VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST/, 497, 1997-01-08

VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST/
497, 1997-01-08

Previous: INTRENET INC, SC 13D/A, 1997-01-08

Next: GOODMARK FOODS INC, 10-Q, 1997-01-08

<PAGE> 1

VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST

(FORMERLY AMERICAN CAPITAL LIFE INVESTMENT TRUST)
One Parkview Plaza
Oakbrook Terrace, Illinois 00181
(800) 421-5666

March 6, 1996, as supplemented on July 1, 1996, November 1, 1996 and January 2,
1997

Van Kampen American Capital Life Investment Trust (the "Trust") is an
open-end diversified management investment company which offers shares in nine
separate Portfolios (the "Portfolios"), seven of which are described herein and
offered pursuant to this Prospectus. Each Portfolio is in effect a separate
mutual fund. 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 may invest in shares of
the Portfolios in accordance with allocation instructions received from Contract
Owners. Such allocation rights are further described in the accompanying
Prospectus for the Contracts. The investment objectives of the seven Portfolios
are as follows:

Domestic Income Portfolio (formerly known as the Domestic Strategic Income
Fund) seeks current income as its primary investment objective. Capital
appreciation is a secondary objective, which will be sought only when
consistent with its primary investment 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 (COMMONLY KNOWN AS "JUNK BONDS") ARE REGARDED BY THE RATING
AGENCIES AS PREDOMINANTLY SPECULATIVE WITH RESPECT TO THE ISSUER'S
CONTINUING ABILITY TO MEET PRINCIPAL AND INTEREST PAYMENTS.

Emerging Growth Portfolio (formerly known as the Emerging Growth Fund) 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.

Enterprise Portfolio (formerly known as the Common Stock Fund) seeks capital
appreciation through investments believed by the Adviser to have above
average potential for capital appreciation.

Government Portfolio (formerly known as the Government Fund) 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.

Growth and Income Portfolio (formerly known as the Growth and Income Fund)
seeks long-term growth of capital and income. The Portfolio invests
principally in income-producing equity securities, including common stocks
and convertible securities. Investments are also made in non-convertible
preferred stocks and debt securities.

Money Market Portfolio (formerly known as the Money Market Fund) seeks
protection of capital and high current income through investments in 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.

Real Estate Securities Portfolio (formerly known as the Real Estate
Securities Fund) seeks as its primary investment objective long-term growth
of capital. Current income is a secondary consideration. The Portfolio seeks
to achieve its objectives by investing principally in securities of
companies operating in the real estate industry ("Real Estate Securities").
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 is no assurance that any Portfolio will achieve its investment
objectives.
- --------------------------------------------------------------------------------

This Prospectus tells Contract Owners briefly the information they should
know before allocating premiums or cash value to the Portfolio. 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 Trust. A copy of the Statement of Additional
Information may be obtained without charge by calling or writing the Portfolio
at the telephone number and address printed above or is available along with
other related materials of the Trust at the SEC's Web site (http://www.sec.gov).
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> 2

VAN KAMPEN 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 Parkview Plaza
Oakbrook Terrace, Illinois 60181
INVESTMENT Van Kampen American Capital
ADVISER: Asset Management, Inc.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
</TABLE>

TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary....................... 3
Financial Highlights..................... 6
Introduction............................. 12
Investment Objectives and Policies....... 12
Domestic Income Portfolio.............. 12
Emerging Growth Portfolio.............. 16
Enterprise Portfolio................... 16
Government Portfolio................... 17
Growth and Income Portfolio............ 21
Money Market Portfolio................. 21
Real Estate Securities Portfolio....... 22

<CAPTION>
Page
<S> <C>
Investment Practices..................... 24
The Trust and Its Management............. 29
Purchase of Shares....................... 32
Determination of Net Asset Value......... 32
Redemption of Shares..................... 33
Dividends, Distributions and Taxes....... 33
Portfolio Performance.................... 35
Description of Shares of the Trust....... 37
Additional Information................... 37
Appendix................................. 38
</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, in connection with the offer contained in this Prospectus and, if
given or made, such other information or representations must not be relied upon
as having been authorized by the Trust, the Adviser or the Distributor. This
Prospectus does not constitute an offer by the Trust or by the Distributor to
sell or a solicitation of an offer to buy any of the securities offered hereby
in any jurisdiction to any person to whom it is unlawful for the Trust to make
such an offer in such jurisdiction.

2
<PAGE> 3

PROSPECTUS SUMMARY

Shares Offered..........Shares of Beneficial Interest in seven Portfolios: the
Domestic Income Portfolio, the Emerging Growth
Portfolio, the Enterprise Portfolio, the Government
Portfolio, the Growth and Income Portfolio, the Money
Market Portfolio and the Real Estate Securities
Portfolio.

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

Investment Objectives...The Domestic Income Portfolio seeks current income as
its primary investment objective; capital appreciation
is a secondary objective, which will be sought only when
consistent with its primary investment objective. The
Emerging Growth Portfolio seeks capital appreciation by
investing in a portfolio of securities consisting
principally of common stock of small and medium sized
companies considered by the Adviser to be emerging
growth companies. The Enterprise Portfolio seeks capital
appreciation through investments in securities believed
by the Adviser to have above average potential for
capital appreciation. The Government Portfolio seeks
high current return consistent with preservation of
capital. The Growth and Income Portfolio seeks long-term
growth of capital and income. The Money Market Portfolio
seeks protection of capital and high current income
through investments in money market investments. The
Real Estate Securities Portfolio seeks long-term growth
of capital as its primary investment objective; current
income is a secondary consideration.

Investment Policies and
Risk Factors..........The Domestic 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 believed by the
Adviser to be of comparable quality 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. Such securities are
commonly referred to as "junk bonds." 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 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."

3
<PAGE> 4

The Emerging Growth Portfolio invests at least 65% of
its 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 -- Foreign Securities." The use of options,
futures contracts and related options may include
additional risks. See "Investment Practices -- Using
Options, Futures Contracts and Options on Futures
Contracts."

The Enterprise 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 -- Using
Options, Futures Contracts and Options on Futures
Contracts."

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 Growth and Income Portfolio invests principally in
income-producing equity securities including common
stock and convertible securities, although investments
are also made in non-convertible preferred stocks and
debt securities. Use of options, futures contracts and
related options may include additional risks. See
"Investment Practices -- Using Options, Futures
Contracts and Options on Futures Contracts."

The Money Market Portfolio invests in money market
instruments.

The Real Estate Securities Portfolio invests 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 or BBB by S&P, a comparable

4
<PAGE> 5

rating by any other nationally recognized statistical
rating organization or if unrated, determined by 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.

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

The Portfolio may purchase or sell debt securities on a
forward commitment basis. See "Investment
Practices -- 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 -- Using Options,
Futures Contracts and Options on Futures Contracts."

Investment Adviser......The Adviser has served as investment adviser to the
Trust since its inception. See "The Trust 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 Domestic Income Portfolio,
Emerging Growth Portfolio, the Enterprise Portfolio, the
Growth and Income Portfolio and the Real Estate
Securities Portfolio declare dividends and any capital
gains distributions annually.

Redemption..............At the net asset value next determined after the
Portfolio receives a redemption request.

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

5
<PAGE> 6

FINANCIAL HIGHLIGHTS

The following information for each of the five most recent 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.

DOMESTIC INCOME PORTFOLIO
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31
--------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1995 1994 1993 1992 1991 1990
-------- --------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period................... $7.35 $8.58 $8.00 $7.74 $6.98 $8.64
-------- --------- --------- --------- --------- --------
INCOME FROM INVESTMENT OPERATIONS
Investment income.................................... .76 .91 .77 .74 .725 1.085
Expenses............................................. (.08) (.10) (.09) (.07) (.07) (.08)
Expense reimbursement................................ .03 .04 .04 .02 .03 .03
-------- --------- --------- --------- --------- --------
Net investment income.................................. .71 .85 .72 .69 .685 1.035
Net realized and unrealized gain (loss) on
securities........................................... .8525 (1.2275) .5825 .2725 .7525 (1.64)
-------- --------- --------- --------- --------- --------
Total from investment operations....................... 1.5625 (.3775) 1.3025 .9625 1.4375 (.605)
-------- --------- --------- --------- --------- --------
LESS DISTRIBUTIONS FROM
Net investment income................................ (.7025) (.8525) (.7225) (.7025) (.6775) (1.055)
Net realized gain on securities...................... -- -- -- -- -- --
-------- --------- --------- --------- --------- --------
Total distributions.................................... (.7025) (.8525) (.7225) (.7025) (.6775) (1.055)
-------- --------- --------- --------- --------- --------
Net asset value, end of period......................... $8.21 $7.35 $8.58 $8.00 $7.74 $6.98
========= ========= ========= ========= ========= ========
TOTAL RETURN(2)........................................ 21.37% (4.33%) 16.32% 12.50% 21.23% (7.23%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)................... $26.6 $21.3 $27.4 $21.1 $17.4 $6.3
Ratios to average net assets (annualized)
Expenses............................................. .60% .60% .60% .60% .60% .60%
Expenses, without expense reimbursement.............. .93% .95% .95% .95% .95% .95%
Net investment income................................ 8.11% 8.35% 7.80% 8.89% 9.72% 11.99%
Net investment income, without expense
reimbursement...................................... 7.78% 8.00% 7.40% 8.54% 9.37% 11.64%
Portfolio turnover rate................................ 54% 94% 130% 117% 90% 123%

PER SHARE OPERATING PERFORMANCE 1989 1988 1987
--------- ---------- ----------
<S> <C> <C> <C>
Net asset value, beginning of period................... $10.96 $10.15 $10.00(1)
--------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS
Investment income.................................... 1.805 .65 .09
Expenses............................................. (.12) (.18) (.08)
Expense reimbursement................................ .04 .15 .07
--------- ---------- ----------
Net investment income.................................. 1.725 .62 .08
Net realized and unrealized gain (loss) on
securities........................................... (2.31) .8975 .1525
--------- ---------- ----------
Total from investment operations....................... (.585) 1.5175 .2325
--------- ---------- ----------
LESS DISTRIBUTIONS FROM
Net investment income................................ (1.725) (.61) (.0825)
Net realized gain on securities...................... (.01) (.0975) --
--------- ---------- ----------
Total distributions.................................... (1.735) (.7075) (.0825)
--------- ---------- ----------
Net asset value, end of period......................... $8.64 $10.96 $10.15
========= ========== ==========
TOTAL RETURN(2)........................................ (5.44%) 14.95% 1.50%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)................... $8.1 $8.1 $1.2
Ratios to average net assets (annualized)
Expenses............................................. .60% .60% .60%
Expenses, without expense reimbursement.............. .95% .95% .95%
Net investment income................................ 12.92% 10.88% 5.58%
Net investment income, without expense
reimbursement...................................... 12.57% 10.53% 5.23%
Portfolio turnover rate................................ 56% 44% 42%
</TABLE>

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

6
<PAGE> 7

FINANCIAL HIGHLIGHTS (CONTINUED)

ENTERPRISE PORTFOLIO
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31
--------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1995 1994 1993 1992 1991 1990 1989
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.................................... $12.39 $14.57 $14.21 $13.44 $10.09 $11.30 $8.70
-------- -------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Investment income...................................... .41 .33 .30 .31 .335 .46 .46
Expenses............................................... (.10) (.09) (.11) (.10) (.10) (.101) (.10)
Expense reimbursement.................................. .01 .01 .02 .02 .03 .036 .04
-------- -------- -------- -------- -------- -------- --------
Net investment income.................................... .32 .25 .21 .23 .265 .395 .40
Net realized and unrealized gain (losses) on
securities............................................. 4.22 (.7625) 1.0325 .77 3.37 (1.17) 2.57
-------- -------- -------- -------- -------- -------- --------
Total from investment operations......................... 4.54 (.5125) 1.2425 1.00 3.635 (.775) 2.97
-------- -------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS FROM
Net investment income.................................. (.3175) (.25) (.215) (.23) (.285) (.435) (.37)
Net realized gain on securities........................ (1.9225) (1.4175) (.6675) -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Total distributions...................................... (2.24) (1.6675) (.8825) (.23) (.285) (.435) (.37)
-------- -------- -------- -------- -------- -------- --------
Net asset value, end of period........................... $14.69 $12.39 $14.57 $14.21 $13.44 $10.09 $11.30
======== ======== ======== ======== ======== ======= ========
TOTAL RETURN(3).......................................... 36.98% (3.39%) 8.98% 7.48% 36.41% (6.84%) 34.23%

</TABLE>

PER SHARE OPERATING PERFORMANCE 1988 1987(1) 1986
-------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.................................... $7.97 $9.33 $10.00(2)
-------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Investment income...................................... .38 .25 .32
Expenses............................................... (.095) (.10) (.06)
Expense reimbursement.................................. .035 .03 .04
-------- -------- --------
Net investment income.................................... .32 .18 .30
Net realized and unrealized gain (losses) on
securities............................................. .765 (1.1975) (.97)
-------- -------- --------
Total from investment operations......................... 1.085 (1.0175) (.67)
-------- -------- --------
LESS DISTRIBUTIONS FROM
Net investment income.................................. (.30) (.2575) --
Net realized gain on securities........................ (.055) (.085) --
-------- -------- --------
Total distributions...................................... (.355) (.3425) --
-------- -------- --------
Net asset value, end of period........................... $8.70 $7.97 $9.33
========= ========= =========
TOTAL RETURN(3).......................................... 13.61% (11.12%) (6.70%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)..................... $76.0 $67.5 $72.3 $65.6 $57.8 $27.2 $31.8
Ratios to average net assets (annualized)
Expenses............................................... .60% .60% .60% .60% .60% .60% .60%
Expenses, without expense reimbursement................ .68% .68% .72% .74% .90% .93% .93%
Net investment income.................................. 2.06% 1.72% 1.41% 1.78% 2.33% 3.64% 3.74%
Net investment income, without expense reimbursement... 1.98% 1.64% 1.29% 1.64% 2.03% 3.31% 3.41%
Portfolio turnover rate.................................. 145% 153% 139% 116% 95% 122% 86%

<CAPTION>
RATIOS/SUPPLEMENTAL DATA
<S> <C> <C> <C>
Net assets, end of period (millions)..................... $24.0 $31.0 $12.0
Ratios to average net assets (annualized)
Expenses............................................... .60% .60% .60%
Expenses, without expense reimbursement................ .95% .89% .95%
Net investment income.................................. 3.13% 1.65% 10.34%
Net investment income, without expense reimbursement... 2.78% 1.36% 9.99%
Portfolio turnover rate.................................. 63% 75% 268%
</TABLE>

- ---------------------
(1) Based on average month-end shares outstanding.
(2) As of April 4, 1986, commencement of operations.
(3) Total return for periods of less than one year are not annualized. Total
return does not consider the effect of sales loads.

7
<PAGE> 8

FINANCIAL HIGHLIGHTS (CONTINUED)

GOVERNMENT PORTFOLIO
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31
------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1995 1994 1993 1992 1991 1990 1989
------- ------- ------- ------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period...................... $8.28 $9.26 $9.13 $9.29 $8.70 $8.80 $8.48
------- ------- ------- ------- ------- ------ -------
INCOME FROM INVESTMENT OPERATIONS
Investment income....................................... .65 .61 .62 .72 .79 .835 .89
Expenses................................................ (.06) (.06) (.06) (.064) (.06) (.06) (.06)
Expense reimbursement................................... .01 .01 .01 .009 .01 .01 .01
------- ------- ------- ------- ------- ------ -------
Net investment income..................................... .60 .56 .57 .665 .74 .785 .84
Net realized and unrealized gain (loss) on securities..... .78 (.985) .135 (.1575) .60 (.105) .325
------- ------- ------- ------- ------- ------ -------
Total from investment operations.......................... 1.38 (.425) .705 .5075 1.34 .68 1.165
------- ------- ------- ------- ------- ------ -------
LESS DISTRIBUTIONS FROM
Net investment income................................... (.60) (.555) (.575) (.6675) (.75) (.78) (.845)
Net realized gain on securities......................... -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------ -------
Total distributions....................................... (.60) (.555) (.575) (.6675) (.75) (.78) (.845)
------- ------- ------- ------- ------- ------ -------
Net asset value, end of period............................ $9.06 $8.28 $9.26 $9.13 $9.29 $8.70 $8.80
======== ======== ======== ======== ======== ====== ========
TOTAL RETURN(2)........................................... 17.17% (4.63%) 7.86% 5.73% 16.23% 8.31% 14.31%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)...................... $67.0 $65.5 $80.6 $74.8 $77.0 $73.2 $81.2
Ratios to average net assets (annualized)
Expenses................................................ .60% .60% .60% .60% .60% .60% .60%
Expenses, without expense reimbursement................. .72% .70% .70% .70% .70% .69% .66%
Net investment income................................... 6.89% 6.71% 6.45% 7.29% 8.37% 9.19% 9.56%
Net investment income, without expense reimbursement.... 6.77% 6.61% 6.35% 7.19% 8.27% 9.10% 9.50%
Portfolio turnover rate................................... 164% 192% 91% 36% 57% 164% 42%

PER SHARE OPERATING PERFORMANCE 1988 1987 1986(1)
------- -------- --------
<S> <C> <C> <C>
Net asset value, beginning of period...................... $8.68 $9.91 $10.00(1)
------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Investment income....................................... .94 .81 .55
Expenses................................................ (.06) (.05) (.07)
Expense reimbursement................................... -- -- .03
------- -------- --------
Net investment income..................................... .88 .76 .51
Net realized and unrealized gain (loss) on securities..... (.215) (.97) .0516
------- -------- --------
Total from investment operations.......................... .665 (.21) .5616
------- -------- --------
LESS DISTRIBUTIONS FROM
Net investment income................................... (.865) (.7525) (.5041)
Net realized gain on securities......................... -- (.2675) (.1475)
------- -------- --------
Total distributions....................................... (.865) (1.02) (.6516)
------- -------- --------
Net asset value, end of period............................ $8.48 $8.68 $9.91
======== ========= =========
TOTAL RETURN(2)........................................... 6.74% (2.12%) 4.22%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)...................... $90.6 $108.8 $67.7
Ratios to average net assets (annualized)
Expenses................................................ .60% .60% .60%
Expenses, without expense reimbursement................. .64% .64% .95%
Net investment income................................... 9.29% 8.37% 6.80%
Net investment income, without expense reimbursement.... 9.25% 8.33% 6.45%
Portfolio turnover rate................................... 88% 65% 115%
</TABLE>

- ---------------------
(1) As of April 4, 1986, commencement of operations.
(2) Total return for periods of less than one year are not annualized. Total
return does not consider the effect of sales loads.

8
<PAGE> 9

FINANCIAL HIGHLIGHTS (CONTINUED)

MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31
------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1995 1994 1993 1992 1991 1990 1989
------- ------- ------- ------- ------- ------ -------
<S> <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
------- ------- ------- ------- ------- ------ -------
INCOME FROM INVESTMENT OPERATIONS
Investment income....................................... .0593 .0425 .0322 .0391 .0607 .082 .0937
Expenses................................................ (.0093) (.0087) (.0095) (.009) (.0087) (.009) (.01)
Expense reimbursement................................... .0033 .0027 .0035 .003 .0026 .003 .004
------- ------- ------- ------- ------- ------ -------
Net investment income..................................... .0533 .0365 .0262 .0331 .0546 .076 .0877
Net realized and unrealized loss on securities............ -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------ -------
Total from investment operations.......................... .0533 .0365 .0262 .0331 .0546 .076 .0877
------- ------- ------- ------- ------- ------ -------
LESS DISTRIBUTIONS FROM NET INVESTMENT INCOME............. (.0533) (.0365) (.0262) (.0331) (.0546) (.076) (.0877)
------- ------- ------- ------- ------- ------ -------
Net asset value, end of period............................ $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
======== ======== ======== ======== ======== ====== ========
TOTAL RETURN(2)........................................... 5.46% 3.71% 2.66% 3.36% 5.46% 7.83% 9.13%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)...................... $21.6 $28.5 $30.0 $32.9 $38.0 $34.3 $29.0
Ratios to average net assets (annualized)
Expenses................................................ .60% .60% .60% .60% .60% .60% .60%
Expenses, without expense reimbursement................. .93% .87% .95% .89% .87% .89% .95%
Net investment income................................... 5.33% 3.63% 2.63% 3.32% 5.44% 7.59% 8.76%
Net investment income, without expense reimbursement.... 5.00% 3.37% 2.28% 3.03% 5.17% 7.30% 8.41%

PER SHARE OPERATING PERFORMANCE 1988 1987 1986(1)
------- -------- -------
<S> <C> <C> <C>
Net asset value, beginning of period...................... $1.00 $1.00 $1.00
------- -------- -------
INCOME FROM INVESTMENT OPERATIONS
Investment income....................................... .0773 .0684 .0429
Expenses................................................ (.0104) (.0141) (.0093)
Expense reimbursement................................... .0045 .0081 .0052
------- -------- -------
Net investment income..................................... .0714 .0624 .0388
Net realized and unrealized loss on securities............ -- (.00002) --
------- -------- -------
Total from investment operations.......................... .0714 .06238 .0388
------- -------- -------
LESS DISTRIBUTIONS FROM NET INVESTMENT INCOME............. (.0714) (.06238) (.0388)
------- -------- -------
Net asset value, end of period............................ $1.00 $1.00 $1.00
======== ========= ========
TOTAL RETURN(2)........................................... 7.38% 6.41% 4.27%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)...................... $24.5 $18.6 $23.4
Ratios to average net assets (annualized)
Expenses................................................ .60% .60% .60%
Expenses, without expense reimbursement................. .95% .95% .95%
Net investment income................................... 7.22% 6.24% 5.70%
Net investment income, without expense reimbursement.... 6.87% 5.89% 5.35%
</TABLE>

9
<PAGE> 10

FINANCIAL HIGHLIGHTS (CONTINUED)

The following information for the period July 3, 1995 through December 31,
1995 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.

EMERGING GROWTH PORTFOLIO

<TABLE>
<CAPTION>
JULY 3,
1995(1)
THROUGH
DECEMBER 31,
PER SHARE OPERATING PERFORMANCE 1995(2)
------------
<S> <C>
Net asset value, beginning of period............................................................................... $10.00
------------
INCOME FROM INVESTMENT OPERATIONS
Investment income................................................................................................ .06
Expenses......................................................................................................... (.30)
Expense reimbursement............................................................................................ .16
------------
Net investment loss................................................................................................ (.08)
Net realized and unrealized gain on securities..................................................................... 1.80
------------
Total from investment operations................................................................................... 1.72
------------
Net asset value, end of period..................................................................................... $11.72
===========
TOTAL RETURN(3).................................................................................................... 17.20%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)............................................................................... $ 2.3
Ratios to average net assets (annualized)
Expenses......................................................................................................... 2.50%
Expenses, without expense reimbursement.......................................................................... 5.40%
Net investment loss.............................................................................................. (1.45)%
Net investment loss, without expense reimbursement............................................................... (4.35)%
Portfolio turnover rate............................................................................................ 41%
</TABLE>

- ---------------------
(1) Commencement of operations.
(2) Based on average shares outstanding.
(3) Total return for a period of less than one year is not annualized. Total
return does not consider the effect of sales loads.

10
<PAGE> 11

FINANCIAL HIGHLIGHTS (CONTINUED)

REAL ESTATE SECURITIES PORTFOLIO

<TABLE>
<CAPTION>
JULY 3,
1995(1)
THROUGH
DECEMBER 31,
PER SHARE OPERATING PERFORMANCE 1995(2)
------------
<S> <C>
Net asset value, beginning of period............................................................................... $ 10.00
------------
INCOME FROM INVESTMENT OPERATIONS
Investment income................................................................................................ .33
Expenses......................................................................................................... (.15)
Expense reimbursement............................................................................................ .02
------------
Net investment income.............................................................................................. .20
Net realized and unrealized gain on securities..................................................................... .6325
------------
Total from investment operations................................................................................... .8325
------------
Less distributions from net investment income...................................................................... (.0925)
Net asset value, end of period..................................................................................... $ 10.74
===========
TOTAL RETURN(3).................................................................................................... 8.35%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)............................................................................... $ 8.6
Ratios to average net assets (annualized)
Expenses......................................................................................................... 2.50%
Expenses, without expense reimbursement.......................................................................... 2.90%
Net investment income............................................................................................ 3.75%
Net investment income, without expense reimbursement............................................................. 3.36%
Portfolio turnover rate............................................................................................ 85%
</TABLE>

11
<PAGE> 12

INTRODUCTION

The Trust is a duly organized Delaware business trust with nine separate
Portfolios, seven of which are described herein and offered pursuant to this
Prospectus. 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 Trust 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
investment objective of each Portfolio, except the Real Estate Securities
Portfolio, is a fundamental policy and may not be changed without shareholder
approval. With respect to the Real Estate Securities Portfolio, the investment
objective may be changed by the Trustees. If there is a change in the objective
of such Portfolio, shareholders should consider whether the Portfolio remains an
appropriate investment in light of their then current financial position and
needs. 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.

DOMESTIC INCOME PORTFOLIO

The Domestic Income Portfolio's primary investment objective is to seek
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 -- 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 -- 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 (commonly known as "junk bonds"), 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,

12
<PAGE> 13

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 on a present
online basis expressed in years that incorporates a 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 measures the length of the time
interval between the present and the time when the interest and principal
payments are scheduled to be received (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. 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. With respect to some securities, there
are some situations where even a duration calculation does not properly reflect
the interest rate exposure of a security. 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, 1995, the duration of the debt securities owned by the
Portfolio, was approximately 5.83 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.

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> 14

During the fiscal year ended December 31, 1995, 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................................................................... -0-
AA/Aa..................................................................... 1.8
A/A....................................................................... 14.6
BBB/Baa................................................................... 34.6
BB/Ba..................................................................... 12.5
B/B....................................................................... 21.8
*Nonrated................................................................. 15.8
Preferred Stocks/Common Stocks/Warrants................................... .9
Cash and Equivalents...................................................... (2.0)
-------
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- 15.8%.

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 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

14
<PAGE> 15

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 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.

15
<PAGE> 16

EMERGING GROWTH PORTFOLIO

The investment objective of the Emerging Growth Portfolio is to seek
capital appreciation by investing in a portfolio of securities consisting
principally of common stocks of small and medium sized companies considered by
the Adviser to be emerging growth companies. 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 (less than $2 billion of market capitalization), 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. See "Investment Practices -- Foreign Securities." Additionally,
the Portfolio may invest up to fifteen 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.

ENTERPRISE PORTFOLIO

The investment objective of the Enterprise Portfolio is to seek 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 growth common stocks. Such securities
generally include those of companies with established records of growth in sales
or earnings, and companies with new products, new services, or new processes.
The Portfolio may also invest in companies in cyclical industries during periods
when their securities appear attractive to the Adviser for capital appreciation.
In addition to common stock, the Portfolio may invest in warrants and preferred

16
<PAGE> 17

stocks, and in investment companies. See "Investment Practices -- Investment in
Investment Companies."

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. See "Investment Practices -- Foreign Securities." 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 -- Using Options,
Futures Contracts and Options on Futures Contracts."

GOVERNMENT PORTFOLIO

GENERAL

The investment objective of the Government 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 -- 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

17
<PAGE> 18

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 incorporates a
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 measures the length of the
time interval between the present and the time when the interest and principal
payments are scheduled to be received (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. 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. With respect to some securities, there
are some situations where even a duration calculation does not properly reflect
the interest rate exposure of a security. 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, 1995, the duration of the debt securities owned by the
Portfolio, as adjusted for investments in options, futures contracts and related
options, was approximately 5.1 years.

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 -- 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 -- Portfolio Turnover."

The Portfolio is subject to the diversification requirements of Section
817(h) of the Internal Revenue Code of 1986, as amended (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

18
<PAGE> 19

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. 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.

19
<PAGE> 20

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 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 mortgage 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.

20
<PAGE> 21

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 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.

GROWTH AND INCOME PORTFOLIO

The Growth and Income Portfolio's investment objective is to seek long-term
growth of capital and income. Since investment in securities involves potential
gain or loss, there is no assurance that the Portfolio's objective will be
achieved.

In view of the investment objective, the Portfolio generally invests
principally in income-producing equity securities including common stocks and
convertible securities; although investments are also made in non-convertible
preferred stocks and debt securities rated "investment grade," i.e., within the
four highest grades assigned by S&P or by Moody's. Ratings at the time of
purchase determine which securities may be acquired, and a subsequent reduction
in rating does not require the Portfolio to dispose of a security. Securities
rated BBB by S&P or Baa by Moody's are in the lowest of the four investment
grades and are considered by the rating agencies 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
market prices of preferred stocks and debt securities generally fluctuate with
changes in interest rates so that the value of investments in such securities
can be expected to decrease as interest rates rise and increase as interest
rates fall. The Portfolio may also invest in warrants and in securities of
newly-formed companies and in investment companies. See "Investment
Practices -- Investment in Investment Companies." The Portfolio may invest up to
15% of its assets in securities of foreign issuers. See "Investment
Practices -- Foreign Securities." The Portfolio may enter into repurchase
agreements with domestic banks and broker-dealers which involves certain risks
or may lend portfolio securities on a fully collateralized basis. See
"Investment Practices -- Repurchase Agreements" and "Investment
Practices -- Loans of Portfolio Securities". When deemed appropriate for
temporary defensive purposes, the Portfolio may invest up to 100% of its total
assets in U.S. Government securities and investment grade corporate debt
securities.

The Portfolio may dispose of a security whenever, in the opinion of the
Adviser, factors indicate it is desirable to do so. Such factors include a
change in economic or market factors in general or with respect to a particular
industry, a change in the market trend of or other factors affecting an
individual security, changes in the relative market performance of or
appreciation possibilities offered by individual securities and other
circumstances bearing on the desirability of a given investment.

MONEY MARKET PORTFOLIO

The investment objective of the Money Market Portfolio is to seek
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 Restrictions" in the Statement of Additional Information 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.

21
<PAGE> 22

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 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 -- Repurchase Agreements."

REAL ESTATE SECURITIES PORTFOLIO

General. The Real Estate Securities 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

22
<PAGE> 23

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 Practices -- 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 -- 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.

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.

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
also be affected by such risks. If

23
<PAGE> 24

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
Code and to maintain exemption from the Investment Company Act of 1940, as
amended (the "1940 Act"). 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 Practices"
herein and in the Statement of Additional Information.

INVESTMENT PRACTICES

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 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. No Portfolio will
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 in the case of the Emerging Growth Portfolio, the Growth and Income
Portfolio and the Real Estate Securities Portfolio, 15% of the value of the
Portfolio's net assets and, in the case of the Domestic Income Portfolio, the
Enterprise Portfolio, the Government Portfolio and the Money Market Portfolio,
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 authorizing this practice, which conditions are designed to ensure the
fair administration of the joint account and to protect the amounts in that
account.

24
<PAGE> 25

Loans of Portfolio Securities. Each Portfolio, except the Real Estate
Securities 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 Domestic Income Portfolio, the Emerging Growth
Portfolio, the Enterprise Portfolio, the Growth and Income Portfolio and the
Real Estate Securities Portfolio may invest up to 25%, 20%, 10%, 15% and 25%,
respectively, of the value of such Portfolios' total assets in securities issued
by foreign issuers. With respect to the Real Estate Securities Portfolio, 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 a
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 a Portfolio's assets denominated in that currency and the Portfolio's
yield on such assets.

A Portfolio may also purchase foreign securities in the form of ADRs and
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. A 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 a 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 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

25
<PAGE> 26

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 a 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. A 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. A Portfolio purchases and sells foreign currency on a spot basis in
connection with the settlement of transactions in securities traded in such
foreign currency. A Portfolio does not purchase and sell foreign currencies as
an investment.

A 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.

A 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. A
Portfolio will not speculate in foreign currency forward or futures contracts or
through the purchase and sale of foreign currencies.

Restricted Securities. The Emerging Growth Portfolio, the Growth and
Income Portfolio and the Real Estate Securities Portfolio may invest up to 15%
of their net assets in restricted securities and other illiquid assets. The
other Portfolios offered in this Prospectus 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 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.

26
<PAGE> 27

Forward Commitments. The Domestic Income Portfolio, the Government
Portfolio and the Real Estate Securities Portfolio may purchase or sell U.S.
Government securities (or debt securities with respect to the Real Estate
Securities Portfolio) 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 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.

Each 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.

Each 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.

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 Emerging Growth Portfolio, the
Enterprise Portfolio, the Government Portfolio, the Growth and Income Portfolio
or Real Estate Securities Portfolio. The annual turnover rates of each Portfolio
other than the Growth and Income Portfolio is shown under "Financial
Highlights." The turnover rate for the Growth and Income Portfolio may exceed
100%, which is higher than that of many other investment companies. 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
Emerging Growth Portfolio, the Enterprise Portfolio, the Government Portfolio,
the Growth and Income Portfolio and the Real Estate Securities 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
securities 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 a 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.
A 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

27
<PAGE> 28

other party to the transaction. Any OTC Option purchased by a Portfolio is
considered an illiquid security. Any OTC Option written by a 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.
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. Each
Portfolio may not invest more than ten percent of its net assets (or 15% for the
Emerging Growth Portfolio, the Growth and Income Portfolio and the Real Estate
Securities Portfolio) 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. The Enterprise Portfolio and the Growth
and Income Portfolio may invest in a separate investment company, Van Kampen
American Capital Small Capitalization Fund ("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
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
Van Kampen 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 Van
Kampen 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 Van Kampen 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 Van Kampen
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 Enterprise Portfolio and the Growth and Income Portfolio will each 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 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 Adviser is authorized to place portfolio transactions with
brokerage firms participating in the distribution of shares of the Portfolio and
other Van Kampen American Capital mutual funds if it

28
<PAGE> 29

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.

THE TRUST AND ITS MANAGEMENT

The Trust, an open-end, diversified management investment company,
generally known as a mutual fund, was organized as a Massachusetts business
trust on June 3, 1985 and reorganized on September 16, 1995, under the laws of
the state of Delaware as a business entity by statute known as a "Delaware
business trust." 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 Trustees have the responsibility for overseeing the affairs of the
Portfolios. The Adviser determines the investment of the Trust's assets,
provides administrative services and manages the Trust's business and affairs.
The Adviser, together with its predecessors, has been in the investment advisory
business since 1926.

THE ADVISER. The Adviser is a wholly owned subsidiary of Van Kampen
American Capital, Inc. ("Van Kampen American Capital"). Van Kampen American
Capital is a diversified asset management company with more than two million
retail investor accounts, extensive capabilities for managing institutional
portfolios, and more than $50 billion under management or supervision. Van
Kampen American Capital's more than 40 open-end and 38 closed-end funds and more
than 2,800 unit investment trusts are professionally distributed by leading
financial advisers nationwide. Van Kampen American Capital Distributors, Inc.
(the "Distributor"), the distributor of the Trust and the sponsor of the funds
mentioned above, is also a wholly-owned subsidiary of Van Kampen American
Capital. Van Kampen American Capital is a wholly-owned subsidiary of VK/AC
Holding, Inc.

On October 31, 1996, VK/AC Holding, Inc. became a wholly-owned indirect
subsidiary of Morgan Stanley Group Inc. pursuant to the closing of an Agreement
and Plan of Merger among Morgan Stanley Group Inc., MSAM Holdings II, Inc. and
MSAM Acquisition Inc., whereby MSAM Acquisition Inc. was merged with and into
VK/AC Holding, Inc. and VK/AC Holding, Inc. was the surviving corporation (the
"Acquisition"). As a result of the Acquisition, VK/AC Holding, Inc. is a
wholly-owned subsidiary of MSAM Holdings II, Inc. which, in turn, is a wholly
owned subsidiary of Morgan Stanley Group Inc.

Morgan Stanley Group Inc. and various of its directly or indirectly owned
subsidiaries, including Morgan Stanley Asset Management Inc., an investment
adviser ("MSAM"), Morgan Stanley & Co. Incorporated, a registered broker-dealer
and investment adviser, and Morgan Stanley International, are engaged in a wide
range of financial services. Their principal businesses include securities
underwriting, distribution and trading; merger, acquisition, restructuring and
other corporate finance advisory activities; merchant banking; stock brokerage
and research services; asset management; trading of futures, options, foreign
exchange commodities and swaps (involving foreign exchange, commodities, indices
and interest rates); real estate advice, financing and investing; and global
custody, securities clearance services and securities lending. As of September
30, 1996, MSAM, together with its affiliated investment advisory companies, had
approximately $103.5 billion of assets under management and fiduciary advice.

As of February 16, 1996, the Adviser owned beneficially and of record
approximately 25.63% of the outstanding shares of the Emerging Growth Portfolio
and therefore, may be deemed to control this Portfolio.

29
<PAGE> 30

ADVISORY AGREEMENTS. The Trust and the Adviser are parties to an investment
advisory agreement (the "Advisory Agreement I"), pursuant to which the Trust
retains the Adviser to manage the investment of assets and to place orders for
the purchase and sale of portfolio securities for certain Portfolios including
the Domestic Income Portfolio, the Enterprise Portfolio, the Government
Portfolio and the Money Market Portfolio. The Trust and the Adviser are also
parties to additional investment advisory agreements for its remaining
Portfolios, including three investment advisory agreements designated herein as
"Advisory Agreement II", "Advisory Agreement IV" and "Advisory Agreement V",
pursuant to which the Trust retains the Adviser to manage the investment of
assets and places orders for the purchase and sale of portfolio securities for
the Emerging Growth Portfolio, the Growth and Income Portfolio and the Real
Estate Securities Portfolio, respectively (Advisory Agreements -- I, II, IV and
V are referred to herein collectively as the "Advisory Agreements").

Under the Advisory Agreements, the Trust 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 Trust 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 Trust 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, 1995, advisory fees plus the cost of accounting services payable by
the Trust, before expense reimbursements, equaled .69%, .58%, .59% and .70% for
the Domestic Income Portfolio, the Enterprise Portfolio, the Government
Portfolio and the Money Market Portfolio, respectively, of each Portfolio's
average daily 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 such Portfolio to 0.60% per year of the average
net assets of 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 Trust 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%. For the period July 3, 1995 through
December 31, 1995, advisory fees plus the cost of accounting services payable by
the Trust on behalf of the Portfolio was .58%.

Under Advisory Agreement-IV, the Trust pays 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 Growth and Income
Portfolio at an annual rate of 0.60% of the first $500 million of the
Portfolio's average net assets; and 0.55% of the Portfolio's average net assets
in excess of $500 million. No investment advisory fees were paid by the
Portfolio during the 1995 fiscal year.

30
<PAGE> 31

Under Advisory Agreement-V, the Trust pays the Adviser a monthly fee
computed on average daily net assets of the Real Estate Securities 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. For the period July 3, 1995
through December 31, 1995, advisory fees plus the cost of accounting services
payable by the Trust on behalf of the Portfolio was .59%.

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

With regard to the Money Market Portfolio, the Domestic Income Portfolio
and Government Portfolio, the Adviser may utilize at its own expense credit
analysis, research and trading support services provided by its affiliate, Van
Kampen American Capital Investment Advisory Corp.

PORTFOLIO MANAGEMENT. The Portfolios have different portfolio managers.

Jeff New and Chris Perras are co-managers of the Enterprise Portfolio and
are primarily responsible for the day-to-day management of the Portfolio's
investment portfolio. Messrs. New and Perras have been primarily responsible for
managing the Portfolio's investment portfolio since the date of this Prospectus.
Mr. New has been a portfolio manager with the Adviser since 1994. Since 1991,
Mr. New was an associate portfolio manager with the Adviser. Prior to that time,
he was a securities analyst with Texas Commerce Investment Management Company.
Mr. Perras has been an associate portfolio manager with the Adviser since
February 1995. Prior to that time, he was an assistant portfolio manager and
investment analyst with Hellman Jordan Management Co. Each portfolio manager is
an employee of the Adviser.

Walter W. Stabell, III is primarily responsible for the day-to-day
management of the Domestic Income Portfolio's investment portfolio. Mr. Stabell
is an 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.

James Gilligan and Bret Stanley are co-managers of the Growth and Income
Portfolio and are primarily responsible for the day-to-day management of the
Portfolio's investment portfolio. Messrs. Gilligan and Stanley have been
primarily responsible for managing the Portfolio's investment portfolio since
its inception. Mr. Gilligan has been Vice President -- Portfolio Manager of the
Adviser since March 1990. Prior to that time, he was a securities analyst with
the Adviser. Mr. Stanley has been an associate portfolio manager of the Adviser
since January 1995. Prior to that time, he was a securities analyst and
portfolio manager with Gulf Investment Management. Prior to that, he was an
analyst at Lovett Underwood Neuhaus & Webb, and Rotan Mosle. Each portfolio
manager is an employee of the Adviser.

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 Adviser. Mr. Lewis has been responsible for managing the Portfolio's
investment portfolio since its inception.

John R. Reynoldson is primarily responsible for the day-to-day management
of the Government Portfolio's investment portfolio. Mr. Reynoldson 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 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.

31
<PAGE> 32

Russell C. Platt and Theodore R. Bigman assumed responsibility for the
day-to-day management of the Portfolio's investment portfolio effective January
1, 1997. Mr. Platt became Executive Vice President of the Adviser on December
31, 1996. Since 1994, Mr. Platt has also been a Principal, and as of December 1,
1996, a Managing Director, of Morgan Stanley Asset Management Inc. ("MSAM")
where he has primary responsibility for managing the real estate securities
investment business for MSAM and serves as a member of the Investment Committee
of The Morgan Stanley Real Estate Fund ("MSREF"). From 1991 to 1993, Mr. Platt
was head of Morgan Stanley Realty's Transaction Development Group. From 1990 to
1991, Mr. Platt was based in Morgan Stanley Realty's London Office. Prior to
this he had extensive transaction responsibilities involving portfolio, retail,
office, hotel and apartment sales and financings. Mr. Bigman became Senior Vice
President of the Adviser on December 31, 1996. Since 1995, Mr. Bigman has also
been a Vice President, and as of December 1, 1996, a Principal, of MSAM where,
together with Mr. Platt, he is responsible for MSAM's real estate securities
research. Prior to joining MSAM, he was a Director at CS First Boston, where he
worked for eight years in the Real Estate Group. Prior to this Mr. Bigman had
extensive real estate experience in a wide variety of transactions involving the
financing and sale of both individual assets and portfolios of real estate
assets as well as the acquisition and sale of several real estate companies.

PERSONAL INVESTING POLICIES. The Trust and the Adviser have adopted Codes
of Ethics designed to recognize the fiduciary relationship between the Trust and
the Adviser and its employees. The Codes permit directors/trustees, officers and
employees to buy and sell securities for their personal accounts subject to
certain restrictions. Persons with access to certain sensitive information are
subject to preclearance and other procedures designed to prevent conflicts of
interest.

PURCHASE OF SHARES

The Trust is offering its shares only to Accounts of various insurance
companies to fund the benefits of variable annuity or variable life insurance
contracts. The Trust 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 Trust'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 Trust
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. The
Distributor, located at 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 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

32
<PAGE> 33

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 Portfolio and Government Portfolio 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 Domestic Income Portfolio, the Emerging
Growth Portfolio, Enterprise Portfolio, the Growth and Income Portfolio and the
Real Estate Securities 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 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

33
<PAGE> 34

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 will or 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 certain funds 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 a 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 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 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 typically
treated as ordinary income or loss. Such Code Section 988 gains or losses may
increase or decrease (or possibly eliminate) the amount of the Portfolio's
investment company taxable income available to be distributed to shareholders as
ordinary income, rather than increasing or decreasing the amount of the
Portfolio's net capital gain. 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 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 Trust 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

34
<PAGE> 35

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
certain 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.

PORTFOLIO PERFORMANCE

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.
Total return calculations do not take into account expenses at the "wrap" or
Contract Owner level. Investors should also review total return calculations
that include those expenses.

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.

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, certain Portfolios 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.
Yield calculations do not take into account expenses at the "wrap" or
contractholder level. Investors should also review yield calculations that
include those expenses.

From time to time, certain Portfolios may include in its sales literature
and shareholder reports a quotation of the current "distribution rate" for
shares of the Portfolio. Distribution rate is a measure of the level of income
and short-term capital gain dividends, if any, distributed for a specified
period. It differs from yield, which is a measure of the income actually earned
by the Portfolio's investments, and from total return, which is a measure of the
income actually earned by, plus the effect of any

35
<PAGE> 36

realized and unrealized appreciation or depreciation of, such investments during
a stated period. Distribution rate is, therefore, not intended to be a complete
measure of the Portfolio's performance. Distribution rate may sometimes be
greater than yield since, for instance, it may not include the effect of
amortization of bond premiums, and may include non-recurring short-term capital
gains and premiums from futures transactions engaged in by the Portfolio.

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 Domestic Income Portfolio, the
Enterprise Portfolio, the Government Portfolio and the Money Market Portfolio.

The Adviser may, from time to time, absorb a certain amount of the future
ordinary business expenses. Absorption of a portion of the expenses will
increase the yield or total return of a Portfolio. The Adviser may stop
absorbing these expenses at any time without prior notice.

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, 1995, 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.

In reports or other communications to shareholders or in advertising
material, a Portfolio may compare its performance with that of other mutual
funds as listed in the ratings or rankings prepared by Lipper Analytical
Services, Inc., CDA, Morningstar Mutual Funds or similar independent services
which monitor the performance of mutual funds, with the Consumer Price Index,
the Dow Jones Industrial Average Index, NAREIT Equity REIT Index, Lehman
Brothers REIT Index, Salomon Brothers High Grade Bond Index, Standard & Poor's,
NASDAQ, other appropriate indices of investment securities, or with investment
or savings vehicles. The performance information may also include evaluations of
the Portfolio published by nationally recognized ranking services and by
financial publications that are nationally recognized, such as Business Week,
Forbes, Fortune,

36
<PAGE> 37

Institutional Investor, Investor's Business Daily, Kiplinger's Personal Finance
Magazine, Money, Mutual Fund Forecaster, Stanger's Investment Advisor, USA
Today, U.S. New & World Report and The Wall Street Journal. Such comparative
performance information will be stated in the same terms in which the
comparative data or indices are stated. Such advertisements and sales material
may also include a yield quotation as of a current period. In each case, such
total return and yield information, if any, will be calculated pursuant to rules
established by the SEC and will be computed separately for each class of the
Portfolio's shares. For these purposes, the performance of the Portfolio, as
well as the performance of other mutual funds or indices, do not reflect various
charges, the inclusion of which would reduce Portfolio performance.

The Portfolio may also utilize performance information in hypothetical
illustrations provided in narrative form. These hypotheticals will be
accompanied by the standard performance information required by the SEC as
described above.

The Trust's Annual Report contains additional performance information. A
copy of the Annual Report may be obtained without charge by calling or writing
the Trust at the telephone number and address printed on the cover page of this
Prospectus.

DESCRIPTION OF SHARES OF THE TRUST

The Trust was originally organized as a Massachusetts business trust on
June 3, 1985 and reorganized on September 16, 1995, under the laws of the state
of Delaware as a business entity commonly known as "Delaware business trust." It
is authorized to issue an unlimited number of shares of beneficial interest of
$0.01 par value. Shares issued by the Trust are fully paid, non-assessable and
have no preemptive or conversion rights.

The Trust does not contemplate holding regular meetings of shareholders to
elect Trustees or otherwise. More detailed information concerning the Trust if
set forth in the Statement of Additional Information.

The Trust's Declaration of Trust provides that 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 the Trust but the assets of the Trust only shall be liable.

ADDITIONAL INFORMATION

This Prospectus and the Statement of Additional Information do not contain
all the information set forth in the Registration Statement filed by the Trust
with the SEC under the Securities Act of 1933. Copies of the Registration
Statement may be obtained at a reasonable charge from the SEC or may be
examined, without charge, at the office of the SEC in Washington, D.C.

37
<PAGE> 38

APPENDIX

DESCRIPTION OF BOND RATINGS

MOODY'S INVESTORS SERVICE'S 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.

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.

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

3. There is 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.

38
<PAGE> 39

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 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.

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.

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 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.

39
<PAGE> 40

EXISTING SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE CALL
THE PORTFOLIO'S TOLL-FREE
NUMBER--(800) 421-5666

PROSPECTIVE INVESTORS--CALL
YOUR BROKER OR (800) 421-5666

DEALERS--FOR DEALER
INFORMATION, SELLING
AGREEMENTS, WIRE ORDERS,
OR REDEMPTIONS CALL THE
DISTRIBUTOR'S TOLL-FREE
NUMBER--(800) 421-5666

FOR SHAREHOLDER AND
DEALER INQUIRIES THROUGH
TELECOMMUNICATIONS
DEVICE FOR THE DEAF (TDD)
DIAL (800) 772-8889

VAN KAMPEN AMERICAN CAPITAL
LIFE INVESTMENT TRUST
One Parkview Plaza
Oakbrook Terrace, Illinois 60181

- ------------------
Investment Adviser

VAN KAMPEN AMERICAN CAPITAL
ASSET MANAGEMENT, INC.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181

Distributor

VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Transfer Agent

ACCESS INVESTOR SERVICES, INC.
P.O. Box 418256
Kansas City, MO 64141-9256

Custodian

STATE STREET BANK AND
TRUST COMPANY
225 Franklin Street, P.O. Box 1713
Boston, MA 02105-1713
Attn: Van Kampen American Capital
Life Investment Trust Portfolios

Legal Counsel

SKADDEN, ARPS, SLATE,
MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, IL 60606

Independent Accountants

PRICE WATERHOUSE LLP
1201 Louisiana, Suite 2900
Houston, TX 77002
<PAGE> 41

LIFE INVESTMENT TRUST

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

P R O S P E C T U S

MARCH 6, 1996, AS SUPPLEMENTED ON
JULY 1, 1996, NOVEMBER 1, 1996 AND JANUARY 2, 1997

------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH ------
VAN KAMPEN AMERICAN CAPITAL
- --------------------------------------------------------------------------------
<PAGE> 42

STATEMENT OF ADDITIONAL INFORMATION
MARCH 6, 1996, AS SUPPLEMENTED ON JULY 1, 1996,
NOVEMBER 1, 1996 AND JANUARY 2, 1997

VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
ONE PARKVIEW PLAZA
OAKBROOK TERRACE, ILLINOIS 60181
(800) 421-5666

Van Kampen American Capital Life Investment Trust, formerly known as
American Capital Life Investment Trust (the "Trust"), is a diversified, open-end
management investment company with nine Portfolios (the "Portfolios"), seven of
which are described herein: Domestic Income Portfolio (formerly Domestic
Strategic Income Fund), Emerging Growth Portfolio (formerly Emerging Growth
Fund), Enterprise Portfolio (formerly Common Stock Fund), Government Portfolio
(formerly Government Fund), Growth and Income Portfolio (formerly Growth and
Income Fund), Money Market Portfolio (formerly Money Market Fund) and Real
Estate Securities Portfolio (formerly Real Estate Securities Fund). Each
Portfolio is in effect a separate mutual fund 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 March 6,
1996, as supplemented on July 1, 1996, November 1, 1996 and January 2, 1997. 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) 421-5666.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
GENERAL INFORMATION.................................................................. B-2
INVESTMENT OBJECTIVES AND POLICIES................................................... B-3
REPURCHASE AGREEMENTS................................................................ B-9
FORWARD COMMITMENTS.................................................................. B-10
DEPOSITARY RECEIPTS.................................................................. B-10
OPTIONS, FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS.......................... B-10
LOANS OF PORTFOLIO SECURITIES........................................................ B-17
INVESTMENT RESTRICTIONS.............................................................. B-17
TRUSTEES AND EXECUTIVE OFFICERS...................................................... B-28
INVESTMENT ADVISORY AGREEMENTS....................................................... B-37
DISTRIBUTOR.......................................................................... B-39
TRANSFER AGENT....................................................................... B-39
PORTFOLIO TRANSACTIONS AND BROKERAGE................................................. B-39
PORTFOLIO TURNOVER................................................................... B-41
DETERMINATION OF NET ASSET VALUE..................................................... B-41
PURCHASE AND REDEMPTION OF SHARES.................................................... B-42
DISTRIBUTIONS AND TAXES.............................................................. B-43
PORTFOLIO PERFORMANCE................................................................ B-44
MONEY MARKET PORTFOLIO YIELD INFORMATION............................................. B-45
OTHER INFORMATION.................................................................... B-46
FINANCIAL STATEMENTS................................................................. B-46
APPENDIX............................................................................. B-47
</TABLE>

2
<PAGE> 43

GENERAL INFORMATION

The Trust was organized under the laws of the Commonwealth of Massachusetts
on June 3, 1985 and reorganized under the laws of Delaware September 16, 1995.

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.

On October 31, 1996, VK/AC Holding, Inc. became a wholly-owned indirect
subsidiary of Morgan Stanley Group Inc. pursuant to the closing of an Agreement
and Plan of Merger among Morgan Stanley Group Inc., MSAM Holdings II, Inc. and
MSAM Acquisition Inc., whereby MSAM Acquisition Inc. was merged with and into
VK/AC Holding, Inc. and VK/AC Holding, Inc. was the surviving corporation (the
"Acquisition"). As a result of the Acquisition, VK/AC Holding, Inc. became a
wholly owned subsidiary of MSAM Holdings II, Inc. which, in turn, is a wholly
owned subsidiary of Morgan Stanley Group Inc.

Morgan Stanley Group Inc. and various of its directly or indirectly owned
subsidiaries, including Morgan Stanley Asset Management Inc., an investment
adviser ("MSAM"), Morgan Stanley & Co. Incorporated, a registered broker-dealer
and investment adviser, and Morgan Stanley International, are engaged in a wide
range of financial services. Their principal businesses include securities
underwriting, distribution and trading, merger, acquisition, restructuring and
other corporate finance advisory activities; merchant banking; stock brokerage
and research services; asset management; trading of futures, options, foreign
exchange commodities and swaps (involving foreign exchange, commodities, indices
and interest rates); real estate advice, financing and investing; and global
custody, securities clearance services and securities lending. As of September
30, 1996, MSAM, together with its affiliated investment advisory companies, had
approximately $103.5 billion of assets under management and fiduciary advice.

As of February 16, 1996 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 as set forth below. The Trust offers its shares only to
separate accounts of various insurance companies. Those separate accounts have
authority to vote shares from which they have not received instructions from the
Contract Owners, but only in the same proportion with respect to "yes" votes,
"no" votes or abstentions as is the case with respect to shares for which
instructions were received.

<TABLE>
<CAPTION>
AMOUNT OF RECORD OWNERSHIP
NAME AND ADDRESS OF OF THE PORTFOLIO
RECORD HOLDER AT FEBRUARY 16, 1996 PERCENT
- ---------------------------------------------------------- -------------------------- -------
<S> <C> <C>
MONEY MARKET PORTFOLIO
American General Life Insurance Company 4,905,311.670 25.22%
Separate Account D
P.O. Box 1591
Houston, Texas 77251-1591
Nationwide VLI -- Separate Account of Nationwide 9,365,296.970 48.14%
Life Insurance Company
P.O. Box 182029
Columbus, Ohio 43218-2029
Nationwide Variable Account -- 3 5,136,370.760 26.40%
c/o IPO Investments Co 69
P.O. Box 182029
Columbus, Ohio 43218-2029
ENTERPRISE PORTFOLIO
American General Life Insurance Company 1,079,682.53 20.98%
Separate Account -- D
P.O. Box 1591
Houston, Texas 77251-1591
</TABLE>

B-2
<PAGE> 44

<TABLE>
<CAPTION>
AMOUNT OF RECORD OWNERSHIP
NAME AND ADDRESS OF OF THE PORTFOLIO
RECORD HOLDER AT FEBRUARY 16, 1996 PERCENT
- ---------------------------------------------------------- -------------------------- -------
<S> <C> <C>
Nationwide Variable Account -- 3 2,285,855.520 44.43%
c/o IPO Investments Co
P.O. Box 182029
Columbus, OH 43218-2029
Nationwide VLI -- separate account of Nationwide 1,779,645.090 34.59%
Life Insurance Company
P.O. Box 182029
Columbus, Ohio 43218-2029
GOVERNMENT PORTFOLIO
Nationwide VLI -- separate account of Nationwide 6,158,134.200 84.55%
Life Insurance Company
P.O. Box 182029
Columbus, Ohio 43218-2029
Nationwide Variable Account -- 3 1,001,433.430 13.75%
c/o IPO Investments Co 69
P.O. Box 182029
Columbus, Ohio 43218-2029
DOMESTIC INCOME PORTFOLIO
American General Life Insurance Company 693,870.710 22.31%
P.O. Box 1591
Houston, Texas 77251-1591
Nationwide VLI -- separate account of Nationwide 406,689.280 13.07%
Life Insurance Company
P.O. Box 182029
Columbus, Ohio 43218-2029
Nationwide Variable Account -- 3 1,882,370.260 60.52%
c/o IPO Investments Co 69
P.O. Box 182029
Columbus, Ohio 43218-2029
EMERGING GROWTH PORTFOLIO
Van Kampen American 50,010.000 25.63%
Capital Distributors Inc.
Kansas City, MO 64153
Nationwide Life Insurance 145,135.46 74.37%
P.O. Box 182029
Columbus, OH 43218-2029
REAL ESTATE SECURITIES PORTFOLIO
Nationwide Life Insurance 1,016,429.850 89.54%
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 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.

B-3
<PAGE> 45

DOMESTIC INCOME PORTFOLIO

The primary objective of the Portfolio is to maximize current income.
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 Rating Group
("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 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 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

B-4
<PAGE> 46

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 investment objective of the Portfolio is to seek capital appreciation
by investing in a portfolio of securities consisting principally of common
stocks of small and medium sized companies considered by the Adviser to be
emerging growth companies.

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
Portfolio'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.

ENTERPRISE PORTFOLIO

The investment objective of the Portfolio is to seek capital appreciation
through investments in securities believed by the Adviser to have about average
potential for capital appreciation. Any income received on such securities is
incidental to the objective of capital appreciation. The Portfolio may enter
into repurchase agreements with banks and broker-dealers. See "Repurchase
Agreements."

B-5
<PAGE> 47

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."

GOVERNMENT PORTFOLIO

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 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 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.

B-6
<PAGE> 48

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 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

B-7
<PAGE> 49

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

B-8
<PAGE> 50

GROWTH AND INCOME PORTFOLIO

The investment objective of the Portfolio is to seek long-term growth of
capital and income. The Portfolio seeks to achieve its investment objective by
investing in income-producing equity securities, including common stocks and
convertible securities.

MONEY MARKET PORTFOLIO

The investment objective of the Portfolio is to seek protection of capital
and high current income through investments 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 10% 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.

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 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 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.

B-9
<PAGE> 51

FORWARD COMMITMENTS

The Government Portfolio, the Domestic Income Portfolio and the Real Estate
Securities 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, 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 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
and the Real Estate Securities 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, cash equivalents, liquid
high grade debt securities or U.S. Government securities (which may have
maturities which are no 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.

DEPOSITARY RECEIPTS

Certain Portfolios 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

All of the Portfolios except the Domestic Income Portfolio and the Money
Market 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. The 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. Each Portfolio writes call
options only on a covered basis and only 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

B-10
<PAGE> 52

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 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.

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 Emerging Growth Portfolio, the Enterprise Portfolio, the Growth
and Income Portfolio and the Real Estate Securities 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 Emerging Growth
Portfolio, the Enterprise Portfolio, the Growth and Income Portfolio and the
Real Estate Securities

B-11
<PAGE> 53

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.

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

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.

B-12
<PAGE> 54

OPTIONS ON STOCK INDEXES (EMERGING GROWTH PORTFOLIO, ENTERPRISE PORTFOLIO,
GROWTH AND INCOME PORTFOLIO AND REAL ESTATE SECURITIES PORTFOLIO 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.

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. Indices 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

Certain Portfolios 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 -- Using Options,
Futures Contracts and Options on Futures Contracts" 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.

B-13
<PAGE> 55

FUTURES CONTRACTS

Certain 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 Trust 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.

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.

The Portfolio also may invest in foreign stock index futures traded outside
the United States. 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. 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.

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

B-14
<PAGE> 56

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.

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 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, a 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 underlying the futures contract.
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

B-15
<PAGE> 57

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.

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 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 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.

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

Unlike transactions entered into by a Portfolio in futures contracts,
options on foreign currencies and forward contracts are not traded on contract
markets regulated by the CFTC or (with the exception of certain foreign currency
options) by the 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 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,

B-16
<PAGE> 58

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 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.

LOANS OF PORTFOLIO SECURITIES

Each of the Portfolios, except the Real Estate Securities Portfolio, may
lend an amount up to ten percent of the value of its 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.

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%

B-17
<PAGE> 59

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. 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 DOMESTIC INCOME PORTFOLIO, THE
EMERGING GROWTH PORTFOLIO, THE ENTERPRISE PORTFOLIO, THE GOVERNMENT PORTFOLIO,
THE GROWTH AND INCOME PORTFOLIO AND THE MONEY MARKET 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 except that the Portfolio may purchase securities of other
investment companies to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated by
the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act;

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 Trust 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 ENTERPRISE
PORTFOLIO:

The 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 except that the
Portfolio may purchase securities of other investment companies to the
extent permitted by (i) the 1940 Act, as amended from time to time, (ii)
the rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act;

2. Invest in securities issued by other investment companies except as part
of a merger, reorganization or other acquisition and except to the
extent permitted by (i) the 1940 Act, as amended from time to time, (ii)
the rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act;

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
except that the Portfolio may purchase securities of other investment
companies to the extent permitted by (i) the 1940 Act, as amended from
time to time, (ii) the rules and regulations

B-18
<PAGE> 60

promulgated by the SEC under the 1940 Act, as amended from time to time,
or (iii) an exemption or other relief from the provisions of the 1940
Act;

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 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 except that the Portfolio may purchase securities of other
investment companies to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated by
the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act; 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 Enterprise 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
Enterprise 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
Enterprise 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.

B-19
<PAGE> 61

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

The Portfolio shall not:

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;

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 except that the Portfolio may purchase securities of
other investment companies to the extent permitted by (i) the 1940 Act,
as amended from time to time, (ii) the rules and regulations promulgated
by the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act;

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
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;

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

B-20
<PAGE> 62

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 securities issued by other investment companies except as part
of a merger, reorganization or other acquisition and except to the
extent permitted by (i) the 1940 Act, as amended from time to time, (ii)
the rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act;

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 except that the
Portfolio may purchase securities of other investment companies to the
extent permitted by (i) the 1940 Act, as amended from time to time, (ii)
the rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act;

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 except that the Portfolio may purchase securities of other
investment companies to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated by
the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act;

B-21
<PAGE> 63

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 except that the Portfolio may purchase securities
of other investment companies to the extent permitted by (i) the 1940
Act, as amended from time to time, (ii) the rules and regulations
promulgated by the SEC under the 1940 Act, as amended from time to time,
or (iii) an exemption or other relief from the provisions of the 1940
Act;

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 ADDITIONAL RESTRICTIONS ARE APPLICABLE TO THE GOVERNMENT
PORTFOLIO:

The 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, except that the
Portfolio may purchase securities of other investment companies to the
extent permitted by (i) the 1940 Act, as amended from time to time, (ii)
the rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act;

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;

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
except that the Fund may purchase securities of other investment
companies to the extent permitted by (i) the 1940 Act, as amended from
time to time, (ii) the rules and regulations promulgated by the SEC
under the 1940 Act, as amended from time to time, or (iii) an exemption
or other relief from the provisions of the 1940 Act;

B-22
<PAGE> 64

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;

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 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 GROWTH AND INCOME
PORTFOLIO:

1. Borrow money, except from a bank and then only as a temporary measure
for extraordinary or emergency purposes but not for making additional
investments and not in excess of five percent of the total net assets of
the Portfolio taken at cost. In connection with any borrowing the
Portfolio may pledge up to 15% of its total assets taken at cost.
Notwithstanding the foregoing, the Portfolio may engage in transactions
in options, futures contracts and related options, segregate or deposit
assets to cover or secure options written, and make margin deposits or
payments for futures contracts and related options.

2. Purchase or sell interests in real estate, except readily marketable
securities, including securities of real estate investment trusts.

3. Purchase or sell commodities or commodities contracts, except that the
Portfolio may enter into transactions in futures contracts and related
options.

4. 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 and other investment strategies and

B-23
<PAGE> 65

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."

5. Invest more than 25% of its total net asset value in any one industry
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.

6. Invest more than five percent of the market value of its total assets at
the time of purchase in the securities (except U.S. Government
securities) of any one issuer or purchase more than ten percent of the
outstanding voting securities of such issuer except that the Portfolio
may purchase securities of other investment companies to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act.

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 Trustees.

1. Purchase securities on margin, or sell securities short, but the
Portfolio may enter into transactions in options, futures contracts and
related options and may make margin deposits and payments in connection
therewith.

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

3. Purchase securities of a corporation in which a trustee of the Portfolio
owns a controlling interest.

4. Permit officers or trustees of the Portfolio to profit by selling
securities to or buying them from the Portfolio. However, companies with
which the officers and trustees of the Portfolio are connected may enter
into underwriting agreements with the Portfolio to sell its shares, sell
securities to, and purchase securities from the Portfolio when acting as
broker or dealer at the customary and usual rates and discounts, to the
extent permitted by the 1940 Act.

5. Investments in repurchase agreements and purchases by the Portfolio of a
portion of an issue of publicly distributed debt securities shall not be
considered the making of a loan.

6. Purchase a restricted security or a security for which market quotations
are not readily available if as a result of such purchase more than
fifteen percent of the value of the Portfolio's net assets would be
invested in such securities except that the Portfolio may purchase
securities of other investment companies to the extent permitted by (i)
the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions
of the 1940 Act.

7. Invest more than five percent of the market value of its total assets in
companies having a record together with predecessors of less than three
years continuous operation and in securities not having readily
available market quotations except that the Portfolio may purchase
securities of other investment companies to the extent permitted by (i)
the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions
of the 1940 Act.

B-24
<PAGE> 66

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

The 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 except that the
Fund may purchase securities of other investment companies to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act;;

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
except that the Fund may purchase securities of other investment
companies to the extent permitted by (i) the 1940 Act, as amended from
time to time, (ii) the rules and regulations promulgated by the SEC
under the 1940 Act, as amended from time to time, or (iii) an exemption
or other relief from the provisions of the 1940 Act;

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 except that the Fund may purchase securities of other
investment companies to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated by
the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act;

11. Write put or call options;

B-25
<PAGE> 67

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

THE FOLLOWING RESTRICTIONS ARE APPLICABLE TO THE REAL ESTATE SECURITIES
PORTFOLIO.

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 5% 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 10% of the outstanding voting securities
of any one issuer, except that the Portfolio may purchase securities of
other investment companies to the extent permitted by (i) the 1940 Act,
as amended from time to time, (ii) the rules and regulations promulgated
by the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions 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 10% of its net assets in connection
with permissible borrowings or purchase additional securities when money
borrowed exceeds 5% 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 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.

B-26
<PAGE> 68

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 10% 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 5% 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 Portfolio'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 except that the Portfolio may purchase securities
of other investment companies to the extent permitted by (i) the 1940
Act, as amended from time to time, (ii) the rules and regulations
promulgated by the SEC under the 1940 Act, as amended from time to time,
or (iii) an exemption or other relief from the provisions of the 1940
Act.

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 that the Portfolio may
purchase securities of other investment companies to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act.

4. The Portfolio may not invest more than 5% of its net assets in warrants
or rights valued at the lower of cost or market, nor more than 2% 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 Portfolio or of the Adviser owns more than one-half of
1% of the outstanding securities of such company, and such officers and
trustees who own more than one-half of 1% own in the aggregate more than
5% 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 5% of its total assets in
securities of unseasoned issuers which have been in operation directly
or through predecessors for less than three years, except that the
Portfolio may purchase securities of other investment companies to the
extent permitted by (i) the 1940 Act, as amended from time to time, (ii)
the rules and regulations promulgated by the

B-27
<PAGE> 69

SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act.

8. The Portfolio may not purchase or otherwise acquire any security if, as
a result, more than 15% 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

The Portfolio's Trustees and Executive Officers and their principal
occupations for the past five years are listed below. For purposes hereof, the
"Van Kampen American Capital Funds" refer to each of the open-end investment
companies advised by the Adviser, excluding the Common Sense Trust and the
American Capital Exchange Portfolio, and Van Kampen American Capital Investment
Advisory Corp. (the "VK Adviser"), excluding the Explorer Institutional Trust.

TRUSTEES

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- ----------------------------------- ---------------------------------------------------------
<S> <C>
J. Miles Branagan.................. Co-founder, Chairman, Chief Executive Officer and
Strafford Hall President of MDT Corporation, a company which develops,
Suite 200 manufactures, markets and services medical and scientific
1009 Slater Road equipment. A Trustee of each of the Van Kampen American
Harrisville, NC 27560 Capital Funds.
Age: 63
Linda Hutton Heagy................. Managing Partner, Paul Ray Berndston, an executive
10 South Riverside Plaza recruiting and management consulting firm. Formerly,
Suite 720 Executive Vice President of ABN AMRO, N.A., a Dutch bank
Chicago, IL 60606 holding company. Prior to 1992, Executive Vice President
Age: 46 of La Salle National Bank. A Trustee of each of the Van
Kampen American Capital Funds.
Roger Hilsman...................... Professor of Government and International Affairs
251-1 Hamburg Cove Emeritus, Columbia University. A Trustee of each of the
Lyme, CT 06371 Van Kampen American Capital Funds.
Age: 76
R. Craig Kennedy................... President and Director, German Marshall Fund of the
11 DuPont Circle, N.W. United States. Formerly, advisor to the Dennis Trading
Washington, D.C. 20036 Group Inc. Prior to 1992, President and Chief Executive
Age: 44 Officer, Director and member of the Investment Committee
of the Joyce Foundation, a private foundation. A Trustee
of each of the Van Kampen American Capital Funds.
Dennis J. McDonnell*............... President, Chief Operating Officer and a Director of the
One Parkview Plaza Adviser, the VK Adviser and Van Kampen American Capital
Oakbrook Terrace, IL 60181 Management, Inc. Executive Vice President and a Director
Age: 53 of VK/AC Holding, Inc. and Van Kampen American Capital,
Inc. ("VKAC"). Chief Executive Officer of McCarthy,
Crisanti & Maffei, Inc. Chairman and a Director of MCM
Asia Pacific Company, Ltd. Executive Vice President and a
Trustee of each of the Van Kampen American Capital Funds.
President of the closed-end investment companies advised
by the VK Adviser. Prior to December, 1991, Senior Vice
President of Van Kampen Merritt Inc.
</TABLE>

B-28
<PAGE> 70

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- ----------------------------------- ---------------------------------------------------------
<S> <C>
Donald C. Miller................... Prior to 1992, Director of Royal Group, Inc., a company
415 North Adams in insurance related businesses. Formerly Vice Chairman
Hinsdale, IL 60521 and Director of Continental Illinois National Bank and
Age: 75 Trust Company of Chicago and Continental Illinois
Corporation. A Trustee of each of the Van Kampen American
Capital Funds and Chairman of such Funds advised by the
VK Adviser.
Jack E. Nelson..................... President of Nelson Investment Planning Services, Inc., a
423 Country Club Drive financial planning company and registered investment
Winter Park, FL 32789 adviser. President of Nelson Investment Brokerage
Age: 60 Services Inc., a member of the National Association of
Securities Dealers, Inc. ("NASD") and Securities
Investors Protection Corp. A Trustee of each of the Van
Kampen American Capital Funds.
Don G. Powell*..................... Mr. Powell resigned from the Board of Trustees as of
2800 Post Oak Blvd. August 15, 1996. President, Chief Executive Officer and a
Houston, TX 77056 Director of VK/AC Holding, Inc. and VKAC. Chairman, Chief
Age: 56 Executive Officer and a Director of Van Kampen American
Capital Distributors, Inc. (the "Distributor"), the
Adviser, the VK Adviser, Van Kampen American Capital
Management, Inc. and Van Kampen American Capital
Advisors, Inc. Chairman, President and a Director of Van
Kampen American Capital Exchange Corporation, American
Capital Contractual Services, Inc. and American Capital
Shareholders Corporation. Chairman and a Director of
ACCESS Investor Services, Inc. ("ACCESS"), Van Kampen
Merritt Equity Advisors Corp., Van Kampen Merritt Equity
Holdings Corp., and VCJ Inc., McCarthy, Crisanti &
Maffei, Inc., McCarthy, Crisanti & Maffei Acquisition,
and Van Kampen American Capital Trust Company. Chairman,
President and a Director of Van Kampen American Capital
Services, Inc. Prior to August 16, 1996, President, Chief
Executive Officer and a Trustee of each of the Van Kampen
American Capital funds advised by the Adviser and the VK
Adviser. Prior to August 16, 1996, Director, Trustee or
Managing General Partner of other open-end investment
companies and closed-end investment companies advised by
the Adviser. Prior to August 16, 1996, Chairman of the
Board of the closed-end investment companies advised by
the VK Adviser.
Jerome L. Robinson................. President of Robinson Technical Products Corporation, a
115 River Road manufacturer and processor of welding alloys, supplies
Edgewater, NJ 07020 and equipment. Director of Pacesetter Software, a
Age: 73 software programming company specializing in white collar
productivity. Director of Panasia Bank. A Trustee of each
of the Van Kampen American Capital Funds.
Fernando Sisto..................... George M. Bond Chaired Professor and, prior to 1995, Dean
Stevens Institute of Graduate School and Chairman, Department of Mechanical
of Technology Engineering, Stevens Institute of Technology. Director of
Castle Point Station Dynalysis of Princeton, a firm engaged in engineering
Hoboken, NJ 07030 research. A Trustee of each of the Van Kampen American
Age: 71 Capital Funds and Chairman of the Van Kampen American
Capital Funds advised by the Adviser.
</TABLE>

B-29
<PAGE> 71

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- ----------------------------------- ---------------------------------------------------------
<S> <C>
Wayne W. Whalen*................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom (Illinois), legal counsel to the Van Kampen
Chicago, IL 60606 American Capital Funds. A Trustee of each of the Van
Age: 56 Kampen American Capital Funds. He also is a Trustee of
the closed-end investment companies advised by the VK
Adviser.
William S. Woodside................ Vice Chairman of the Board of LSG Sky Chefs, Inc., a
712 Fifth Avenue caterer of airline food. Formerly, Director of Primerica
40th Floor Corporation (currently known as The Traveler's Inc.).
New York, NY 10019 Formerly, Director of James River Corporation, a producer
Age: 74 of paper products. Trustee, and former President of
Whitney Museum of American Art. Formerly, Chairman of
Institute for Educational Leadership, Inc., Board of
Visitors, Graduate School of The City University of New
York, Academy of Political Science. Trustee of Committee
for Economic Development. Director of Public Education
Fund Network, Fund for New York City Public Education.
Trustee of Barnard College. Member of Dean's Council,
Harvard School of Public Health. Member of Mental Health
Task Force, Carter Center. A Trustee of each of the Van
Kampen American Capital Funds.
</TABLE>

* Such Trustees are "interested persons" (within the meaning of Section 2(a)(19)
of the 1940 Act). Messrs. Powell and McDonnell are interested persons of the
Adviser and each Portfolio by reason of their position with the Adviser. Mr.
Whalen is an interested person of the Adviser and each Portfolio by reason of
his firm having acted as legal counsel to the Adviser and the Portfolios.

Messrs. Powell and McDonnell own, or have the opportunity to purchase, an
equity interest in VK/AC Holding, Inc., the parent company of VKAC and have
entered into employment contracts (for a term of five years) with VKAC.

The Executive Officers other than Messrs. Hegel, Nyberg, Wood, Sullivan,
Dalmaso, Martin, Wetherell and Hill are located at 2800 Post Oak Blvd., Houston,
TX 77056. Messrs. Hegel, Nyberg, Wood, Sullivan, Dalmaso, Martin, Wetherell and
Hill are located at One Parkview Plaza, Oakbrook Terrace, IL 60181.

OFFICERS

B-30
<PAGE> 72

<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH PORTFOLIO DURING PAST 5 YEARS
- ------------------------- -------------------------- -------------------------------------------
<S> <C> <C>
Peter W. Hegel........... Vice President Executive Vice President of the Adviser and
Age: 39 the VK Adviser, Van Kampen American Capital
Advisors, Inc. Director of McCarthy,
Crisanti & Maffei, Inc. and McCarthy,
Crisanti & Maffei Acquisition Corporation.
Vice President of each of the Van Kampen
American Capital Funds. Vice President of
the closed-end funds advised by the VK
Adviser.
Curtis W. Morell......... Vice President and Chief Vice President and Chief Accounting Officer
Age: 49 Accounting Officer of most of the investment companies advised
by the Adviser.
Ronald A. Nyberg......... Vice President and Executive Vice President, General Counsel
Age: 42 Secretary and Secretary of Van Kampen American
Capital and VK/AC Holding, Inc. Executive
Vice President, General Counsel and a
Director of the Distributor. Executive Vice
President and General Counsel of the
Adviser and the VK Adviser, Van Kampen
American Capital Management, Inc., VSU Inc.
VCJ, Inc., Van Kampen Merritt Equity
Advisors Corp., and Van Kampen Merritt
Equity Holdings Corp. Executive Vice
President, General Counsel and Assistant
Secretary of Van Kampen American Capital
Advisors, Inc., American Capital
Contractual Services, Inc., Van Kampen
American Capital Exchange Corporation,
ACCESS Investor Services, Inc., American
Capital Shareholders Corporation, and Van
Kampen American Capital Trust Company.
General Counsel of McCarthy, Crisanti &
Maffei, Inc. and McCarthy, Crisanti &
Maffei Acquisition Corp. Vice President and
Secretary of each of the Van Kampen
American Capital Funds. Secretary of the
closed-end funds advised by the VK Adviser.
Director of ICI Mutual Insurance Co., a
provider of insurance to members of the
Investment Company Institute.
Robert C. Peck, Jr. Vice President Executive Vice President and Director of
(until October 31, the Adviser. Executive Vice President of
1996).................. the VK Adviser. Vice President of each of
Age: 49 the Van Kampen American Capital Funds.
Alan T. Sachtleben....... Vice President Executive Vice President and a Director of
Age: 53 the Adviser. Executive Vice President of
the VK Adviser. Vice President of each of
the Van Kampen American Capital Funds.
Paul R. Wolkenberg....... Vice President Executive Vice President of the Adviser.
Age: 51 President, Chief Executive Officer and a
Director of Van Kampen American Capital
Trust Company and ACCESS. Vice President of
each of the Van Kampen American Capital
Funds.
</TABLE>

B-31
<PAGE> 73

<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH PORTFOLIO DURING PAST 5 YEARS
- ------------------------- -------------------------- -------------------------------------------
<S> <C> <C>
Edward C. Wood III....... Vice President and Chief Senior Vice President of VK Adviser. Vice
Age: 40 Financial Officer President and Chief Financial Officer of
each of the Van Kampen American Capital
Funds. Vice President, Treasurer and Chief
Financial Officer of the closed- end funds
advised by VK Adviser.
John L. Sullivan......... Treasurer First Vice President of the Adviser and VK
Age: 40 Adviser. Treasurer of each of the Van
Kampen American Capital Funds. Controller
of the closed-end funds advised by the VK
Adviser. Formerly Controller of open-end
funds advised by VK Adviser.
Tanya M. Loden........... Controller Controller of most of the investment
Age: 36 companies advised by the Adviser, formerly
Tax Manager/Assistant Controller.
Nicholas Dalmaso......... Assistant Secretary Assistant Vice President and Senior
Age: 30 Attorney of VKAC. Assistant Vice President
and Assistant Secretary of the Distributor,
the Adviser, the VK Adviser, and Van Kampen
American Capital Management, Inc. Assistant
Vice President of Van Kampen American
Capital Advisors, Inc. Assistant Secretary
of each of the Van Kampen American Capital
Funds, Assistant Secretary of the
closed-end funds advised by the VK Adviser.
Prior to May 1992, attorney for Cantwell &
Cantwell, a Chicago law firm.
Huey P. Falgout, Jr...... Assistant Secretary Assistant Vice President and Senior
Age: 32 Attorney of VKAC. Assistant Vice President
and Assistant Secretary of the Distributor,
the Adviser, the VK Adviser, Van Kampen
American Capital Management, Inc., Van
Kampen American Capital Advisors, Inc.,
American Capital Contractual Services,
Inc., Van Kampen American Capital Exchange
Corporation, ACCESS, and American Capital
Shareholders Corporation. Assistant
Secretary of each of the Van Kampen
American Capital Funds.
</TABLE>

B-32
<PAGE> 74

<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH PORTFOLIO DURING PAST 5 YEARS
- ------------------------- -------------------------- -------------------------------------------
<S> <C> <C>
Scott E. Martin.......... Assistant Secretary Senior Vice President, Deputy General
Age: 39 Counsel and Assistant Secretary of VKAC.
Senior Vice President, Deputy General
Counsel and Secretary of the Adviser, the
VK Adviser and the Distributor, Van Kampen
American Capital Management, Inc., Van
Kampen American Capital Advisers, Inc., VSM
Inc., VCJ Inc., American Capital
Contractual Services, Inc., Van Kampen
American Capital Exchange Corporation,
ACCESS Investor Services, Inc., Van Kampen
Merritt Equity Advisors Corp., Van Kampen
Merritt Equity Holdings Corp., American
Capital Shareholders Corporation. Secretary
and Deputy General Counsel of McCarthy,
Crisanti, & Maffei, Inc. and McCarthy,
Crisanti & Maffei Acquisition. Chief Legal
Officer of McCarthy, Crisanti & Maffei,
S.A. Assistant Secretary of each of the Van
Kampen American Capital Funds. Assistant
Secretary of the closed-end funds advised
by the VK Adviser.
Weston B. Wetherell...... Assistant Secretary Vice President, Associate General Counsel
Age: 39 and Assistant Secretary of VKAC, the
Adviser, the VK Adviser and the
Distributor, Van Kampen American Capital
Management, Inc. Van Kampen American
Capital Advisors, Inc. Assistant Secretary
of each of the Van Kampen American Capital
Funds. Assistant Secretary of closed-end
funds advised by VK Adviser.
Perry Farrell............ Assistant Treasurer Assistant Treasurer of each of the Van
Age: 59 Kampen American Capital Funds.
Steven M. Hill........... Assistant Treasurer Assistant Vice President of the Adviser and
Age: 31 VK Adviser. Assistant Treasurer of each of
the Van Kampen American Capital Funds.
Assistant Treasurer of the closed-end funds
advised by the VK Adviser.
Robert Sullivan.......... Assistant Controller Assistant Controller of each of the Van
Age: 62 Kampen American Capital Funds.
</TABLE>

Each of the foregoing trustees and officers holds the same position with
each of 46 other Van Kampen American Capital mutual funds (the "Fund Complex").
Each trustee who is not an affiliated person of the Adviser, the Distributor or
VKAC (each a "Non-Affiliated Trustee") is compensated by an annual retainer and
meeting fees for services to the funds in the Fund Complex. Each fund in the
Fund Complex provides a deferred compensation plan to its Non-Affiliated
Trustees that allows trustees to defer receipt of his or her compensation and
earn a return on such deferred amounts based upon the return of the common stock
of the funds in the Fund Complex as more fully described below.

The compensation of each Non-Affiliated Trustee includes a retainer from
the mutual funds in the Fund Complex advised by the Adviser (the "AC Funds") in
an amount equal to $35,000 per calendar year, due in four quarterly installments
on the first business day of each calendar quarter. The AC Funds pay each Non-
Affiliated Trustee a per meeting fee in the amount of $2,000 per regular
quarterly meeting attended by the Non-Affiliated Trustee, due on the date of
such meeting, plus reasonable expenses incurred by the Non-

B-33
<PAGE> 75

Affiliated Trustee in connection with his or her services as a trustee. The
annual retainer and the regular meeting fees are allocated among the AC Funds
(i) 50% on the basis of the relative net assets of each AC Fund to the aggregate
net assets of all of the AC Funds and (ii) 50% equally to each AC Fund, in each
case as of the last business day of the preceding calendar quarter. Each AC Fund
participating in any special meeting of the trustees generally pays each
Non-Affiliated Trustee a per meeting fee in the amount of $125 per special
meeting attended by the Non-Affiliated Trustee, due on the date of such meeting,
plus reasonable expenses incurred by the Non-Affiliated Trustee in connection
with his or her services as a trustee, provided that no compensation will be
paid in connection with certain telephonic special meetings. The trustees have
approved an aggregate compensation cap with respect to the Fund Complex of
$84,000 per Non-Affiliated Trustee per year (excluding any retirement benefits)
for the period July 22, 1995 through December 31, 1996, subject to the net
assets and the number of mutual funds in the Fund Complex as of July 21, 1995
and certain other exceptions. In addition, the Adviser has agreed to reimburse
each fund in the Fund Complex through December 31, 1996 for any increase in the
aggregate trustee's compensation over the aggregate compensation paid by such
fund in its 1994 fiscal year, provided that if a fund did not exist for the
entire 1994 fiscal year appropriate adjustments will be made.

Each Non-Affiliated Trustee can elect to defer receipt of all or a portion
of the compensation earned by such Non-Affiliated Trustee until retirement.
Amounts deferred are retained by the Portfolio. Through the 1995 fiscal year of
the Trust, the deferred compensation earned a rate of return determined by
reference to the return earned on short-term investments owned by the respective
Portfolio paying the Trustee the compensation. After March 19, 1996, the return
on the deferred compensation may be determined by reference to either the return
on the common stock of the respective Portfolio or other mutual funds in the
Fund Complex as selected by the respective Non-Affiliated Trustee. To the extent
permitted by the 1940 Act, it is anticipated that the Portfolio will invest in
common stock of those mutual funds selected by the Non-Affiliated Trustees in
order to match the deferred compensation obligation. The deferred compensation
plan is not funded and obligations thereunder represent general unsecured claims
against the general assets of each Portfolio.

The Trust adopted a retirement plan on January 26, 1996. Under the
retirement plan, a Non-Affiliated Trustee who is receiving trustee's fees from
the Portfolio prior to such Non-Affiliated Trustee's retirement, has at least
ten years of service and retires at or after attaining the age of 60, is
eligible to receive a retirement benefit equal to $2,500 per year for each of
the ten years following such trustee's retirement. Under certain conditions,
reduced benefits are available for early retirement provided the trustee has
served at least five years. As of the date hereof, the retirement plan contains
a Fund Complex retirement benefit cap of $60,000 per year. The Adviser will
reimburse each AC Fund for expenses related to the retirement plan through
December 31, 1996.

B-34
<PAGE> 76

Additional information regarding compensation before deferral by the
Portfolios and the other funds in the Fund Complex is set forth in the table
below.

COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT
BENEFITS
AGGREGATE COMPENSATION BEFORE DEFERRAL FROM REGISTRANT(3) ACCRUED AS
------------------------------------------------------------------------------- PART OF
MONEY ASSET DOMESTIC EMERGING REAL GLOBAL REGISTRANT
NAME(2) ENTERPRISE GOVERNMENT MARKET ALLOCATION INCOME GROWTH ESTATE EQUITY EXPENSES(4)
- ----------------------------------------------- ---------- ------ ---------- -------- -------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
J. Miles Branagan.................... $1,020 $ 950 $ 990 $ 970 $ 990 $ 180 $ 180 $ 180 $ -0-
Dr. Richard E. Caruso................ $ 780 $ 720 $ 770 $ 740 $ 770 $ -0- $ -0- $ -0- $ -0-
Philip P. Gaughan.................... $ 360 $ 330 $ 330 $ 330 $ 330 $ 150 $ 150 $ 150 $ -0-
Linda Hutton Heagy................... $ 360 $ 340 $ 340 $ 340 $ 340 $ 210 $ 210 $ 210 $ -0-
Dr. Roger Hilsman.................... $1,060 $ 990 $1,030 $1,010 $1,030 $ 180 $ 180 $ 180 $ -0-
R. Craig Kennedy..................... $ 440 $ 410 $ 410 $ 410 $ 410 $ 180 $ 180 $ 180 $ -0-
Donald C. Miller..................... $ 400 $ 370 $ 370 $ 370 $ 370 $ 150 $ 150 $ 150 $ -0-
Jack E. Nelson....................... $ 440 $ 410 $ 410 $ 410 $ 410 $ 180 $ 180 $ 180 $ -0-
David Rees........................... $1,020 $ 950 $ 990 $ 970 $ 990 $ 180 $ 180 $ 180 $ -0-
Jerome L. Robinson................... $ 440 $ 410 $ 410 $ 410 $ 410 $ 180 $ 180 $ 180 $ -0-
Lawrence J. Sheehan.................. $1,060 $ 990 $1,030 $1,010 $1,030 $ 180 $ 180 $ 180 $ -0-
Dr. Fernando Sisto................... $1,190 $1,170 $1,120 $1,170 $1,100 $ 180 $ 180 $ 180 $ -0-
Wayne W. Whalen...................... $ 440 $ 410 $ 410 $ 410 $ 410 $ 180 $ 180 $ 180 $ -0-
William S. Woodside.................. $1,020 $ 950 $ 990 $ 970 $ 990 $ 180 $ 180 $ 180 $ -0-

<CAPTION>
TOTAL
COMPENSATION
ESTIMATED BEFORE DEFERRAL
ANNUAL FROM REGISTRANT
BENEFITS AND FUND
UPON COMPLEX PAID
NAME(2) RETIREMENT(4) TO TRUSTEE(5)
- ------------------------------------- ------------ ----------------
<S> <C> <C>
J. Miles Branagan.................... $ -0- $ 84,250
Dr. Richard E. Caruso................ $ -0- $ 57,250
Philip P. Gaughan.................... $ -0- $ 76,500
Linda Hutton Heagy................... $ -0- $ 38,417
Dr. Roger Hilsman.................... $ -0- $ 91,250
R. Craig Kennedy..................... $ -0- $ 92,625
Donald C. Miller..................... $ -0- $ 94,625
Jack E. Nelson....................... $ -0- $ 93,625
David Rees........................... $ -0- $ 83,250
Jerome L. Robinson................... $ -0- $ 89,375
Lawrence J. Sheehan.................. $ -0- $ 91,250
Dr. Fernando Sisto................... $ -0- $ 98,750
Wayne W. Whalen...................... $ -0- $ 93,375
William S. Woodside.................. $ -0- $ 79,125
</TABLE>

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

(1) The "Registrant" is the Trust, which currently consists of nine operating
series. As indicated in the other explanatory notes, the amounts in the
table relate to the applicable trustees during the Registrant's last fiscal
year ended December 31, 1995 or the Fund Complex' last calendar year ended
December 31, 1995. No Compensation was paid to any trustee with regard to
the Growth and Income Portfolio.

(2) Messrs. Powell and McDonnell, trustees of the Trust, are affiliated persons
of the Adviser and are not eligible for compensation or retirement benefits
from the Registrant. Messrs. Gaughan, Kennedy, Miller, Nelson, Robinson and
Whalen were elected by shareholders to the Board of Trustees on July 21,
1995. Ms. Heagy was appointed to the Board of Trustees on September 7, 1995.
Mr. McDonnell was appointed to the Board of Trustees on January 29, 1996.
Mr. Gaughan retired from the Board of Trustees on January 26, 1996. Messrs.
Caruso, Rees and Sheehan were removed from the Board of Trustees effective
September 7, 1995, January 29, 1996 and January 29, 1996, respectively. Mr.
Powell resigned on August 15, 1996.

(3) The amounts shown in this column are accumulated from the Aggregate
Compensation before Deferral of each series in operation during the
Registrant's fiscal year ended December 31, 1995. Amounts deferred, if any,
by each trustee are set forth in a table below. Through the 1995 fiscal year
of the Trust, the deferred compensation earned a rate of return determined
by reference to the return earned on short-term investments owned by the
respective Portfolio paying the Trustee the compensation. After March 19,
1996, the return on the deferred compensation may be determined by reference
to either the return on the common stock of the respective Portfolio or
other mutual funds in the Fund Complex as selected by the respective
Non-Affiliated Trustee. To the extent permitted by the 1940 Act, it is
anticipated that the Portfolio will invest in common stock of those mutual
funds selected by the Non-Affiliated Trustees in order to match the deferred
compensation obligation.

(4) The amounts shown in these columns are zero because the Trust did not adopt
its retirement plan until after the end of its 1995 fiscal year. The
retirement plan is described above the Compensation Table.

(5) The amounts shown in this column are accumulated from the Aggregate
Compensation before Deferral of each of the 46 mutual funds in the Fund
Complex as of December 31, 1995. The following trustees deferred
compensation from the Registrant and the Fund Complex during the calendar
year ended December 31, 1995: Dr. Caruso, $41,750; Mr. Gaughan, $57,750; Ms.
Heagy, $8,750; Mr. Kennedy, $65,875; Mr. Miller, $65,875; Mr. Nelson,
$65,875; Mr. Rees, $8,375; Mr. Robinson, $62,375; Dr. Sisto, $30,260; and
Mr. Whalen, $65,625. Through the 1995 fiscal year of the Trust, the deferred
compensation earned a rate of return determined by reference to the return
earned on short-term investments owned by the respective Portfolio paying
the Trustee the compensation. After March 19, 1996, the return on the
deferred compensation may be determined by reference to either the return of
the common stock of the respective Portfolio or other mutual funds in the
Fund Complex as selected by the respective Non-Affiliated Trustee. To the
extent permitted by the 1940 Act, it is anticipated that the Portfolio will
invest in common stock of those mutual funds selected by the Non-Affiliated
Trustees in order to match the deferred compensation obligation. The
trustees' Fund Complex compensation cap commenced on July 22, 1995 and
covered the period between July 22, 1995 and December 31, 1995. Compensation
received prior to July 22, 1995 was not subject to the cap. For the calendar
year ended December 31, 1995, while certain trustees received compensation
over $84,000 in the aggregate, no trustee received compensation in excess of
the pro rata amount of the Fund Complex cap for the period July 22, 1995
through December 31, 1995. In addition to the amounts set forth above,
certain trustees received lump sum retirement benefit distributions not
subject to the cap in 1995 related to three mutual funds that ceased
investment operations during 1995 as follows: Mr. Gaughan, $22,136; Mr.
Miller, $33,205; Mr. Nelson, $30,851; Mr. Robinson, $11,068; and Mr. Whalen,
$27,332. The Adviser and its affiliates also serve as investment adviser for
other investment companies; however, with the exception of Messrs. Powell,
McDonnell and Whalen, the trustees were not trustees of such investment
companies. Combining the Fund Complex with other investment companies
advised by the Adviser and its affiliates, Mr. Whalen received Total
Compensation of $268,857 during the calendar year ended December 31, 1995.

B-35
<PAGE> 77

DEFERRED FEES (INCLUDED IN ABOVE TABLE)(1)

<TABLE>
<CAPTION>
MONEY ASSET DOMESTIC EMERGING REAL GLOBAL
NAME OF TRUSTEE ENTERPRISE GOVERNMENT MARKET ALLOCATION INCOME GROWTH ESTATE EQUITY
- ----------------------------------------- ---------- ---------- ------ ---------- -------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dr. Richard E. Caruso.................... $ 780 $ 720 $ 770 $ 740 $ 770 $ -0- $ -0- $ -0-
Philip P. Gaughan........................ $ 180 $ 170 $ 160 $ 170 $ 160 $ 150 $ 150 $ 150
Linda H. Heagy........................... $ 220 $ 210 $ 200 $ 210 $ 200 $ 180 $ 180 $ 180
R. Craig Kennedy......................... $ 220 $ 210 $ 200 $ 210 $ 200 $ 180 $ 180 $ 180
Donald C. Miller......................... $ 180 $ 170 $ 160 $ 170 $ 160 $ 150 $ 150 $ 150
Jack E. Nelson........................... $ 220 $ 210 $ 200 $ 210 $ 200 $ 180 $ 180 $ 180
Jerome L. Robinson....................... $ 220 $ 210 $ 200 $ 210 $ 200 $ 180 $ 180 $ 180
Dr. Fernando Sisto....................... $ 730 $ 720 $ 680 $ 720 $ 660 $ -0- $ -0- $ -0-
Wayne W. Whalen.......................... $ 220 $ 210 $ 200 $ 210 $ 200 $ 180 $ 180 $ 180
</TABLE>

CUMULATIVE DEFERRED COMPENSATION ACCRUED BY PORTFOLIO(1)

<TABLE>
<CAPTION>
MONEY ASSET DOMESTIC EMERGING REAL GLOBAL
NAME OF TRUSTEE ENTERPRISE GOVERNMENT MARKET ALLOCATION INCOME GROWTH ESTATE EQUITY
- ------------------------------------- ---------- ---------- --------- ---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dr. Richard E. Caruso................ $1,032.21 $1,082.47 $ 941.79 $1,185.66 $1,048.25
Philip P. Gaughan.................... $ 186.37 $ 174.54 $ 161.38 $ 175.59 $ 163.15 $ 155.72 $ 158.88 $ 154.65
Linda H. Heagy....................... $ 227.80 $ 215.61 $ 201.73 $ 216.90 $ 203.93 $ 186.86 $ 190.64 $ 185.58
R. Craig Kennedy..................... $ 227.80 $ 215.61 $ 201.73 $ 216.90 $ 203.93 $ 186.86 $ 190.64 $ 185.58
Donald C. Miller..................... $ 186.37 $ 174.54 $ 161.38 $ 175.59 $ 163.15 $ 155.72 $ 158.88 $ 154.65
Jack E. Nelson....................... $ 227.80 $ 215.61 $ 201.73 $ 216.90 $ 203.93 $ 186.86 $ 190.64 $ 185.58
David Rees........................... $5,507.08 $6,103.24 $5,560.64 $4,346.37 $3,570.25 $ -0- $ -0- $ -0-
Jerome L. Robinson................... $ 227.80 $ 215.61 $ 201.73 $ 216.90 $ 203.93 $ 186.86 $ 190.64 $ 185.58
Dr. Fernando Sisto................... $6,329.08 $5,707.18 $4,787.12 $5,713.65 $5,135.86 $ -0- $ -0- $ -0-
Wayne W. Whalen...................... $ 227.80 $ 215.61 $ 201.73 $ 216.90 $ 203.93 $ 186.86 $ 190.64 $ 185.58
</TABLE>

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

(1) Through the 1995 fiscal year of the Trust, deferred compensation earned a
rate of return determined by reference to the return earned on short-term
investments owned by the respective Portfolio paying the Trustee the
compensation. After March 19, 1996, the return on deferred compensation may
be determined by reference to either the return of the common stock of the
respective Portfolio or other mutual funds in the Fund Complex as selected
by the respective Non-Affiliated Trustee. To the extent permitted by the
1940 Act, it is anticipated that the Portfolio will invest in common stock
of those mutual funds selected by the Non-Affiliated Trustees in order to
match the deferred compensation obligation.

The trustees and officers of the Trust, as a group, do not own any
outstanding shares of the Trust 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"). As of
February 16, 1996, no trustee or officer of the Trust owns or would be able to
acquire 5% or more of the common stock of VK/AC Holding, Inc.

B-36
<PAGE> 78

INVESTMENT ADVISORY AGREEMENTS

The Trust and the Adviser are parties to an investment advisory agreement
("Advisory Agreement - I") pursuant to which the Trust retains the Adviser to
manage the investment of assets and to place orders for the purchase and sale of
portfolio securities for certain portfolios including the Domestic Income
Portfolio, the Enterprise Portfolio, the Government Portfolio and the Money
Market Portfolio. The Trust and the Adviser are also parties to other investment
advisory agreements pursuant to which the Adviser manages the investment of
assets and places orders for the purchase and sale of portfolio securities for
the remaining Portfolios including three advisory agreements designated herein
as "Advisory Agreement - II," "Advisory Agreement - IV" and "Advisory
Agreement - V" for the Emerging Growth Portfolio, the Growth and Income
Portfolio and Real Estate Securities Portfolio, respectively (Advisory
Agreement - I, Advisory Agreement - II, Advisory Agreement - IV and Advisory
Agreement - V 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 Portfolio (except as
noted herein) the services of sufficient executive and clerical personnel for
the Trust 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 Portfolio the services of a President of
the Trust, one or more Vice Presidents as needed, and a Secretary.

Under the Advisory Agreements, the Trust 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 Trust 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.

Under Advisory Agreement - I, the Trust 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 Agreement - II, the Trust
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 at an annual rate of 0.70% for the Emerging Growth Portfolio.
Under Advisory Agreement - IV, the Trust pays 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 at an annual rate of 0.60%
of the first $500 million and 0.55% in excess of $500 million for the Growth and
Income Portfolio. Under Advisory Agreement - V, the Trust pays 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 at an annual
rate of 1.00% for the Real Estate Securities Portfolio.

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 VK/AC Holding, Inc., in connection with
the purchase and sale of portfolio investments of the Portfolio, less any direct
expenses incurred by such subsidiary of VK/AC Holding, Inc. 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 Portfolio 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 VK/AC
Holding, Inc., to receive in connection with the Portfolio's portfolio
transactions or other arrangements which may benefit the Portfolio.

B-37
<PAGE> 79

Advisory Agreement - I also provides that, in the event the ordinary
business expenses of the Domestic Income Portfolio, the Enterprise Portfolio,
the Government Portfolio and the Money Market 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 Portfolio
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 Portfolio'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,
Advisory Agreement - IV and Advisory Agreement IV.

In addition to the contractual expense limitation, the Adviser elected to
reimburse the Domestic Income Portfolio, the Enterprise Portfolio, the
Government Portfolio and the Money Market 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 Agreements
during the periods ended December 31, 1993, December 31, 1994 and December 31,
1995. The Growth and Income Portfolio did not commence operations as of the date
of this Prospectus.

<TABLE>
<CAPTION>
REAL
DOMESTIC MONEY EMERGING ESTATE
PERIOD ENDING ENTERPRISE INCOME GOVERNMENT MARKET GROWTH SECURITIES
DECEMBER 31, 1993: PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------------- ---------- -------- ---------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Advisory fees $ 345,093 $132,513 $393,050 $ 144,373 N/A N/A
Accounting Services $ 66,688 $ 63,008 $ 68,628 $ 59,477 N/A N/A
Contractual expense
reimbursement $ -- $ 14,128 $ -- $ 445 N/A N/A
Voluntary expense reimbursement $ 84,676 $ 93,319 $ 80,855 $ 101,061 N/A N/A
</TABLE>

<TABLE>
<CAPTION>
PERIOD ENDING
DECEMBER 31, 1994:
- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
Advisory fees $ 346,359 $130,474 $351,674 $ 152,665 N/A N/A
Accounting Services $ 52,665 $ 51,604 $ 58,043 $ 51,778 N/A N/A
Contractual expense
reimbursement $ -- $ 302 $ -- $ -- N/A N/A
Voluntary expense reimbursement $ 57,464 $ 91,332 $ 68,843 $ 80,915 N/A N/A
</TABLE>

<TABLE>
<CAPTION>
PERIOD ENDING
DECEMBER 31, 1995:
- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
Advisory fees $ 355,715 $130,064 $333,447 $ 121,552 N/A N/A
Accounting Services $ 55,772 $ 49,819 $ 57,526 $ 48,109 N/A N/A
Contractual expense
reimbursement $ -- $ -- $ -- $ -- N/A N/A
Voluntary expense reimbursement $ 56,680 $ 86,887 $ 77,421 $ 80,637 N/A N/A
</TABLE>

<TABLE>
<CAPTION>
PERIOD FROM JULY 3, 1995
THROUGH DECEMBER 31, 1995:
- -------------------------------
<S> <C> <C>
Advisory fees $ 4,798 $ 18,136
Accounting Services $ 3,222 $ 3,153
Contractual expense
reimbursement $19,858 $ 7,173
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 Trust'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.

B-38
<PAGE> 80

DISTRIBUTOR

The Distributor acts as the principal underwriter of the shares of the
Trust pursuant to written agreements (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
Trust's Trustees or by a vote of a majority of the Trust'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 Trust 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, 1993, 1994, and 1995, ACCESS,
shareholder service agent and dividend disbursing agent for the Trust, received
fees aggregating $18,000, $18,000 and $15,514, respectively, from each Portfolio
offered herein, excluding Emerging Growth Portfolio, Growth and Income Portfolio
and Real Estate Securities Portfolio, for these services. These services are
provided at cost plus a profit.

PORTFOLIO TRANSACTIONS AND BROKERAGE

The Adviser is responsible for decisions to buy and sell securities for the
Trust 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 Trust 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 Trust 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 Trust's Trustees
have authorized the Adviser to cause the Portfolio 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 Trust. The Adviser undertakes that such higher commissions will not be paid
by the Portfolio unless (a) the Adviser determines in good faith that the amount
is reasonable in relation to the

B-39
<PAGE> 81

services in terms of the particular transaction or in terms of the Adviser's
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 Adviser, the total commissions paid by the Portfolio are
reasonable in relation to the expected benefits to the Trust over the long term.
The investment advisory fee paid by the Trust under the Advisory Agreements 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 Trust and of the other Van Kampen American Capital mutual funds as a
factor in the selection of dealers to execute portfolio transactions for the
Trust.

Prior to December 20, 1994, the Portfolio placed brokerage transactions
with brokers who were considered affiliated persons of the Adviser's former
parent, The Travelers Inc. Such affiliated persons included Smith Barney Inc.
("Smith Barney") and Robinson Humphrey, Inc. ("Robinson Humphrey"). Effective
December 20, 1994, Smith Barney and Robinson Humphrey ceased to be affiliates 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 Trust paid the following commissions to affiliated brokers during the
periods shown:

Commissions Paid:

<TABLE>
<CAPTION>
SMITH BARNEY ROBINSON
SHEARSON HUMPHREY
------------ --------
<S> <C> <C>
Fiscal 1993
Enterprise Portfolio $ 32,295 --
Government Portfolio $ 2,739
Fiscal 1994
Enterprise Portfolio $ 36,136 $1,330
Government Portfolio $ 2,578 --
</TABLE>

The Adviser places portfolio transactions for other advisory accounts
including other investment companies. Research services furnished by firms
through which the Trust 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 Trust. In the opinion of the Adviser, the
benefits from research services to each of the accounts, including the Trust,
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 Trust will not be disproportionate to the benefits
received by the Trust on a continuing basis.

The Adviser seeks to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities by the Trust 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 Trust. In
making such allocations among the Trust 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.

B-40
<PAGE> 82

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 Growth and Income Portfolio commenced operations
after the end of fiscal year 1995.

<TABLE>
<CAPTION>
DOMESTIC EMERGING REAL ESTATE
ENTERPRISE GOVERNMENT INCOME GROWTH SECURITIES
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
----------- ---------- -------- -------- -----------
<S> <C> <C> <C> <C> <C>
1993
Total brokerage commissions $ 283,795 $ 12,198 -- -- --
Commissions for research services $ 146,345 0 -- -- --
Value of research transactions $84,070,654 0 -- -- --
1994
Total brokerage commissions $ 340,219 $ 15,213 $ 395 -- --
Commissions for research services $ 144,248 -- -- -- --
Value of research transactions $84,974,336 -- -- -- --
1995
Total brokerage commissions $ 305,770 $ 30,598 -- $ 2,474 $ 14,076
Commissions for research services $ 114,552 -- -- 2,143 12,934
Value of research transactions $66,483,840 -- -- 2,340,642 12,044,246
</TABLE>

PORTFOLIO TURNOVER

The portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for a fiscal year by the average
monthly value of each Portfolio's investment portfolio securities during such
fiscal year. Securities which mature in one year or less at the time of
acquisition are not included in this computation. The turnover rate may vary
greatly from year to year as well as within a year. The Portfolio's investment
portfolio turnover rate for prior years is shown under "Financial Highlights" in
the Prospectus.

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 Exchange (the
"Exchange") is open (currently 4:00 p.m., New York time). The 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 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

B-41
<PAGE> 83

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 $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 INCOME, EMERGING GROWTH, ENTERPRISE, GROWTH AND INCOME AND REAL ESTATE
SECURITIES PORTFOLIOS 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
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 Trust'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 Trust's Trustees.

With respect to certain Portfolios, 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.

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 Trust's Trustees. Such
valuations and procedures will be reviewed periodically by the Trustees.

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.

B-42
<PAGE> 84

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 Portfolio of securities owned by it is not reasonably
practicable or it is not reasonably practicable for the Portfolio 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 certain Portfolios, the Portfolio 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 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 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 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.

B-43
<PAGE> 85

BACK-UP WITHHOLDING

The Trust 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 Trust with a correct
taxpayer identification number, who fails to report fully dividend or interest
income, or who fails to certify to the Trust 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 certain Portfolios 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.

PORTFOLIO PERFORMANCE

The Adviser has agreed so long as it serves as adviser to the Portfolio to
limit the ordinary business expenses of the Domestic Income Portfolio, the
Enterprise Portfolio, the Government Portfolio and the Money Market 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.

The Government Portfolio's average annual total returns (computed in the
manner described in the Prospectus) for the one-year, five-year and the
nine-year-and-nine-month period ended December 31, 1995 were 17.17%, 8.17% and
7.37%, respectively.

B-44
<PAGE> 86

The Domestic Income Portfolio's average annual total returns (computed in
the manner described in the Prospectus) for the one-year, five-year and the
eight-year-and-one-half-month period ended December 31, 1995, were 21.37%,
12.99% and 8.08%, 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 Enterprise Portfolio's average annual total returns (computed in the
manner described in the Prospectus) for the one-year, five-year and
nine-year-and-nine-month period ended December 31, 1995 were 36.98%, 16.16% and
9.83%, respectively.

The Government Portfolio's and the Domestic Income Portfolio's annualized
current yields for the 30-day period ended December 31, 1995 were 5.99% and
7.97%, 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's average annual total return (computed in
the manner described in the Prospectus) for the period July 3, 1995 through
December 31, 1995 was 17.20%.

The Real Estate Securities Portfolio average annual total return (computed
in the manner described in the Prospectus) for the period July 3, 1995 to
December 31, 1995 was 8.35%.

From time to time VKAC will announce the results of monthly polls of U.S.
investor intentions -- the Van Kampen American Capital Index of Investor
Intentions and the Van Kampen American Capital Mutual Portfolio Index -- which
polls measure how Americans plan to use their money.

From time to time, in reports or other communications, or in advertising or
sales materials, the Adviser may announce the results of actual tests performed
by DALBAR Financial Securities, Inc., an independent research firm, as they
relate to the level of services for mutual fund investors, and may refer to the
Missouri Quality Award received by ACCESS, the Portfolio's transfer agent, in
1993. In addition, the Adviser may also refer to the Houston Awards for Quality,
received by American Capital in 1994.

From time to time, in reports or other communications, or in advertising or
sales materials the Adviser may graphically illustrate the relative average
annual returns of the following categories for the prior ten-year period:
Inflation, Short-Term Government Securities, Long-Term Government Securities,
Equity REITs and Common Stocks.

The Growth and Income Portfolio commenced operations after the end of
fiscal year 1995.

MONEY MARKET PORTFOLIO YIELD INFORMATION

The Money Market Portfolio's annualized current yield for the seven-day
period ending December 31, 1995 was 5.02%. Its compound effective yield for the
same period was 5.14%.

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.

B-45
<PAGE> 87

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.

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 Portfolio 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 Portfolio is not insured. Investors comparing
results of the Portfolio 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 Portfolio 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 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.

SHAREHOLDER REPORTS -- Semi-annual 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 LLP, 1201 Louisiana, Houston, Texas
77002, the independent accountants for the Portfolio, performs an annual audit
of the Portfolio's financial statements.

FINANCIAL STATEMENTS

The attached financial statements are in the form in which they appear in
the Annual Report to Shareholders including the related report of Independent
Accountants The financial statements are for all Portfolios of the Trust,
including Portfolios not offered hereby.

B-46
<PAGE> 88

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

B-47
<PAGE> 89

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.

B-48
<PAGE> 90

COMMON STOCK FUND PORTFOLIO OF INVESTMENTS

December 31, 1995

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares
(000) Description Market Value
- --------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCK AND EQUIVALENTS 94.6%
CONSUMER DISTRIBUTION 5.1%
*7 Best Buy, Inc......................................... $ 112,125
8 Dayton Hudson Corp.................................... 607,500
9 Gap, Inc.............................................. 373,800
*21 Kroger Co............................................. 795,000
10 May Department Stores Co.............................. 401,375
12 Sears, Roebuck & Co................................... 479,700
*11 Sports & Recreation, Inc.............................. 81,225
46 Wal-Mart Stores, Inc.................................. 1,024,775
-----------
3,875,500
-----------
CONSUMER DURABLES 3.8%
11 Chrysler Corp......................................... 592,512
20 Ford Motor Co......................................... 582,900
24 General Motors Corp................................... 1,290,150
15 Newell Co............................................. 385,538
-----------
2,851,100
-----------
CONSUMER NON-DURABLES 7.7%
4 Clorox Co............................................. 286,500
9 Colgate-Palmolive Co.................................. 646,300
28 Dial Corp............................................. 820,612
5 General Mills, Inc.................................... 306,075
15 Nabisco Holdings Corp., Class A....................... 473,063
22 Philip Morris Companies, Inc.......................... 1,954,800
22 Quaker Oats Co........................................ 759,000
4 Ralston-Purina Group.................................. 224,550
8 Tambrands, Inc........................................ 358,125
-----------
5,829,025
-----------
CONSUMER SERVICES 4.9%
*29 Cox Communications, Inc............................... 557,700
5 Disney (Walt) Co...................................... 283,200
9 Harcourt General, Inc................................. 381,063
*3 ITT Corp.............................................. 180,200
9 Marriott International, Inc........................... 344,250
2 McGraw Hill, Inc...................................... 174,250
11 New York Times Co., Class A........................... 319,950
40 Time Warner, Inc...................................... 1,511,213
-----------
3,751,826
-----------
ENERGY 14.9%
7 Amoco Corp............................................ 488,750
3 Atlantic Richfield Co................................. 299,025
11 Baker Hughes, Inc..................................... 258,375
17 Coastal Corp.......................................... 644,425
15 Exxon Corp............................................ 1,177,837
7 Halliburton Co........................................ 369,562
6 Mobil Corp............................................ 627,200
20 Noble Affiliates, Inc................................. 597,500
15 Norsk Hydro, SA, ADR.................................. 615,563
20 Occidental Petroleum Corp............................. 427,500
9 Pacific Enterprises................................... 240,125
</TABLE>

See Notes to Financial Statements

F-1

<PAGE> 91

COMMON STOCK FUND PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1995

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares
(000) Description Market Value
- --------------------------------------------------------------------------------
<C> <S> <C>
27 Panhandle Eastern Corp................................ $ 741,475
17 Pogo Producing Co..................................... 483,075
11 Repsol SA, ADR........................................ 361,625
10 Royal Dutch Petroleum Co., ADR........................ 1,411,250
7 Schlumberger, Ltd..................................... 463,975
17 Sonat, Inc............................................ 619,875
12 Texaco, Inc........................................... 949,850
4 Tosco Corp............................................ 156,313
11 Total, SA, ADR........................................ 384,200
-----------
11,317,500
-----------
FINANCE 11.5%
7 Aetna Life & Casualty Co.............................. 463,975
6 Allmerica Financial Corp.............................. 148,500
20 Allstate Corp......................................... 825,749
6 AMBAC, Inc............................................ 281,250
4 American Bankers Insurance Group...................... 163,800
5 American International Group, Inc..................... 457,875
5 BankAmerica Corp...................................... 310,800
7 Bankers Trust New York Corp........................... 445,550
24 Bear Stearns Companies, Inc........................... 482,962
*189 Chase Manhattan Corp., warrants (expiring 6/30/96).... 4,938
12 Chemical Banking Corp................................. 722,625
7 Federal National Mortgage Association................. 819,225
7 Fleet Financial Group, Inc............................ 277,100
11 Franklin Resources, Inc............................... 539,012
15 Great Western Financial Corp.......................... 369,750
9 Morgan (J.P.) & Co., Inc.............................. 738,300
19 Providian Corp........................................ 757,950
14 St. Paul Companies, Inc............................... 750,938
5 SunAmerica, Inc....................................... 213,750
-----------
8,774,049
-----------
HEALTH CARE 8.5%
5 American Home Products Corp........................... 455,900
*5 Amgen, Inc............................................ 267,187
6 Bristol-Myers Squibb Co............................... 532,425
63 Caremark International, Inc........................... 1,134,625
25 Community Psychiatric Centers......................... 305,025
27 Mallinckrodt Group, Inc............................... 978,488
9 Merck & Co., Inc...................................... 618,050
4 Pfizer, Inc........................................... 264,600
10 Pharmacia & Upjohn, Inc............................... 393,313
8 Schering-Plough Corp.................................. 448,950
*14 Tenet Healthcare Corp................................. 286,350
8 Warner-Lambert Co..................................... 786,713
-----------
6,471,626
-----------
PRODUCER MANUFACTURING 9.1%
4 Emerson Electric Co................................... 318,825
5 Fluor Corp............................................ 330,000
10 Foster Wheeler Corp................................... 425,000
19 General Electric Co................................... 1,389,600
7 Honeywell, Inc........................................ 325,788
</TABLE>

See Notes to Financial Statements

F-2

<PAGE> 92

COMMON STOCK FUND PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1995

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares
(000) Description Market Value
- --------------------------------------------------------------------------------
<C> <S> <C>
*3 ITT Industries........................................ $ 81,600
10 Rockwell International Corp........................... 528,750
11 TRW, Inc.............................................. 829,250
*10 Varity Corp........................................... 378,675
76 WMX Technologies, Inc................................. 2,282,450
-----------
6,889,938
-----------
RAW MATERIALS/PROCESSING INDUSTRIES 11.9%
4 Air Products & Chemicals., Inc........................ 216,275
24 Barrick Gold Corp..................................... 635,637
14 Boise Cascade Corp.................................... 495,137
7 Consolidated Papers................................... 381,650
*2 Crown Vantage, Inc.................................... 33,487
16 Du Pont (E.I) de Nemours & Co, Inc.................... 1,124,987
9 Freeport McMoRan, Inc., Copper and Gold, Class B...... 244,687
8 Georgia-Pacific Corp.................................. 562,725
9 Homestake Mining and Gold............................. 146,875
20 International Paper Co................................ 757,500
51 James River Corp...................................... 1,218,313
7 Mead Corp............................................. 339,625
7 Monsanto Co........................................... 796,250
7 Nalco Chemical Co..................................... 201,838
4 Newmont Gold Co....................................... 192,500
9 Nucor Corp............................................ 491,275
13 Union Camp Corp....................................... 600,075
6 Union Carbide Corp.................................... 217,500
7 Willamette Industries, Inc............................ 388,125
-----------
9,044,461
-----------
TECHNOLOGY 4.6%
3 Avnet, Inc............................................ 152,150
*10 Gateway 2000, Inc..................................... 254,800
13 General Dynamics Corp................................. 762,712
7 General Motors Corp., Class H......................... 343,875
4 Hewlett-Packard Co.................................... 293,125
4 Intel Corp............................................ 215,650
8 International Business Machines Corp.................. 743,175
*11 LSI Logic Corp........................................ 363,525
4 Motorola, Inc......................................... 228,000
*8 National Semiconductor Corp........................... 171,325
-----------
3,528,337
-----------
TRANSPORTATION 1.0%
*4 AMR Corp.............................................. 311,850
3 Canadian National Railway............................. 48,000
10 Illinois Central Corp................................. 364,563
-----------
724,413
-----------
UTILITIES 11.6%
4 American Electric Power, Inc.......................... 170,100
7 Ameritech Corp........................................ 383,500
13 AT&T Corp............................................. 867,650
6 Bell Atlantic Corp.................................... 374,500
9 Bellsouth Corp........................................ 391,500
</TABLE>

See Notes to Financial Statements

F-3

<PAGE> 93

COMMON STOCK FUND PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1995

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares
(000) Description Market Value
- -------------------------------------------------------------------------------
<C> <S> <C>
1 Boston Edison Co..................................... $ 38,350
4 Carolina Power & Light Co............................ 131,100
4 Central & South West Corp............................ 103,137
3 CMS Energy Group..................................... 80,662
4 Detroit Edison Co.................................... 151,800
9 FPL Group, Inc....................................... 426,650
11 Frontier Corp........................................ 315,000
2 General Public Utilities Corp........................ 78,200
8 Illinova Corp........................................ 249,000
22 MCI Communications Corp.............................. 569,525
3 New York State Electric & Gas Corp................... 77,625
2 NIPSCO Industries, Inc............................... 76,500
2 Northern State Power................................. 78,600
7 NYNEX Corp........................................... 356,400
3 Ohio Edison Co....................................... 77,550
2 Oklahoma Gas & Electric Co........................... 77,400
6 Pacific Telesis Group................................ 188,300
4 Pacificorp........................................... 80,750
20 Peco Energy Co....................................... 608,525
3 Pinnacle West Capital Corp........................... 80,500
3 Public Service Co. of Colorado....................... 106,125
11 Public Service Co. of New Mexico..................... 193,875
3 Rochester Gas & Electric Co.......................... 72,400
7 SBC Communications, Inc.............................. 379,500
3 Southwestern Public Service Co....................... 81,875
24 Sprint Corp.......................................... 964,975
9 Telefonica de Espana, SA, ADR........................ 381,063
3 Texas Utilities Co................................... 115,150
7 US West Communications Group......................... 250,250
2 Unicom Corp.......................................... 75,325
*5 WorldCom, Inc........................................ 172,725
-----------
8,826,087
-----------
TOTAL COMMON STOCK AND EQUIVALENTS (Cost
$62,609,418)......................................... 71,883,862
-----------
Par
Amount
(000)
------
REPURCHASE AGREEMENTS 5.4%
$4,145 Lehman Government Securities, Inc., dated 12/29/95,
5.85%, due 01/02/96, (collateralized by U.S.
Government obligations in a pooled cash account)
repurchase proceeds $4,147,694
(Cost $4,145,000).................................... 4,145,000
-----------
TOTAL INVESTMENTS (Cost $66,754,418) 100.0%..................... 76,028,862
OTHER ASSETS AND LIABILITIES, NET 0.0%.......................... (19,002)
-----------
NET ASSETS 100%................................................. $76,009,860
-----------
</TABLE>

* Non-income producing security

F-4

See Notes to Financial Statements

<PAGE> 94

COMMON STOCK FUND STATEMENT OF ASSETS AND LIABILITIES

December 31, 1995

- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $66,754,418).................... $76,028,862
Cash............................................................... 745
Receivable for investments sold.................................... 165,995
Dividends and interest receivable.................................. 154,343
Other assets....................................................... 20,403
-----------
Total Assets...................................................... 76,370,348
-----------
LIABILITIES
Payable for investments purchased.................................. 200,775
Payable for Fund shares redeemed................................... 66,703
Due to Adviser..................................................... 26,292
Deferred Trustees' compensation.................................... 20,167
Due to shareholder service agent................................... 1,200
Accrued expenses................................................... 45,351
-----------
Total Liabilities................................................. 360,488
-----------
NET ASSETS, equivalent to $14.69 per share......................... $76,009,860
-----------
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, par value $.01 per share; unlimited
shares authorized; 5,173,759 shares outstanding................... $ 51,738
Capital surplus.................................................... 64,118,310
Undistributed net realized gain on securities...................... 2,532,183
Net unrealized appreciation of securities.......................... 9,274,444
Undistributed net investment income................................ 33,185
-----------
NET ASSETS......................................................... $76,009,860
-----------
</TABLE>

F-5
See Notes to Financial Statements

<PAGE> 95

COMMON STOCK FUND FINANCIAL STATEMENTS

- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
December 31, 1995
- --------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Dividends..................................................... $ 1,632,554
Interest...................................................... 259,259
-----------
Investment income............................................ 1,891,813
-----------
EXPENSES
Management fees............................................... 355,715
Shareholder service agent's fees and expenses................. 15,940
Accounting services........................................... 55,772
Trustees' fees and expenses................................... 13,161
Audit fees.................................................... 14,703
Custodian fees................................................ 16,307
Legal fees.................................................... 3,795
Reports to shareholders....................................... 7,487
Miscellaneous................................................. 657
Expense reimbursement......................................... (56,680)
-----------
Total expenses............................................... 426,857
-----------
NET INVESTMENT INCOME......................................... 1,464,956
-----------
REALIZED AND UNREALIZED GAIN ON SECURITIES
Net realized gain on securities............................... 10,869,574
Net unrealized appreciation of securities during the period... 9,837,636
-----------
NET REALIZED AND UNREALIZED GAIN ON SECURITIES................ 20,707,210
-----------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.............. $22,172,166
-----------
</TABLE>

- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended December 31
------------------------
1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C>
NET ASSETS, beginning of period...................... $67,471,922 $72,259,545
----------- -----------
OPERATIONS
Net investment income............................... 1,464,956 1,190,278
Net realized gain on securities..................... 10,869,574 6,950,717
Net unrealized appreciation (depreciation) of
securities during the period........................ 9,837,636 (10,647,731)
----------- -----------
Increase (decrease) in net assets resulting from
operation.......................................... 22,172,166 (2,506,736)
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income............................... (1,446,938) (1,197,291)
Net realized gain on securities..................... (8,808,250) (6,788,651)
----------- -----------
(10,255,188) (7,985,942)
----------- -----------
CAPITAL TRANSACTIONS
Proceeds from shares sold........................... 6,340,082 11,714,030
Proceeds from shares issued for distributions
reinvested.......................................... 10,255,188 7,985,942
Cost of shares redeemed............................. (19,974,310) (13,994,917)
----------- -----------
Increase (decrease) in net assets from capital
transactions....................................... (3,379,040) 5,705,055
----------- -----------
INCREASE (DECREASE) IN NET ASSETS.................... 8,537,938 (4,787,623)
----------- -----------
NET ASSETS, end of period (including undistributed
net investment income of $33,185
and $15,167, respectively).......................... $76,009,860 $67,471,922
----------- -----------
CAPITAL SHARE TRANSACTIONS
Shares sold.......................................... 438,275 827,085
Shares issued for distributions reinvested........... 703,905 648,452
Shares redeemed...................................... (1,413,351) (989,273)
----------- -----------
Increase (decrease) in capital shares outstanding.. (271,171) 486,264
----------- -----------
</TABLE>

F-6
See Notes to Financial Statements

<PAGE> 96

COMMON STOCK FUND FINANCIAL HIGHLIGHTS

Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------
1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period. $12.39 $14.57 $14.21 $13.44 $10.09
------- ------- ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Investment income................... .41 .33 .30 .31 .335
Expenses............................ (.10) (.09) (.11) (.10) (.10)
Expense reimbursement(/1/).......... .01 .01 .02 .02 .03
------- ------- ------ ------ ------
Net investment income................ .32 .25 .21 .23 .265
Net realized and unrealized gain
(loss) on securities................ 4.22 (.7625) 1.0325 .77 3.37
------- ------- ------ ------ ------
Total from investment operations..... 4.54 (.5125) 1.2425 1.00 3.635
------- ------- ------ ------ ------
LESS DISTRIBUTIONS FROM
Net investment income............... (.3175) (.25) (.215) (.23) (.285)
Net realized gain on securities..... (1.9225) (1.4175) (.6675) -- --
------- ------- ------ ------ ------
Total distributions.................. (2.24) (1.6675) (.8825) (.23) (.285)
------- ------- ------ ------ ------
Net asset value, end of period....... $14.69 $12.39 $14.57 $14.21 $13.44
------- ------- ------ ------ ------
TOTAL RETURN......................... 36.98% (3.39%) 8.98% 7.48% 36.41%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions). $76.0 $67.5 $72.3 $65.6 $57.8
Average net assets (millions)........ $71.1 $69.3 $69.0 $58.0 $36.4
Ratios to average net assets(/1/)
Expenses............................ .60% .60% .60% .60% .60%
Expenses, without expense
reimbursement...................... .68% .68% .72% .74% .90%
Net investment income............... 2.06% 1.72% 1.41% 1.78% 2.33%
Net investment income, without
expense reimbursement.............. 1.98% 1.64% 1.29% 1.64% 2.03%
Portfolio turnover rate.............. 145% 153% 139% 116% 95%
</TABLE>

(1) See Note 2.

F-7
See Notes to Financial Statements

<PAGE> 97

DOMESTIC STRATEGIC INCOME FUND PORTFOLIO OF INVESTMENTS

December 31, 1995

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CORPORATE OBLIGATIONS 84.4%
CONSUMER DISTRIBUTION 12.8%
$ 500 Americold Corp......................... 15.000% 05/01/07 $ 500,000
500 Borden, Inc. .......................... 7.875 02/15/23 475,100
300 ConAgra, Inc. ......................... 9.750 03/01/21 392,127
500 Nabisco, Inc........................... 7.550 06/15/15 522,950
500 Ralphs Grocery Co...................... 13.750 06/15/05 535,000
500 Specialty Retailers, Inc............... 11.000 08/15/03 465,000
500 Sysco Corp............................. 6.500 06/15/05 516,620
-----------
3,406,797
-----------
CONSUMER NON-DURABLES 5.4%
500 Dr Pepper/Seven-Up Companies, Inc...... ** 11/01/02 470,625
500 Fieldcrest Cannon, Inc................. 11.250 06/15/04 465,000
500 Westpoint Stevens...................... 9.375 12/15/05 491,875
-----------
1,427,500
-----------
CONSUMER SERVICES 18.2%
500 Continental Cablevision (private
placement, purchased on 12/08/95)...... 8.300 05/15/06 502,500
500 Cox Communications, Inc................ 7.250 11/15/15 518,150
500 New York Times Co...................... 8.250 03/15/25 575,300
500 News America Holdings, Inc............. 10.125 10/15/12 612,870
500 Petro PSC Properties................... 12.500 06/01/02 475,000
500 TCI Communications, Inc................ 8.750 08/01/15 554,200
500 Time Warner, Inc....................... 9.125 01/15/13 563,350
500 Valassis Communications, Inc........... 9.550 12/01/03 516,950
500 Viacom, Inc............................ 7.625 01/15/16 505,900
-----------
4,824,220
-----------
ENERGY 14.1%
300 Coastal Corp. ......................... 10.250 10/15/04 373,170
500 HS Resources, Inc...................... 9.875 12/01/03 492,500
500 Occidental Petroleum Corp.............. 10.125 11/15/01 597,350
500 PDV America, Inc....................... 7.875 08/01/03 503,800
500 Plains Resources, Inc.................. 12.000 10/01/99 526,250
500 Texaco Capital, Inc.................... 8.625 06/30/10 615,900
250 Union Oil Co. of California............ 9.250 02/01/03 292,500
350 Vintage Petroleum...................... 9.000 12/15/05 354,375
-----------
3,755,845
-----------
FINANCE 2.8%
247 Blue Bell Funding, Inc................. 11.850 05/01/99 217,360
500 Phoenix Re Corp........................ 9.750 08/15/03 532,500
-----------
749,860
-----------
HEALTH CARE 3.0%
500 Quorum Health Group.................... 11.875 12/15/02 561,250
200 Tenet Healthcare Corp.................. 10.125 03/01/05 221,250
-----------
782,500
-----------
</TABLE>

F-8
See Notes to Financial Statements

<PAGE> 98

DOMESTIC STRATEGIC INCOME FUND PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1995

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
RAW MATERIALS/PROCESSING
INDUSTRIES 11.4%
$ 500 Boise Cascade Corp................. 9.450% 11/01/09 $ 622,100
500 Georgia-Pacific Corp. ............. 9.950 06/15/02 598,080
400 IMC Fertilizer Group, Inc.......... 9.450 12/15/11 429,000
500 Noranda, Inc....................... 8.125 06/15/04 554,200
500 Smurfit Capital Funding............ 6.750 11/20/05 513,000
265 UCAR Global Enterprise, Inc........ 12.000 01/15/05 304,088
-----------
3,020,468
-----------
TECHNOLOGY 1.8%
500 Unisys Corp........................ 13.500 07/01/97 476,250
-----------
TRANSPORTATION 11.9%
500 Delta Air Lines, Inc............... 9.750 05/15/21 619,350
500 International Shipholding Corp..... 9.000 07/01/03 500,000
350 Kansas City Southern Industries,
Inc................................ 8.800 07/01/22 394,975
250 Southern Pacific Rail Corp......... 9.375 08/15/05 271,875
500 Southwest Airlines Co.............. 9.400 07/01/01 577,050
500 Union Pacific Co................... 8.350 05/01/25 560,400
200 United Air Lines, Inc., Series
1991-A............................. 10.020 03/22/14 240,760
-----------
3,164,410
-----------
UTILITIES 3.0%
350 Monongahela Power Co. ............. 8.375 07/01/22 396,515
350 Public Service Co. of Colorado..... 8.750 03/01/22 409,255
-----------
805,770
-----------
TOTAL CORPORATE OBLIGATIONS (Cost $21,173,889)..... 22,413,620
-----------
GOVERNMENT OBLIGATIONS 15.0%
*1,000 Federal National Mortgage
Association, Forward............... 7.500 12/31/23 1,024,380
1,010 Federal National Mortgage
Association, Pool.................. 10.000 04/01/21 1,109,506
350 Province of Newfoundland (Canada).. 8.650 10/22/22 417,445
350 Province of Saskatchewan (Canada).. 8.000 02/01/13 398,160
(/1/)1,000 United States Treasury Notes....... 6.750 06/30/99 1,045,470
-----------
TOTAL GOVERNMENT OBLIGATIONS (Cost $3,789,708)..... 3,994,961
-----------
</TABLE>

F-9
See Notes to Financial Statements

<PAGE> 99

DOMESTIC STRATEGIC INCOME FUND PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1995

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
COMMON AND PREFERRED STOCK 0.9%
2,226 Arcadian Corp....................... $ 43,129
*2,500 F F Holdings Co. (private placement,
purchased on 10/6/92)............... 5,000
*6,889 Supermarkets General Holdings Corp.,
$3.52 preferred stock, Payment in
Kind (cost $166,940)................ 199,781
-----------
TOTAL COMMON AND PREFERRED STOCK (Cost $184,374)..... 247,910
-----------
<CAPTION>
Par
Amount
(000)
- ------
<C> <S> <C> <C> <C>
REPURCHASE AGREEMENT 1.7%
$ 445 Lehman Government Securities, Inc.,
dated 12/29/95 (collateralized by
U.S. Government obligations in a
pooled cash account) repurchase
proceeds $445,289 (Cost $445,000)... 5.850% 01/02/96 445,000
-----------
TOTAL INVESTMENTS (Cost $25,592,971) 102.0%.................... 27,101,491
OTHER ASSETS AND LIABILITIES, NET (2.0%)....................... (539,196)
-----------
NET ASSETS 100%................................................ $26,562,295
-----------
</TABLE>

*Non-income producing security.
**Zero Coupon

(/1/)Security with a market value of $1.0 million was placed as collateral for
forward commitments (see Note 1B).

F-10
See Notes to Financial Statements

<PAGE> 100

DOMESTIC STRATEGIC INCOME FUND STATEMENT OF ASSETS AND LIABILITIES

December 31, 1995

- --------------------------------------------------------------------------------
ASSETS
<TABLE>
<S> <C>
Investment, at market value (Cost $25,592,971).................... $27,101,491
Cash.............................................................. 554
Receivable for investments sold................................... 2,037,500
Interest receivable............................................... 492,763
Receivable for Fund shares sold................................... 10,183
Other assets...................................................... 18,339
-----------
Total Assets..................................................... 29,660,830
-----------
LIABILITIES
Payable for investments purchased................................. 3,026,250
Deferred Trustees' compensation................................... 15,505
Due to Adviser.................................................... 9,728
Payable for Fund shares redeemed.................................. 1,635
Due to shareholder service agent.................................. 1,155
Accrued expenses and other liabilities............................ 44,262
-----------
Total Liabilities................................................ 3,098,535
-----------
NET ASSETS, equivalent to $8.21 per share......................... $26,562,295
-----------
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, par value $.01 per share; unlimited
shares authorized; 3,235,694 shares outstanding.................. $ 32,357
Capital surplus................................................... 27,033,560
Accumulated net realized loss on securities....................... (2,028,673)
Net unrealized appreciation of securities......................... 1,508,520
Undistributed net investment income............................... 16,531
-----------
NET ASSETS........................................................ $26,562,295
-----------
</TABLE>

F-11
See Notes to Financial Statements

<PAGE> 101

DOMESTIC STRATEGIC INCOME FUND FINANCIAL STATEMENTS

- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
December 31, 1995
- ----------------------------------------------
<S> <C>
INVESTMENT INCOME
Interest.................. $2,263,167
Dividends................. 3,821
----------
Investment income....... 2,266,988
----------
EXPENSES
Management fees........... 130,064
Shareholder service
agent's fees and expenses. 15,840
Accounting services....... 49,819
Trustees' fees and
expenses.................. 11,467
Audit fees................ 20,124
Custodian fees............ 3,969
Legal fees................ 3,948
Reports to shareholders... 6,212
Miscellaneous............. 1,520
Expense reimbursement..... (86,887)
----------
Total expenses.......... 156,076
----------
NET INVESTMENT INCOME..... 2,110,912
----------
REALIZED AND UNREALIZED
GAIN ON SECURITIES
Net realized gain on
securities................ 222,049
Net unrealized
appreciation of securities
during the period......... 2,671,771
----------
NET REALIZED AND
UNREALIZED GAIN ON
SECURITIES............... 2,893,820
----------
INCREASE IN NET ASSETS
RESULTING FROM
OPERATIONS............... $5,004,732
----------
</TABLE>

- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended December 31
------------------------
1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C>
NET ASSETS, beginning of period...................... $21,273,969 $27,443,291
----------- -----------
OPERATIONS
Net investment income............................... 2,110,912 2,178,975
Net realized gain (loss) on securities.............. 222,049 (857,071)
Net unrealized appreciation (depreciation) of secu-
rities during the period........................... 2,671,771 (2,543,211)
----------- -----------
Increase (decrease) in net assets resulting from
operations...................................... 5,004,732 (1,221,307)
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT
INCOME.............................................. (2,098,216) (2,170,097)
----------- -----------
CAPITAL TRANSACTIONS
Proceeds from shares sold........................... 7,719,168 9,066,088
Proceeds from shares issued for distributions rein-
vested............................................. 2,098,217 2,170,097
Cost of shares redeemed............................. (7,435,575) (14,014,103)
----------- -----------
Increase (decrease) in net assets from capital
transactions.................................... 2,381,810 (2,777,918)
----------- -----------
INCREASE (DECREASE) IN NET ASSETS.................... 5,288,326 (6,169,322)
----------- -----------
NET ASSETS, end of period (including undistributed
net investment income of $16,531
and $11,622, respectively).......................... $26,562,295 $21,273,969
----------- -----------
CAPITAL SHARE TRANSACTIONS
Shares sold.......................................... 997,934 1,100,823
Shares issued for distributions reinvested........... 258,208 296,939
Shares redeemed...................................... (915,148) (1,700,172)
----------- -----------
Increase (decrease) in capital shares outstanding... 340,994 (302,410)
----------- -----------
</TABLE>

F-12
See Notes to Financial Statements

<PAGE> 102

DOMESTIC STRATEGIC INCOME FUND FINANCIAL HIGHLIGHTS

Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated.

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------
1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of
period.......................... $7.35 $8.58 $8.00 $7.74 $6.98
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Investment income............... .76 .91 .77 .74 .725
Expenses........................ (.08) (.10) (.09) (.07) (.07)
Expense reimbursement(/1/)...... .03 .04 .04 .02 .03
------- ------- ------- ------- -------
Net investment income............ .71 .85 .72 .69 .685
Net realized and unrealized gain
(loss) on securities............ .8525 (1.2275) .5825 .2725 .7525
------- ------- ------- ------- -------
Total from investment operations. 1.5625 (.3775) 1.3025 .9625 1.4375
------- ------- ------- ------- -------
LESS DISTRIBUTIONS FROM NET
INVESTMENT INCOME............... (.7025) (.8525) (.7225) (.7025) (.6775)
------- ------- ------- ------- -------
Net asset value, end of period... $8.21 $7.35 $8.58 $8.00 $7.74
------- ------- ------- ------- -------
TOTAL RETURN..................... 21.37% (4.33%) 16.32% 12.50% 21.23%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(millions)...................... $26.6 $21.3 $27.4 $21.1 $17.4
Average net assets (millions).... $26.0 $26.1 $26.7 $18.8 $10.6
Ratios to average net assets(/1/)
Expenses........................ .60% .60% .60% .60% .60%
Expenses, without expense
reimbursement.................. .93% .95% .95% .95% .95%
Net investment income........... 8.11% 8.35% 7.80% 8.89% 9.72%
Net investment income, without
expense reimbursement.......... 7.78% 8.00% 7.40% 8.54% 9.37%
Portfolio turnover rate.......... 54% 94% 130% 117% 90%
</TABLE>

(1) See Note 2.

F-13
See Notes to Financial Statements

<PAGE> 103

GOVERNMENT FUND PORTFOLIO OF INVESTMENTS

December 31, 1995

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount Market
(000) Description Coupon Maturity Value
- -------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
UNITED STATES AGENCY
OBLIGATIONS 64.4%
Federal Home Loan Mortgage
$2,807 Corp., Pools.............. 7.000% 12/31/23 to 07/01/24 $ 2,831,914
Federal Home Loan Mortgage
1,672 Corp., Pools.............. 7.500 06/01/24 to 10/01/24 1,714,248
Federal Home Loan Mortgage
1,900 Corp., Pools.............. 8.000 09/01/24 to 10/01/24 1,968,094
Federal National Mortgage
2,484 Association, CMO.......... 6.294 03/25/09 2,490,878
Federal National Mortgage
2,385 Association, Pool......... 6.274 03/25/09 2,387,947
Federal National Mortgage
**1,928 Association, Pools........ 7.000 12/01/23 to 06/01/24 1,942,177
Federal National Mortgage
1,761 Association, Pools........ 7.500 05/01/24 to 10/01/24 1,804,249
Federal National Mortgage
**3,768 Association, Pools........ 8.000 04/01/24 to 10/01/24 3,902,465
Federal National Mortgage
1,488 Association, Pool......... 11.000 11/01/20 1,663,149
Government National
Mortgage Association,
**6,859 Pools..................... 7.000 04/15/23 to 10/15/24 6,936,058
Government National
Mortgage Association,
**5,493 Pools..................... 7.500 04/15/22 to 06/15/24 5,647,105
Government National
Mortgage Association,
3,278 Pools..................... 8.000 05/15/17 to 11/15/24 3,411,836
Government National
Mortgage Association,
755 Pools..................... 8.500 04/15/17 to 07/15/17 792,886
Government National
Mortgage Association,
307 Pools..................... 11.000 09/15/10 to 08/15/20 343,398
Student Loan Marketing
**5,000 Association............... 7.500 03/08/00 5,357,800
-----------
TOTAL UNITED STATES AGENCY OBLIGATIONS (Cost
$41,578,470)........................................... 43,194,204
-----------
UNITED STATES TREASURY
OBLIGATIONS 26.4%
1,500 Treasury Notes............ 6.250 05/31/00 1,550,385
**6,000 Treasury Notes............ 7.750 12/31/99 6,510,000
**6,000 Treasury Notes............ 7.875 01/15/98 6,304,680
**2,000 Treasury Notes............ 8.000 05/15/01 2,237,180
1,000 Treasury Notes............ 9.000 05/15/98 1,082,660
-----------
TOTAL UNITED STATES TREASURY OBLIGATIONS (Cost
$17,369,531)........................................... 17,684,905
-----------
FORWARD PURCHASE
COMMITMENTS 13.6%
*2,000 Government National
Mortgage Association...... 7.000 settling 01/96 2,022,500
*7,000 United States Treasury
Notes..................... 5.750 settling 01/96 7,064,540
-----------
TOTAL FORWARD PURCHASE COMMITMENTS (Cost $9,026,953)... 9,087,040
-----------
REPURCHASE AGREEMENT 7.8%
5,210 Lehman Government
Securities, Inc., dated
12/29/95 (collateralized
by U.S. Government
obligations in a pooled
cash account) repurchase
proceeds $5,213,387 (Cost
$5,210,000)............... 5.850 01/02/96 5,210,000
-----------
TOTAL INVESTMENTS (Cost $73,184,954) 112.2%.................... 75,176,149
OTHER ASSETS AND LIABILITIES, NET (12.2%)...................... (8,156,941)
-----------
NET ASSETS 100%................................................ $67,019,208
-----------
</TABLE>
*Non-income producing security.
**Securities with a market value of approximately $38.8 million were placed as
collateral for futures contracts and forward purchase commitments (see Note
1B).
ARM--adjustable rate mortgage backed security
CMO--collateralized mortgage obligation

F-14
See Notes to Financial Statements

<PAGE> 104

GOVERNMENT FUND STATEMENT OF ASSETS AND LIABILITIES

December 31, 1995

- --------------------------------------------------------------------------------
ASSETS
<TABLE>
<S> <C>
Investments, at market value (Cost $73,184,954).................. $ 75,176,149
Cash............................................................. 4,138
Receivable for investments sold.................................. 5,510,781
Interest receivable.............................................. 916,013
Unrealized appreciation on forward commitments................... 85,020
Receivable from broker for variation margin...................... 51,406
Other assets..................................................... 63,582
------------
Total Assets.................................................... 81,807,089
------------
LIABILITIES
Payable for investments purchased................................ 14,641,583
Unrealized depreciation on forward commitments................... 23,914
Due to Adviser................................................... 21,689
Deferred Trustees' compensation.................................. 20,025
Payable for Fund shares redeemed................................. 19,303
Due to shareholder service agent................................. 1,200
Accrued expenses................................................. 60,167
------------
Total Liabilities............................................... 14,787,881
------------
NET ASSETS, equivalent to $9.06 per share........................ $ 67,019,208
------------
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, par value $.01 per share;
unlimited shares authorized; 7,399,648 shares outstanding....... $ 73,996
Capital surplus.................................................. 78,076,858
Accumulated net realized loss on securities...................... (13,544,629)
Net unrealized appreciation of securities
Investments..................................................... 1,991,195
Forward commitments............................................. 61,106
Futures contracts............................................... 345,267
Undistributed net investment income.............................. 15,415
------------
NET ASSETS....................................................... $ 67,019,208
------------
</TABLE>
See Notes to Financial Statements

F-15

<PAGE> 105

GOVERNMENT FUND FINANCIAL STATEMENTS

- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
December 31, 1995
- -------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Interest.................................................... $ 4,992,539
-----------
EXPENSES
Management fees............................................. 333,447
Shareholder service agent's fees and expenses............... 16,066
Accounting services......................................... 57,526
Trustees' fees and expenses................................. 12,049
Audit fees.................................................. 23,204
Custodian fees.............................................. 25,654
Legal fees.................................................. 3,727
Reports to shareholders..................................... 5,233
Miscellaneous............................................... 651
Expense reimbursement....................................... (77,421)
-----------
Total expenses............................................ 400,136
-----------
NET INVESTMENT INCOME....................................... 4,592,403
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized gain (loss) on securities
Investments................................................ 387,319
Forward commitments........................................ 1,092,109
Futures contracts.......................................... (221,413)
Net unrealized appreciation of securities during the period
Investments................................................ 4,323,795
Forward commitments........................................ 34,537
Futures contracts.......................................... 347,644
-----------
NET REALIZED AND UNREALIZED GAIN ON SECURITIES.............. 5,963,991
-----------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............ $10,556,394
-----------
</TABLE>

- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended December 31
------------------------
1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C>
NET ASSETS, beginning of period..................... $65,513,261 $80,630,053
----------- -----------
OPERATIONS
Net investment income.............................. 4,592,403 4,717,706
Net realized gain (loss) on securities............. 1,258,015 (6,083,772)
Net unrealized appreciation (depreciation) of secu-
rities during the period.......................... 4,705,976 (2,217,746)
----------- -----------
Increase (decrease) in net assets resulting from
operations..................................... 10,556,394 (3,583,812)
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT
INCOME............................................. (4,588,452) (4,508,286)
----------- -----------
CAPITAL TRANSACTIONS
Proceeds from shares sold.......................... 2,668,721 3,484,195
Proceeds from shares issued for distributions rein-
vested............................................ 4,588,452 4,508,286
Cost of shares redeemed............................ (11,719,168) (15,017,175)
----------- -----------
Decrease in net assets from capital transactions.. (4,461,995) (7,024,694)
----------- -----------
INCREASE (DECREASE) IN NET ASSETS................... 1,505,947 (15,116,792)
----------- -----------
NET ASSETS, end of period (including undistributed
net investment income of $15,415 and accumulated
net investment loss of $4,137, respectively)....... $67,019,208 $65,513,261
----------- -----------
CAPITAL SHARE TRANSACTIONS
Shares sold......................................... 307,711 405,270
Shares issued for distributions reinvested.......... 524,601 524,430
Shares redeemed..................................... (1,347,594) (1,719,219)
----------- -----------
Decrease in capital shares outstanding............ (515,282) (789,519)
----------- -----------
</TABLE>

F-16
See Notes to Financial Statements

<PAGE> 106

GOVERNMENT FUND FINANCIAL HIGHLIGHTS

Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated.

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------
1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period... $8.28 $9.26 $9.13 $9.29 $8.70
----- ------ ------ ------- -----
INCOME FROM INVESTMENT OPERATIONS
Investment income..................... .65 .61 .62 .72 .79
Expenses.............................. (.06) (.06) (.06) (.064) (.06)
Expense reimbursement(/1/)............ .01 .01 .01 .009 .01
----- ------ ------ ------- -----
Net investment income.................. .60 .56 .57 .665 .74
Net realized and unrealized gain (loss)
on securities......................... .78 (.985) .135 (.1575) .60
----- ------ ------ ------- -----
Total from investment operations....... 1.38 (.425) .705 .5075 1.34
----- ------ ------ ------- -----
LESS DISTRIBUTIONS FROM NET INVESTMENT
INCOME................................ (.60) (.555) (.575) (.6675) (.75)
----- ------ ------ ------- -----
Net asset value, end of period......... $9.06 $8.28 $9.26 $9.13 $9.29
----- ------ ------ ------- -----
TOTAL RETURN........................... 17.17% (4.63%) 7.86% 5.73% 16.23%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)... $67.0 $65.5 $80.6 $74.8 $77.0
Average net assets (millions).......... $66.7 $70.3 $78.6 $74.6 $72.9
Ratios to average net assets(/1/)
Expenses.............................. .60% .60% .60% .60% .60%
Expenses, without expense
reimbursement........................ .72% .70% .70% .70% .70%
Net investment income................. 6.89% 6.71% 6.45% 7.29% 8.37%
Net investment income, without expense
reimbursement........................ 6.77% 6.61% 6.35% 7.19% 8.27%
Portfolio turnover rate................ 164% 192% 91% 36% 57%
</TABLE>

(1) See Note 2.

F-17
See Notes to Financial Statements

<PAGE> 107

MONEY MARKET FUND PORTFOLIO OF INVESTMENTS

December 31, 1995

F-18
See Notes to Financial Statements

<PAGE> 108

MONEY MARKET FUND STATEMENT OF ASSETS AND LIABILITIES

December 31, 1995

- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments, at amortized cost.................................... $21,612,759
Cash.............................................................. 5,647
Other assets...................................................... 21,548
-----------
Total Assets..................................................... 21,639,954
-----------
LIABILITIES
Deferred Trustees' compensation................................... 18,162
Payable for Fund shares redeemed.................................. 6,873
Due to Adviser.................................................... 2,876
Due to shareholder service agent.................................. 1,215
Accrued expenses.................................................. 35,911
-----------
Total Liabilities................................................ 65,037
-----------
NET ASSETS, equivalent to $1.00 per share......................... $21,574,917
-----------
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, par value $.01 per share; unlimited
shares authorized; 21,575,617 shares outstanding................. $ 215,756
Capital surplus................................................... 21,359,861
Accumulated net investment loss................................... (700)
-----------
NET ASSETS........................................................ $21,574,917
-----------
</TABLE>

F-19
See Notes to Financial Statements

<PAGE> 109

MONEY MARKET FUND FINANCIAL STATEMENTS

- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended December 31
------------------------
1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C>
NET ASSETS, beginning of period...................... $28,547,675 $29,966,001
----------- -----------
OPERATIONS
Net investment income............................... 1,294,856 1,109,674
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT
INCOME.............................................. (1,295,753) (1,109,772)
----------- -----------
CAPITAL TRANSACTIONS
Proceeds from shares sold........................... 10,862,643 22,474,029
Proceeds from shares issued for distributions
reinvested......................................... 1,295,753 1,107,713
Cost of shares redeemed............................. (19,130,257) (24,999,970)
----------- -----------
Decrease in net assets from capital transactions... (6,971,861) (1,418,228)
----------- -----------
DECREASE IN NET ASSETS............................... (6,972,758) (1,418,326)
----------- -----------
NET ASSETS, end of period (including accumulated net
investment loss of $700 and undistributed net
investment income of $197, respectively)............ $21,574,917 $28,547,675
----------- -----------
CAPITAL SHARE TRANSACTIONS
Shares sold.......................................... 10,862,643 22,474,029
Shares issued for distributions reinvested........... 1,295,753 1,107,713
Shares redeemed...................................... (19,130,257) (24,999,970)
----------- -----------
Decrease in capital shares outstanding............. (6,971,861) (1,418,228)
----------- -----------
</TABLE>

F-20
See Notes to Financial Statements

<PAGE> 110

MONEY MARKET FUND FINANCIAL HIGHLIGHTS

Selected data for a share of beneficial outstanding throughout each of the
periods indicated.

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------
1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period... $1.00 $1.00 $1.00 $1.00 $1.00
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Investment income..................... .0593 .0425 .0322 .0391 .0607
Expenses.............................. (.0093) (.0087) (.0095) (.009) (.0087)
Expense reimbursement(/1/)............ .0033 .0027 .0035 .003 .0026
------ ------ ------ ------ ------
Net investment income.................. .0533 .0365 .0262 .0331 .0546
------ ------ ------ ------ ------
LESS DISTRIBUTIONS FROM NET INVESTMENT
INCOME................................ (.0533) (.0365) (.0262) (.0331) (.0546)
------ ------ ------ ------ ------
Net asset value, end of period......... $1.00 $1.00 $1.00 $1.00 $1.00
------ ------ ------ ------ ------
TOTAL RETURN........................... 5.46% 3.71% 2.66% 3.36% 5.46%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)... $21.6 $28.5 $30.0 $32.9 $38.0
Average net assets (millions).......... $24.3 $30.5 $28.9 $36.2 $36.3
Ratios to average net assets(/1/)
Expenses.............................. .60% .60% .60% .60% .60%
Expenses, without expense
reimbursement........................ .93% .87% .95% .89% .87%
Net investment income................. 5.33% 3.63% 2.63% 3.32% 5.44%
Net investment income, without expense
reimbursement........................ 5.00% 3.37% 2.28% 3.03% 5.17%
</TABLE>

(1) See Note 2.

F-21
See Notes to Financial Statements

<PAGE> 111

MULTIPLE STRATEGY FUND PORTFOLIO OF INVESTMENTS

December 31, 1995

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of Market
Shares Description Value
- --------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCK 60.2%
CONSUMER DISTRIBUTION 3.3%
*3,900 Best Buy, Inc.......................................... $ 63,375
4,000 Dayton Hudson Corp..................................... 300,000
5,100 Gap, Inc............................................... 214,200
*11,400 Kroger Co.............................................. 427,500
5,100 May Department Stores Co............................... 215,475
6,600 Sears, Roebuck & Co.................................... 257,400
*5,700 Sports & Recreation, Inc............................... 40,613
24,600 Wal-Mart Stores, Inc................................... 550,425
-----------
2,068,988
-----------
CONSUMER DURABLES 2.4%
5,900 Chrysler Corp.......................................... 326,713
10,000 Ford Motor Co.......................................... 290,000
12,200 General Motors Corp.................................... 645,075
8,400 Newell Co.............................................. 217,350
-----------
1,479,138
-----------
CONSUMER NON-DURABLES 4.7%
2,000 Clorox Co.............................................. 143,250
5,000 Colgate-Palmolive Co................................... 351,250
13,400 Dial Corp.............................................. 396,975
2,600 General Mills, Inc..................................... 150,150
7,300 Nabisco Holdings Corp., Class A........................ 238,162
10,800 Philip Morris Companies, Inc........................... 977,400
11,500 Quaker Oats Co......................................... 396,750
1,800 Ralston-Purina Group................................... 112,275
3,700 Tambrands, Inc......................................... 176,675
-----------
2,942,887
-----------
CONSUMER SERVICES 3.1%
*14,400 Cox Communications, Inc................................ 280,800
2,400 Disney (Walt) Co....................................... 141,600
4,600 Harcourt General, Inc.................................. 192,625
*1,500 ITT Corp............................................... 79,500
5,600 Marriott International, Inc............................ 214,200
1,400 McGraw Hill, Inc....................................... 121,975
5,700 New York Times Co., Class A............................ 168,863
19,900 Time Warner, Inc....................................... 753,712
-----------
1,953,275
-----------
</TABLE>

F-22
See Notes to Financial Statements

<PAGE> 112

MULTIPLE STRATEGY FUND PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1995

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of
Shares Description Market Value
- --------------------------------------------------------------------------------
<C> <S> <C>
ENERGY 9.3%
3,700 Amoco Corp............................................ $ 265,937
1,400 Atlantic Richfield Co................................. 155,050
5,500 Baker Hughes, Inc..................................... 134,062
9,000 Coastal Corp.......................................... 335,250
7,200 Exxon Corp............................................ 576,900
3,700 Halliburton Co........................................ 187,312
3,100 Mobil Corp............................................ 347,200
10,000 Noble Affiliates, Inc................................. 298,750
7,800 Norsk Hydro, SA, ADR.................................. 326,625
10,200 Occidental Petroleum Corp............................. 218,025
4,400 Pacific Enterprises................................... 124,300
14,300 Panhandle Eastern Corp................................ 398,612
8,500 Pogo Producing Co..................................... 240,125
7,000 Repsol, SA, ADR....................................... 230,125
5,000 Royal Dutch Petroleum Co., ADR........................ 705,625
3,300 Schlumberger, Ltd..................................... 228,525
8,500 Sonat, Inc............................................ 302,812
6,500 Texaco, Inc........................................... 510,250
2,100 Tosco Corp............................................ 80,063
5,900 Total, SA, ADR........................................ 200,600
-----------
5,866,148
-----------
FINANCE 7.4%
3,300 Aetna Life & Casualty Co.............................. 228,525
2,900 Allmerica Financial Corp.............................. 78,300
10,800 Allstate Corp......................................... 444,150
3,000 AMBAC, Inc............................................ 140,625
2,100 American Bankers Insurance Group...................... 81,900
2,700 American International Group, Inc..................... 249,750
2,500 BankAmerica Corp...................................... 161,875
3,500 Bankers Trust New York Corp........................... 232,750
12,200 Bear Stearns Companies, Inc........................... 242,475
6,300 Chemical Banking Corp................................. 370,125
3,300 Federal National Mortgage Association................. 409,612
3,600 Fleet Financial Group, Inc............................ 146,700
7,700 Franklin Resources, Inc............................... 387,888
7,800 Great Western Financial Corp.......................... 198,900
4,900 Morgan (J.P.) & Co., Inc.............................. 393,225
9,400 Providian Corp........................................ 383,050
7,200 St. Paul Companies, Inc............................... 400,500
2,300 SunAmerica, Inc....................................... 109,250
-----------
4,659,600
-----------
HEALTH CARE 5.4%
2,500 American Home Products Corp........................... 242,500
*2,400 Amgen, Inc............................................ 142,500
3,300 Bristol-Myers Squibb Co............................... 283,387
32,400 Caremark International, Inc........................... 587,250
12,500 Community Psychiatric Centers......................... 153,125
13,500 Mallinckrodt Group, Inc............................... 491,063
4,700 Merck & Co., Inc...................................... 309,025
2,200 Pfizer, Inc........................................... 138,600
5,365 Pharmacia & Upjohn, Inc............................... 207,894
5,000 Schering-Plough Corp.................................. 273,750
*7,100 Tenet Healthcare Corp................................. 147,325
4,300 Warner-Lambert Co..................................... 417,638
-----------
3,394,057
-----------
</TABLE>

F-23
See Notes to Financial Statements

<PAGE> 113

MULTIPLE STRATEGY FUND PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1995

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of
Shares Description Market Value
- --------------------------------------------------------------------------------
<C> <S> <C>
PRODUCER MANUFACTURING 6.0%
1,900 Emerson Electric Co................................... $ 155,325
2,600 Fluor Corp............................................ 171,600
5,000 Foster Wheeler Corp................................... 212,500
11,800 General Electric Co................................... 849,600
3,300 Honeywell, Inc........................................ 160,462
1,500 ITT Industries........................................ 36,000
5,900 Rockwell International Corp........................... 311,963
5,800 TRW, Inc.............................................. 449,500
*5,400 Varity Corp........................................... 200,475
41,300 WMX Technologies, Inc................................. 1,233,837
-----------
3,781,262
-----------
RAW MATERIALS/PROCESSING INDUSTRIES 7.4%
2,200 Air Products & Chemicals, Inc......................... 116,050
14,300 Barrick Gold Corp..................................... 377,163
9,100 Battle Mountain Gold Co............................... 76,213
7,100 Boise Cascade Corp.................................... 245,837
3,700 Consolidated Papers................................... 207,662
*1,210 Crown Vantage, Inc.................................... 17,243
8,000 DuPont (E.I.) de Nemours & Co., Inc................... 559,000
4,400 Freeport McMoRan Inc., Copper and Gold, Class B....... 123,750
4,000 Georgia Pacific Corp.................................. 274,500
4,700 Homestake Mining and Gold............................. 73,438
10,000 International Paper Co................................ 378,750
25,200 James River Corp...................................... 607,950
3,500 Mead Corp............................................. 182,875
3,300 Monsanto Co........................................... 404,250
3,400 Nalco Chemical Co..................................... 102,425
1,800 Newmont Gold Corp..................................... 78,750
4,600 Nucor Corp............................................ 262,775
6,100 Union Camp Corp....................................... 290,513
3,000 Union Carbide Corp.................................... 112,500
3,500 Willamette Industries, Inc............................ 196,875
-----------
4,688,519
-----------
TECHNOLOGY 2.7%
1,700 Avnet, Inc............................................ 76,075
*5,300 Gateway 2000, Inc..................................... 129,850
6,900 General Dynamics Corp................................. 407,962
3,700 General Motors Corp., Class H......................... 181,763
1,800 Hewlett-Packard Co.................................... 150,750
2,000 Intel Corp............................................ 113,500
4,000 International Business Machines Corp.................. 367,000
3,400 LSI Logic Corp........................................ 111,350
2,000 Motorola, Inc......................................... 114,000
*3,300 National Semiconductor Corp........................... 73,425
-----------
1,725,675
-----------
TRANSPORTATION 0.6%
*2,300 AMR Corp.............................................. 170,775
2,500 Canadian National Railway............................. 37,500
4,800 Illinois Central Corp................................. 184,200
-----------
392,475
-----------
</TABLE>

F-24
See Notes to Financial Statements

<PAGE> 114

MULTIPLE STRATEGY FUND PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1995

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of
Shares Description Market Value
- --------------------------------------------------------------------------------
<C> <S> <C>
UTILITIES 7.9%
2,800 American Electric Power, Inc.......................... $ 113,400
3,400 Ameritech Corp........................................ 200,600
6,700 AT&T Corp............................................. 433,825
2,800 Bell Atlantic Corp.................................... 187,250
4,500 Bellsouth Corp........................................ 195,750
2,000 Boston Edison Co...................................... 59,000
4,500 Carolina Power & Light Co............................. 155,250
800 Central & South West Corp............................. 22,300
1,300 CMS Energy Group...................................... 38,837
3,400 Detroit Edison Co..................................... 117,300
5,000 FPL Group, Inc........................................ 231,875
6,300 Frontier Corp......................................... 189,000
2,300 General Public Utilities Corp......................... 78,200
4,500 Illinova Corp......................................... 135,000
10,900 MCI Communications Corp............................... 284,762
3,100 New York State Electric & Gas Corp.................... 80,213
1,000 NIPSCO Industries, Inc................................ 38,250
1,000 Northern State Power.................................. 49,125
3,600 NYNEX Corp............................................ 194,400
1,600 Ohio Edison Co........................................ 37,600
900 Oklahoma Gas & Electric Co............................ 38,700
2,800 Pacific Telesis Group................................. 94,150
1,900 Pacificorp............................................ 40,375
12,100 Peco Energy Co........................................ 364,512
2,100 Pinnacle West Capital Corp............................ 60,375
1,300 Public Service Co. of Colorado........................ 45,988
*7,600 Public Service Co. of New Mexico...................... 133,950
1,700 Rochester Gas & Electric Co........................... 38,462
3,300 SBC Communications, Inc............................... 189,750
2,600 Southwestern Public Service Co........................ 85,150
12,000 Sprint Corp........................................... 478,500
4,900 Telefonica de Espana, SA, ADR......................... 205,188
1,400 Texas Utilities Co.................................... 57,575
4,000 US West Communications Group.......................... 143,000
2,400 Unicom Corp........................................... 78,600
*2,500 WorldCom, Inc......................................... 88,125
-----------
4,984,337
-----------
TOTAL COMMON STOCK (Cost $33,439,690)................. 37,936,361
-----------
</TABLE>

See Notes to Financial Statements

F-25

<PAGE> 115

MULTIPLE STRATEGY FUND PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1995

F-26

See Notes to Financial Statements

<PAGE> 116

MULTIPLE STRATEGY FUND STATEMENT OF ASSETS AND LIABILITIES

December 31, 1995

- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $56,994,792).................... $63,027,764
Interest and dividends receivable.................................. 457,697
Receivable for investments sold.................................... 172,296
Other assets....................................................... 18,812
-----------
Total Assets..................................................... 63,676,569
-----------
LIABILITIES
Payable for investments purchased.................................. 559,732
Payable for Fund shares redeemed................................... 35,535
Due to Adviser..................................................... 22,939
Deferred Trustees' compensation.................................... 17,522
Bank overdraft..................................................... 1,524
Due to shareholder service agent................................... 1,210
Accrued expenses and other liabilities............................. 56,990
-----------
Total Liabilities................................................ 695,452
-----------
NET ASSETS, equivalent to $11.64 per share......................... $62,981,117
-----------
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, par value $.01 per share; unlimited
shares authorized; 5,409,616 shares outstanding................... $ 54,096
Capital surplus.................................................... 55,782,358
Undistributed net realized gain on securities...................... 1,092,149
Net unrealized appreciation of securities.......................... 6,032,972
Undistributed net investment income................................ 19,542
-----------
NET ASSETS......................................................... $62,981,117
-----------
</TABLE>

F-27

See Notes to Financial Statements

<PAGE> 117

MULTIPLE STRATEGY FUND FINANCIAL STATEMENTS

- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
December 31, 1995
- ---------------------------------------------
<S> <C>
INVESTMENT INCOME
Interest.................. $ 1,861,454
Dividends................. 826,046
-----------
Investment income....... 2,687,500
-----------
EXPENSES
Management fees........... 302,141
Shareholder service
agent's fees and
expenses................. 15,970
Accounting services....... 57,576
Trustees' fees and
expenses................. 12,543
Audit fees................ 24,203
Custodian fees............ 24,703
Legal fees................ 4,176
Reports to shareholders... 6,196
Miscellaneous............. 663
Expense reimbursement..... (85,602)
-----------
Total expenses.......... 362,569
-----------
NET INVESTMENT INCOME..... 2,324,931
-----------
REALIZED AND UNREALIZED
GAIN ON SECURITIES
Net realized gain on
securities............... 6,122,759
Net unrealized
appreciation of
securities during the
period................... 7,920,361
-----------
NET REALIZED AND
UNREALIZED GAIN ON
SECURITIES............... 14,043,120
-----------
INCREASE IN NET ASSETS
RESULTING FROM
OPERATIONS............... $16,368,051
-----------
</TABLE>

- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended December 31
------------------------
1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C>
NET ASSETS, beginning of period...................... $56,635,933 $64,857,688
----------- -----------
OPERATIONS...........................................
Net investment income............................... 2,324,931 2,280,114
Net realized gain on securities..................... 6,122,759 4,566,704
Net unrealized appreciation (depreciation) of
securities during the period....................... 7,920,361 (9,205,867)
----------- -----------
Increase (decrease) in net assets resulting from
operations........................................ 16,368,051 (2,359,049)
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM (see Note 1H)
Net investment income............................... (2,326,257) (2,288,536)
Net realized gain on securities..................... (4,841,441) (4,566,704)
Excess of book-basis net realized gain.............. -- (106,886)
----------- -----------
(7,167,698) (6,962,126)
----------- -----------
CAPITAL TRANSACTIONS
Proceeds from shares sold........................... 1,931,514 3,800,820
Proceeds from shares issued for distributions
reinvested......................................... 7,167,697 6,962,125
Cost of shares redeemed............................. (11,954,380) (9,663,525)
----------- -----------
Increase (decrease) in net assets from capital
transactions...................................... (2,855,169) 1,099,420
----------- -----------
INCREASE (DECREASE) IN NET ASSETS.................... 6,345,184 (8,221,755)
----------- -----------
NET ASSETS, end of period (including undistributed
net investment income of $19,542
and $14,467, respectively).......................... $62,981,117 $56,635,933
----------- -----------
CAPITAL SHARE TRANSACTIONS
Shares sold.......................................... 166,906 327,001
Shares issued for distributions reinvested........... 619,366 700,508
Shares redeemed...................................... (1,045,554) (857,318)
----------- -----------
Increase (decrease) in capital shares outstanding.. (259,282) 170,191
----------- -----------
</TABLE>
See Notes to Financial Statements

F-28

<PAGE> 118

MULTIPLE STRATEGY FUND FINANCIAL HIGHLIGHTS

Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated.

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------
1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period. $ 9.99 $11.80 $11.92 $12.08 $10.43
------- ------ ------- ------ ------
INCOME FROM INVESTMENT OPERATIONS
Investment income................... .55 .52 .37 .44 .54
Expenses............................ (.09) (.09) (.09) (.09) (.09)
Expense reimbursement(/1/).......... .02 .02 .01 .02 .02
------- ------ ------- ------ ------
Net investment income................ .48 .45 .29 .37 .47
Net realized and unrealized gain
(loss) on securities................ 2.6425 (.89) .6025 .493 2.27
------- ------ ------- ------ ------
Total from investment operations..... 3.1225 (.44) .8925 .863 2.74
------- ------ ------- ------ ------
LESS DISTRIBUTIONS FROM (see Note 1H)
Net investment income............... (.4775) (.45) (.2925) (.3689) (.4825)
Net realized gain on securities..... (.995) (.90) (.63) (.6541) (.6075)
Excess of book-basis net realized
gain on securities................. -- (.02) (.09) -- --
------- ------ ------- ------ ------
Total distributions.................. (1.4725) (1.37) (1.0125) (1.023) (1.09)
------- ------ ------- ------ ------
Net asset value, end of period....... $11.64 $ 9.99 $11.80 $11.92 $12.08
------- ------ ------- ------ ------
TOTAL RETURN......................... 31.36% (3.66%) 7.71% 7.28% 27.05%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions). $63.0 $56.6 $64.9 $59.6 $52.2
Average net assets (millions)........ $60.4 $61.6 $63.9 $54.8 $44.4
Ratios to average net assets(/1/)
Expenses............................ .60% .60% .60% .60% .60%
Expenses, without expense
reimbursement...................... .74% .72% .74% .77% .80%
Net investment income............... 3.85% 3.70% 2.34% 3.05% 4.12%
Net investment income, without
expense reimbursement.............. 3.71% 3.58% 2.20% 2.88% 3.92%
Portfolio turnover rate.............. 124% 163% 150% 126% 88%
</TABLE>

(1) See Note 2.
See Notes to Financial Statements

F-29

<PAGE> 119

REAL ESTATE FUND PORTFOLIO OF INVESTMENTS

December 31, 1995

See Notes to Financial Statements

F-30

<PAGE> 120

REAL ESTATE FUND PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1995

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of
Shares Market
(000) Description Value
- -------------------------------------------------------------------------------
<C> <S> <C>
SHOPPING CENTERS 8.4%
12 Bradley Real Estate, Inc................................. $ 168,750
7 Federal Realty Investment Trust.......................... 166,075
7 Kimco Realty Corp........................................ 192,113
5 Vornado Realty Trust..................................... 191,250
----------
718,188
----------
SHOPPING MALLS 12.3%
15 DeBartolo Realty Corp.................................... 189,800
9 JP Realty, Inc........................................... 196,875
11 Macerich Co.............................................. 226,000
11 Rouse Co................................................. 215,975
9 Simon Property Group, Inc................................ 224,250
----------
1,052,900
----------
TOTAL COMMON STOCK (Cost $7,234,383)..................... 7,566,488
----------
<CAPTION>
Par
Amount
(000)
------
<C> <S> <C>
REPURCHASE AGREEMENT 18.9%
$1,620 Lehman Government Securities, Inc., dated 12/29/95,
5.875%, due 1/02/96
(Collateralized by U.S. Government obligations in a
pooled cash account) repurchase proceeds $1,621,058 (Cost
$1,620,000).............................................. $1,620,000
----------
TOTAL INVESTMENTS (Cost $8,854,383) 107.0%....................... 9,186,488
OTHER ASSETS AND LIABILITIES (7.0%).............................. (601,167)
----------
NET ASSETS 100%.................................................. $8,585,321
----------
</TABLE>

See Notes to Financial Statements

F-31

<PAGE> 121

REAL ESTATE FUND_________________________STATEMENT OF ASSETS AND LIABILITIES

December 31, 1995

- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $8,854,383).................... $9,186,488
Cash.............................................................. 7,367
Receivable for Fund shares sold................................... 245,466
Receivable for investments sold................................... 155,515
Interest and dividends receivable................................. 51,396
Other assets...................................................... 8,447
----------
Total Assets.................................................... 9,654,679
----------
LIABILITIES
Payable for investments purchased................................. 914,414
Payable for options closed........................................ 125,640
Deferred Trustees' compensation................................... 1,050
Due to shareholder service agent.................................. 100
Accrued expenses.................................................. 28,154
----------
Total Liabilities............................................... 1,069,358
----------
NET ASSETS, equivalent to $10.74 per share........................ $8,585,321
----------
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, par value $.01 per share; unlimited
shares authorized; 799,347 shares outstanding.................... $ 7,993
Capital surplus................................................... 8,269,041
Accumulated net realized loss on securities....................... (32,530)
Net unrealized appreciation of securities......................... 332,105
Undistributed net investment income............................... 8,712
----------
NET ASSETS........................................................ $8,585,321
----------
</TABLE>

F-32
See Notes to Financial Statements

<PAGE> 122

REAL ESTATE FUND________________________________________FINANCIAL STATEMENTS

- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
July 3, 1995*
through
December 31, 1995
- ----------------------------------------------
<S> <C>
INVESTMENT INCOME
Dividends................. $ 99,314
Interest.................. 14,118
--------
Investment income....... 113,432
--------
EXPENSES
Management fees........... 18,136
Shareholder service
agent's expenses.......... 307
Accounting services....... 3,153
Trustees' fees and
expenses.................. 2,280
Audit fees................ 20,403
Custodian fees............ 3,000
Legal fees................ 500
Reports to shareholders... 752
Registration and filing
fees...................... 2,855
Miscellaneous............. 1,128
Expense reimbursement..... (7,173)
--------
Total expenses.......... 45,341
--------
NET INVESTMENT INCOME..... 68,091
--------
REALIZED AND UNREALIZED
GAIN (LOSS) ON SECURITIES
Net realized loss on
securities
Investment............... (32,460)
Options.................. (70)
Net unrealized
appreciation of securities
during the period......... 332,105
--------
NET REALIZED AND
UNREALIZED GAIN ON
SECURITIES............... 299,575
--------
INCREASE IN NET ASSETS
RESULTING FROM
OPERATIONS............... $367,666
--------
</TABLE>

- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
July 3, 1995*
through
December 31, 1995
- -------------------------------------------------------------------------------
<S> <C>
NET ASSETS, beginning of period............................. $ 100
----------
OPERATIONS
Net investment income...................................... 68,091
Net realized loss on securities............................ (32,530)
Net unrealized appreciation of securities during the
period..................................................... 332,105
----------
Increase in net assets resulting from operations.......... 367,666
----------
DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT INCOME.... (60,786)
----------
CAPITAL TRANSACTIONS
Proceeds from shares sold.................................. 11,796,374
Proceeds from shares issued for distributions reinvested... 60,786
Cost of shares redeemed.................................... (3,578,819)
----------
Increase in net assets from capital transactions.......... 8,278,341
----------
INCREASE IN NET ASSETS...................................... 8,585,221
----------
NET ASSETS, end of period (including undistributed net
investment income of $8,712)................................ $8,585,321
----------
CAPITAL SHARE TRANSACTIONS
Shares sold................................................. 1,140,133
Shares issued for distributions reinvested.................. 5,789
Shares redeemed............................................. (346,585)
----------
Increase in capital shares outstanding.................... 799,337
----------
</TABLE>
*Commencement of operations

F-33
See Notes to Financial Statements

<PAGE> 123

REAL ESTATE FUND FINANCIAL HIGHLIGHTS

Selected data for a share of beneficial interest outstanding throughout the
period indicated

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
July 3, 1995(/1/)
through
December 31, 1995(/2/)
- --------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C>
Net asset value, beginning of period.................... $10.00
------
INCOME FROM INVESTMENT OPERATIONS
Investment income...................................... .33
Expenses............................................... (.15)
Expense reimbursement (/3/)............................ .02
------
Net investment income................................... .20
Net realized and unrealized gain on securities.......... .6325
------
Total from investment operations........................ .8325
------
LESS DISTRIBUTIONS FROM NET INVESTMENT INCOME........... (.0925)
------
Net asset value, end of period.......................... $10.74
------
TOTAL RETURN(/4/)....................................... 8.35%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions).................... $8.6
Average net assets (millions)........................... $3.6
Ratios to average net assets (annualized) (/3/)
Expenses............................................... 2.50%
Expenses, without expense reimbursement................ 2.90%
Net investment income.................................. 3.75%
Net investment income, without expense reimbursement... 3.36%
Portfolio turnover rate................................. 85%
</TABLE>

(1) Commencement of operations.
(2) Based on average shares outstanding.
(3) See Note 2.
(4) Total return for a period less than one year is not annualized.

F-34
See Notes to Financial Statements

<PAGE> 124

EMERGING GROWTH FUND________________________________PORTFOLIO OF INVESTMENTS

December 31, 1995

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares Description Market Value
- --------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCK 98.8%
CONSUMER DISTRIBUTION 7.8%
200 Alco Standard Corp.................................... $ 9,125
*200 Baby Superstore, Inc.................................. 11,400
100 Bed Bath & Beyond, Inc................................ 3,881
*200 Boise Cascade Office Products Corp.................... 8,550
100 Cardinal Health, Inc.................................. 5,475
200 Casey's General Stores, Inc........................... 4,375
*200 CompUSA, Inc.......................................... 6,225
*400 Consolidated Stores Corp.............................. 8,700
*400 Corporate Express, Inc................................ 12,050
100 Eckerd Corp........................................... 4,460
200 Fastenal Co........................................... 8,450
*200 Garden Ridge Corp..................................... 7,750
*500 General Nutrition Companies, Inc...................... 11,500
200 Just For Feet, Inc.................................... 7,150
*400 Kroger Co............................................. 15,000
*200 Micro Warehouse, Inc.................................. 8,650
*200 Petco Animal Supplies................................. 5,850
200 Richfood Holdings, Inc................................ 5,350
*200 Safeway, Inc.......................................... 10,300
*300 Staples, Inc.......................................... 7,310
*300 Sunglass Hut International, Inc....................... 7,125
100 Vons Companies, Inc................................... 2,825
400 Zale Corp............................................. 6,450
----------
177,951
----------
CONSUMER DURABLES 1.7%
200 Beazer Homes USA, Inc................................. 4,125
200 Centex Corp........................................... 6,950
250 Clayton Homes, Inc.................................... 5,344
200 Harman International Industries, Inc.................. 8,025
100 Snap On, Inc.......................................... 4,525
*400 Toll Brothers, Inc.................................... 9,200
----------
38,169
----------
CONSUMER NON-DURABLES 5.1%
300 Coca Cola Enterprises, Inc............................ 8,025
200 Fila Holdings, ADR.................................... 9,100
200 First Brands Corp..................................... 9,525
400 Liz Claiborne, Inc.................................... 11,100
300 Nautica Enterprises, Inc.............................. 13,125
*200 Nu Kote Holdings Inc., Class A........................ 3,400
*100 Quiksilver, Inc....................................... 3,419
200 St. John Knits, Inc................................... 10,625
400 Starbucks Corp........................................ 8,400
*500 Tommy Hilfiger Corp................................... 21,185
*100 USA Detergents, Inc................................... 2,350
500 Wolverine World Wide, Inc............................. 15,750
----------
116,004
----------
</TABLE>

See Notes to Financial Statements

F-35

<PAGE> 125

EMERGING GROWTH FUND____________________PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1995

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares Description Market Value
- --------------------------------------------------------------------------------
<C> <S> <C>
CONSUMER SERVICES 9.5%
200 Accustaff, Inc........................................ $ 8,800
*100 Alternative Resources Corp............................ 3,025
300 Applebees International, Inc.......................... 6,825
*400 Boston Chicken, Inc................................... 12,850
*300 Clear Channel Communications, Inc .................... 13,235
*600 Corrections Corp. of America.......................... 22,275
400 Equifax, Inc.......................................... 8,550
*300 Evergreen Media Corp., Class A........................ 9,600
*400 Gartner Group, Inc.................................... 19,150
*100 HA-LO Industries, Inc................................. 3,075
200 Hospitality Franchise Systems, Inc.................... 16,350
*300 Infinity Broadcasting Corp............................ 11,175
200 Interpublic Group Companies, Inc...................... 8,675
200 La Quinta Inns, Inc................................... 5,475
*200 Lone Star Steakhouse Saloon, Inc ..................... 7,675
200 Meredith Corp......................................... 8,375
*300 Mirage Resorts, Inc................................... 10,350
200 National Data Corp.................................... 4,950
100 National Media Corp................................... 2,100
*200 Outback Steakhouse, Inc............................... 7,175
*450 Regal Cinemas, Inc.................................... 13,385
300 Reynolds & Reynolds Co................................ 11,663
*100 SITEL Corp............................................ 3,063
----------
217,796
----------
ENERGY 4.3%
*200 BJ Services Corp...................................... 5,800
*450 Chesapeake Energy Corp................................ 14,963
*1,000 Global Marine, Inc.................................... 8,750
200 Kerr McGee Corp....................................... 12,700
200 Newfield Exploration Co............................... 5,400
200 Phoenix Resource Co................................... 3,450
300 Pogo Producing Co..................................... 8,475
*300 Pride Petroleum Services, Inc......................... 3,188
*400 Smith International, Inc.............................. 9,400
400 Sonat Offshore Drilling, Inc.......................... 17,900
300 Tidewater, Inc........................................ 9,450
----------
99,476
----------
FINANCE 13.5%
100 AAMES Financial Corp.................................. 2,788
200 American Bankers Insurance Group...................... 7,800
400 American Travellers Corp.............................. 11,250
200 Bank New York, Inc.................................... 9,750
400 Bank of Boston Corp................................... 18,500
200 BayBanks, Inc......................................... 19,650
200 City National Corp.................................... 2,800
200 CMAC Investment Corp.................................. 8,800
400 Coast Savings Financial, Inc.......................... 13,850
200 Cullen Frost Bankers, Inc............................. 10,000
200 EXEL Ltd.............................................. 12,200
300 FINOVA Group, Inc..................................... 14,475
200 First American Corp................................... 9,475
</TABLE>

See Notes to Financial Statements

F-36

<PAGE> 126

EMERGING GROWTH FUND____________________PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1995

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares Description Market Value
- --------------------------------------------------------------------------------
<C> <S> <C>
100 First Bank System, Inc................................ $ 4,963
300 Fremont General Corp.................................. 11,025
400 Green Tree Financial Corp............................. 10,550
100 MBNA Corp............................................. 3,688
100 Mercantile Bancorporation, Inc........................ 4,600
300 Mercury Financial Co.................................. 3,975
250 Mercury General Corp.................................. 11,938
125 Money Store, Inc...................................... 1,953
200 North Fork Bancorporation............................. 5,050
200 Old Republic International Corp....................... 7,100
*500 Oxford Resources Corp., Class A....................... 11,250
300 Penncorp Financial Group, Inc......................... 8,813
200 Peoples Heritage Financial Group, Inc................. 4,550
100 Raychem Corp.......................................... 5,688
100 Reliastar Financial Corp.............................. 4,438
200 Star Banc Corp........................................ 11,900
175 Student Loan Marketing Association.................... 11,528
400 TCF Financial Corp.................................... 13,250
200 TIG Holdings, Inc..................................... 5,700
400 United Companies Financial Corp....................... 10,550
300 Vesta Insurance Group, Inc............................ 16,350
----------
310,197
----------
HEALTH CARE 15.8%
*300 Boston Scientific Corp................................ 14,700
300 Circon Corp........................................... 6,075
*100 Coherent, Inc......................................... 4,050
*400 CompDent Corp......................................... 16,600
*200 Cycare Systems, Inc................................... 5,125
*300 Dura Pharmaceuticals, Inc............................. 10,425
300 Guidant Corp.......................................... 12,675
*200 Gulf South Medical Supply, Inc........................ 6,050
500 HBO & Co.............................................. 38,313
*300 Health Management Associates, Inc., Class A........... 7,838
*400 Health Management Systems, Inc........................ 15,600
*500 Healthsouth Rehabilitation............................ 14,563
*100 HPR, Inc.............................................. 3,013
300 Invacare Corp......................................... 7,575
400 Maxicare Health Plans................................. 10,750
100 Medisense, Inc........................................ 3,163
*100 MedPartners/Mullikin, Inc............................. 3,300
300 Medtronic, Inc........................................ 16,763
200 Mentor Corp........................................... 4,600
100 Minimed, Inc.......................................... 1,250
100 Nellcor, Inc.......................................... 5,800
*200 OccuSystems, Inc...................................... 4,000
400 OmniCare, Inc......................................... 17,900
*500 PhyCor, Inc........................................... 25,281
*300 Physician Reliance Network............................ 11,925
*300 Physician Sales & Service, Inc........................ 8,550
*200 Quintiles Transnational Corp.......................... 8,200
*200 Renal Treatment Centers, Inc.......................... 8,800
*400 Research Industries Corp.............................. 10,800
100 Respironics, Inc...................................... 2,100
</TABLE>

F-37

See Notes to Financial Statements

<PAGE> 127

EMERGING GROWTH FUND____________________PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1995

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares Description Market Value
- --------------------------------------------------------------------------------
<C> <S> <C>
100 Spine Tech, Inc....................................... $ 2,325
*400 Sybron Corp........................................... 9,500
*100 Thermedics, Inc....................................... 2,775
*200 United Dental Care, Inc............................... 8,250
100 United Healthcare Corp................................ 6,550
300 Universal Health Services, Inc., Class B.............. 13,313
*300 Watson's Pharmaceuticals, Inc......................... 14,700
----------
363,197
----------
PRODUCER MANUFACTURING 5.4%
200 Camco International, Inc.............................. 5,600
*400 Cognex Corp........................................... 13,900
200 Danaher Corp.......................................... 6,350
300 Dover Corp............................................ 11,063
200 Duriron, Inc.......................................... 4,675
*100 FMC Corp.............................................. 6,763
*100 Glenayre Technologies, Inc............................ 6,225
300 Granite Construction, Inc............................. 9,450
100 Illinois Tool Works, Inc.............................. 5,900
*200 Kent Electronics Corp................................. 11,675
200 Measurex Corp......................................... 5,650
*200 Mueller Industries, Inc............................... 5,850
100 Precision Castparts Co................................ 3,975
*300 Sanifill, Inc......................................... 10,013
200 U S Filter Corp....................................... 5,325
*200 United Waste Systems, Inc............................. 7,450
*200 USA Waste Services, Inc............................... 3,775
----------
123,639
----------
RAW MATERIALS/PROCESSING INDUSTRIES 3.6%
100 Agrium, Inc........................................... 4,500
200 Albemarle Corp........................................ 3,875
200 Goodrich (BF) Co...................................... 13,625
100 Hercules, Inc......................................... 5,638
400 IMC Global, Inc....................................... 16,350
200 Millipore Corp........................................ 8,225
100 Mineral Technologies, Inc............................. 3,650
200 Potash Corp Sask, Inc................................. 14,175
*200 Sealed Air Corp....................................... 5,625
100 Sonoco Products Co.................................... 2,625
*100 UCAR International, Inc............................... 3,375
----------
81,663
----------
TECHNOLOGY 27.2%
100 Allen Group, Inc...................................... 2,238
*200 Altera Corp........................................... 9,950
*400 America Online, Inc................................... 15,000
*150 Analog Devices, Inc................................... 5,306
*600 Ascend Communications, Inc............................ 48,675
*300 Aspect Telecommunications Corp........................ 10,050
*300 Aspen Technology, Inc................................. 10,125
*150 Atmel Corp............................................ 3,356
*400 Bay Networks, Inc..................................... 16,450
200 BMC Industries, Inc................................... 4,650
*200 Cabletron Systems, Inc................................ 16,200
</TABLE>

F-38

See Notes to Financial Statements

<PAGE> 128

EMERGING GROWTH FUND____________________PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1995

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares Description Market Value
- --------------------------------------------------------------------------------
<C> <S> <C>
*600 Cadence Design Systems, Inc........................... $ 25,200
*200 Cambridge Technology Partners, Inc.................... 11,500
*100 Cascade Communications................................ 8,525
*400 C-Cube Microsystems, Inc.............................. 25,000
*100 Ceridian Corp......................................... 4,125
*200 CIBER, Inc............................................ 4,675
*400 Cyberoptics Corp...................................... 15,900
*300 Dell Computer Corp.................................... 10,388
*200 DSP Communications, Inc............................... 8,725
200 ECI Telecommunications, Ltd........................... 4,563
*100 Global Village Communications......................... 1,938
*300 Informix Corp......................................... 9,000
*300 Input/Output, Inc..................................... 17,325
*100 INSO Corp............................................. 4,250
*600 International Rectifier Corp.......................... 15,000
*200 Jabil Circuit, Inc.................................... 2,250
*300 KEMET Corp............................................ 7,163
*100 KLA Instruments Corp.................................. 2,606
*100 Kronos, Inc........................................... 4,750
300 Linear Technology Corp................................ 11,775
*300 Macromedia, Inc....................................... 15,675
*400 McAfee Associates, Inc................................ 17,550
*300 Medic Computer Systems, Inc........................... 18,150
*200 MICROS Systems, Inc................................... 9,850
*400 Mylex Corp............................................ 7,650
*50 Netscape Communications Corp.......................... 6,950
*100 Network General Corp.................................. 3,338
*100 Oak Technology, Inc................................... 4,225
*100 Oracle System Corp.................................... 4,238
*200 PairGain Technologies, Inc............................ 10,950
*300 Parametric Technology Corp............................ 19,950
*300 PeopleSoft, Inc....................................... 12,900
*200 PictureTel Corp....................................... 8,625
*200 PRI Automation........................................ 7,025
*100 Project Software & Development, Inc................... 3,488
*300 Quarterdeck Office Systems............................ 8,250
*200 Robotic Vision Systems, Inc........................... 4,825
*300 SCI Systems, Inc...................................... 9,300
*100 Security Dynamics Technology, Inc..................... 5,450
*300 Structural Dynamics Research Corp..................... 8,813
*600 Sun Microsystems, Inc................................. 27,375
100 Sundstrand Corp....................................... 7,038
*200 SunGuard Data Systems, Inc............................ 5,700
100 Tektronix, Inc........................................ 4,913
*200 3Com Corp............................................. 9,325
300 US Robotics Corp...................................... 26,325
*200 Ultratech Stepper, Inc................................ 5,150
*75 UUNET Technologies, Inc............................... 4,725
200 V-Tel Corp............................................ 3,700
100 Watkins Johnson Co.................................... 4,375
----------
622,486
----------
</TABLE>

F-39

See Notes to Financial Statements

<PAGE> 129

EMERGING GROWTH FUND____________________PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1995

*Non-income producing security

F-40

See Notes to Financial Statements

<PAGE> 130

EMERGING GROWTH FUND_____________________STATEMENT OF ASSETS AND LIABILITIES

December 31, 1995

- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $2,017,998).................... $2,262,663
Cash.............................................................. 48,245
Receivable for investments sold................................... 8,298
Receivable for Fund shares sold................................... 6,018
Dividends receivable.............................................. 841
Other assets...................................................... 17,233
----------
Total Assets.................................................... 2,343,298
----------
LIABILITIES
Payable for investments purchased................................. 26,467
Due to auditors................................................... 20,000
Deferred Trustees' compensation................................... 1,050
Due to shareholder service agent.................................. 80
Accrued expenses.................................................. 6,044
----------
Total Liabilities............................................... 53,641
----------
NET ASSETS, equivalent to $11.72 per share........................ $2,289,657
----------
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, par value $.01 per share; unlimited
shares authorized; 195,420 shares outstanding.................... $ 1,954
Capital surplus................................................... 2,101,591
Accumulated net realized loss on securities....................... (57,503)
Net unrealized appreciation of securities......................... 244,665
Accumulated net investment loss................................... (1,050)
----------
NET ASSETS........................................................ $2,289,657
----------
</TABLE>

F-41
See Notes to Financial Statements

<PAGE> 131

EMERGING GROWTH FUND____________________________________FINANCIAL STATEMENTS

- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
July 3, 1995*
through
December 31, 1995
- ----------------------------------------------
<S> <C>
INVESTMENT INCOME
Dividends................. $ 3,298
Interest.................. 3,897
--------
Investment income....... 7,195
--------
EXPENSES
Management fees........... 4,798
Shareholder service
agent's expenses.......... 192
Accounting services....... 3,222
Trustees' fees and
expenses.................. 2,280
Audit fees................ 20,403
Custodian fees............ 3,000
Legal fees................ 250
Reports to shareholders... 978
Miscellaneous............. 1,872
Expense reimbursement..... (19,858)
--------
Total expenses.......... 17,137
--------
NET INVESTMENT LOSS....... (9,942)
--------
REALIZED AND UNREALIZED
GAIN (LOSS) ON SECURITIES
Net realized loss on
securities................ (57,503)
Net unrealized
appreciation of securities
during the period......... 244,665
--------
NET REALIZED AND
UNREALIZED GAIN ON
SECURITIES................ 187,162
--------
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS. $177,220
--------
</TABLE>

- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
July 3, 1995*
through
December 31, 1995
- -------------------------------------------------------------------------------
<S> <C>
NET ASSETS, beginning of period............................. $ 100
----------
OPERATIONS
Net investment loss........................................ (9,942)
Net realized loss on securities............................ (57,503)
Net unrealized appreciation of securities during the
period..................................................... 244,665
----------
Increase in net assets resulting from operation........... 177,220
----------
CAPITAL TRANSACTIONS
Proceeds from shares sold.................................. 2,362,883
Cost of shares redeemed.................................... (250,546)
----------
Increase in net assets from capital transactions.......... 2,112,337
----------
INCREASE IN NET ASSETS...................................... 2,289,557
----------
NET ASSETS, end of period (including accumulated net
investment loss of $1,050).................................. $2,289,657
----------
CAPITAL SHARE TRANSACTIONS
Shares sold................................................. 217,875
Shares redeemed............................................. (22,465)
----------
Increase in capital shares outstanding.................... 195,410
----------
</TABLE>

*Commencement of operations.

F-42
See Notes to Financial Statements

<PAGE> 132

EMERGING GROWTH FUND FINANCIAL HIGHLIGHTS

Selected data for a share of beneficial interest outstanding throughout the
period indicated

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
July 3, 1995(/1/)
through
December 31, 1995(/2/)
- --------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C>
Net asset value, beginning of period................... $10.00
------
INCOME FROM INVESTMENT OPERATIONS
Investment income..................................... .06
Expenses.............................................. (.30)
Expense reimbursement (/3/)........................... .16
------
Net investment loss.................................... (.08)
Net realized and unrealized gain on securities......... 1.80
------
Total from investment operations....................... 1.72
------
Net asset value, end of period......................... $11.72
------
TOTAL RETURN(/4/)...................................... 17.20%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)................... $2.3
Average net assets (millions).......................... $1.4
Ratios to average net assets (annualized) (/3/)
Expenses.............................................. 2.50%
Expenses, without expense reimbursement............... 5.40%
Net investment loss................................... (1.45)%
Net investment loss, without expense reimbursement.... (4.35)%
Portfolio turnover rate................................ 41%
</TABLE>

(1) Commencement of operations.
(2) Based on average shares outstanding.
(3) See Note 2.
(4) Total return for a period less than one year is not annualized.

F-43
See Notes to Financial Statements

<PAGE> 133

GLOBAL EQUITY FUND PORTFOLIO OF INVESTMENTS

December 31, 1995

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares Description Market Value
- --------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCK 96.8%
AUSTRALIA 0.2%
*200 News Corp............................................. $ 4,275
----------
FINLAND 1.6%
750 Kymmene Corp.......................................... 19,830
390 Nokia (AB) OY, Series A............................... 15,333
*100 Nokia Corp............................................ 3,887
----------
39,050
----------
FRANCE 2.1%
280 Christian Dior........................................ 30,190
*500 SGS Thomson Micro..................................... 19,144
----------
49,334
----------
GERMANY 5.7%
*500 Adidas................................................ 26,455
600 Berliner Elektro Holdings............................. 19,575
35 CKAG Colonia Konzern.................................. 22,691
500 Deutsche Bank......................................... 23,691
70 Mannesmann............................................ 22,286
500 Veba.................................................. 21,227
----------
135,925
----------
HONG KONG 4.4%
20,000 First Pacific Co...................................... 22,244
6,000 Hutchison Whampoa..................................... 36,547
*70,000 Jilin Chemical Industries, Class H.................... 14,484
4,000 Swire Pacific......................................... 31,038
----------
104,313
----------
ITALY 0.8%
500 Gucci Group........................................... 19,438
----------
INDONESIA 0.5%
500 Perusahaan Persero Telekom............................ 12,625
----------
JAPAN 23.0%
2,000 Amada Co.............................................. 19,758
2,000 Bank of Tokyo......................................... 35,061
2,000 Daimei Telecom Engineering............................ 17,240
3,000 Daiwa Securities...................................... 45,908
1,000 Fuji Photo Film Co.................................... 28,862
2,000 Fujitsu............................................... 22,276
2,000 Hitachi............................................... 20,145
2,000 Honda Motor Co........................................ 41,259
2,000 Mitsubishi Estate..................................... 24,988
3,000 Mitsubishi Heavy Industries........................... 23,913
1,000 Mitsubishi Trust & Banking............................ 16,659
2,000 Mitsukoshi............................................ 18,789
2,000 Nomura Securities..................................... 43,584
3,000 Ricoh Co.............................................. 32,833
2,000 SXL Corporation....................................... 20,726
2,000 Tokio Marine & Fire Insurance Co. .................... 26,150
1,000 Tokyo Electron........................................ 38,741
3,000 Toshiba Corp.......................................... 23,506
2,000 Wishimatsu Construction............................... 23,438
1,000 Yamanouchi Pharmacy................................... 21,501
----------
545,337
----------
</TABLE>

See Notes to Financial Statements

F-44

<PAGE> 134

GLOBAL EQUITY FUND PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1995

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares Description Market Value
- --------------------------------------------------------------------------------
<C> <S> <C>
MALAYSIA 1.1%
5,000 Resorts World......................................... $ 26,775
----------
MEXICO 1.3%
1,100 Cemex................................................. 7,631
1,000 Empresas Ica Sociedad................................. 10,250
400 Telefonos de Mexico................................... 12,750
----------
30,631
----------
NETHERLANDS 3.8%
*1,500 BE Semiconductor Industries........................... 19,630
440 ING Group............................................. 29,394
50 Philips Electronics................................... 1,807
300 Philips Electronics, Inc.............................. 10,762
200 Ver Ned Uitgevers..................................... 27,457
----------
89,050
----------
NORWAY 1.7%
*2,000 Fokus Bank............................................ 10,799
*5,500 Uni Storebrand........................................ 30,391
----------
41,190
----------
SINGAPORE 2.4%
2,000 Fraser & Neave........................................ 25,451
5,000 Singapore Land........................................ 32,343
----------
57,794
----------
SWEDEN 3.5%
800 Astra, Series B....................................... 31,688
1,100 Ericsson (LM) Telephone, Series B..................... 21,537
11,000 Rottneros............................................. 11,597
1,600 Stora Kopparbergs..................................... 19,157
----------
83,979
----------
SWITZERLAND 4.6%
38 Alusuisse Lonza Holdings.............................. 30,110
33 Ciba Geigy............................................ 29,038
*200 Logitech International................................ 20,633
70 Schweizerischer Bankverein............................ 28,582
----------
108,363
----------
UNITED KINGDOM 11.9%
10,000 Astec................................................. 17,705
1,500 BOC Group............................................. 20,989
1,200 Carlton Communications................................ 17,994
4,000 Dixons Group.......................................... 27,582
5,000 Farnell Electronic.................................... 55,793
2,000 General Accident...................................... 20,205
2,800 Marks & Spencer....................................... 19,568
2,000 National Westminster.................................. 20,143
2,000 Reuters Holdings...................................... 18,310
2,000 Severn Trent.......................................... 21,354
2,200 SmithKline Beecham.................................... 24,258
4,000 Tesco................................................. 18,450
----------
282,351
----------
</TABLE>

See Notes to Financial Statements

F-45

<PAGE> 135

GLOBAL EQUITY FUND PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1995

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares Description Market Value
- --------------------------------------------------------------------------------
<C> <S> <C>
UNITED STATES 28.2%
*100 Adaptec, Inc........................................... $ 4,100
100 Aetna Life & Casualty Co............................... 6,925
200 Allstate Corp.......................................... 8,225
*100 American Radio System Corp., Class A................... 2,800
*100 Amgen, Inc............................................. 5,937
100 Analog Devices, Inc.................................... 3,538
100 Applied Materials, Inc................................. 3,937
100 AT&T Corp.............................................. 6,475
100 BankAmerica Corp....................................... 6,475
100 Bank of Boston Corp.................................... 4,625
100 Bank of New York, Inc.................................. 4,875
100 BayBanks, Inc.......................................... 9,825
*150 Bay Networks, Inc...................................... 6,169
100 Bristol-Myers Squibb Co................................ 8,587
*100 Buffets, Inc........................................... 1,375
*100 Cabletron Systems, Inc................................. 8,100
100 Cadence Design Systems, Inc............................ 4,200
100 Cellular Communications, Inc........................... 4,975
100 Chemical Banking Corp.................................. 5,875
100 Circon Corp............................................ 2,025
*100 Cisco Systems, Inc..................................... 7,462
150 Citicasters, Inc....................................... 3,544
100 Citicorp............................................... 6,725
*100 Community Health System, Inc........................... 3,562
*100 Compaq Computer Corp................................... 4,800
200 Computer Associates International, Inc................. 11,375
100 ConAgra, Inc........................................... 4,125
100 Conseco, Inc........................................... 6,263
100 Consolidated Stores Corp............................... 2,175
100 Continental Homes Holding Corp......................... 2,463
*300 Cox Communications, Inc., Class A...................... 5,850
100 CPC International, Inc................................. 6,863
*100 Cytec Industries, Inc.................................. 6,237
*100 Dell Computer Corp..................................... 3,463
100 Disney (Walt) Co....................................... 5,900
100 Dover Corp............................................. 3,687
*100 DST Systems, Inc....................................... 2,850
*100 Eckerds Corp........................................... 4,463
*100 Emmis Broadcasting Corp., Class A...................... 3,100
*100 Evergreen Media Corp., Class A......................... 3,200
100 EXEL, Ltd.............................................. 6,100
100 Exxon Corp............................................. 8,013
200 Federal National Mortgage Association.................. 24,825
100 Federated Department Stores, Inc....................... 2,750
100 First Data Corp........................................ 6,687
*100 Foundation Health Corp................................. 4,300
100 Franklin Resources, Inc................................ 5,038
300 Frontier Corp.......................................... 9,000
100 General Nutrition Companies, Inc....................... 2,300
100 Genzyme Corp........................................... 6,237
*150 Grand Casinos, Inc..................................... 3,488
100 Greenfield Industries, Inc............................. 3,125
</TABLE>

See Notes to Financial Statements

F-46

<PAGE> 136

GLOBAL EQUITY FUND PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1995

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares Description Market Value
- --------------------------------------------------------------------------------
<C> <S> <C>
200 Green Tree Financial Corp.............................. $ 5,275
100 Guidant Corp........................................... 4,225
100 Harnischfeger Industries, Inc.......................... 3,325
*100 Health Management Association, Inc., Class A........... 2,612
100 Illinois Central Corp.................................. 3,838
100 Ilinois Tool Works, Inc................................ 5,900
100 Intel Corp............................................. 5,675
*200 International Rectifier Corp........................... 5,000
100 James River Corp....................................... 2,412
100 Johnson & Johnson...................................... 8,562
78 Kimberly Clark Corp.................................... 6,454
100 Komag, Inc............................................. 4,613
*100 Kroger Co.............................................. 3,750
300 LG Chemical, Ltd....................................... 6,285
100 Lincare Holdings, Inc.................................. 2,500
*100 Linear Technology Corp................................. 3,925
*100 Litton Industries, Inc................................. 4,450
*100 LSI Logic Corp......................................... 3,275
100 Marriott International, Inc............................ 3,825
*100 Maxicare Health Plans, Inc............................. 2,687
400 MCI Communications Corp................................ 10,450
100 Medtronic, Inc......................................... 5,588
200 Merck & Co., Inc....................................... 13,150
150 Mercury Financial Co................................... 1,988
3,000 Metaclad Corp.......................................... 12,000
*100 Microsoft Corp......................................... 8,775
100 Mobil Corp............................................. 11,200
*100 MSC Industrial Direct, Inc., Class A................... 2,750
*100 Nautica Enterprises, Inc............................... 4,375
*100 Nellcor Puritan Bennett, Inc........................... 5,800
*100 Oak Technology, Inc.................................... 4,225
*200 Office Max, Inc........................................ 4,475
200 Omnicom Group, Inc..................................... 7,450
*100 Oracle System Corp..................................... 4,238
200 Panhandle Eastern Corp................................. 5,575
100 Parker Hannifin Corp................................... 3,425
100 Penncorp Financial Group, Inc.......................... 2,938
200 PepsiCo., Inc.......................................... 11,175
145 Pharmacia & Upjohn, Inc................................ 5,619
300 Phillip Morris Companies, Inc.......................... 27,150
200 Praxair, Inc........................................... 6,725
200 Reliastar Financial Corp............................... 8,875
*100 Renal Treatment Centers, Inc........................... 4,400
*200 Safeway, Inc........................................... 10,300
200 Schering-Plough Corp................................... 10,950
*100 SCI Systems, Inc....................................... 3,100
*100 Seagate Technology, Inc................................ 4,750
100 Sears, Roebuck & Co.................................... 3,900
300 Service Corp. International............................ 13,200
100 Sigma-Aldrich.......................................... 4,950
*200 Smith International, Inc............................... 4,700
200 Sprint Corp............................................ 7,975
</TABLE>

See Notes to Financial Statements

F-47

<PAGE> 137

GLOBAL EQUITY FUND PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1995

<TABLE>
<CAPTION>
Principal
Amount
---------
<C> <S> <C>
CONVERTIBLE CORPORATE OBLIGATION 0.9%
$16,000 United Micro, 1.25%, 06/08/04 (Cost $29,520)............ 20,160
----------
TOTAL INVESTMENTS (Cost $2,227,858) 97.7%.......................... 2,319,837
OTHER ASSETS AND LIABILITIES 2.3%.................................. 55,332
----------
NET ASSETS 100%.................................................... $2,375,169
----------
</TABLE>

*Non-income producing security.

See Notes to Financial Statements

F-48

<PAGE> 138

GLOBAL EQUITY FUND STATEMENT OF ASSETS AND LIABILITIES

December 31, 1995

- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $2,227,858).................... $2,319,837
Foreign currency, at market value (Cost $80,097).................. 80,240
Receivable from Adviser........................................... 29,605
Unrealized appreciation of forward currency exchange contracts.... 11,123
Receivable for investments sold................................... 6,664
Interest and dividends receivable................................. 2,321
Other assets and receivables...................................... 27,078
----------
Total Assets.................................................... 2,476,868
----------
LIABILITIES
Due to auditors................................................... 30,000
Payable for investments purchased................................. 29,940
Bank overdraft.................................................... 23,875
Due to custodian.................................................. 11,500
Deferred Trustees' fees........................................... 1,050
Unrealized depreciation of forward currency exchange contracts.... 561
Due to shareholder service agent.................................. 102
Payable for Fund shares redeemed.................................. 71
Accrued expenses and other payables............................... 4,600
----------
Total Liabilities............................................... 101,699
----------
NET ASSETS, equivalent to $10.30 per share........................ $2,375,169
----------
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, par value $.01 per share; unlimited
shares authorized; 230,530 shares outstanding.................... $ 2,305
Capital surplus................................................... 2,290,202
Accumulated net realized loss on securities....................... (7,843)
Net unrealized appreciation (depreciation) of securities
Investments...................................................... 91,979
Foreign currency................................................. 143
Forward currency exchange contracts.............................. 10,562
Other foreign denominated assets and liabilities................. (6)
Accumulated net investment loss................................... (12,173)
----------
NET ASSETS........................................................ $2,375,169
----------
</TABLE>

F-49
See Notes to Financial Statements

<PAGE> 139

GLOBAL EQUITY FUND FINANCIAL STATEMENTS

- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
July 3, 1995*
through
December 31, 1995
- ------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Dividends (net of $893 of foreign taxes withheld at
source).................................................... $ 9,942
Interest................................................... 7,481
-------
Total income............................................. 17,423
-------
EXPENSES
Management fees............................................ 10,983
Shareholder service agent's expenses....................... 161
Accounting services........................................ 7,200
Trustees' fees and expenses................................ 2,280
Audit fees................................................. 30,403
Custodian fees............................................. 36,580
Legal fees................................................. 500
Reports to shareholders.................................... 750
Registration and filing fees............................... 800
Organization expenses...................................... 688
Miscellaneous.............................................. 444
Expense reimbursement...................................... (43,031)
-------
Total expenses........................................... 47,758
-------
NET INVESTMENT LOSS........................................ (30,335)
-------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized gain (loss) on securities
Investments.............................................. (7,843)
Foreign currency and forward currency exchange contracts. 1,787
Net unrealized appreciation (depreciation) of securities
during the period
Investments.............................................. 91,979
Foreign currency......................................... 143
Forward currency exchange contracts...................... 10,562
Other foreign denominated assets and liabilities......... (6)
-------
NET REALIZED AND UNREALIZED GAIN ON SECURITIES............. 96,622
-------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........... $66,287
-------
</TABLE>

- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
July 3, 1995*
through
December 31, 1995
- -------------------------------------------------------------------------------
<S> <C>
NET ASSETS, beginning of period............................. $ 100
----------
OPERATIONS
Net investment loss........................................ (30,335)
Net realized loss on securities............................ (6,056)
Net unrealized appreciation of securities during the
period..................................................... 102,678
----------
Increase in net assets resulting from operations.......... 66,287
----------
CAPITAL TRANSACTIONS
Proceeds from shares sold.................................. 2,319,291
Cost of shares redeemed.................................... (10,509)
----------
Increase in net assets from capital transactions.......... 2,308,782
----------
INCREASE IN NET ASSETS...................................... 2,375,069
----------
NET ASSETS, end of period (including accumulated net
investment loss of $12,173)................................. $2,375,169
----------
CAPITAL SHARE TRANSACTIONS
Shares sold................................................. 231,560
Shares redeemed............................................. (1,040)
----------
Increase in capital shares outstanding.................... 230,520
----------
</TABLE>
*Commencement of operations

F-50
See Notes to Financial Statements

<PAGE> 140

GLOBAL EQUITY FUND FINANCIAL HIGHLIGHTS

Selected data for a share of beneficial interest outstanding throughout the
period indicated

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
July 3, 1995(/1/)
through
December 31, 1995(/2/)
- --------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C>
Net asset value, beginning of period................... $10.00
------
INCOME FROM INVESTMENT OPERATIONS
Investment income..................................... .09
Expenses.............................................. (.48)
Expense reimbursement (/3/)........................... .23
------
Net investment loss.................................... (.16)
Net realized and unrealized gain on securities......... .46
------
Total from investment operations....................... .30
------
Net asset value, end of period......................... $10.30
------
TOTAL RETURN(/4/)...................................... 3.00%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)................... $2.4
Average net assets (millions).......................... $2.2
Ratios to average net assets (annualized) (/3/)
Expenses.............................................. 4.35%
Expenses, without expense reimbursement............... 8.27%
Net investment loss................................... (2.76)%
Net investment loss, without expense reimbursement.... (6.68)%
Portfolio turnover rate................................ 42%
</TABLE>

(1) Commencement of operations.
(2) Based on average month-end shares outstanding.
(3) See Note 2.
(4) Total return for a period less than one year is not annualized.

F-51
See Notes to Financial Statements

<PAGE> 141

NOTES TO FINANCIAL STATEMENTS

- -------------------------------------------------------------------------------
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
Van Kampen American Capital Life Investment Trust (the "Trust", formerly Amer-
ican Capital Life Investment Trust) is registered under the Investment Company
Act of 1940, as amended, as a diversified open-end management investment com-
pany comprised of eight Funds: Common Stock Fund ("Common Stock"), Domestic
Strategic Income Fund ("Domestic Strategic"), Government Fund ("Government"),
Money Market Fund ("Money Market"), Multiple Strategy Fund ("Multiple Strate-
gy"), Emerging Growth Fund ("Emerging Growth"), Real Estate Fund ("Real Es-
tate") and Global Equity Fund ("Global Equity"). Each Fund is accounted for as
a separate entity.
The goals of the Funds are as follows: Common Stock seeks capital apprecia-
tion by investing principally in common stocks; Domestic Strategic seeks in-
come as its primary objective and capital appreciation as a secondary
objective; Government seeks high current return consistent with preservation
of capital; Money Market seeks protection of capital and high current income
by investing in short-term money market instruments; Multiple Strategy seeks a
high total investment return consistent with prudent risk; Emerging Growth
seeks capital appreciation by investing principally in common stocks of small
and medium sized companies; Real Estate seeks long-term growth of capital by
investing principally in securities of companies operating in the real estate
industry; and Global Equity seeks long-term growth of capital through an in-
ternationally diversified portfolio of equity securities of any nation, in-
cluding the United States.
The following is a summary of significant accounting policies consistently
followed by the Trust in the preparation of its financial statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported. Actual amounts may differ from the
estimates.

A. INVESTMENT VALUATIONS-Securities listed or traded on a national securities
exchange are valued at the last sale price. Unlisted securities and listed se-
curities for which the last sale price is not available are valued at the most
recent bid price.
U.S. Agency and Government obligations and related forward commitments are
valued at the last reported bid price. Listed options are valued at the last
reported sale price on the exchange on which such option is traded, or, if no
sale is reported, at the mean between the last reported bid and asked prices.
Options and forward commitments for which market quotations are not readily
available are valued at fair value under a method approved by the Board of
Trustees.
Private placements are valued at fair value as determined in good faith by,
or under the direction of, the Board of Trustees. Private placements generally
may be resold only in a privately negotiated transaction until they are regis-
tered.
Short-term investments with a maturity of 60 days or less when purchased are
valued at amortized cost, which approximates market value. Short-term invest-
ments with a maturity of more than 60 days when purchased are valued based on
market quotations until the remaining days to maturity becomes less than 61
days. From such time, until maturity, the investments are valued at amortized
cost. For Money Market, all investments are valued at amortized cost.
Domestic Strategic's investments include lower rated and unrated debt secu-
rities which may be more susceptible to a decline in value due to adverse eco-
nomic conditions than other investment grade holdings. These securities are
often subordinated to the prior claims of other senior lenders and uncertain-
ties exist as to an issuer's ability to meet principal and interest payments.
Debt securities rated below investment grade and comparable unrated securities
represented approximately 33% of Domestic Strategic's investment portfolio at
the end of the period.
Investments in foreign securities involve certain risks not ordinarily asso-
ciated with investments in securities of domestic issuers, including fluctua-
tions in foreign exchange rates, future political and economic developments,
and the possible imposition of exchange controls or other foreign governmental
laws or restrictions.

B. FUTURES CONTRACTS, FORWARD COMMITMENTS AND OPTIONS-General--Transactions in
futures contracts, forward commitments, and options are utilized in strategies
to manage the market risk of a Fund's investments. The purchase of a futures
contract, forward commitment, or call option (or the writing of a put option)
increases the impact on net asset value of changes in the market price of in-
vestments. Forward commitments have a risk of loss due to nonperformance of
counterparties. There is a risk that the market movement of such instruments
may not be in the direction forecasted. Note 3--Investment Activity contains
additional information.
Futures Contracts--Upon entering into futures contracts, a Fund maintains,
in a segregated account with its custodian, securities with a value equal to
its obligation under the futures contracts. A portion of these funds is held
as collateral in an account in the name of the broker, the Fund's agent in ac-
quiring the futures position. During the period the futures contract is open,
changes in the value of the contract ("variation margin") are recognized by
marking the contract to market on a daily basis. As unrealized gains or losses
are incurred,

F-52

<PAGE> 142

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

- --------------------------------------------------------------------------------
variation margin payments are received from or made to the broker. Upon the
closing or cash settlement of a contract, gains or losses are realized. The
cost of securities acquired through delivery under a contract is adjusted by
the unrealized gain or loss on the contract.
Forward Commitments--A Fund trades certain securities under the terms of for-
ward commitments whereby the settlement for payment and delivery occurs at a
specified future date. Forward commitments are privately negotiated transac-
tions between a Fund and
dealers. Upon executing a forward commitment and during the period of obliga-
tion, a Fund maintains collateral of cash or securities in a segregated account
with its custodian in an amount sufficient to relieve the obligation. If the
intent of a Fund is to accept delivery of a security traded under a forward
purchase commitment, the commitment is recorded as a long-term purchase. For
forward purchase commitments for which security settlement is not intended by a
Fund, and for all forward sales commitments, changes in the value of the com-
mitment are recognized by marking the commitment to market on a daily basis.
During the period of obligation, a Fund may either resell or repurchase the
forward commitment and enter into a new forward commitment, the effect of which
is to extend the settlement date. In addition, a Fund may occasionally close
such forward commitments prior to delivery. Gains and losses on investments are
realized upon the ultimate closing or cash settlement of forward commitments.
Options--Options purchased are recorded as investment, options written (sold)
are accounted for as liabilities. When an option expires, the premium (original
option value) is realized as a gain if the option was written or realized as a
loss if the option was purchased. When the exercise of an option results in a
cash settlement, the difference between the premium and the settlement proceeds
is realized as a gain or loss. When an option is closed, the difference between
the premium and the cost to close the position is realized as a gain or loss.

C. REPURCHASE AGREEMENTS-A repurchase agreement is a short-term investment in
which a Fund acquires ownership of a debt security and the seller agrees to re-
purchase the security at a future time and specified price. A Fund may invest
independently in repurchase agreements, or transfer uninvested cash balances
into a pooled cash account along with other investment companies advised by Van
Kampen American Capital Asset Management, Inc. (the "Adviser"), the daily ag-
gregate of which is invested in repurchase agreements. Repurchase agreements
are collateralized by the underlying debt security. A Fund will make payment
for such securities only upon physical delivery or evidence of book entry
transfer to the account of the custodian bank. The seller is required to main-
tain the value of the underlying security at not less than the repurchase pro-
ceeds due a Fund.

D. FOREIGN CURRENCY TRANSLATION-The market values of foreign securities, for-
ward currency exchange contracts and other assets and liabilities stated in
foreign currency are translated into U.S. dollars based on quoted exchange
rates as of noon Eastern Time. The cost of securities is determined using his-
torical exchange rates. Income and expenses are translated at prevailing ex-
change rates when accrued or incurred. Gains and losses on the sale of
securities are not segregated for financial reporting purposes between amounts
arising from changes in exchange rates and amounts arising from changes in the
market prices of securities. Realized gain and loss on foreign currency in-
cludes the net realized amount from the sale of currency and the amount real-
ized between trade date and settlement date on security transactions.

E. FORWARD CURRENCY EXCHANGE CONTRACTS-Global Equity enters into forward cur-
rency exchange contracts in order to hedge its exposure to changes in foreign
currency exchange rates on its foreign portfolio holdings or to settle transac-
tions. A forward currency exchange contract is a commitment to buy or sell a
foreign currency at a set price on a future date. Changes in the value of the
contract are recognized by marking the contract to market on a daily basis. The
Fund realizes gains or losses at the time the forward currency exchange con-
tract is closed. Risks may arise as a result of the potential inability of the
counterparties to meet the terms of their contracts, and from unanticipated
movements in the value of a foreign currency relative to the U.S. dollar.

F. FEDERAL INCOME TAXES-No provision for federal income taxes is required be-
cause each of the Funds has elected to be qualified as a "regulated investment
company" under the Internal Revenue Code and intends to maintain this qualifi-
cation by annually distributing all taxable net investment income and taxable
net realized capital gains on investments to shareholders. It is anticipated
that no distributions of net realized capital gains will be made until tax ba-
sis capital loss carryforwards, if any, expire or are offset by net realized
capital gains.

F-53

<PAGE> 143

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

- --------------------------------------------------------------------------------
The following table presents the identified cost of investments at the end of
the period for federal income tax purposes with the associated net unrealized
appreciation and the net realized capital loss carryforward at December 31,
1995 with expiration dates.

<TABLE>
<CAPTION>
Common Domestic Money Multiple Emerging Real Global
Stock Strategic Government Market Strategy Growth Estate Equity
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Identified cost......... $66,854,310 $25,601,004 $73,227,636 $21,612,759 $57,112,937 $2,017,998 $8,875,739 $2,309,755
----------- ----------- ----------- ----------- ----------- ---------- ---------- ----------
Gross unrealized
appreciation........... $ 9,928,432 $ 1,746,960 $ 1,972,463 -- $ 6,303,781 $ 295,831 $ 356,534 $ 180,032
Gross unrealized
depreciation........... 753,880 246,473 23,950 -- 388,954 51,166 45,785 89,710
----------- ----------- ----------- ----------- ----------- ---------- ---------- ----------
Net unrealized
appreciation........... $ 9,174,552 $ 1,500,487 $ 1,948,513 -- $ 5,914,827 $ 244,665 $ 310,749 $ 90,322
----------- ----------- ----------- ----------- ----------- ---------- ---------- ----------
Capital loss
carryforward utilized
during the period...... -- $ 104,892 $ 1,385,949 -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ---------- ---------- ----------
Net realized capital
loss carryforward...... -- $ 2,020,640 $13,105,418 $ 2,059 -- $ 36,712 $ 10,729 $ 6,043
----------- ----------- ----------- ----------- ----------- ---------- ---------- ----------
Expiration dates of
capital loss
carryforward............ -- 1998-2002 1996-2002 2002-2003 -- 2003 2003 2003
</TABLE>

The net capital loss carryforwards at the end of the period may be utilized
to offset any future capital gains until expiration.
Additionally, $20,791 and $445 of post October losses for Emerging Growth and
Real Estate, respectively, are deferred for federal income tax purposes to the
1996 fiscal year.

G. INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME-Investment transac-
tions are accounted for on the trade date. Realized gains and losses on invest-
ments are determined on the basis of identified cost. Dividend income is
recorded on the ex-dividend date or when information becomes available, which-
ever is later. Interest income is accrued daily. Issuers of Payment-in-Kind se-
curities may make dividend or interest payments by issuing additional stocks or
bonds in lieu of cash payments.
Under the applicable foreign tax laws, a withholding tax may be imposed on
interest, dividends and realized gains generated from foreign investments. Such
withholding taxes are reflected on the Statement of Operations as a reduction
of the related income or gain.

H. DIVIDENDS AND DISTRIBUTIONS-Government and Money Market declare dividends
from net investment income on each business day. Domestic Strategic, Common
Stock, Multiple Strategy, Emerging Growth, Real Estate and Global Equity
declare dividends and distributions annually. Government declares distributions
from short-term capital gains, if any, monthly. Dividends and distributions are
recorded on the record date.
Each of the Funds distributes tax basis earnings in accordance with the mini-
mum distribution requirements of the Internal Revenue Code, which may differ
from generally accepted accounting principles. Such dividends or distributions
may exceed financial statement earnings.

I. DEBT DISCOUNT AND PREMIUM-The Trust accounts for discounts and premiums on
the same basis as used for federal income tax reporting. Accordingly, original
issue discounts on debt securities purchased are amortized over the life of the
security. Premiums on debt securities are not amortized. Market discounts are
recognized at the time of sale as realized gains for book purposes and ordinary
income for tax purposes.

J. PRIVATE PLACEMENTS-A Fund may own securities purchased in private placement
transactions, which have not been registered under the Securities Act of 1933.
Such securities generally may be resold only in a privately negotiated transac-
tion with a limited number of purchasers or in a public offering after they
have been registered under the Securities Act of 1933. The issuers of privately
placed debt securities held by a Fund generally have agreed to register the se-
curities within specified time periods or increase the interest paid on such
securities.

NOTE 2--MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
The Adviser serves as investment manager of the Trust. Management fees are paid
monthly, based on the average daily net assets of the Funds (Common Stock, Do-
mestic Strategic, Government, Money Market and Multiple Strategy) at an annual
rate of .50% of the first $500 million, .45% of the next $500 million and .40%
of the amount in excess of $1 billion. The resulting fee is prorated to each
Fund (Common Stock, Domestic Strategic, Government, Money Market and Multiple
Strategy) based on its average daily net assets. The Adviser

F-54

<PAGE> 144

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

- --------------------------------------------------------------------------------
has volunteered to reimburse each of these Funds for all ordinary business ex-
penses, exclusive of taxes and interest, in excess of .60% of the average daily
net assets. For the period, such voluntary expense reimbursements were:

<TABLE>
<S> <C>
Common Stock...................................................... $56,680
Domestic Strategic................................................ 86,887
Government........................................................ 77,421
Money Market...................................................... 80,637
Multiple Strategy................................................. 85,602
</TABLE>

Under the terms of the advisory agreement, if the total ordinary business ex-
penses, exclusive of taxes, distribution fees and interest, exceed .95% of av-
erage daily net assets, the Adviser will reimburse the Funds (Common Stock,
Domestic Strategic, Government, Money Market and Multiple Strategy) for the
amount of the excess. The contractual expense reimbursement shall be made
monthly. For the period, none of the above Funds had contractual expense reim-
bursements.
For Emerging Growth, management fees are paid monthly, based on the average
daily net assets at an annual rate of .70%.
For Real Estate, the Adviser has entered into a subadvisory agreement with
Hines Interest Realty Advisors Limited Partnership ("Subadviser--Real Estate"),
who provides advisory services to Real Estate and the Adviser with respect to
Real Estate's investments in real estate. Management fees are calculated month-
ly, based on the average daily net assets of Real Estate at the annual rate of
1.00%. The Adviser pays 50% of its management fee to the Subadviser--Real Es-
tate.
For Global Equity, the Adviser has entered into a subadvisory agreement with
John Govett & Co., Limited ("Subadviser--Global Equity), who provides advisory
services to Global Equity and the Adviser with respect to Global Equity's in-
vestments in foreign securities. Management fees are calculated monthly, based
on the average daily net assets of Global Equity at the annual rate of 1.00%.
The Adviser pays 50% of its management fee to the Subadviser--Global Equity.
Under the terms of the advisory agreements, if the total ordinary business
expenses of the Funds (Emerging Growth, Real Estate and Global Equity), exclu-
sive of taxes, interest and other extraordinary expenses, exceed the most re-
strictive expense limitation applicable in the states where the Funds' shares
are qualified for sale, the Adviser will reimburse the Funds for the excess.
Such reimbursement shall be made monthly. The most restrictive expense limita-
tion in effect was California's which aggregated 2 1/2% of the first $30 mil-
lion of average daily net assets, 2% of the next $70 million of average daily
net assets and 1 1/2% of the average daily net assets in excess of $100
milllion. For the period, $19,858 for Emerging Growth, $7,173 for Real Estate,
and $43,031 for Global Equity was reimbursed due to the expense limitation.
As of January 1, 1996, the Adviser has volunteered to reimburse for all ex-
penses in excess of .85% for Emerging Growth, 1.10% for Real Estate, and 1.20%
for Global Equity, each of the Fund's average daily net assets.
Other transactions with affiliates during the period were as follows:

Accounting services include the salaries and overhead expenses of the Trust's
Treasurer and the personnel operating under his direction. Charges are allo-
cated among investment companies advised by the Adviser. These charges include
the employee costs attributable to the accounting officers of the Trust. A por-
tion of the accounting services expense was paid to the Adviser in reimburse-
ment of personnel, facilities and equipment costs attributable to the provision
of accounting services. The services provided by the Adviser are at cost.
ACCESS Investor Services, Inc., an affiliate of the Adviser, serves as the
Trust's shareholder service agent. These services are provided at cost plus a
profit. Legal fees during the period were for services rendered by former coun-
sel of the Trust, O'Melveny & Myers. A former trustee was of counsel to that
firm. Certain officers and trustees of the Trust are officers and trustees of
the Adviser and the shareholder service agent.

F-55

<PAGE> 145

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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

NOTE 3--INVESTMENT ACTIVITY
During the period, the cost of purchases and proceeds from sales of invest-
ments, excluding short-term investments and forward commitments, were:

<TABLE>
<CAPTION>
Common Domestic Multiple Emerging Real Global
Stock Strategic Government Strategy Growth Estate Equity
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Purchases............... $ 98,217,059 $17,345,053 $106,514,498 $65,674,248 $2,586,768 $9,986,356 $2,994,454
Sales................... 109,821,318 14,448,328 117,494,867 77,631,643 511,267 2,719,513 758,759
</TABLE>

Money Market held only short-term investments.
At the end of the period, Government held the following forward purchase com-
mitments settling in January 1996 for which delivery is not intended and long
U.S. Treasury futures contracts expiring in March 1996.

FORWARD PURCHASE COMMITMENTS:

<TABLE>
<CAPTION>
Par Unrealized
Amount Appreciation
(000) Security Market Value (Depreciation)
--------------------------------------------------------------------------
<C> <S> <C> <C>
Federal Home Loan Mortgage
$1,500 Corp., 8.00%, short............. $(1,553,445) $(23,914)
----------- --------
Federal Home Loan Mortgage
1,000 Corp., 7.00%, long.............. 1,008,750 16,563
Government National Mortgage
4,000 Association, 7.50%, long........ 4,112,520 68,457
----------- --------
5,121,270 85,020
----------- --------
$ 3,567,825 $ 61,106
----------- --------
</TABLE>

FUTURES CONTRACTS:

<TABLE>
<CAPTION>
Number of Unrealized
Contracts Description Market Value Appreciation
---------------------------------------------------------------------------
<C> <S> <C> <C>
60 U.S. Treasury Bonds................ $ 7,288,125 $178,120
20 U.S. Treasury Notes (five year).... 2,208,125 25,686
95 U.S. Treasury Notes (ten year)..... 10,886,406 141,461
----------- --------
$20,382,656 $345,267
----------- --------
</TABLE>

During the period, Real Estate and Global Equity had the following option
activity on S&P 500 index futures:

<TABLE>
<CAPTION>
Real Estate Global Equity
------------------- ------------------
Number of Number of
Contracts Premium Contracts Premium
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options open at beginning of the
period.......................... 0 $0 0 $0
Options written................. 120 149,875 80 95,917
Options closed.................. (60) (47,938) (40) (53,958)
Options expired................. (60) (101,937) (40) (41,959)
--- -------- --- -------
Options open at the end of the
period.......................... 0 $0 0 $0
--- -------- --- -------
</TABLE>

At the end of the period Global Equity held the following forward currency
exchange contracts:

<TABLE>
<CAPTION>
U.S. Unrealized
Settlement Dollar Appreciation
Currency Date Value (Depreciation)
---------------------------------------------------------------------------
<S> <C> <C> <C>
JAPANESE YEN
9,892,000 (payable)................... 09/24/96 $ 99,256 $ 745
9,629,000 (payable)................... 11/13/96 97,207 2,793
9,574,000 (payable)................... 11/13/96 96,652 3,348
9,486,000 (payable)................... 11/13/96 95,763 4,237
-------- -------
388,878 11,123
-------- -------
SWEDISH KRONA
343,400 (payable)................... 11/13/96 50,561 (561)
-------- -------
Total forward currency exchange contracts....... $439,439 $10,562
-------- -------
</TABLE>

F-56

<PAGE> 146

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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

NOTE 4--TRUSTEE COMPENSATION
Trustees who are not affiliated with the Adviser are compensated by the Trust
at the annual rate of $3,342 plus a fee of $96 per day for the Board and Com-
mittee meetings attended. The Trustees may participate in a voluntary Deferred
Compensation Plan (the "Plan"). The Plan is not funded, and obligations under
the Plan will be paid solely out of each Fund's general accounts. Funds for the
payment of obligations under the Plan will not be reserved or set aside by any
form of trust or escrow. Each Trustee covered under the Plan elects to be cred-
ited with an earnings component on amounts deferred equal to the income earned
by each Fund on its short-term investments or equal to the total return of each
Fund.
Trustees' fees for the period were:

NOTE 5--FUND REORGANIZATION
On July 21, 1995, the shareholders approved the reorganization of the Trust to
a Delaware Business Trust and the election of additional trustees. On September
16, 1995, the reorganization became effective.

NOTE 6--SUBSEQUENT EVENT
Effective March 6, 1996, the Trust will make the following name changes to
three of the Funds: Common Stock to Enterprise, Domestic Strategic Income to
Domestic Income, and Multiple Strategy to Asset Allocation.

F-57

<PAGE> 147

REPORT OF INDEPENDENT ACCOUNTANTS

TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST

In our opinion, the accompanying statements of assets and liabilities,
including the portfolios of investments, and the related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of the Common Stock
Fund, Domestic Strategic Income Fund, Government Fund, Money Market Fund,
Multiple Strategy Fund, Real Estate Fund, Emerging Growth Fund and Global
Equity Fund (constituting Van Kampen American Capital Life Investment Trust,
hereafter referred to as the "Trust") at December 31, 1995, and the results of
each of their operations, the changes in each of their net assets and the
financial highlights for each of the fiscal periods presented, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at December 31, 1995 by
correspondence with the custodian and brokers and the application of
alternative auditing procedures where confirmations from brokers were not
received, provide a reasonable basis for the opinion expressed above.

PRICE WATERHOUSE LLP

Houston, Texas
February 21, 1996

F-58