL
(Don G. Powell, President)

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on February 15, 1995.

Principal Executive Officer and Trustee:

<TABLE>
<C> <S>
/s/ DON G. POWELL President and Trustee
(Don G. Powell)

Financial Officer and Accounting Officer:

/s/ Curtis W. Morell Vice President and Treasurer
(Curtis W. Morell)

Trustees:

*J. MILES BRANAGAN Trustee
(J. Miles Branagan)

*RICHARD E. CARUSO Trustee
(Richard E. Caruso)

*ROGER HILSMAN Trustee
(Roger Hilsman)

*DAVID REES Trustee
(David Rees)

*LAWRENCE J. SHEEHAN Trustee
(Lawrence J. Sheehan)

*FERNANDO SISTO Trustee
(Fernando Sisto)

*WILLIAM S. WOODSIDE Trustee
(William S. Woodside)
</TABLE>

- ---------------

* Signed by the undersigned pursuant to a Power-of-Attorney previously filed.

/s/ NORI L. GABERT
Nori L. Gabert
Attorney-in-Fact
<PAGE> 135

INDEX TO EXHIBITS TO FORM N-1A
REGISTRATION STATEMENT

EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
1 -- Agreement and Declaration of Trust dated June 3, 1985 -- Note 1 *
1.1 -- Certificate of Designation [of] "Multiple Strategy Portfolio" -- Note *
4
1.2 -- Amendment to Certificate of Designation [of] "Multiple Strategy *
Portfolio" -- Note 11
1.3 -- Certificate of Designation [of] "Corporate Bond Portfolio" -- Note 11 *
1.4 -- Amendment to Certificate of Designation [of] "Corporate Bond *
Portfolio" -- Note 11
1.5 -- Amendment to Certificate of Designation [of] "Corporate Bond *
Portfolio" -- Note 11
1.6 -- Form of Certificate of Designation of American Capital Real Estate *
Securities Portfolio, American Capital Global Equity Portfolio and
American Capital Emerging Growth Portfolio
2 -- Bylaws *
4.1 -- Specimen copy of Share of Beneficial Interest in American Capital *
Life Investment Trust -- Money Market Portfolio -- Note 1
4.2 -- Specimen copy of Share of Beneficial Interest in American Capital *
Life Investment Trust -- Common Stock Portfolio -- Note 1
4.3 -- Specimen copy of Share of Beneficial Interest in American Capital *
Life Investment Trust -- Government Portfolio -- Note 2
4.4 -- Specimen copy of Share of Beneficial Interest in American Capital *
Life Investment Trust -- Multiple Strategy Portfolio -- Note 5
4.5 -- Specimen copy of Share of Beneficial Interest in American Capital *
Life Investment Trust -- Corporate Bond Portfolio -- Note 5
4.6 -- Specimen copy of Share of Beneficial Interest in American Capital
Life Investment Trust -- Global Equity Portfolio
4.7 -- Specimen copy of Share of Beneficial Interest in American Capital
Life Investment Trust -- Emerging Growth Portfolio
4.8 -- Specimen copy of Share of Beneficial Interest in American Capital
Life Investment Trust -- Real Estate Securities Portfolio
5 -- Investment Advisory Agreement dated December 20, 1994 *
5.1 -- Notification under the Investment Advisory Agreement as to American *
Capital Life Investment Trust -- Multiple Strategy Portfolio -- Note
4
5.2 -- Notification under the Investment Advisory Agreement as to American *
Capital Life Investment Trust -- Corporate Bond Portfolio -- Note 5
5.3 -- Form of Investment Advisory Agreement for American Capital Real
Estate Securities Portfolio dated April , 1995.
5.4 -- Form of Investment Sub-Advisory Agreement for American Capital Real
Estate Securities Portfolio dated April , 1995.
5.5 -- Form of Investment Advisory Agreement for American Capital Global
Equity Portfolio dated April , 1995.
5.6 -- Form of Investment Sub-Advisory Agreement for American Capital Global
Equity Portfolio dated April , 1995.
</TABLE>
<PAGE> 136

EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
5.7 -- Form of Investment Advisory Agreement for American Capital Emerging
Growth Portfolio
6 -- Underwriting Agreement dated December 20, 1994
6.1 -- Form of Addendum to Underwriting Agreement for American Capital Real
Estate Securities Portfolio dated April , 1995.
6.2 -- Form of Addendum to Underwriting Agreement for American Capital
Emerging Growth Portfolio dated April , 1995.
6.3 -- Form of Addendum to Underwriting Agreement for American Capital
Global Equity Portfolio dated April , 1995.
8.1a -- Custodian Agreement between Registrant and State Street Bank and *
Trust Company -- Note 2
8.1b -- Amendment to Custodian Contract (January 19, 1989) -- Note 7 *
8.2 -- Transfer Agency Agreement between Registrant and Van Kampen American
Capital Companies Shareholder Services, Inc. -- Note 10
13 -- Investment Letter dated October 7, 1987 -- Note 3 *
15.2 -- Copy of Servicing Agreement -- Note 3 *
18.1 -- Powers of Attorney for Messrs. Branagan, Hilsman, Powell, Rees, *
Sisto, and Woodside -- Note 8
18.2 -- Powers of Attorney for Messrs. Caruso and Sheehan -- Note 9 *
</TABLE>

- ---------------

* Incorporated herein by reference.

<PAGE> 1

EXHIBIT 1.6

AMERICAN CAPITAL LIFE INVESTMENT TRUST

Certificate of Designation
of
American Capital Global Equity Portfolio
American Capital Emerging Growth Portfolio
American Capital Real Estate Securities Portfolio

The undersigned, being the Secretary of American Capital Life
Investment Trust (hereinafter referred to as the "Trust"), a trust with
transferable shares of the type commonly called a Massachusetts business trust,
DOES HEREBY CERTIFY that, pursuant to the authority conferred upon the Trustees
of the Trust by Section 6.1(b) and Section 9.3 of the Agreement and Declaration
of Trust, dated June 3, 1985, as amended May 4, 1987, and further amended
October 6, 1987, February 24, 1992 and September 2, 1993 (hereinafter, as so
amended, referred to as the "Declaration of Trust"), and by the affirmative
vote of a Majority of the Trustees at a meeting duly called and held on
February 10, 1995, the Declaration of Trust is amended as follows:

1. There are hereby established and designated the American
Capital Global Equity Portfolio, American Capital Emerging Growth Portfolio,
American Capital Real Estate Securities Portfolio (each hereinafter referred to
as a "New Portfolio" and collectively as the "New Portfolios"). The beneficial
interest in each New Portfolio shall be divided into Shares having a nominal or
par value of one cent ($.01) per Share, of which an unlimited number may be
issued, which Shares shall represent interests only in such New Portfolio. The
Trustees shall have authority from time to time to authorize separate Series of
Shares for each New Portfolio (each of which Series shall represent interests
only in such New Portfolio), as they deem necessary and desirable. The Shares
of the New Portfolios shall have the following rights and preferences:

(a) Assets Belonging to the New Portfolios. Any portion of
the Trust Property allocated to a New Portfolio, and all consideration
received by the Trust for the issue or sale of Shares of such New
Portfolio, together with all assets in which such consideration is
invested or reinvested, all interest, dividends, income, earnings,
profits and gains therefrom, and proceeds thereof, including any
proceeds derived from the sale, exchange or liquidation of such assets,
and any funds or payments derived from any reinvestment of such
proceeds in whatever form the same may be, shall be held by the
Trustees in trust for the benefit of the holders of Shares of such New
Portfolio and shall irrevocably belong to such New Portfolio for all
purposes, and shall be so recorded upon the books of account of the
Trust, and the Shareholders of any other Portfolio who are not
Shareholders of such New Portfolio shall not have, and shall be
conclusively deemed to have waived, any claims to the assets of such
New Portfolio. Such consideration, assets, interest, dividends, income,
earnings, profits, gains and proceeds, together with any General Items
allocated to such New Portfolio as provided in the following
sentence, are herein referred to collectively as "Portfolio Assets"

<PAGE> 2
of the New Portfolio, and as assets "belonging to" such New Portfolio. In the
event that there are any assets, income, earnings, profits, and proceeds
thereof, funds, or payments which are not readily identifiable as belonging to
any particular Portfolio (collectively "General Items"), the Trustees shall
allocate such General Items to and among any one or more of the Portfolios
established and designated from time to time in such manner and on such basis
as they, in their sole discretion, deem fair and equitable; and any General
Items so allocated to a New Portfolio shall belong to and be part of the
Portfolio Assets of such New Portfolio. Each such allocation by the Trustees
shall be conclusive and binding upon the Shareholders of all the Portfolios for
all purposes.

(b) Liabilities of the New Portfolio. The assets belonging to a New
Portfolio shall be charged with the liabilities in respect of such New
Portfolio and all expenses, costs, charges and reserves attributable to such
New Portfolio, and any general liabilities, expenses, costs, charges or
reserves of the Trust which are not readily identifiable as pertaining to any
particular Portfolio shall be allocated and charged by the Trustees to and
among any one or more of the Portfolios established and designated from time to
time in such manner and on such basis as the Trustees in their sole discretion
deem fair and equitable. The indebtedness, expenses, costs, charges and
reserves allocated and so charged to a New Portfolio are herein referred to as
"liabilities of" such New Portfolio. Each allocation of liabilities, expenses,
costs, charges and reserves by the Trustees shall be conclusive and binding
upon the Shareholders of all the Portfolios for all purposes. Any creditor of a
New Portfolio may look only to the assets of such New Portfolio to satisfy such
creditor's debt.

(c) Dividends. Dividends and distributions on Shares of a New Portfolio
may be paid with such frequency as the Trustees may determine, which may be
daily or otherwise pursuant to a standing resolution or resolutions adopted
only once or with such frequency as the Trustees may determine, to the
Shareholders of such New Portfolio, from such of the income, accrued or
realized, and capital gains, realized or unrealized, and out of the assets
belonging to such New Portfolio, as the Trustees may determine, after providing
for actual and accrued liabilities of such New Portfolio. All dividends and
distributions on Shares of a New Portfolio shall be distributed pro rata to the
Shareholders of such New Portfolio in proportion to the number of such Shares
held by such holders at the date and time of record established for the payment
of such dividends or distributions, except that in connection with any dividend
or distribution program or procedure the Trustees may determine that no
dividend or distribution shall be payable on Shares as to which the
Shareholder's purchase order and/or payment have not been received by the time
or times established by the Trustees under such program or procedure, or that
dividends or distributions shall be payable on Shares which have been tendered
by the holder thereof for redemption or repurchase, but the redemption or
repurchase proceeds of which have not yet been paid to such Shareholder. Such
dividends and distributions may be made in cash or Shares of such New Portfolio
or a combination thereof as determined by the Trustees, or pursuant to any
program that the Trustees may have in effect at the time for the election by
each Shareholder of the mode of the making of such dividend or distribution to
that Shareholder. Any such dividend or distribution paid in Shares will be paid
at the net asset value thereof as determined in accordance with subsection (h)
hereof.

(d) Liquidation. In the event of the liquidation or dissolution of the
Trust, the Shareholders of a New Portfolio shall be entitled to receive, when
and as declared by the Trustees, the excess of the Portfolio Assets over the
liabilities of such New Portfolio. The assets so distributable to the
Shareholders of a New Portfolio shall be distributed among such

2
<PAGE> 3
Shareholders in proportion to the number of Shares of such New Portfolio held
by them and recorded on the books of the Trust. The liquidation of a New
Portfolio may be authorized by vote of a Majority of the Trustees, subject to
the affirmative vote of "a majority of the outstanding voting securities" of
such New Portfolio, as the quoted phrase is defined in the 1940 Act, determined
in accordance with clause (iii) of the definition of "Majority Shareholder
Vote" in Section 1.4 of the Declaration of Trust.

(e) Voting. The Shareholders shall have the voting rights set forth in
or determined under Article 7 of the Declaration of Trust.

(f) Redemption by Shareholder. Each holder of Shares of a New Portfolio
shall have the right at such times as may be permitted by the Trust, but no
less frequently than once each week, to require the Trust to redeem all or any
part of his Shares of such New Portfolio at a redemption price equal to the net
asset value per Share of such New Portfolio next determined in accordance with
subsection (h) hereof after the Shares are properly tendered for redemption;
provided, that the Trustees may from time to time, in their discretion,
determine and impose a fee for such redemption. Payment of the redemption price
shall be in cash; provided, however, that if the Trustees determine, which
determination shall be conclusive, that conditions exist which make payment
wholly in cash unwise or undesirable, the Trust may make payment wholly or
partly in Securities or other assets belonging to such New Portfolio at the
value of such Securities or assets used in such determination of net asset
value. Notwithstanding the foregoing, the Trust may postpone payment of the
redemption price and may suspend the right of the holders of Shares of a New
Portfolio to require the Trust to redeem Shares of such New Portfolio during
any period or at any time when and to the extent permissible under the 1940
Act.

(g) Redemption at the Option of the Trust. Each Share of a New
Portfolio shall be subject to redemption at the option of the Trust at the
redemption price which would be applicable if such Share were then being
redeemed by the Shareholder pursuant to subsection (f) hereof: (i) at any time,
if the Trustees determine in their sole discretion that failure to so redeem
may have materially adverse consequences to the holders of the Shares of the
Trust or of any Portfolio, or (ii) upon such other conditions with respect to
maintenance of Shareholder accounts of a minimum amount as may from time to
time be determined by the Trustees and set forth in the then current Prospectus
of such New Portfolio. Upon such redemption the holders of the Shares so
redeemed shall have no further right with respect thereto other than to receive
payment of such redemption price.

(h) Net Asset Value. The net asset value per Share of a New Portfolio
at any time shall be the quotient obtained by dividing the value of the net
assets of such New Portfolio at such time (being the current value of the
assets belonging to such New Portfolio, less its then existing liabilities) by
the total number of Shares of such New Portfolio then outstanding, all
determined in accordance with the methods and procedures, including without
limitation those with respect to rounding, established by the Trustees from
time to time. The Trustees may determine to maintain the net asset value per
Share of a New Portfolio at a designated constant dollar amount and in
connection therewith may adopt procedures not inconsistent with the 1940 Act
for the continuing declaration of income attributable to such New Portfolio as
dividends payable in additional Shares of such New Portfolio at the designated
constant dollar amount and for the handling of any losses attributable to such
New Portfolio. Such procedures may provide that in the event of any loss each
Shareholder shall be deemed to have contributed to the shares of beneficial
interest

<PAGE> 4
account of a New Portfolio his pro rata portion of the total number of Shares
required to be canceled in order to permit the net asset value per Share of
such New Portfolio to be maintained, after reflecting such loss, at the
designated constant dollar amount. Each Shareholder of such New Portfolio shall
be deemed to have expressly agreed, by his investment in such New Portfolio, to
make the contribution referred to in the preceding sentence in the event of any
such loss.

(i) Transfer. All Shares of each New Portfolio shall be transferable,
but transfers of Shares of a New Portfolio will be recorded on the Share
transfer records of the Trust applicable to such New Portfolio only at such
times as Shareholders shall have the right to require the Trust to redeem
Shares of such New Portfolio and at such other times as may be permitted by the
Trustees.

(j) Equality. All Shares of each New Portfolio shall represent an equal
proportionate interest in the assets belonging to such New Portfolio (subject
to the liabilities of such New Portfolio), and each Share of a New Portfolio
shall be equal to each other Share thereof; but the provisions of this sentence
shall not restrict any distinctions permissible under subsection (c) hereof
that may exist with respect to dividends and distributions on Shares of a New
Portfolio. The Trustees may from time to time divide or combine the Shares of a
New Portfolio into a greater or lesser number of Shares of such New Portfolio
without thereby changing the proportionate beneficial interest in the assets
belonging to such New Portfolio or in any way affecting the rights of the
holders of Shares of any other Portfolio.

(k) Rights of Fractional Shares. Any fractional Share of any Series
shall carry proportionately all the rights and obligations of a whole Share of
that Series, including rights and obligations with respect to voting, receipt
of dividends and distributions, redemption of Shares, and liquidation of the
Trust or of a New Portfolio.

(l) Conversion Rights. Subject to compliance with the requirements of
the 1940 Act, the Trustees shall have the authority to provide that holders of
Shares of a New Portfolio shall have the right to convert said Shares into
Shares of one or more other Portfolios in accordance with such requirements and
procedures as the Trustees may establish.

(m) Amendment, etc. Subject to the provisions and limitations of
Section 9.3 of the Declaration of Trust and applicable law, this Certificate of
Designation may be amended by an instrument signed in writing by a Majority of
the Trustees (or by an officer of the Trust pursuant to the vote of a Majority
of the Trustees), provided that, if any amendment adversely affects the rights
of the Shareholders of a New Portfolio, such amendment may be adopted by an
instrument signed in writing by a Majority of the Trustees (or by an officer of
the Trust pursuant to the vote of a Majority of the Trustees) when authorized
to do so by the vote in accordance with Section 7.1 of the Declaration of Trust
of the holders of a majority of all the Shares of such New Portfolio
outstanding and entitled to vote.

(n) Incorporation of Defined Terms. All capitalized terms which are not
defined herein shall have the same meanings as are assigned to those terms in
the Declaration of Trust filed with the Secretary of State of the Commonwealth
of Massachusetts.

<PAGE> 5
The Trustees further direct that, upon the execution of this
Certificate of Designation, the Trust take all necessary action to file a copy
of this Certificate of Designation with the Secretary of State of The
Commonwealth of Massachusetts and at any other place required by law or by the
Declaration of Trust.

IN WITNESS WHEREOF, the undersigned has set her hand and seal this ___
day of ___________, 1995.

_______________________________
Secretary

<PAGE> 6
ACKNOWLEDGMENT

STATE OF TEXAS )
) ss.
HARRIS COUNTY )

On this ______ day of ___________, 1995, personally appeared the
above-named Nori Gabert and acknowledged the foregoing instrument to be her
free act and deed.

Before me,

___________________________________
Notary Public
My Commission expires:_____________

[SEAL]

<PAGE> 1

EXHIBIT 2.0

_______________________________________

AMERICAN CAPITAL LIFE INVESTMENT TRUST

By-Laws

(As amended June 9, 1994)

_______________________________________

<PAGE> 2

AMERICAN CAPITAL LIFE INVESTMENT TRUST

By-Laws

(As amended June 9, 1994)

Index

<TABLE>
<CAPTION>
Page No.
--------

<S> <C>
RECITAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

ARTICLE I - SHAREHOLDERS AND SHAREHOLDERS'
MEETINGS . . . . . . . . . . . . . . . . . . . 1

Section 1.1 Meetings . . . . . . . . . . . . . . . . . . . 1

Section 1.2 Presiding Officer; Secretary . . . . . . . . . 1

Section 1.3 Authority of Chairman of Meeting
to Interpret Declaration and
By-Laws . . . . . . . . . . . . . . . . . . 1

Section 1.4 Voting; Quorum . . . . . . . . . . . . . . . . 2

Section 1.5 Inspectors . . . . . . . . . . . . . . . . . . 2

Section 1.6 Shareholders' Action in Writing . . . . . . . 2

ARTICLE II - TRUSTEES AND TRUSTEES' MEETINGS . . . . . . . . . . . . . . . 2

Section 2.1 Number of Trustees . . . . . . . . . . . . . . 2

Section 2.2 Regular Meetings of Trustees . . . . . . . . . 3

Section 2.3 Special Meetings of Trustees . . . . . . . . . 3

Section 2.4 Notice of Meetings . . . . . . . . . . . . . . 3

Section 2.5 Quorum . . . . . . . . . . . . . . . . . . . . 3

Section 2.6 Participation by Telephone . . . . . . . . . . 3

Section 2.7 Location of Meetings . . . . . . . . . . . . . 4

Section 2.8 Votes . . . . . . . . . . . . . . . . . . . . 4

Section 2.9 Rulings of Chairman . . . . . . . . . . . . . 4

Section 2.10 Trustees' Action in Writing . . . . . . . . . 4

Section 2.11 Resignations . . . . . . . . . . . . . . . . . 4

</TABLE>

<PAGE> 3

<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Section 2.12 Tenure of Trustees . . . . . . . . . . . . . . 4

ARTICLE III - OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Section 3.1 Officers of the Trust . . . . . . . . . . . . 4

Section 3.2 Time and Terms of Election . . . . . . . . . . 4

Section 3.3 Resignation and Removal . . . . . . . . . . . 5

Section 3.4 Fidelity Bond . . . . . . . . . . . . . . . . 5

Section 3.5 President . . . . . . . . . . . . . . . . . . 5

Section 3.6 Vice Presidents . . . . . . . . . . . . . . . 5

Section 3.7 Treasurer and Assistant Treasurers . . . . . . 5

Section 3.8 Controller and Assistant Controllers . . . . . 6

Section 3.9 Secretary and Assistant Secretaries . . . . . 6

Section 3.10 Substitutions . . . . . . . . . . . . . . . . 7

Section 3.11 Execution of Deeds, etc. . . . . . . . . . . . 7

Section 3.12 Power to Vote Securities . . . . . . . . . . . 7

ARTICLE IV - COMMITTEES . . . . . . . . . . . . . . . . . . . . . . . . . .. 7

Section 4.1 Power of Trustees to Designate
Committees . . . . . . . . . . . . . . . . . 7

Section 4.2 Rules for Conduct of Committee Affairs . . . . 8

Section 4.3 Trustees May Alter, Abolish, etc.,
Committees . . . . . . . . . . . . . . . . . 8

Section 4.4 Minutes; Review by Trustees . . . . . . . . . 8

ARTICLE V - SEAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

</TABLE>

<PAGE> 4
- iii -

<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
ARTICLE VI - SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Section 6.1 Issuance of Shares . . . . . . . . . . . . . . 8

Section 6.2 Uncertificated Shares . . . . . . . . . . . . 9

Section 6.3 Share Certificates . . . . . . . . . . . . . . 9

Section 6.4 Lost, Stolen, etc., Certificates. . . . . . . 9

Section 6.5 Record Transfer of
Pledged Shares . . . . . . . . . . . . . . . 9

ARTICLE VII - CUSTODIAN . . . . . . . . . . . . . . . . . . . . . . . . . . 10

ARTICLE VIII - AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . . 10

Section 8.1 By-Laws Subject to Amendment . . . . . . . . . 10

Section 8.2 Notice of Proposal to Amend
By-Laws Required . . . . . . . . . . . . . . 10

</TABLE>

<PAGE> 5
1

AMERICAN CAPITAL LIFE INVESTMENT TRUST

BY-LAWS

These Articles are the By-Laws of AMERICAN CAPITAL LIFE INVESTMENT
TRUST, a trust with transferable shares established under the laws of The
Commonwealth of Massachusetts (the "Trust"), pursuant to an Agreement and
Declaration of Trust of the Trust (the "Declaration") made the 3rd day of June,
1985, and filed in the office of the Secretary of the Commonwealth. These
By-Laws have been adopted by the Trustees pursuant to the authority granted by
Section 3.1 of the Declaration.

All words and terms capitalized in these By-Laws, unless otherwise
defined herein, shall have the same meanings as they have in the Declaration.

ARTICLE I

SHAREHOLDERS AND SHAREHOLDERS' MEETINGS

SECTION 1.1. Meetings. A meeting of the Shareholders of the Trust
shall be held whenever called by the Trustees and whenever election of a
Trustee or Trustees by Shareholders is required by the provisions of the 1940
Act. Meetings of Shareholders shall also be called by the Trustees when
requested in writing by Shareholders holding at least ten percent (10%) of the
Shares then outstanding for the purpose of voting upon removal of any Trustee,
or if the Trustees shall fail to call or give notice of any such meeting of
Shareholders for a period of thirty (30) days after such application, then
Shareholders holding at least ten percent (10%) of the Shares then outstanding
may call and give notice of such meeting. Notice of Shareholders' meetings
shall be given as provided in the Declaration.

SECTION 1.2. Presiding Officer; Secretary. The President shall
preside at each Shareholders' meeting as chairman of the meeting, or in the
absence of the President, the Trustees present at the meeting shall elect one
of their number as chairman of the meeting. Unless otherwise provided for by
the Trustees, the Secretary of the Trust shall be the secretary of all meetings
of Shareholders and shall record the minutes thereof.

SECTION 1.3. Authority of Chairman of Meeting to Interpret
Declaration and By-Laws. At any Shareholders' meeting the chairman of the
meeting shall be empowered to determine the construction or interpretation of
the Declaration or these By-Laws, or any part thereof or hereof, and his ruling
shall be final.

<PAGE> 6
2

SECTION 1.4. Voting; Quorum. At each meeting of Shareholders,
except as otherwise provided by the Declaration, every holder of record of
Shares entitled to vote shall be entitled to a number of votes equal to the
number of Shares standing in his name on the Share register of the Trust on the
record date of the meeting, which are outstanding at the time such vote is
taken. Shareholders may vote by proxy and the form of any such proxy may be
prescribed from time to time by the Trustees. A quorum shall exist if the
holders of a majority of the outstanding Shares of the Trust entitled to vote
without regard to Series, are present in person or by proxy, but any lesser
number shall be sufficient for adjournments. At all meetings of the
Shareholders, votes shall be taken by ballot for all matters which may be
binding upon the Trustees pursuant to Section 7.1 of the Declaration. On other
matters, votes of Shareholders need not be taken by ballot unless otherwise
provided for by the Declaration or by vote of the Trustees, or as required by
the Act or the Regulations, but the chairman of the meeting may in his
discretion authorize any matter to be voted upon by ballot.

SECTION 1.5. Inspectors. At any meeting of Shareholders, the
chairman of the meeting may appoint one or more Inspectors of Election or
Balloting to supervise the voting at such meeting or any adjournment thereof.
If Inspectors are not so appointed, the chairman of the meeting may, and on the
request of any Shareholder present or represented and entitled to vote shall,
appoint one or more Inspectors for such purpose. Each Inspector, before
entering upon the discharge of his duties, shall take and sign an oath
faithfully to execute the duties of Inspector of Election or Balloting, as the
case may be, at such meeting with strict impartiality and according to the best
of his ability. If appointed, Inspectors shall take charge of the polls and,
when the vote is completed, shall make a certificate of the result of the vote
taken and of such other facts as may be required by law.

SECTION 1.6. Shareholders' Action in Writing. Nothing in this
Article I shall limit the power of the Shareholders to take any action by means
of written instruments without a meeting, as permitted by Section 7.6 of the
Declaration.

ARTICLE II

TRUSTEES AND TRUSTEES' MEETINGS

SECTION 2.1. Number of Trustees. There shall initially be one (1)
Trustee, and the number of Trustees shall thereafter be such number, authorized
by the Declaration, as from time to time shall be fixed by a vote adopted by a
Majority of the Trustees.

<PAGE> 7
3

SECTION 2.2. Regular Meetings of Trustees. Regular meetings of
the Trustees may be held without call or notice at such places and at such
times as the Trustees may from time to time determine; provided, that notice of
such determination, and of the time, place and purposes of the first regular
meeting thereafter, shall be given to each absent Trustee in accordance with
Section 2.4 hereof.

SECTION 2.3. Special Meetings of Trustees. Special meetings of
the Trustees may be held at any time and at any place when called by the
President or the Treasurer or by two (2) or more Trustees, or if there shall be
less than three (3) Trustees, by any Trustee; provided, that notice of the
time, place and purposes thereof is given to each Trustee in accordance with
Section 2.4 hereof by the Secretary or an Assistant Secretary or by the officer
or the Trustees calling the meeting.

SECTION 2.4. Notice of Meetings. Notice of any regular or special
meeting of the Trustees shall be sufficient if given in writing to each
Trustee, and if sent by mail at least five (5) days, or by telegram at least
twenty-four (24) hours, before the meeting, addressed to his usual or last
known business or residence address, or if delivered to him in person at least
twenty-four (24) hours before the meeting. Notice of a special meeting need
not be given to any Trustee who was present at an earlier meeting, not more
than thirty-one (31) days prior to the subsequent meeting, at which the
subsequent meeting was called. Notice of a meeting may be waived by any
Trustee by written waiver of notice, executed by him before or after the
meeting, and such waiver shall be filed with the records of the meeting.
Attendance by a Trustee at a meeting shall constitute a waiver of notice,
except where a Trustee attends a meeting for the purpose of protesting prior
thereto or at its commencement the lack of notice.

SECTION 2.5. Quorum; Presiding Officer. At any meeting of the
Trustees, a Majority of the Trustees shall constitute a quorum. Any meeting
may be adjourned from time to time by a majority of the votes cast upon the
question, whether or not a quorum is present, and the meeting may be held as
adjourned without further notice. Unless the Trustees shall otherwise elect,
generally or in a particular case, the President shall preside at each meeting
of the Trustees as chairman of the meeting or in the absence of the President,
the Trustees present at the meeting shall elect one of their number as Chairman
of the meeting.

SECTION 2.6. Participation by Telephone. One or more of the
Trustees may participate in a meeting thereof or of any Committee of the
Trustees by means of a conference telephone or similar communications equipment
allowing all persons participating in the meeting to hear each other at the
same time. Participation by such means shall constitute presence in person at
a meeting.

<PAGE> 8
4

SECTION 2.7. Location of Meetings. Trustees' meetings may be held
at any place, within or without Massachusetts.

SECTION 2.8. Votes. Voting at Trustees' meetings may be conducted
orally, by show of hands, or, if requested by any Trustee, by written ballot.
The results of all voting shall be recorded by the Secretary in the minute
book.

SECTION 2.9. Rulings of Chairman. All other rules of conduct
adopted and used at any Trustees' meeting shall be determined by the chairman
of such meeting, whose ruling on all procedural matters shall be final.

SECTION 2.10. Trustees' Action in Writing. Nothing in this Article
II shall limit the power of the Trustees to take action by means of a written
instrument without a meeting, as provided in Section 4.2 of the Declaration.

SECTION 2.11. Resignations. Any Trustee may resign at any time by
written instrument signed by him and delivered to the Chairman, the President
or the Secretary or to a meeting of the Trustees. Such resignation shall be
effective upon receipt unless specified to be effective at some other time.

SECTION 2.12. Tenure of Trustees. Notwithstanding any other
provision herein to the contrary, through June 30, 1995, the term of office of
each trustee shall end at the time such trustee reaches the age of 76 1/2 or 73
1/2 for persons first elected on or after January 1, 1986 as a trustee or
director of any open end investment company managed by American Capital Asset
Management, Inc. and on and after July 1, 1995 the term of office of each
trustee shall end at the time such trustee reaches the age of 76 1/2 or 72 1/2
for persons first elected on or after January 1, 1986 as a trustee or director
of any open end investment company managed by American Capital Asset
Management, Inc.

ARTICLE III

OFFICERS

SECTION 3.1. Officers of the Trust. The officers of the Trust
shall consist of a President, a Treasurer and a Secretary, and may include one
or more Vice Presidents, Assistant Treasurers and Assistant Secretaries, and
such other officers as the Trustees may designate. Any person may hold more
than one office. No officer other than the President need be a Trustee.

SECTION 3.2. Time and Terms of Election. The President, the
Treasurer and the Secretary shall be elected by the Trustees at

<PAGE> 9
5

their first meeting and thereafter at the annual meeting of the Trustees, as
provided in Section 4.2 of the Declaration. Such officers shall hold office
until the next annual meeting of the Trustees and until their successors shall
have been duly elected and qualified, and may be removed at any meeting by the
affirmative vote of a Majority of the Trustees. All other officers of the
Trust may be elected or appointed at any meeting of the Trustees. Such officers
shall hold office for any term, or indefinitely, as determined by the Trustees,
and shall be subject to removal, with or without cause, at any time by the
Trustees.

SECTION 3.3. Resignation and Removal. Any officer may resign at
any time by giving written notice to the Trustees. Such resignation shall take
effect at the time specified therein, and, unless otherwise specified therein,
the acceptance of such resignation shall not be necessary to make it effective.
If the office of any officer or agent becomes vacant by reason of death,
resignation, retirement, disqualification, removal from office or otherwise,
the Trustees may choose a successor, who shall hold office for the unexpired
term in respect of which such vacancy occurred. Except to the extent expressly
provided in a written agreement with the Trust, no officer resigning or removed
shall have any right to any compensation for any period following such
resignation or removal, or any right to damage on account of such removal.

SECTION 3.4. Fidelity Bond. The Trustees may, in their
discretion, direct any officer appointed by them to furnish at the expense of
the Trust a fidelity bond approved by the Trustees, in such amount as the
Trustees may prescribe.

SECTION 3.5. President. The President shall be the chief
executive officer of the Trust and, subject to the supervision of the Trustees,
shall have general charge and supervision of the business, property and affairs
of the Trust and such other powers and duties as the Trustees may prescribe.

SECTION 3.6. Vice Presidents. In the absence or disability of the
President, the Vice President or, if there shall be more than one, the Vice
Presidents in the order of their seniority or as otherwise designated by the
Trustees, shall exercise all of the powers and duties of the President. The
Vice Presidents shall have the power to execute bonds, notes, mortgages and
other contracts, agreements and instruments in the name of the Trust, and shall
do and perform such other duties as the Trustees or the President shall direct.

SECTION 3.7. Treasurer and Assistant Treasurers. The Treasurer
shall be the chief financial officer of the Trust, and shall have the custody
of the Trust's funds and Securities, and shall keep full and accurate accounts
of receipts and disbursements

<PAGE> 10
6

in books belonging to the Trust and shall deposit all moneys, and other
valuable effects in the name and to the credit of the Trust, in such
depositories as may be designated by the Trustees, taking proper vouchers for
such disbursements, shall have such other duties and powers as may be
prescribed from time to time by the Trustees, and shall render to the Trustees,
whenever they may require it, an account of all his transactions as Treasurer
and of the financial condition of the Trust. If no Controller is elected, the
Treasurer shall also have the duties and powers of the Controller, as provided
in these By-Laws. Any Assistant Treasurer shall have such duties and powers as
shall be prescribed from time to time by the Trustees or the Treasurer, and
shall be responsible to and shall report to the Treasurer. In the absence or
disability of the Treasurer, the Assistant Treasurer or, if there shall be more
than one, the Assistant Treasurers in the order of their seniority or as
otherwise designated by the Trustees or the Chairman, shall have the powers and
duties of the Treasurer.

SECTION 3.8. Controller and Assistant Controllers. If a
Controller is elected, he shall be the chief accounting officer of the Trust
and shall be in charge of its books of account and accounting records and of
its accounting procedures, and shall have such duties and powers as are
commonly incident to the office of a controller, and such other duties and
powers as may be prescribed from time to time by the Trustees. The Controller
shall be responsible to and shall report to the Trustees, but in the ordinary
conduct of the Trust's business, shall be under the supervision of the
Treasurer. Any Assistant Controller shall have such duties and powers as shall
be prescribed from time to time by the Trustees or the Controller, and shall be
responsible to and shall report to the Controller. In the absence or
disability of the Controller, the Assistant Controller or, if there shall be
more than one, the Assistant Controllers in the order of their seniority or as
otherwise designated by the Trustees, shall have the powers and duties of the
Controller.

SECTION 3.9. Secretary and Assistant Secretaries. The Secretary
shall, if and to the extent requested by the Trustees, attend all meetings of
the Trustees, any Committee of the Trustees and/or the Shareholders and record
all votes and the minutes of proceedings in a book to be kept for that purpose,
shall give or cause to be given notice of all meetings of the Trustees, any
Committee of the Trustees, and of the Shareholders and shall perform such other
duties as may be prescribed by the Trustees. The Secretary, or in his absence
any Assistant Secretary, shall affix the Trust's seal to any instrument
requiring it, and when so affixed, it shall be attested by the signature of the
Secretary or an Assistant Secretary. The Secretary shall be the custodian of
the Share records and all other books, records and papers of the Trust (other
than financial) and shall see that all books, reports, statements, certificates
and other documents and records required

<PAGE> 11
7

by law are properly kept and filed. In the absence or disability of the
Secretary, the Assistant Secretary or, if there shall be more than one, the
Assistant Secretaries in the order of their seniority or as otherwise
designated by the Trustees, shall have the powers and duties of the Secretary.

SECTION 3.10. Substitutions. In case of the absence or disability
of any officer of the Trust, or for any other reason that the Trustees may deem
sufficient, the Trustees may delegate, for the time being, the powers or
duties, or any of them, of such officer to any other officer, or to any
Trustee.

SECTION 3.11. Execution of Deeds, etc. Except as the Trustees may
generally or in particular cases otherwise authorize or direct, all deeds,
leases, transfers, contracts, proposals, bonds, notes, checks, drafts and other
obligations made, accepted or endorsed by the Trust shall be signed or endorsed
on behalf of the Trust by the Chairman, the President, one of the Vice
Presidents or the Treasurer.

SECTION 3.12. Power to Vote Securities. Unless otherwise ordered
by the Trustees, the Treasurer shall have full power and authority on behalf of
the Trust to give proxies for, and/or to attend and to act and to vote at, any
meeting of stockholders of any corporation in which the Trust may hold stock,
and at any such meeting the Treasurer or his proxy shall possess and may
exercise any and all rights and powers incident to the ownership of such stock
which, as the owner thereof, the Trust might have possessed and exercised if
present. The Trustees, by resolution from time to time, or, in the absence
thereof, the Treasurer, may confer like powers upon any other person or persons
as attorneys and proxies of the Trust.

ARTICLE IV

COMMITTEES

SECTION 4.1. Power of Trustees to Designate Committees. The
Trustees, by vote of a Majority of the Trustees, may elect from their number an
Executive Committee and any other Committees and may delegate thereto some or
all of their powers except those which by law, by the Declaration or by these
By-Laws may not be delegated; provided, that the Executive Committee shall not
be empowered to elect the President, the Treasurer or the Secretary, to amend
the By-Laws, to exercise the powers of the Trustees under this Section 4.1 or
under Section 4.3 hereof, or to perform any act for which the action of a
Majority of the Trustees is required by law, by the Declaration or by these
By-Laws. The members of any such Committee shall serve at the pleasure of the
Trustees.

<PAGE> 12
8

SECTION 4.2. Rules for Conduct of Committee Affairs. Except as
otherwise provided by the Trustees, each Committee elected or appointed
pursuant to this Article IV may adopt such standing rules and regulations for
the conduct of its affairs as it may deem desirable, subject to review and
approval of such rules and regulations by the Trustees at the next succeeding
meeting of the Trustees, but in the absence of any such action or any contrary
provisions by the Trustees, the business of each Committee shall be conducted,
so far as practicable, in the same manner as provided herein and in the
Declaration for the Trustees.

SECTION 4.3. Trustees May Alter, Abolish, etc., Committees. The
Trustees may at any time alter or abolish any Committee, change the membership
of any Committee, or revoke, rescind or modify any action of any Committee or
the authority of any Committee with respect to any matter or class of matters;
provided, that no such action shall impair the rights of any third parties.

SECTION 4.4. Minutes; Review by Trustees. Any Committee to which
the Trustees delegate any of their powers or duties shall keep records of its
meetings and shall report its actions to the Trustees.

ARTICLE V

SEAL

The seal of the Trust shall consist of a flat-faced circular die with
the word "Massachusetts", together with the name of the Trust, the words "Trust
Seal", and the year of its organization cut or engraved thereon, but, unless
otherwise required by the Trustees, the seal shall not be necessary to be
placed on, and its absence shall not impair the validity of, any document,
instrument or other paper executed and delivered by or on behalf of the Trust.

ARTICLE VI

SECTION 6.1. Issuance of Shares. The Trustees may issue Shares of
any or all Series either in certificated or uncertificated form, they may issue
certificates to the holders of Shares of a Series which was originally issued
in uncertificated form, and if they have issued Shares of any Series in
certificated form, they may at any time discontinue the issuance of Share
certificates for such Series and may, by written notice to such Shareholders of
such Series require the surrender of their Share

<PAGE> 13
9

certificates to the Trust for cancellation, which surrender and cancellation
shall not affect the ownership of Shares for such Series.

SECTION 6.2. Uncertificated Shares. For any Series of Shares for
which the Trustees issue Shares without certificates, the Trust or the Transfer
Agent may either issue receipts therefor or may keep accounts upon the books of
the Trust for the record holders of such Shares, who shall in either case be
deemed, for all purposes hereunder, to be the holders of such Shares as if they
had received certificates therefor and shall be held to have expressly assented
and agreed to the terms hereof and of the Declaration.

SECTION 6.3. Share Certificates. For any Series of Shares for
which the Trustees shall issue Share certificates, each Shareholder of such
Series shall be entitled to a certificate stating the number of Shares owned by
him in such form as shall be prescribed from time to time by the Trustees.
Such certificate shall be signed by the President or a Vice President, and by
the Treasurer or an Assistant Treasurer or the Secretary or an Assistant
Secretary of the Trust. Such signatures may be facsimiles if the certificate
is countersigned by a Transfer Agent, or by a Registrar, other than a Trustee,
officer or employee of the Trust. In case any officer who has signed or whose
facsimile signature has been placed on such certificate shall cease to be such
officer before such certificate is issued, it may be issued by the Trust with
the same effect as if he were such officer at the time of its issue.

SECTION 6.4. Lost, Stolen, etc., Certificates. If any certificate
for certificated Shares shall be lost, stolen, destroyed or mutilated, the
Trustees may authorize the issuance of a new certificate of the same tenor and
for the same number of Shares in lieu thereof. The Trustees shall require the
surrender of any mutilated certificate in respect of which a new certificate is
issued, and may, in their discretion, before the issuance of a new certificate,
require the owner of a lost, stolen or destroyed certificate, or the owner's
legal representative, to make an affidavit or affirmation setting forth such
facts as to the loss, theft or destruction as they deem necessary, and to give
the Trust a bond in such reasonable sum as the Trustees direct, in order to
indemnify the Trust.

SECTION 6.5. Record Transfer of Pledged Shares. A pledgee of
Shares pledged as collateral security shall be entitled to a new certificate in
his name as pledgee, in the case of certificated Shares, or to be registered as
the holder in pledge of such Shares in the case of uncertificated Shares;
provided, that the instrument of pledge substantially describes the debt or
duty that is intended to be secured thereby. Any such new certificate shall
express on its face that it is held as collateral security, and the name of

<PAGE> 14
10

the pledgor shall be stated thereon, and any such registration of
uncertificated Shares shall be in a form which indicates that the registered
holder holds such Shares in pledge. After such issue or registration, and
unless and until such pledge is released, such pledgee and his successors and
assigns shall alone be entitled to the rights of a Shareholder, and entitled to
vote such Shares.

ARTICLE VII

CUSTODIAN

The Trust shall at all times employ a bank or trust company having a
capital, surplus and undivided profits of at least Two Million Dollars
($2,000,000) as Custodian of the capital assets of the Trust. The Custodian
shall be compensated for its services by the Trust upon such basis as shall be
agreed upon from time to time between the Trust and the Custodian.

ARTICLE VIII

AMENDMENTS

SECTION 8.1. By-Laws Subject to Amendment. These By-Laws may be
altered, amended or repealed, in whole or in part, at any time by vote of the
holders of a majority of the Shares (or whenever there shall be more than one
Series of Shares, of the holders of a majority of the Shares of each Series)
issued, outstanding and entitled to vote. The Trustees, by vote of a Majority
of the Trustees, may alter, amend or repeal these By-Laws, in whole or in part,
including By-Laws adopted by the Shareholders, except with respect to any
provision hereof which by law, the Declaration or these By-Laws requires action
by the Shareholders; provided, that no later than the time of giving notice of
the meeting of Shareholders next following the alteration, amendment or repeal
of these By-Laws, in whole or in part, notice thereof, stating the substance of
such action shall be given to all Shareholders entitled to vote. By-Laws
adopted by the Trustees may be altered, amended or repealed by the
Shareholders.

SECTION 8.2. Notice of Proposal to Amend By-Laws Required. No
proposal to amend or repeal these By-Laws or to adopt new By-Laws shall be
acted upon at a meeting unless either (i) such proposal is stated in the notice
or in the waiver of notice, as the case may be, of the meeting of the Trustees
or Shareholders at which such action is taken, or (ii) all of the Trustees or
Shareholders, as the case may be, are present at such meeting and

<PAGE> 15
11

all agree to consider such proposal without protesting the lack of notice.

______________________________________________________________________

<PAGE> 1
EXHIBIT 4.6

The Commonwealth of Massachusetts

NUMBER SHARES

-X- -X-

AMERICAN CAPITAL LIFE INVESTMENT TRUST

AMERICAN CAPITAL GLOBAL EQUITY PORTFOLIO

Par Value $0.01 per Share

This certifies that Specimen of -------------------
--------------------------- ----------------------------
is the owner of -X- Shares in the
-------------------------------------------------
AMERICAN CAPITAL LIFE INVESTMENT TRUST
American Capital Global Equity Portfolio, par value $0.01 per share created by
a Declaration of Trust dated February , 1995 and recorded with the Secretary
of State of the Commonwealth of Massachusetts which shares are fully paid and
non-assessable, and subject to the provisions of this Trust, are transferable
by assignment endorsed thereon, and, the surrender of this certificate.

In Witness Whereof, the Trustees hereunto set their hands and have caused their
seal to be affixed hereto this ____________ day of _______________ A.D. 19___

______________________________ _______________________________
President Treasurer

<PAGE> 2

________________________________________________________________________________

REQUIREMENTS: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.

THE SIGNATURE(S) MUST BE GUARANTEED BY ONE OF THE FOLLOWING: A BANK OR TRUST
COMPANY; A BROKER/DEALER; A CREDIT UNION; A NATIONAL SECURITIES EXCHANGE,
REGISTERED SECURITIES ASSOCIATION OR CLEARING AGENCY; A SAVINGS AND LOAN
ASSOCIATION; OR A FEDERAL SAVINGS BANK.
________________________________________________________________________________

For value received, hereby sell, assign and transfer unto
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)

_________________________________________________________________________ Shares

of Beneficial Interest represented by the within Certificate, and do hereby

irrevocably constitute and appoint _____________________________________________

_______________________________________________________________________ Attorney

to transfer the said stock on the books of the within-named Corporation with

full power of substitution in the premises.

Dated, _____________________ 19 ________

_________________________________________________________________
Owner

_________________________________________________________________
Signature of Co-Owner, if any

IMPORTANT ( BEFORE SIGNING, READ AND COMPLY CAREFULLY
( WITH REQUIREMENTS PRINTED ABOVE.

SIGNATURE(s) guaranteed by:

________________________________________________________________________________
THIS SPACE MUST NOT BE COVERED IN ANY WAY

________________________________________________________________________________

*The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations.

TEN COM -as tenants in common UNIF GIFT MIN. ACT-
TEN ENT -as tenants by the entireties __________ Custodian ___________
JT TEN -as joint tenants with right (Cust) (Minor)
of survivorship and not as under Uniform Gifts to Minors
tenants in common Act ____________________________
(State)
Additional abbreviations may
also be used though
not in the above list
________________________________________________________________________________

<PAGE> 1
EXHIBIT 4.7

The Commonwealth of Massachusetts

NUMBER SHARES

-X- -X-

AMERICAN CAPITAL LIFE INVESTMENT TRUST

AMERICAN CAPITAL EMERGING GROWTH PORTFOLIO

Par Value $0.01 per Share

This certifies that Specimen of -------------------
--------------------------- ----------------------------
is the owner of -X- Shares in the
-------------------------------------------------
AMERICAN CAPITAL LIFE INVESTMENT TRUST
American Capital Emerging Growth Portfolio, par value $0.01 per share created by
a Declaration of Trust dated February , 1995 and recorded with the Secretary
of State of the Commonwealth of Massachusetts which shares are fully paid and
non-assessable, and subject to the provisions of this Trust, are transferable
by assignment endorsed thereon, and, the surrender of this certificate.

In Witness Whereof, the Trustees hereunto set their hands and have caused their
seal to be affixed hereto this ____________ day of _______________ A.D. 19___

______________________________ _______________________________
President Treasurer

<PAGE> 2

________________________________________________________________________________

For value received, hereby sell, assign and transfer unto
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)

_________________________________________________________________________ Shares

of Beneficial Interest represented by the within Certificate, and do hereby

irrevocably constitute and appoint _____________________________________________

_______________________________________________________________________ Attorney

to transfer the said stock on the books of the within-named Corporation with

full power of substitution in the premises.

Dated, _____________________ 19 ________

_________________________________________________________________
Owner

_________________________________________________________________
Signature of Co-Owner, if any

IMPORTANT ( BEFORE SIGNING, READ AND COMPLY CAREFULLY
( WITH REQUIREMENTS PRINTED ABOVE.

SIGNATURE(s) guaranteed by:

________________________________________________________________________________
THIS SPACE MUST NOT BE COVERED IN ANY WAY

________________________________________________________________________________

*The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations.

<PAGE> 1
EXHIBIT 4.8

The Commonwealth of Massachusetts

NUMBER SHARES

-X- -X-

AMERICAN CAPITAL LIFE INVESTMENT TRUST

AMERICAN CAPITAL REAL ESTATE SECURITIES PORTFOLIO

Par Value $0.01 per Share

This certifies that Specimen of -------------------
--------------------------- ----------------------------
is the owner of -X- Shares in the
-------------------------------------------------
AMERICAN CAPITAL LIFE INVESTMENT TRUST
American Capital Real Estate Securities Portfolio, par value $0.01 per share
created by a Declaration of Trust dated February , 1995 and recorded with the
Secretary of State of the Commonwealth of Massachusetts which shares are fully
paid and non-assessable, and subject to the provisions of this Trust, are
transferable by assignment endorsed thereon, and, the surrender of this
certificate.

In Witness Whereof, the Trustees hereunto set their hands and have caused their
seal to be affixed hereto this ____________ day of _______________ A.D. 19___

______________________________ _______________________________
President Treasurer

<PAGE> 2

________________________________________________________________________________

For value received, hereby sell, assign and transfer unto
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)

_________________________________________________________________________ Shares

of Beneficial Interest represented by the within Certificate, and do hereby

irrevocably constitute and appoint _____________________________________________

_______________________________________________________________________ Attorney

to transfer the said stock on the books of the within-named Corporation with

full power of substitution in the premises.

Dated, _____________________ 19 ________

_________________________________________________________________
Owner

_________________________________________________________________
Signature of Co-Owner, if any

IMPORTANT ( BEFORE SIGNING, READ AND COMPLY CAREFULLY
( WITH REQUIREMENTS PRINTED ABOVE.

SIGNATURE(s) guaranteed by:

________________________________________________________________________________
THIS SPACE MUST NOT BE COVERED IN ANY WAY

________________________________________________________________________________

*The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations.

<PAGE> 1
EXHIBIT 5.0

INVESTMENT ADVISORY AGREEMENT

AGREEMENT made this 20th day of December, 1994, by and between AMERICAN
CAPITAL LIFE INVESTMENT TRUST, a Massachusetts business trust, hereinafter
referred to as the "FUND," and AMERICAN CAPITAL ASSET MANAGEMENT, INC., a
Delaware corporation, hereinafter referred to as the "ADVISER".

The FUND and the ADVISER agree as follows:

1. Appointment

a. The FUND hereby appoints the ADVISER to act as investment adviser to the
FUND'S American Capital Common Stock Portfolio, American Capital Domestic
Strategic Income Portfolio, American Capital Government Portfolio, American
Capital Money Market Portfolio and American Capital Multiple Strategy Portfolio
("Initial Portfolios"), for the period and on the terms set forth in this
Agreement. The ADVISER accepts such appointment and agrees to furnish the
services herein set forth for the compensation herein provided.

b. In the event that the FUND establishes one or more portfolios other than
the Initial Portfolios with respect to which it desires to retain the ADVISER
to act as investment adviser hereunder, it shall notify the ADVISER in writing.
If the ADVISER is willing to render such services it shall notify the FUND in
writing whereupon such portfolio shall become a Portfolio hereunder and the
compensation payable by such new portfolio to the ADVISER will be as agreed in
writing at the time.

2. Services Rendered and Expenses Paid by ADVISER

The ADVISER, subject to the control, direction and supervision of the FUND's
Trustees and in conformity with applicable laws, the FUND's Declaration of
Trust, Bylaws, registration statement, prospectus and the stated investment
objectives, policies and restrictions of each Portfolio, shall:

a. manage the investment and reinvestment of the FUND's assets including, by
way of illustration, the evaluation of pertinent economic, statistical,
financial and other data, determination of the industries and companies to be
represented in each of the FUND'S Portfolios, and formulation and
implementation of investment programs;

b. maintain a trading desk and place all orders for the purchase and sale of
portfolio investments for the account of each Portfolio of the FUND with
brokers or dealers selected by the ADVISER;

<PAGE> 2
c. conduct and manage the day-to-day operations of the FUND including, by way
of illustration, the preparation of registration statements, prospectuses,
reports, proxy solicitation materials and amendments thereto, the furnishing of
legal services except for services provided by outside counsel to the FUND
selected by the Trustees, and the supervision of the FUND's Treasurer and the
personnel working under his direction; and

d. furnish to the FUND office space, facilities, equipment and personnel
adequate to provide the services described in paragraphs a., b., and c. above
and pay the compensation of each FUND trustee and FUND officer who is an
affiliated person of the ADVISER, except the compensation of the FUND's
Treasurer and related expenses as provided below.

In performing the services described in paragraph b. above, the ADVISER shall
use its best efforts to obtain for the FUND and each Portfolio the most
favorable price and execution available and shall maintain records adequate to
demonstrate compliance with this requirement. Subject to prior authorization by
the FUND's Trustees of appropriate policies and procedures, the ADVISER may, to
the extent authorized by law, cause the FUND to pay a broker or dealer that
provides brokerage and research services to the ADVISER an amount of commission
for effecting a portfolio investment transaction in excess of the amount of
commission another broker or dealer would have charged for effecting that
transaction. In the event of such authorization and to the extent authorized by
law the ADVISER shall not be deemed to have acted unlawfully or to have
breached any duty created by this Agreement or otherwise solely by reason of
such action.

2
<PAGE> 3
expenses related to the repurchase or redemption of its shares including
expenses related to a program of periodic repurchases or redemptions; (viii)
expenses related to the issuance of its shares against payment therefor by or
on behalf of the subscribers thereto; (ix) fees and related expenses of
registering and qualifying the FUND and its shares for distribution under state
and federal securities laws; (x) expenses of printing and mailing of
registration statements, prospectuses, reports, notices and proxy solicitation
materials of the FUND; (xi) all other expenses incidental to holding meetings
of the FUND's shareholders including proxy solicitations therefor; (xii)
expenses for servicing shareholder accounts; (xiii) insurance premiums for
fidelity coverage and errors and omissions insurance; (xiv) dues for the FUND's
membership in trade associations approved by the Trustees; and (xv) such
nonrecurring expenses as may arise, including those associated with actions,
suits, or proceedings to which the FUND is a party and the legal obligation
which the FUND may have to indemnify its officers and trustees with respect
thereto. To the extent that any of the foregoing expenses are allocated between
the FUND and any other party, such allocations shall be pursuant to methods
approved by the Trustees.

3. Role of ADVISER

The ADVISER, and any person controlled by or under common control with the
ADVISER, shall be free to render similar services to others and engage in other
activities, so long as the services rendered to the FUND are not impaired.

Except as otherwise required by the Investment Company Act of 1940 any of the
shareholders, trustees, officers and employees of the FUND may be a
shareholder, director, officer or employee of, or be otherwise interested in,
the ADVISER, and in any person controlled by or under common control with the
ADVISER, and the ADVISER, and any person controlled by or under common control
with the ADVISER, may have an interest in the FUND.

Except as otherwise agreed, in the absence of willful misfeasance, bad faith,
negligence, or reckless disregard of obligations or duties hereunder on the
part of the ADVISER, the ADVISER shall not be subject to liability to the FUND,
or to any shareholder of the FUND, for any act or omission in the course of, or
connected with, rendering services hereunder or for any losses that may be
sustained in the purchase, holding or sale of any security.

4. Compensation Payable to ADVISER

The FUND shall pay to the ADVISER, as compensation for the services rendered,
facilities furnished and expenses paid by the ADVISER, with respect to the
Portfolios set forth below, a monthly fee computed at the following annual
rates:

3
<PAGE> 4
.50% on the first $500 million of the Portfolio's average daily net assets;
.45% on the next $500 million of the Portfolio's average daily net assets; and
.40% of any excess over $1 billion.

For purposes of this calculation, assets of such Portfolios shall be combined
in calculating the investment advisory fee. Each Portfolio shall bear its pro
rata share of such fee based upon its average daily net assets.

Average daily net assets shall be determined by taking the average of the net
assets for each business day (for each calendar day in the case of the Money
Market Portfolio) during a given calendar month, calculated in the manner
provided in the FUND's Declaration of Trust. Such fee shall be payable for each
calendar month as soon as practicable after the end of that month.

The fees payable to the ADVISER by the FUND pursuant to this Section 4 shall be
reduced by any commissions, tender solicitation and other fees, brokerage or
similar payments received by the ADVISER, or any other direct or indirect
majority owned subsidiary of American Capital Management & Research, Inc., or
its successor, in connection with the purchase and sale of portfolio
investments of the FUND, less any direct expenses incurred by such person, in
connection with obtaining such commissions, fees, brokerage or similar
payments. The ADVISER shall use its best efforts to recapture all available
tender offer solicitation fees and exchange offer fees in connection with each
of the FUND's portfolio transactions and shall advise the Trustees of any other
commissions, fees, brokerage or similar payments which may be possible for the
ADVISER or any other direct or indirect majority owned subsidiary of American
Capital Management & Research, Inc., or its successor, to receive in connection
with the FUND's portfolio transactions or other arrangements which may benefit
the FUND.

In the event that the ordinary business expenses of the FUND for any fiscal
year should exceed .95% of average daily net assets, the compensation due the
ADVISER for such fiscal year shall be reduced by the amount of such excess. The
ADVISER's compensation shall be so reduced by a reduction or a refund thereof,
at the time such compensation is payable after the end of each calendar month
during such fiscal year of the FUND, and if such amount should exceed such
monthly compensation, the ADVISER shall pay the FUND an amount sufficient to
make up the deficiency, subject to readjustment during the FUND's fiscal year.
For purposes of this paragraph, all ordinary business expenses of the FUND
include the investment advisory fee and other operating expenses paid by the
FUND except (i) for interest and taxes; (ii) brokerage commissions; (iii) as a
result of litigation in connection with a suit involving a claim for recovery
by the FUND; (iv) as a result of litigation involving a defense against a
liability asserted against the FUND, provided

4
<PAGE> 5
that, if the ADVISER made the decision or took the actions which resulted in
such claim, it acted in good faith without negligence or misconduct; and (v)
any indemnification paid by the FUND to its officers and trustees and the
ADVISER in accordance with applicable state and federal laws as a result of
such litigation.

If the ADVISER shall serve for less than the whole of any month, the foregoing
compensation shall be prorated.

5. Books and Records

In compliance with the requirements of Rule 31a-3 under the 1940 Act, the
ADVISER hereby agrees that all records which it maintains for the FUND are the
property of the FUND and further agrees to surrender promptly to the FUND any
of such records upon the FUND's request. The ADVISER further agrees to preserve
for the periods prescribed by Rule 31a-2 under the 1940 Act the records
required to be maintained by Rule 31a-1 under the Act.

6. Duration and Termination

This Agreement will become effective with respect to the initial Portfolios on
the date hereof, and with respect to any additional Portfolios, on the date of
receipt by the FUND of notice from the ADVISER in accordance with Section 1(b)
hereof that the ADVISER is willing to serve as investment adviser with respect
to such Portfolio, provided that this Agreement (as supplemented by the terms
specified in any notice and agreement pursuant to Section 1(b) hereof) shall
have been approved by the shareholders of each Portfolio subject to this
Agreement, in accordance with the requirements under the 1940 Act, and, unless
sooner terminated as provided herein, shall continue in effect for an initial
period of two years. Thereafter, if not terminated, this Agreement shall
continue in effect as to a particular Portfolio for successive periods of
twelve months each, provided such continuance is specifically approved at least
annually, (a) by the vote of a majority of those members of the FUND's Trustees
who are not interested persons of any party to this Agreement, cast in person
at a meeting called for the purpose of voting on such approval, and (b) by the
FUND's Trustees or by vote of a majority of the outstanding voting securities
of such Portfolio. Not withstanding the foregoing, this Agreement may be
terminated as to any Portfolio at any time, without the payment of any penalty,
by the FUND (by vote of the FUND's Trustees or by vote of a majority of the
outstanding voting securities of such Portfolio), or by the ADVISER, on sixty
days' written notice. This Agreement will immediately terminate in the event of
its assignment.

7. Miscellaneous Provisions

For the purposes of this Agreement, the terms "affiliated person,"
"assignment," "interested person," and "majority of the outstanding

5
<PAGE> 6
voting securities" shall have their respective meanings defined in the
Investment Company Act of 1940 (the "1940 Act") and the Rules and Regulations
thereunder, subject, however, to such exemptions as may be granted to either
the ADVISER or the FUND by the Securities and Exchange Commission, or such
interpretive positions as may be taken by the Commission or its staff, under
said Act, and the term "brokerage and research services" shall have the meaning
given in the Securities Exchange Act of 1934 and the Rules and Regulations
thereunder.

The execution of this Agreement has been authorized by the Fund's Trustees and
shareholders. A copy of the Agreement and Declaration of Trust of the Fund is
on file with the Secretary of State of The Commonwealth of Massachusetts, and
it is hereby agreed that this Agreement is executed on behalf of the Trustees
of the Fund as Trustees and not individually and that the obligations of this
Agreement are not binding upon any of the Trustees, officers or shareholders of
the Fund individually but are binding only upon the assets and property of the
Fund. The FUND is composed of multiple Portfolios. All obligations of the FUND
under this Agreement shall apply only on a Portfolio by Portfolio basis and the
assets of one Portfolio shall not be liable for the obligations of any other
Portfolio.

The parties hereto each have caused this Agreement to be signed in duplicate on
its behalf by its duly authorized officer on the above date.

AMERICAN CAPITAL LIFE INVESTMENT TRUST

By Curtis W. Morell
______________________________________

Name: Curtis W. Morell
___________________________________

Its: Vice President
___________________________________

AMERICAN CAPITAL ASSET MANAGEMENT, INC.

By Nori L. Gabert
______________________________________

Name: Nori L. Gabert
___________________________________

Its: Vice President
___________________________________

<PAGE> 1

INVESTMENT ADVISORY AGREEMENT

AGREEMENT made this ____ day of ________, l995, by and between AMERICAN
CAPITAL LIFE INVESTMENT TRUST, a Massachusetts business trust, hereinafter
referred to as the "FUND," and VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT,
INC., a Delaware corporation, hereinafter referred to as the "ADVISER".

The FUND and the ADVISER agree as follows:

1. Appointment

a. The FUND hereby appoints the ADVISER to act as investment adviser to the
FUND'S American Capital Real Estate Securities Portfolio ("the Portfolio"), for
the period and on the terms set forth in this Agreement. The ADVISER accepts
such appointment and agrees to furnish the services herein set forth for the
compensation herein provided.

b. In the event that the FUND establishes one or more portfolios with respect
to which it desires to retain the ADVISER to act as investment adviser
hereunder, it shall notify the ADVISER in writing. If the ADVISER is willing to
render such services it shall notify the FUND in writing whereupon such
portfolio shall become a Portfolio hereunder and the compensation payable by
such new portfolio to the ADVISER will be as agreed in writing at the time.

2. Services Rendered and Expenses Paid by ADVISER

a. manage the investment and reinvestment of the FUND's assets including, by
way of illustration, the evaluation of pertinent economic, statistical,
financial and other data, determination of the industries and companies to be
represented in the FUND'S Portfolio, and formulation and implementation of
investment programs;

b. maintain a trading desk and place all orders for the purchase and sale of
portfolio investments for the account of the Portfolio of the FUND with brokers
or dealers selected by the ADVISER;

c. conduct and manage the day-to-day operations of the FUND including, by way
of illustration, the preparation of registration statements, prospectuses,
reports, proxy solicitation materials and amendments thereto, the furnishing of
legal services except for services provided by outside counsel to the FUND
selected by the Trustees, and the supervision of the FUND's Treasurer and the
personnel working under his direction; and
<PAGE> 2
d. furnish to the FUND office space, facilities, equipment and personnel
adequate to provide the services described in paragraphs a., b., and c. above
and pay the compensation of each FUND trustee and FUND officer who is an
affiliated person of the ADVISER, except the compensation of the FUND's
Treasurer and related expenses as provided below.

In performing the services described in paragraph b. above, the ADVISER shall
use its best efforts to obtain for the FUND and the Portfolio the most
favorable price and execution available and shall maintain records adequate to
demonstrate compliance with this requirement. Subject to prior authorization by
the FUND's Trustees of appropriate policies and procedures, the ADVISER may, to
the extent authorized by law, cause the FUND to pay a broker or dealer that
provides brokerage and research services to the ADVISER an amount of commission
for effecting a portfolio investment transaction in excess of the amount of
commission another broker or dealer would have charged for effecting that
transaction. In the event of such authorization and to the extent authorized by
law the ADVISER shall not be deemed to have acted unlawfully or to have
breached any duty created by this Agreement or otherwise solely by reason of
such action.

Except as otherwise agreed, or as otherwise provided herein, the FUND shall
pay, or arrange for others to pay, all its expenses other than those expressly
stated to be payable by the ADVISER hereunder, which expenses payable by the
FUND shall include (i) interest and taxes; (ii) brokerage commissions and other
costs in connection with the purchase and sale of portfolio investments; (iii)
compensation of its trustees and officers other than those who are affiliated
persons of the ADVISER; (iv) compensation of its Treasurer, compensation of
personnel working under the Treasurer's direction, and expenses of office
space, facilities, and equipment used by the Treasurer and such personnel in
the performance of their normal duties for the FUND which consist of
maintenance of the accounts, books and other documents which constitute the
record forming the basis for the FUND's financial statements, preparation of
such financial statements and other FUND documents and reports of a financial
nature required by federal and state laws, and participation in the production
of the FUND's registration statement, prospectuses, proxy solicitation
materials and reports to shareholders; (v) fees of outside counsel to and of
independent accountants of the FUND selected by the Trustees; (vi) custodian,
registrar and shareholder service agent fees and expenses; (vii) expenses
related to the repurchase or redemption of its shares including expenses
related to a program of periodic repurchases or redemptions; (viii) expenses
related to the issuance of its shares against payment therefor by or on behalf
of the subscribers thereto; (ix) fees and related expenses of registering and
qualifying the FUND and its shares for distribution under state and federal
securities laws; (x) expenses of printing and mailing of registration
statements, prospectuses, reports, notices and proxy solicitation materials of
the FUND; (xi) all other expenses incidental to holding meetings of the FUND's
shareholders including proxy solicitations therefor; (xii) expenses for
servicing shareholder accounts; (xiii) insurance premiums for fidelity coverage
and errors and omissions insurance; (xiv) dues for the FUND's membership in
trade associations approved by the Trustees; and (xv) such nonrecurring
expenses as may arise, including those associated with actions, suits, or
proceedings to which the FUND is a party and the legal obligation which the
FUND may have to indemnify its officers and trustees with respect thereto. To
the extent that any of the foregoing expenses are allocated between the FUND
and any other party, such allocations shall be pursuant to methods approved by
the Trustees.

3. Role of ADVISER

2
<PAGE> 3
Except as otherwise required by the Investment Company Act of l940 any of the
shareholders, trustees, officers and employees of the FUND may be a
shareholder, director, officer or employee of, or be otherwise interested in,
the ADVISER, and in any person controlled by or under common control with the
ADVISER, and the ADVISER, and any person controlled by or under common control
with the ADVISER, may have an interest in the FUND.

4. Compensation Payable to ADVISER

The FUND shall pay to the ADVISER, as compensation for the services rendered,
facilities furnished and expenses paid by the ADVISER, with respect to the
Portfolio, a monthly fee computed at the following annual rate: 1.00% of
average daily net assets.

Average daily net assets shall be determined by taking the average of the net
assets for each business day during a given calendar month, calculated in the
manner provided in the FUND's Declaration of Trust. Such fee shall be payable
for each calendar month as soon as practicable after the end of that month.

The fees payable to the ADVISER by the FUND pursuant to this Section 4 shall be
reduced by any commissions, tender solicitation and other fees, brokerage or
similar payments received by the ADVISER, or any other direct or indirect
majority owned subsidiary of Van Kampen American Capital, Inc., in connection
with the purchase and sale of portfolio investments of the FUND, less any
direct expenses incurred by such person, in connection with obtaining such
commissions, fees, brokerage or similar payments. The ADVISER shall use its
best efforts to recapture all available tender offer solicitation fees and
exchange offer fees in connection with each of the FUND's portfolio
transactions and shall advise the Trustees of any other commissions, fees,
brokerage or similar payments which may be possible for the ADVISER or any
other direct or indirect majority owned subsidiary of Van Kampen American
Capital, Inc., to receive in connection with the FUND's portfolio transactions
or other arrangements which may benefit the FUND.

If the ADVISER shall serve for less than the whole of any month, the foregoing
compensation shall be prorated.

5. Books and Records

3
<PAGE> 4
6. Duration and Termination

This Agreement will become effective with respect to the Portfolio on the date
hereof, and with respect to any additional Portfolios, on the date of receipt
by the FUND of notice from the ADVISER in accordance with Section 1(b) hereof
that the ADVISER is willing to serve as investment adviser with respect to such
Portfolio, provided that this Agreement (as supplemented by the terms specified
in any notice and agreement pursuant to Section 1(b) hereof) shall have been
approved by the shareholders of each Portfolio subject to this Agreement, in
accordance with the requirements under the 1940 Act, and, unless sooner
terminated as provided herein, shall continue in effect for an initial period
of two years. Thereafter, if not terminated, this Agreement shall continue in
effect as to a particular Portfolio for successive periods of twelve months
each, provided such continuance is specifically approved at least annually, (a)
by the vote of a majority of those members of the FUND's Trustees who are not
interested persons of any party to this Agreement, cast in person at a meeting
called for the purpose of voting on such approval, and (b) by the FUND's
Trustees or by vote of a majority of the outstanding voting securities of such
Portfolio. Not withstanding the foregoing, this Agreement may be terminated as
to any Portfolio at any time, without the payment of any penalty, by the FUND
(by vote of the FUND's Trustees or by vote of a majority of the outstanding
voting securities of such Portfolio), or by the ADVISER, on sixty days' written
notice. This Agreement will immediately terminate in the event of its
assignment.

7. Miscellaneous Provisions

For the purposes of this Agreement, the terms "affiliated person,"
"assignment," "interested person," and "majority of the outstanding voting
securities" shall have their respective meanings defined in the Investment
Company Act of l940 (the "1940 Act") and the Rules and Regulations thereunder,
subject, however, to such exemptions as may be granted to either the ADVISER or
the FUND by the Securities and Exchange Commission, or such interpretive
positions as may be taken by the Commission or its staff, under said Act, and
the term "brokerage and research services" shall have the meaning given in the
Securities Exchange Act of l934 and the Rules and Regulations thereunder.

It is understood and agreed that the ADVISER may engage a subadviser to assist
it in the performance of its duties hereunder.

4
<PAGE> 5
The parties hereto each have caused this Agreement to be signed in duplicate on
its behalf by its duly authorized officer on the above date.

AMERICAN CAPITAL LIFE INVESTMENT TRUST

By ______________________________________

Name: __________________________________

Its: ___________________________________

VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT, INC.

By ______________________________________

Name: __________________________________

Its: ___________________________________

<PAGE> 1

EXHIBIT 5.4

INVESTMENT SUB-ADVISORY AGREEMENT BETWEEN
VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT, INC.
AND
HINES INTERESTS REALTY ADVISORS LIMITED PARTNERSHIP

This Agreement is entered into this ___ day of ___________, 1994, between VAN
KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT, INC., ("VKAC") and HINES INTERESTS
REALTY ADVISORS LIMITED PARTNERSHIP ("Hines"), to provide certain investment
advisory services to American Capital Life Investment Trust (the "Fund").

WHEREAS, VKAC has entered into an Investment Advisory Agreement (the "Advisory
Agreement"), dated this date, with the Fund, under which VKAC has agreed, among
other things, to act as investment adviser to the American Capital Real Estate
Securities Portfolio of the Fund (the "Portfolio"); and

WHEREAS, the Advisory Agreement provides that VKAC may engage a
subadviser to furnish requested investment information and advice with respect
to real estate matters to assist VKAC in carrying out its
responsibilities under the Advisory Agreement; and

WHEREAS, it is the purpose of this Sub-Advisory Agreement (the "Agreement") to
express the agreements and understandings of the parties with respect to the
services to be provided by Hines to VKAC with respect to the Portfolio
and the terms and conditions under which such services will be rendered.

NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth below, it is agreed as follows:

1. Services of Hines.

Hines shall act as sub-adviser to VKAC to assist VKAC in the performance of
its investment advisory responsibilities to the Porfolio. In this capacity,
Hines shall have the following responsibilities:

(a) to provide regional economic analysis of the areas in which properties
owned by real estate investment trusts are located;

(b) to provide analysis and information concerning the relative attractiveness
of the various property types within the several geographic regions;

(d) to evaluate property managers and sponsors of real estate investment
trusts;

(e) to review and monitor the real estate investments in the Portfolio;
and

<PAGE> 2
(f) to furnish such other information and reports as may reasonably be
requested by VKAC from time to time.

2. Obligations of VKAC.

VKAC shall have the following obligations under this Agreement:

(a) to keep Hines fully informed as to the composition of the Portfolio's
investment securities;

(b) to keep Hines fully advised of the Portfolio's investment objectives, and
any modifications and changes thereto, as well as any specific investment
restrictions or limitations by sending Hines copies of each registration
statement;

(c) to furnish Hines with a copy of any financial statement or report prepared
for the Fund by independent public accountants, and with copies of any
financial statements or reports made by the Fund to shareholders or to any
governmental body or securities exchange and to inform Hines of the results of
any audits or examinations by regulatory authorities pertaining to the Fund;

(d) to furnish Hines with any further materials or information which Hines may
reasonably request to enable it to perform its functions under this Agreement;
and

(e) to compensate Hines for its services under this Agreement by the payment
of fees equal to (i) 50% of the fees received by VKAC for services rendered
under the Advisory Agreement by VKAC to the Portfolio during the term of this
Agreement, less (ii) 50% of the amount paid by VKAC on behalf of the Portfolio
pursuant to any expense limitation or the amount of any other reimbursement
made by VKAC to the Portfolio. In the event that this Agreement shall be
effective for only part of a period to which any such fee received by VKAC is
attributable, then an appropriate pro-ration of the fee that would have been
payable to Hines under this Agreement shall be made. The fees payable to Hines
from VKAC shall be payable upon receipt by VKAC of advisory fees from the
Portfolio.

3. Best Efforts.

It is understood and agreed that in furnishing the investment advice and other
services as provided in this Agreement, Hines shall use its best professional
judgment to recommend actions which will provide favorable results for the
Portfolio. Hines shall not be liable to the Fund or to any shareholder of the
Fund to any greater degree than VKAC. Hines shall be free to render similar
services to others and otherwise to engage in the real estate business and
related activities so long as the services rendered to the Portfolio are not
impaired.

4. Compliance With Laws.

Hines represents that it is, and will continue to be throughout the term of
this Agreement, an investment adviser registered under all applicable federal
and state laws. In all matters relating to the performance of this Agreement,
Hines will act in conformity with the Fund's Agreement and Declaration of
Trust, Bylaws, and current registration statement and with the instructions and
direction of VKAC and the Fund's Trustees, and will conform to and comply with
the Investment Company Act of 1940, as amended (the "1940 Act"), and all other
applicable federal or state laws and regulations.

2
<PAGE> 3
5. Termination.

This Agreement shall terminate automatically upon the termination of the
Advisory Agreement. This Agreement may be terminated at any time, without
penalty, by VKAC or by the Fund by giving 30 days' written notice of such
termination to Hines at its principal place of business, provided that such
termination is approved by the Trustees of the Fund or by vote of a majority of
the outstanding voting securities (as that phrase is defined in Section
2(a)(42) of the 1940 Act) of the Portfolio. This Agreement may be terminated
at any time by Hines by giving 30 days' written notice of such termination
to the Fund and VKAC at their respective principal places of business.

6. Assignment.

This Agreement shall terminate automatically in the event of its assignment (as
that term is defined in Section 2(a)(4) of the 1940 Act).

7. Term.

This Agreement shall continue in effect, unless sooner terminated in accordance
with its terms, for an initial term of two years and shall continue in effect
from year to year thereafter provided continuance is specifically approved at
least annually by the vote of a majority of the Trustees of the Fund who are
not parties hereto or interested persons (as the term is defined in Section
2(a)(19) of the 1940 Act) of any such party, cast in person at a meeting called
for the purpose of voting on the approval of the terms of such renewal, and by
either the Trustees of the Fund or the affirmative vote of a majority of the
outstanding voting securities of the Portfolio (as that phrase is defined in
Section 2(a)(42) of the 1940 Act).

8. Amendments.

This Agreement may be amended only with the approval by the affirmative vote of
a majority of the outstanding voting securities of the Portfolio (as that
phrase is defined in Section 2(a)(42) of the 1940 Act) and the approval by the
vote of a majority of the Trustees of the Fund who are not parties hereto
or interested persons (as that term is defined in Section 2(a)(19) of the 1940
Act) of any such party, cast in person at a meeting called for the purpose of
voting on the approval of such amendment, unless otherwise permitted in
accordance with the 1940 Act.

9. Applicable Laws.

This Agreement shall be construed according to, and the rights and liabilities
of the parties hereto shall be governed by, the laws of the United States and
the State of Texas.

3
<PAGE> 4
IN WITNESS WHEREOF, this Agreement has been executed as of the date first above
written.

VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT, INC.

Name: _____________________________________

Its: _____________________________________

By: ______________________________________

HINES INTERESTS REALTY ADVISORS LIMITED PARTNERSHIP

Name: _____________________________________

Its: ______________________________________

By: ______________________________________

<PAGE> 1

EXHIBIT 5.5

INVESTMENT ADVISORY AGREEMENT

AGREEMENT made this ____ day of ________, 1995, by and between AMERICAN
CAPITAL LIFE INVESTMENT TRUST, a Massachusetts business trust, hereinafter
referred to as the "FUND," and VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT,
INC., a Delaware corporation, hereinafter referred to as the "ADVISER".

The FUND and the ADVISER agree as follows:

1. Appointment

a. The FUND hereby appoints the ADVISER to act as investment adviser to the
FUND'S American Capital Global Equity Portfolio ("the Portfolio"), for the
period and on the terms set forth in this Agreement. The ADVISER accepts such
appointment and agrees to furnish the services herein set forth for the
compensation herein provided.

2. Services Rendered and Expenses Paid by ADVISER

a. manage the investment and reinvestment of the FUND's assets including, by
way of illustration, the evaluation of pertinent economic, statistical,
financial and other data, determination of the industries and companies to be
represented in the FUND'S Portfolio, and formulation and implementation of
investment programs;

b. maintain a trading desk and place all orders for the purchase and sale of
portfolio investments for the account of the Portfolio of the FUND with brokers
or dealers selected by the ADVISER;

<PAGE> 2
d. furnish to the FUND office space, facilities, equipment and personnel
adequate to provide the services described in paragraphs a., b., and c. above
and pay the compensation of each FUND trustee and FUND officer who is an
affiliated person of the ADVISER, except the compensation of the FUND's
Treasurer and related expenses as provided below.

3. Role of ADVISER

2
<PAGE> 3
Except as otherwise required by the Investment Company Act of 1940 any of the
shareholders, trustees, officers and employees of the FUND may be a
shareholder, director, officer or employee of, or be otherwise interested in,
the ADVISER, and in any person controlled by or under common control with the
ADVISER, and the ADVISER, and any person controlled by or under common control
with the ADVISER, may have an interest in the FUND.

4. Compensation Payable to ADVISER

The fees payable to the ADVISER by the FUND pursuant to this Section 4 shall be
reduced by any commissions, tender solicitation and other fees, brokerage or
similar payments received by the ADVISER, or any other direct or indirect
majority owned subsidiary of Van Kampen American Capital, Inc., in connection
with the purchase and sale of portfolio investments of the FUND, less any
direct expenses incurred by such person, in connection with obtaining such
commissions, fees, brokerage or similar payments. The ADVISER shall use its
best efforts to recapture all available tender offer solicitation fees and
exchange offer fees in connection with each of the FUND's portfolio
transactions and shall advise the Trustees of any other commissions, fees,
brokerage or similar payments which may be possible for the ADVISER or any
other direct or indirect majority owned subsidiary of Van Kampen American
Capital, Inc., to receive in connection with the FUND's portfolio transactions
or other arrangements which may benefit the FUND.

If the ADVISER shall serve for less than the whole of any month, the foregoing
compensation shall be prorated.

5. Books and Records

3
<PAGE> 4
6. Duration and Termination

7. Miscellaneous Provisions

For the purposes of this Agreement, the terms "affiliated person,"
"assignment," "interested person," and "majority of the outstanding voting
securities" shall have their respective meanings defined in the Investment
Company Act of 1940 (the "1940 Act") and the Rules and Regulations thereunder,
subject, however, to such exemptions as may be granted to either the ADVISER or
the FUND by the Securities and Exchange Commission, or such interpretive
positions as may be taken by the Commission or its staff, under said Act, and
the term "brokerage and research services" shall have the meaning given in the
Securities Exchange Act of 1934 and the Rules and Regulations thereunder.

4
<PAGE> 5
The parties hereto each have caused this Agreement to be signed in duplicate on
its behalf by its duly authorized officer on the above date.

AMERICAN CAPITAL LIFE INVESTMENT TRUST

By ______________________________________

Name: __________________________________

Its: ___________________________________

VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT, INC.

By ______________________________________

Name: __________________________________

Its: ___________________________________

<PAGE> 1
EXHIBIT 5.6

INVESTMENT SUB-ADVISORY AGREEMENT BETWEEN
VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT, INC.
and
JOHN GOVETT & CO. LIMITED

THIS AGREEMENT is made as of this ____ day of ________, 1995 by and between
JOHN GOVETT & CO. LIMITED ("JOHN GOVETT") of Shackleton House, 4 Battle Bridge
Lane, London SE1 2HR, England, and VAN KAMPEN AMERICAN CAPITAL ASSET
MANAGEMENT, INC. ("VKAC") of 2800 Post Oak Boulevard, Houston, Texas 77056.

WHEREAS, VKAC has heretofore sponsored and acts as Investment Adviser to
American Capital Life Investment Trust with respect to American Capital Global
Equity Portfolio (the "Fund"); and

WHEREAS, JOHN GOVETT has available a staff of experienced investment personnel
and facilities for providing investment sub-advisory services applicable to
that portion of the investment portfolio invested in non-U.S. securities; and

WHEREAS, VKAC represents that it is a non-private investor with regard to the
Investment Management Regulatory Organization Limited ("IMRO") rules.

WHEREAS, JOHN GOVETT is a member of IMRO, a self-regulating organization
recognized under the Financial Services Act 1986 of the United Kingdom and is
willing to provide VKAC with investment advisory services on the terms and
conditions hereinafter set forth; and

WHEREAS, VKAC and JOHN GOVETT (jointly referred to as "the Advisers") desire to
enter into an agreement for JOHN GOVETT to provide sub-advisory services to the
Fund and to VKAC with respect to the Fund's non-U.S. investments.

NOW THEREFORE it is mutually agreed:

1. Investment Sub-Advisory Services

1.1 Investment Advice

a) Subject to the overall policies, control, direction and review of the
Fund's Trustees, JOHN GOVETT shall keep under review the non-U.S. investments
of the Fund and continuously furnish to the Fund and to VKAC (1) investment
advice primarily for investments in securities for which the principal trading
market(s) are in non-U.S. countries; (2) economic, statistical and research
information and advice, including advice on the allocation of investments among
countries, relating only to such portion of the Fund's assets as the Advisers
shall from time to time designate ("Non-U.S. Securities"), generally with
respect to securities issued outside

<PAGE> 2
the United States and Canada; (3) recommendations as to the voting of proxies
solicited by or with respect to Non-U.S. Securities; and (4) an investment
program with respect to Non-U.S. Securities and recommendations as to what
securities shall be purchased, sold or exchanged, and what portion, if any, of
the Non-U.S. Securities shall be held in money market instruments.

b) The Advisers are responsible for the allocation of the Fund's assets among
the various securities markets of the world. The Advisers will determine at
least quarterly the percentage of the assets that shall be allocated to each of
the Advisers (the "Asset Allocation"). The Asset Allocation will specify the
percentage and nature of the assets of the Fund allocated to each of the
Advisers for management on the effective date of the determination and will
apply to cash inflows or outflows and income and expense accruals thereafter
until such time as the Asset Allocation is redetermined. Each of the Advisers
will be responsible for the allocation of assets among the securities markets
within the area for which it is responsible. If the Advisers cannot agree on an
Asset Allocation, the Trustees shall make the final determination since the
Trustees retains in all events the control and management of the business and
affairs of the Fund.

c) Unless otherwise instructed by VKAC or the Trustees, and subject to the
provisions of this Agreement and to any guidelines or limitations specified
from time to time by VKAC or by the Trustees, JOHN GOVETT shall determine the
Non-U.S. Securities to be purchased and sold by the Fund and shall place
orders for the purchase, sale or exchange of Non-U.S. Securities for the
Fund's accounts with brokers or dealers and to that end JOHN GOVETT is
authorized by the Trustees to give instructions to the Custodian and any
Sub-Custodian of the Fund as to deliveries of such Non-U.S. Securities,
transfers of currencies and payments of cash for the account of the Fund.

d) In performing these services, JOHN GOVETT shall adhere to the Fund's
investment objectives, restrictions and limitations as contained in its
Prospectus, Statement of Additional Information, or Agreement and Declaration
of Trust and shall comply with all statutory and regulatory restrictions,
limitations and requirements applicable to the activity of the Fund.

e) Unless otherwise instructed by VKAC or the Trustees, and subject to the
provisions of this Agreement and to any guidelines or limitations specified
from time to time by VKAC or by the Trustees, JOHN GOVETT shall have executed
and performed on behalf of and at the expense of the Fund:

i) Purchases, sales, exchanges, conversions, and placement or orders for
execution, and

2
<PAGE> 3
ii) Reporting of all transactions to VKAC and to other entities as directed by
VKAC or by the Trustees.

f) JOHN GOVETT shall provide the Trustees at least quarterly, in advance of
the regular meetings of the Trustees, a report of its activities hereunder on
behalf of the Fund and its proposed strategy for the next quarter, all in such
form and detail as requested by the Trustees. JOHN GOVETT shall also make an
investment officer available to attend such meetings of the Trustees as the
Trustees may reasonably request.

1.2 Restriction of JOHN GOVETT's Powers

(a) JOHN GOVETT shall not commit the Fund to any extent beyond the amount of
the cash and securities placed by the Fund under the control of the JOHN
GOVETT.

(b) In carrying out its duties hereunder JOHN GOVETT shall comply with all
reasonable instruction of the Fund or VKAC in connection therewith. Such
instructions may be given by letter, telex, telefax or telephone confirmed by
telex, by the Trustees or by any other person authorized by a resolution of the
Trustees provided a certified copy of such resolution has been supplied to JOHN
GOVETT.

(c) All securities, cash, and other assets of the Fund shall be placed and
maintained in the care of a member bank of the Federal Reserve System of the
United States approved by the Trustees as custodian and one or more "Eligible
Foreign Custodians" (as defined in Rule 17f-5 under the Investment Company Act
of 1940 (the "1940 Act")) approved by the Trustees as sub-custodians.

(d) Persons authorized by resolution of the Trustees shall have the right to
inspect and copy contracts, notes, vouchers, and copies of entries in books or
electronic recording media relating to the Fund's transactions at the
registered office of JOHN GOVETT at any time during normal business hours. Such
records, in relation to each transaction effected by JOHN GOVETT on behalf of
the Fund shall be maintained by JOHN GOVETT for a period of seven years from
the date of such transaction.

1.3 Purchase and Sale of Securities

In performing the services described above, JOHN GOVETT shall use its best
efforts to obtain for the Fund the most favorable price and execution
available. Subject to prior authorization of appropriate policies and
procedures by the Trustees, JOHN GOVETT may, to the extent authorized by law,
cause the Fund to pay a broker or dealer who provides brokerage and research
services an amount of commission for effecting the Fund's investment
transaction in excess of the amount of commission another broker or dealer
would have charged for effecting that transaction, in

3
<PAGE> 4
recognition of the brokerage and research services provided by the broker or
dealer. To the extent authorized by law, JOHN GOVETT shall not be deemed to
have acted unlawfully or to have breached any duty created by this Agreement or
otherwise solely by reason of such action.

1.4 Custodian

JOHN GOVETT shall not act as Custodian for the securities or any other assets
of the Fund. All such assets shall be held by the Custodian or Sub-Custodian
appointed by the Trustees.

2. Duties of VKAC

2.1 Provision of Information

VKAC shall advise JOHN GOVETT from time to time with respect to the Fund of its
investment objectives and of any changes or modifications thereto, as well as
any specific investment restrictions or limitations by sending to JOHN GOVETT a
copy of each registration statement relating to the Fund as filed with the
Securities and Exchange Commission. As requested by JOHN GOVETT, VKAC shall
furnish such information to JOHN GOVETT as to holdings, purchases, and sales of
the securities under its management as will reasonably enable JOHN GOVETT to
furnish its investment advice under this Agreement.

2.2 Compensation to JOHN GOVETT

The fee for the services provided under this Agreement will be determined as
follows:

(a) An amount for each month (or such other valuation period as may be
mutually agreed upon) equivalent, on an annual basis, to 50% of the
compensation actually received by VKAC pursuant to the investment advisory fee
schedule set forth in the Investment Advisory Agreement between the Fund and
VKAC taking into account any waiver or return to the Fund of any or all of such
advisory fee by VKAC (with any such return of fees to be treated as if not
actually received). The value of the assets of the Fund shall be computed as of
the close of business on the last day of each valuation period for the Fund,
using the average of all the daily determinations of the net value of the
assets of the Fund.

(b) The foregoing fee shall be paid in cash by VKAC to JOHN GOVETT within five
(5) business days after the last day of the valuation period.

3. Miscellaneous

3.1 Activities of JOHN GOVETT

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<PAGE> 5
The services of JOHN GOVETT as Sub-Adviser to VKAC under this Agreement are not
to be deemed exclusive, JOHN GOVETT and its affiliates being free to render
services to others. It is understood that shareholders, directors, officers and
employees of JOHN GOVETT may become interested in the Fund or VKAC as a
shareholder, trustee, officer, partner or otherwise.

3.2 Services to Other Clients

VKAC acknowledges that JOHN GOVETT may have investment responsibilities, or
render investment advice to, or perform other investment advisory services for,
other individuals or entities, ("Clients"). Subject to the provisions of this
paragraph, VKAC agrees that JOHN GOVETT may give advice or exercise investment
responsibility and take such other action with respect to such Clients which
may differ from advice given or the timing or nature of action taken with
respect to the Fund, provided that JOHN GOVETT acts in good faith, and
provided, further, that it is JOHN GOVETT policy to allocate, within its
reasonable discretion, investment opportunities to the Fund over a period of
time on a fair and equitable basis relative to the Clients, taking into account
the investment objectives and policies of the Fund and any specific investment
restrictions applicable thereto. VKAC acknowledges that one or more of the
Clients may at any time hold, acquire, increase, decrease, dispose of or
otherwise deal with positions in investments in which the Fund may have an
interest from time to time, whether in transactions which may involve the Fund
or otherwise. JOHN GOVETT shall have no obligation to acquire for the Fund a
position in any investment which any Client may acquire, and VKAC shall have no
first refusal, coinvestment or other rights in respect of any such investment,
either for the Fund or otherwise.

3.3 Best Efforts

It is understood and agreed that in furnishing the investment advice and other
services as herein provided, JOHN GOVETT shall use its best professional
judgment to recommend actions which will provide favorable results for the
Fund. JOHN GOVETT shall not be liable to the Fund or to any shareholder of the
Fund to any greater degree than VKAC.

3.4 Indemnity for Taxes

a) Notwithstanding any other provision of this Agreement, VKAC shall indemnify
and save JOHN GOVETT and each of its affiliates, officers, directors and
employees (each an "Indemnified Party") harmless from, against, for and in
respect of all taxes imposed by the United Kingdom on VKAC or the Fund, in
relation to the matters contemplated by this Agreement in the event that any
such tax is assessed or charged on an Indemnified Party as a branch or agent of
VKAC or the Fund.

5
<PAGE> 6
b) VKAC will not be liable under this indemnification provision with respect
to any liabilities incurred by reason of an Indemnified Party's willful
misfeasance, bad faith, or gross negligence in the performance of such
Indemnified Party's duties or by reason of such Indemnified Party's reckless
disregard of obligations and duties under this Agreement or to the Fund.

c) VKAC will not be liable under this indemnification provision with respect
to any claim made against an Indemnified Party unless such Indemnified Party
shall have notified VKAC in writing within a reasonable time after the summons
or other first legal process giving information of the nature of the claim
shall have been served upon such Indemnified Party (or after such Indemnified
Party shall have received notice of such service on any designated agent). In
case any such action is brought against the Indemnified Parties, VKAC will be
entitled to participate, at its own expense, in the defense thereof. VKAC also
will be entitled to assume the defense thereof, with counsel satisfactory to
the party named in the action. After notice from VKAC to such party of VKAC's
election to assume the defense thereof, the Indemnified Party will bear the
fees and expenses of any additional counsel retained by it, and VKAC will not
be liable to such party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in connection with the
defense thereof.

3.5 Duration of Agreement

a) This Agreement, unless terminated pursuant to paragraph b or c below, shall
have an initial term of two years, and thereafter shall continue in effect from
year to year, provided its continued applicability is specifically approved at
least annually by the Trustees or by a vote of the holders of a majority of the
outstanding shares of the Fund. In addition, such continuation shall be
approved by vote of a majority of the Trustees who are not parties to this
Agreement or interested persons of any such party, cast in person at a meeting
called for the purpose of voting on such approval. As used in this paragraph,
the term "interested person" shall have the same meaning as set forth in the
1940 Act.

b) This Agreement may be terminated by sixty (60) days' written notice by
either VKAC or JOHN GOVETT to the other party. The Agreement may also be
terminated at any time, without the payment of any penalty, by the Fund (by
vote of the Trustees or, by the vote of a majority of the outstanding voting
securities of such Fund), on sixty (60) days' written notice to both VKAC and
JOHN GOVETT. This Agreement shall automatically terminate in the event of the
termination of the investment advisory agreement between VKAC and the Fund.

c) This Agreement shall terminate in the event of its assignment. The term
"assignment" for this purpose shall have the same meaning

6
<PAGE> 7
set forth in Section 2(a)(4) of the 1940 Act.

d) Termination shall be without prejudice to the completion of any
transactions which JOHN GOVETT shall have committed to on behalf of the Fund
prior to the time of termination. JOHN GOVETT shall not effect and the Fund
shall not be entitled to instruct JOHN GOVETT to effect any further
transactions on behalf of the Fund subsequent to the time termination takes
effect.

e) This Agreement shall terminate forthwith by notice in writing on the
happening of any of the following events:

i) if VKAC or JOHN GOVETT shall go into liquidation (except a voluntary
liquidation for the purpose of and followed by a bona fide reconstruction or
amalgamation upon terms previously approved in writing by the party not in
liquidation) or if a receiver or receiver and manager of any of the assets of
any of them is appointed; or

ii) if either of the parties hereto shall commit any breach of the provisions
hereof and shall not have remedied such breach within 30 days after the service
of notice by the party not in breach on the other requiring the same to be
remedied.

f) On the termination of this Agreement and completion of all matters referred
to in the foregoing paragraph (d) JOHN GOVETT shall deliver or cause to be
delivered to the Fund copies of all documents, records and books of the Fund
required to be maintained pursuant to Rules 31a-1 or 31a-2 of the 1940 Act
which are in JOHN GOVETT's possession, power or control and which are valid and
in force at the date of termination.

3.6 Notices

Any notice, request, instruction, or other document to be given under this
Agreement by any party hereto to the other parties shall be in writing and
delivered personally or sent by mail or telecopy (with a hard copy to follow),

If to JOHN GOVETT, to:

Shackleton House
4 Battle Bridge Lane
London SE1 2HR
England
attn: The Hon. Kevin Pakenham

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<PAGE> 8
with a copy to:

650 California Street
28th Floor
San Francisco, CA 94108
telecopy: (415) 249-0554
attn: Michael J. Mayer

and a copy to:

650 California Street
28th Floor
San Francisco, CA 94108
telecopy: (415) 249-0553
attn: Robert A. Cornman, Esq.

and a copy to:

Heller, Ehrman, White & McAuliffe
333 Bush Street
San Francisco, CA 94104
telecopy: (415) 772-6268
attn: Mitchell E. Nichter, Esq.

If to VKAC, to:

2800 Post Oak Blvd.
Houston, TX 77056
telecopy: (713) 993-4300
attn: Don Powell

with a copy to:

2800 Post Oak Blvd.
Houston, TX 77056
telecopy: (713) 993-4317
attn: Nori L. Gabert, Esq.

or at such other address for a party as shall be specified by like notice. Any
notice that is delivered personally in the manner provided herein shall be
deemed to have been duly given to the party to whom it is directed upon actual
receipt by such party (or its agent for notices hereunder). Any notice that is
addressed and mailed in the manner herein provided shall be presumed to have
been duly given to the party to which it is addressed, on the date three (3)
days after mailing, and in the case of delivery by telecopy, on the date the
hard copy is received.

3.7 IMRO Rules

As a member of IMRO and in light of IMRO Rules, the Sub-Adviser

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<PAGE> 9
places on record that it regards this Agreement as not necessitating any
ancillary agreement with the Fund or VKAC on the grounds that, within meanings
of the IMRO Rules (a) the Fund is an open-ended investment company and a
business investor, (b) VKAC is a professional investor and (c) the subject
matter of this Agreement is a scheme management activity.

3.8 Choice of Law

This Agreement shall be construed according to, and the rights and liabilities
of the parties hereto shall be governed by, the laws of the United States and
the State of California.

IN WITNESS WHEREOF, the Agreement has been executed as of the date first above
given.

JOHN GOVETT & CO. LIMITED

By:_____________________________________

Name: _________________________________

Its: __________________________________

VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT, INC.

By: ____________________________________

Name: _________________________________

Its: __________________________________

<PAGE> 1
EXHIBIT 5.7

INVESTMENT ADVISORY AGREEMENT

The FUND and the ADVISER agree as follows:

1. Appointment

a. The FUND hereby appoints the ADVISER to act as investment adviser to the
FUND'S American Capital Emerging Growth Portfolio ("the Portfolio"), for the
period and on the terms set forth in this Agreement. The ADVISER accepts such
appointment and agrees to furnish the services herein set forth for the
compensation herein provided.

2. Services Rendered and Expenses Paid by ADVISER

a. manage the investment and reinvestment of the FUND's assets including, by
way of illustration, the evaluation of pertinent economic, statistical,
financial and other data, determination of the industries and companies to be
represented in the FUND'S Portfolio, and formulation and implementation of
investment programs;

b. maintain a trading desk and place all orders for the purchase and sale of
portfolio investments for the account of the Portfolio of the FUND with brokers
or dealers selected by the ADVISER;

3. Role of ADVISER

4. Compensation Payable to ADVISER

The fees payable to the ADVISER by the FUND pursuant to this Section 4 shall be
reduced by any commissions, tender solicitation and other fees, brokerage or
similar payments received by the ADVISER, or any other direct or indirect
majority owned subsidiary of Van Kampen American Capital, Inc., in connection
with the purchase and sale of portfolio investments of the FUND, less any
direct expenses incurred by such person, in connection with obtaining such
commissions, fees, brokerage or similar payments. The ADVISER shall use its
best efforts to recapture all available tender offer solicitation fees and
exchange offer fees in connection with each of the FUND's portfolio
transactions and shall advise the Trustees of any other commissions, fees,
brokerage or similar payments which may be possible for the ADVISER or any
other direct or indirect majority owned subsidiary of Van Kampen American
Capital, Inc., to receive in connection with the FUND's portfolio transactions
or other arrangements which may benefit the FUND.

If the ADVISER shall serve for less than the whole of any month, the foregoing
compensation shall be prorated.

5. Books and Records

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<PAGE> 4
6. Duration and Termination

7. Miscellaneous Provisions

For the purposes of this Agreement, the terms "affiliated person,"
"assignment," "interested person," and "majority of the outstanding voting
securities" shall have their respective meanings defined in the Investment
Company Act of 1940 (the "1940 Act") and the Rules and Regulations thereunder,
subject, however, to such exemptions as may be granted to either the ADVISER or
the FUND by the Securities and Exchange Commission, or such interpretive
positions as may be taken by the Commission or its staff, under said Act, and
the term "brokerage and research services" shall have the meaning given in the
Securities Exchange Act of 1934 and the Rules and Regulations thereunder.

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<PAGE> 5
The parties hereto each have caused this Agreement to be signed in duplicate on
its behalf by its duly authorized officer on the above date.

AMERICAN CAPITAL LIFE INVESTMENT TRUST

By ______________________________________

Name: __________________________________

Its: ___________________________________

VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT, INC.

By ______________________________________

Name: __________________________________

Its: ___________________________________

<PAGE> 1
EXHIBIT 6.0

UNDERWRITING AGREEMENT
between
AMERICAN CAPITAL LIFE INVESTMENT TRUST
and
AMERICAN CAPITAL MARKETING, INC.

THIS AGREEMENT made this 20th day of December, 1994, by and between AMERICAN
CAPITAL LIFE INVESTMENT TRUST, a Massachusetts business trust, hereinafter
referred to as the "Fund", and AMERICAN CAPITAL MARKETING, INC., a Texas
corporation, hereinafter referred to as the "Underwriter".

W I T N E S S E T H :

In consideration of the mutual covenants herein contained and other good and
valuable consideration, the receipt whereof is hereby acknowledged, the parties
hereto agree as follows:

FIRST: The Fund hereby appoints the Underwriter as its exclusive agent for the
sale of shares of the Fund to separate accounts established by life insurance
companies to fund variable life insurance or variable annuities. This
agreement shall apply to shares of the American Capital Common Stock Portfolio,
American Capital Corporate Bond Portfolio, American Capital Government
Portfolio, American Capital Money Market Portfolio, and American Capital
Multiple Strategy Portfolio and to such additional portfolios of the Fund as
may be mutually agreed upon in writing by the Fund and the Underwriter.

SECOND: The Fund shall not sell any of its shares except through the
Underwriter and under the terms and conditions set forth in paragraph FOURTH
below.

THIRD: The Underwriter hereby accepts appointment as exclusive agent for the
sale of the shares of the Fund and agrees that it will use its best efforts to
sell such shares; provided, however, that:

(A) the Underwriter may, and when requested by the Fund shall, suspend its
efforts to effectuate such sales at any time when, in the opinion of the
Underwriter or of the Fund, no sales should be made because of market or other
economic considerations or abnormal circumstances of any kind; and

(B) the Fund may withdraw the offering of its shares (i) at any time with the
consent of the Underwriter, or (ii) without such consent when so required by
the provisions of any statute or of any order, rule or regulation of any
governmental body having jurisdiction. It is mutually understood and agreed
that the Underwriter does not undertake to sell any specific amount of shares
of the Fund.

<PAGE> 2

FOURTH: The offering price of shares of the Fund (the "offering price") shall
be the net asset value per share which shall be determined in the manner
provided in the then current prospectus of the Fund.

The Underwriter shall act as agent of the Fund in connection with the sale and
repurchase of shares of the Fund. Except with respect to such sales and
repurchases, the Underwriter shall act as principal in all matters relating to
the promotion of the sale of shares of the Fund and shall enter into all of its
own engagements, agreements and contracts as principal on its own account.

FIFTH: The Underwriter shall bear

(A) the expense of printing from the final proof and distributing registration
statement and prospectuses relating to public offerings made by the Underwriter
pursuant to this Agreement and annual and semi-annual shareowner reports used
as sales literature (not, however, including typesetting costs), as well as all
printing and distribution costs of any other sales literature used by the
Underwriter or furnished by the Underwriter to dealers in connection with such
public offerings except as otherwise agreed by the Board of Trustees;

(B) expenses of advertising in connection with such public offerings except as
otherwise agreed by the Board of Trustees; and

SIXTH: The Underwriter will accept orders for shares of the Fund only to the
extent of purchase orders actually received and not in excess of such orders,
and it will not avail itself of any opportunity of making a profit by
expediting or withholding orders.

SEVENTH:

(A) The Fund and the Underwriter shall each comply with all applicable
provisions of the Investment Company Act of 1940 (the "Act"), the Securities
Act of 1933 (the "Securities Act") and of all other federal and state laws,
rules and regulations governing the issuance and sale of shares of the Fund.

(B) The Fund agrees to indemnify the Underwriter against any and all claims,
demands, liabilities and expenses which the Underwriter may incur under the
Securities Act, or common law or otherwise, arising out of or based upon any
alleged untrue statement of a material fact contained in any registration
statement or prospectus of the Fund, or any omission to state a material fact
therein, the omission of which makes any statement contained therein
misleading, unless such statement or omission was made in reliance upon, and in
conformity with, information furnished to the Fund in connection

2
<PAGE> 3
therewith by or on behalf of the Underwriter.

(C) The Underwriter agrees to indemnify the Fund against any and all claims,
demands, liabilities and expenses which the Fund may incur arising out of or
based upon any act or deed of the Underwriter or its sales representatives
which has not been authorized by the Fund in its prospectus or in this
Agreement. The Underwriter agrees to indemnify the Fund against any and all
claims, demands, liabilities and expenses which the Fund may incur under the
Securities Act, or common law or otherwise, arising out of or based upon any
alleged untrue statement of a material fact contained in any registration
statement or prospectus of the Fund, or any omission to state a material fact
therein if such statement or omission was made in reliance upon, and in
conformity with, information furnished to the Fund in connection therewith by
or on behalf of the Underwriter.

(D) The Underwriter agrees to indemnify the Fund against any and all claims,
demands, liabilities and expenses which the Fund may incur under the Securities
Act, or common law or otherwise, arising out of or based upon any alleged
untrue statement of a material fact contained in any prospectus of the Fund
prepared for use under Rule 482 of the Securities Act, or any omission to state
a material fact therein.

EIGHTH: Nothing herein contained shall require the Fund to take any action
contrary to any provision of its Declaration of Trust or to any applicable
statute or regulation.

NINTH: This Agreement shall become effective on the date hereof, shall have an
initial term of two years from the date hereof, and shall continue in force and
effect from year to year thereafter, provided, that such continuance is
specifically approved at least annually (a)(i) by the Board of Trustees of the
Fund, or (ii) by vote of a majority of the Fund's outstanding voting securities
(as defined in Section 2(a)(42) of the Act), and (b) by vote of a majority of
the Fund's Trustees who are not parties to this Agreement or interested persons
(as defined in Section 2(a)(19) of the Act) of any party to this Agreement,
cast in person at a meeting called for the purpose of voting on such approval.

TENTH:

(A) This Agreement may be terminated at any time, without the payment of any
penalty, by vote of the Board of Trustees of the Fund or by vote of a majority
of the outstanding voting securities of the Fund, or by the Underwriter, on
sixty (60) days' written notice to the other party.

(B) This Agreement shall automatically terminate in the event of its
assignment (as defined in Section 2(a)(4) of the Act).

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<PAGE> 4
ELEVENTH: Any notice under this Agreement shall be in writing, addressed and
delivered, or mailed, postage paid, to the other party at such address as such
other party may designate for the receipt of such notices. Until further
notice to the other party, it is agreed that the address of both the Fund and
the Underwriter shall be 2800 Post Oak Boulevard, Houston, Texas 77056.

TWELFTH: The Declaration of Trust establishing American Capital Life
Investment Trust, dated June 3, 1985, a copy of which, together with all
amendments thereto (the "Declaration"), is on file in the office of the
Secretary of the Commonwealth of Massachusetts, provides that the name
"American Capital Life Investment Trust" refers to the Trustees under the
Declaration collectively as Trustees, but not as individuals or personally; and
no Trustee, shareholder, officer, employee or agent of said Fund shall be held
to any personal liability, nor shall resort be had to their private property
for the satisfaction of any obligation or claim or otherwise in connection with
the affairs of said Fund, but the trust estate only shall be liable. The Fund
is comprised of five portfolios: American Capital Common Stock Portfolio,
American Capital Corporate Bond Portfolio, American Capital Government
Portfolio, American Capital Money Market Portfolio and American Capital
Multiple Strategy Portfolio. All obligations of the Fund under this Agreement
shall apply only on a portfolio by portfolio basis and the assets of one
portfolio shall not be liable for the obligations of any other portfolio.

IN WITNESS WHEREOF, the parties have caused this Agreement to be executed in
duplicate on the day and year first above written.

AMERICAN CAPITAL MARKETING, INC.

By: Fred Shepherd
__________________________________________

Name: Fred Shepherd
________________________________________

Its: Vice President
_________________________________________

AMERICAN CAPITAL LIFE INVESTMENT TRUST

By: J. David Wise
__________________________________________

Name: J. David Wise
________________________________________

Its: Vice President and Assistant Secretary
_________________________________________

<PAGE> 1

EXHIBIT 6.1

AMERICAN CAPITAL LIFE INVESTMENT TRUST

ADDENDUM TO UNDERWRITING AGREEMENT

AMERICAN CAPITAL REAL ESTATE SECURITIES PORTFOLIO

The Underwriting Agreement ("Agreement") dated December 20, 1994 by
and between American Capital Life Investment Trust, a Massachusetts business
trust ("Fund") and American Capital Marketing, Inc. ("Underwriter") provides
that, in the event the Fund establishes an additional portfolio with respect to
which it wishes to appoint Underwriter to act as underwriter, the Fund shall
notify the Underwriter in writing. The Fund has created a new portfolio called
American Capital Real Estate Securities Portfolio ("Real Estate Securities
Portfolio") and wishes to appoint the Underwriter to act as the Underwriter for
the Real Estate Securities Portfolio on the following terms.

1. All terms of the Agreement shall apply to American Capital
Real Estate Securities Portfolio as if it had been one of the
initial portfolios named therein.

All obligations of the Fund under the Agreement and this Addendum
shall apply only on a Portfolio by Portfolio basis, and the assets of one
Portfolio shall not be liable for the obligations of any other Portfolio.

Dated: ____________________________ American Capital Life Investment Trust

By: ____________________________
Nori L. Gabert
Vice President and Secretary

Van Kampen American Capital
Distributors, Inc. (the successor
entity to American Capital Marketing,
Inc.) accepts American Capital Real
Estate Securities Portfolio on the
terms and conditions set forth above.

Dated: _____________________________ Van Kampen American Capital
Distributors, Inc.

By: _____________________________

<PAGE> 1

EXHIBIT 6.2

AMERICAN CAPITAL LIFE INVESTMENT TRUST

ADDENDUM TO UNDERWRITING AGREEMENT

AMERICAN CAPITAL EMERGING GROWTH PORTFOLIO

The Underwriting Agreement ("Agreement") dated December 20, 1994 by
and between American Capital Life Investment Trust, a Massachusetts business
trust ("Fund") and American Capital Marketing, Inc. ("Underwriter") provides
that, in the event the Fund establishes an additional portfolio with respect to
which it wishes to appoint Underwriter to act as underwriter, the Fund shall
notify the Underwriter in writing. The Fund has created a new portfolio called
American Capital Emerging Growth Portfolio ("Emerging Growth Portfolio") and
wishes to appoint the Underwriter to act as the Underwriter for the Emerging
Growth Portfolio on the following terms.

1. All terms of the Agreement shall apply to American Capital
Emerging Growth Portfolio as if it had been one of the initial
portfolios named therein.

Dated: ____________________________ American Capital Life Investment Trust

By: ____________________________
Nori L. Gabert
Vice President and Secretary

Van Kampen American Capital
Distributors, Inc. (the successor
entity to American Capital Marketing,
Inc.) accepts American Capital
Emerging Growth Portfolio on the terms
and conditions set forth above.

Dated: ____________________________ Van Kampen American Capital
Distributors, Inc.

By: ____________________________

<PAGE> 1

EXHIBIT 6.3

AMERICAN CAPITAL LIFE INVESTMENT TRUST

ADDENDUM TO UNDERWRITING AGREEMENT

AMERICAN CAPITAL GLOBAL EQUITY PORTFOLIO

The Underwriting Agreement ("Agreement") dated December 20, 1994 by
and between American Capital Life Investment Trust, a Massachusetts business
trust ("Fund") and American Capital Marketing, Inc. ("Underwriter") provides
that, in the event the Fund establishes an additional portfolio with respect to
which it wishes to appoint Underwriter to act as underwriter, the Fund shall
notify the Underwriter in writing. The Fund has created a new portfolio called
American Capital Global Equity Portfolio ("Global Equity Portfolio") and wishes
to appoint the Underwriter to act as the Underwriter for the Global Equity
Portfolio on the following terms.

1. All terms of the Agreement shall apply to American Capital
Global Equity Portfolio as if it had been one of the initial
portfolios named therein.

Dated: ____________________________ American Capital Life Investment Trust

By: ____________________________
Nori L. Gabert
Vice President and Secretary

Van Kampen American Capital
Distributors, Inc. (the successor
entity to American Capital Marketing,
Inc.) accepts American Capital Global
Equity Portfolio on the terms and
conditions set forth above.

Dated: ____________________________ Van Kampen American Capital
Distributors, Inc.

By: ____________________________