VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST/, 485APOS, 1997-07-28

VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST/
485APOS, 1997-07-28

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY , 1997.

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

FORM N-1A

<TABLE>
<S> <C>
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933 [X]
POST-EFFECTIVE AMENDMENT NO. 23 [X]
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 25 [X]
</TABLE>

VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN DECLARATION OF TRUST)
ONE PARKVIEW PLAZA, OAKBROOK TERRACE, IL 60181
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)(ZIP CODE)
(630) 684-6000
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE

RONALD A. NYBERG, ESQ.
EXECUTIVE VICE PRESIDENT, GENERAL COUNSEL AND CORPORATE SECRETARY
VAN KAMPEN AMERICAN CAPITAL, INC.
ONE PARKVIEW PLAZA
OAKBROOK TERRACE, ILLINOIS 60181
(NAME AND ADDRESS OF AGENT FOR SERVICE)

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

Copies to:

WAYNE W. WHALEN, ESQ.
THOMAS A. HALE, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM (ILLINOIS)
333 WEST WACKER DRIVE
CHICAGO, ILLINOIS 60606
(312) 407-0700

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

Approximate Date of Proposed Public Offering: As soon as practicable following
effectiveness of this Registration Statement.

It is proposed that this filing will become effective:

[ ] immediately upon filing pursuant to paragraph (b)

[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (a)(i)

[X] 75 days after filing pursuant to paragraph (a)(ii)

[ ] on (date) pursuant to paragraph (a)(ii) of Rule 485

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

DECLARATION PURSUANT TO RULE 24F-2

REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF SHARES UNDER THE SECURITIES
ACT OF 1933 PURSUANT TO RULE 24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940 AND
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION A FORM 24F-2 FOR ITS FISCAL
YEAR ENDING DECEMBER 31, 1997 ON OR ABOUT MARCH 31, 1998.
================================================================================
<PAGE> 2

EXPLANATORY NOTE

The Van Kampen American Capital Life Investment Trust (the "Trust")
currently has nine operating series (each a "Series"). The purpose of this
Post-Effective Amendment is to add an additional Series, the Strategic Stock
Portfolio. Enclosed herein is a form of prospectus containing seven of the
existing Series and the new Series and a form of statement of additional
information containing all Series. Two additional forms of prospectus are
incorporated herein by reference to Post-Effective Amendment No. 22 under the
Securities Act of 1933, as amended, which was filed with the Commission on April
30, 1997. One incorporated prospectus contains all nine existing Series of the
Trust, the second incorporated prospectus contains one existing Series of the
Trust.

<PAGE> 3

VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST

CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
PROSPECTUS CAPTION
FORM N-1A ITEM ------------------
<C> <S> <C>

<CAPTION>
PART A
- ------------------------------------------------
<C> <S> <C>
1. Cover Page................................. Cover Page
2. Synopsis................................... Prospectus Summary
3. Condensed Financial Information............ Financial Highlights
4. General Description of Registrant.......... Investment Objectives and Policies;
Investment Practices; The Trust and Its
Management; Description of Shares of the
Trust
5. Management of the Fund..................... Investment Practices; The Trust and Its
Management; Inside Back Cover
6. Capital Stock and Other Securities......... The Trust and Its Management; Purchase of
Shares; Determination of Net Asset Value;
Redemption of Shares; Dividends,
Distributions and Taxes; Description of
Shares of the Trust; Additional
Information
7. Purchase of Securities Being Offered....... Purchase of Shares
8. Redemption or Repurchase................... Redemption of Shares
9. Pending Legal Proceedings.................. Inapplicable
</TABLE>

<TABLE>
<CAPTION>
STATEMENT OF ADDITIONAL INFORMATION CAPTION
PART B -------------------------------------------
<C> <S> <C>
10. Cover Page................................. Cover Page
11. Table of Contents.......................... Table of Contents
12. General Information and History............ General Information
13. Investment Objectives and Policies......... Investment Objectives and Policies;
Repurchase Agreements; Forward Commitments;
Depositary Receipts; Options, Futures
Contracts and Options on Futures
Contracts; Loans on Portfolio Securities;
Investment Restrictions; Portfolio
Turnover
14. Management of the Fund..................... General Information; Trustees and Officers;
Investment Advisory Agreements
15. Control Persons and Principal Holders of
Securities............................... General Information; Trustees and Officers;
Investment Advisory Agreements
16. Investment Advisory and Other Services..... Investment Advisory Agreements;
Distributor; Transfer Agent; Portfolio
Transactions and Brokerage; Other
Information
17. Brokerage Allocation and Other Practices... Portfolio Transactions and Brokerage
18. Capital Stock and Other Securities......... Purchase and Redemption of Shares
19. Purchase, Redemption and Pricing of
Securities Being Offered................. Determination of Net Asset Value; Purchase
and Redemption of Shares
20. Tax Status................................. Tax Status of the Trust
21. Underwriters............................... Distributor
22. Calculation of Performance Data............ Portfolio Performance; Money Market
Portfolio Yield Information
23. Financial Statements....................... Report of Independent Accountants;
Financial Statements; Notes to Financial
Statements
PART C
</TABLE>

Information required to be included in Part C is set forth under the
appropriate item in Part C of this registration statement.
<PAGE> 4

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.

SUBJECT TO COMPLETION

DATED JULY 28, 1997

VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
(800) 421-5666

, 1997

Van Kampen American Capital Life Investment Trust (the "Trust") is a
diversified, open-end management investment company which offers shares in ten
separate Portfolios (the "Portfolios"), eight 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 eight 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.

MORGAN STANLEY 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

<PAGE> 5

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.

STRATEGIC STOCK PORTFOLIO seeks to provide investors with an above average
total return through a combination of potential capital appreciation and
dividend income, consistent with the preservation of invested capital, by
investing primarily in a portfolio of dividend paying equity securities
included in the Dow Jones Industrial Average (the "DJIA") or in the Morgan
Stanley Capital International USA Index (the "MSCI Index"). Subject to the
Portfolio's other investment policies and restrictions, the Portfolio
attempts to achieve its investment objective by investing primarily in a
portfolio of actively traded equity securities comprised of (i) high
dividend yield stocks periodically selected from the companies included in
the DJIA and (ii) high dividend yield stocks periodically selected from a
pre-screened subset of the companies included in the MSCI Index. A
security's dividend yield is a primary factor in the security selection
process. The MSCI Index is the property of Morgan Stanley Capital
International ("MSCI"). MSCI has granted a license for use by the Trust of
the MSCI Index and related trademarks and tradenames. The DJIA is the
property of Dow Jones & Company, Inc. Dow Jones & Company, Inc. has not
granted to the Strategic Stock Portfolio a license to use the DJIA. Neither
MSCI nor Dow Jones & Company, Inc. has participated in any way in the
creation of the Strategic Stock Portfolio or in the selection of the stocks
included in such Portfolio and neither has approved any information herein
relating thereto. Shares of the Strategic Stock Portfolio are not designed
so that their prices will parallel or correlate with any movements in the
DJIA or the MSCI Index, and it is expected that their prices will not
parallel or correlate with such movements.

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 a Portfolio. Investors should
read and retain this Prospectus for future reference.

A Statement of Additional Information dated , 1997
containing additional information about the Trust and its Portfolios is hereby
incorporated in its entirety into this Prospectus. A copy of the Statement of
Additional Information may be obtained without charge by calling (800) 421-5666
or for Telecommunications Device for the Deaf at (800) 421-2833. The Statement
of Additional Information has been filed with the Securities and Exchange
Commission ("SEC") and is available along with other related materials of the
Trust at the SEC's internet web site (http://www.sec.gov).

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE REGULATORS NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE REGULATORS PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 6

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..................... 9
Introduction............................. 16
Investment Objectives and Policies....... 16
Domestic Income Portfolio.............. 16
Emerging Growth Portfolio.............. 20
Enterprise Portfolio................... 20
Government Portfolio................... 21
Growth and Income Portfolio............ 25
Money Market Portfolio................. 25
Morgan Stanley Real Estate Securities
Portfolio........................... 26
Strategic Stock Portfolio.............. 28
</TABLE>

<TABLE>
<CAPTION>
Page
<S> <C>
Investment Practices..................... 31
The Trust and Its Management............. 36
Purchase of Shares....................... 40
Determination of Net Asset Value......... 40
Redemption of Shares..................... 41
Dividends, Distributions and Taxes....... 41
Portfolio Performance.................... 42
Description of Shares of the Trust....... 44
Additional Information................... 44
Appendix................................. 46
</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> 7

PROSPECTUS SUMMARY

Shares Offered..........Shares of Beneficial Interest in eight Portfolios: the
Domestic Income Portfolio, the Emerging Growth
Portfolio, the Enterprise Portfolio, the Government
Portfolio, the Growth and Income Portfolio, the Money
Market Portfolio, the Morgan Stanley Real Estate
Securities Portfolio and the Strategic Stock 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
Morgan Stanley Real Estate Securities Portfolio seeks
long-term growth of capital as its primary investment
objective; current income is a secondary consideration.
The Strategic Stock Portfolio seeks above average total
return through a combination of potential capital
appreciation and dividend income, consistent with the
preservation of invested capital, by investing primarily
in a portfolio of dividend paying equity securities
included in the DJIA or in the MSCI Index. A security's
dividend yield is a primary factor in the security
selection process. There can be no assurance that any
Portfolio will achieve its investment objective.

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, Inc. ("Moody's") or Standard & Poor's Ratings
Group ("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
3
<PAGE> 8

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."

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
4
<PAGE> 9

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 Morgan Stanley 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 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 -- Morgan Stanley 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

5
<PAGE> 10

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."

The Strategic Stock Portfolio invests primarily in
dividend paying equity securities of companies included
in the DJIA or in the MSCI Index. The Portfolio will
initially invest approximately equally in 20 securities
identified by the Adviser in the following manner (the
"Strategic Selection Policies"). The ten highest
dividend yielding securities in the DJIA will be
identified for investment. In addition, all companies
having securities in the MSCI Index will be reviewed by
the Adviser and securities of companies in the financial
or utility sectors and of companies having securities
included in the DJIA will be excluded. The remaining
pool of MSCI Index securities will be further evaluated
and securities of companies that do not have positive
one- and three-year sales and earnings growth rates and
two years positive dividend growth will be excluded. The
Adviser also will exclude MSCI Index securities that are
in the bottom 25% of all MSCI Index securities measured
in terms of total annual trading volume. MSCI Index
securities of the remaining companies will be ranked by
dividend yield, and the ten highest-yielding such MSCI
Index securities will be identified for investment. The
20 securities so identified (the "Strategic Securities")
initially will represent the Portfolio's initial
investments. The Adviser periodically will employ the
same Strategic Selection Policies to identify a new list
of 20 Strategic Securities and will review and adjust a
portion or all of the Portfolio's assets so as to invest
that portion of the Portfolio's assets approximately
equally in the new list of 20 Strategic Securities. In
this manner, the Adviser expects that each security in
the Portfolio will be reviewed and potentially adjusted
approximately annually. Application of the Strategic
Selection Policies will be subject to and limited by
certain of the Portfolio's other investment policies and
restrictions, including restrictions and limitations
which must be met in order for the Portfolio to qualify
to be treated for U.S. federal income tax purposes as a
"regulated investment company" under Subchapter M of the
Internal Revenue Code of 1986, as amended, or in order
to comply with requirements of the Investment Company
Act of 1940, as amended (such as investment
diversification requirements, industry concentration
limitations and limitations on the ability of the
Portfolio to realize gain from the sale of securities
held for less than three months). In addition, the
Adviser will try to avoid transacting in odd-lots of
securi-

6
<PAGE> 11

ties in order to minimize transaction costs. These
limitations may, at times, cause the composition of the
Portfolio's investment portfolio to differ significantly
from that which would have resulted had the Strategic
Selection Policies been fully implemented. Although each
new list of Strategic Securities will include only 20
securities, because only a portion of the Portfolio's
assets may be reviewed and adjusted at any given time,
the Adviser expects that the number of securities held
by the Portfolio will over time increase and that the
Portfolio may eventually hold forty or more different
securities. Except to raise cash for operational
purposes, the Portfolio ordinarily will not sell
securities or reevaluate its portfolio investments
except as periodically determined by the Adviser. As a
result, the adverse financial condition of a company
will not result in its elimination from the Portfolio,
except under extraordinary circumstances. Risks
associated with an investment in the Portfolio include
the possible deterioration of either the financial
condition of the issuers or the general condition of the
stock market, and general price volatility. The
relatively high dividend yield (calculated based on the
current stock price and the annualized most recent
dividend payment amount) of certain securities that the
Portfolio will acquire may reflect the market's
assessment of the risk that the company may reduce or
eliminate the dividend in the current period or in the
future, or otherwise reflect the market's unfavorable
assessment of the company's performance outlook. The
Adviser generally will not take these considerations
into account in implementing the Strategic Selection
Policies. Use of options, futures contracts and related
options may include additional risks. See "Investment
Practices -- Using Options, Futures Contracts and
Options on Futures Contracts."

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

Investment Adviser......Van Kampen American Capital Asset Management, Inc. (the
"Adviser") is the investment adviser for each Portfolio.

Distributor.............Van Kampen American Capital Distributors, Inc. (the
"Distributor") distributes each Portfolio's shares.

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, the Morgan Stanley Real
Estate Securities Portfolio and the Strategic Stock
Portfolio declare dividends and any capital gains
distributions annually.

The foregoing is qualified in its entirety by reference to the
more detailed information appearing elsewhere in this Prospectus.

7
<PAGE> 12

FINANCIAL HIGHLIGHTS

The following financial highlights have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. The most
recent annual report (which contains financial highlights for the last five
years) is included in the Statement of Additional Information and may be
obtained by shareholders without charge by calling the telephone number on the
cover of this Prospectus. 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
---------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988
PER SHARE OPERATING PERFORMANCE ------- ------- -------- ------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period.......................... $ 8.21 $ 7.35 $ 8.58 $ 8.00 $ 7.74 $ 6.98 $ 8.64 $ 10.96 $ 10.15
------- ------- -------- ------- ------- ------- ------- ------- --------
Net Investment Income........... .755 .71 .85 .72 .69 .685 1.035 1.725 .62
Net Realized and Unrealized
Gain/Loss on Securities....... (.212) .8525 (1.2275) .5825 .2725 .7525 (1.64) (2.31) .8975
------- ------- -------- ------- ------- ------- ------- ------- --------
Total from Investment
Operations...................... .543 1.5625 (.3775) 1.3025 .9625 1.4375 (.605) (.585) 1.5175
------- ------- -------- ------- ------- ------- ------- ------- --------
Distributions from Net
Investment Income........... .745 .7025 .8525 .7225 .7025 .6775 1.055 1.725 .61
Distributions from Net
Realized Gain on
Securities.................. -- -- -- -- -- -- -- .01 .0975
------- ------- -------- ------- ------- ------- ------- ------- --------
Total Distributions............... .745 .7025 .8525 .7225 .7025 .6775 1.055 1.735 .7075
------- ------- -------- ------- ------- ------- ------- ------- --------
Net Asset Value, End of the
Period.......................... $ 8.008 $ 8.21 $ 7.35 $ 8.58 $ 8.00 $ 7.74 $ 6.98 $ 8.64 $ 10.96
======= ======= ======== ======= ======= ======= ======= ======= ========

Total Return(1)*.................. 6.68% 21.37% (4.33%) 16.32% 12.50% 21.23% (7.23%) (5.44%) 14.95%
Net Assets at End of the Period
(In millions)................... $ 19.8 $ 26.6 $ 21.3 $ 27.4 $ 21.1 $ 17.4 $ 6.3 $ 8.1 $ 8.1
Ratio of Expenses to Average Net
Assets*......................... .60% .60% .60% .60% .60% .60% .60% .60% .60%
Ratio of Net Investment Income to
Average Net Assets*............. 7.97% 8.11% 8.35% 7.80% 8.89% 9.72% 11.99% 12.92% 10.88%

Portfolio Turnover Rate........... 77% 54% 94% 130% 117% 90% 123% 56% 44%
*If certain expenses had not been
assumed by the Adviser, Total
Return would have been lower and
the ratios would have been as
follows:
Ratio of Expenses to Average Net
Assets.......................... 1.29% .93% .95% .95% .95% .95% .95% .95% .95%
Ratio of Net Investment Income to
Average Net Assets.............. 7.28% 7.78% 8.00% 7.40% 8.54% 9.37% 11.64% 12.57% 10.53%

<CAPTION>
NOVEMBER 4, 1987
(COMMENCEMENT OF
INVESTMENT OPERATIONS) TO
DECEMBER 31, 1987
PER SHARE OPERATING PERFORMANCE -------------------------
<S> <C>
Net Asset Value, Beginning of the
Period.......................... $10.00
-------
Net Investment Income........... .08
Net Realized and Unrealized
Gain/Loss on Securities....... .1525
-------
Total from Investment
Operations...................... .2325
-------
Distributions from Net
Investment Income........... .0825
Distributions from Net
Realized Gain on
Securities.................. --
-------
Total Distributions............... .0825
-------
Net Asset Value, End of the
Period.......................... $10.15
=======
Total Return(1)*.................. 1.50%
Net Assets at End of the Period
(In millions)................... $ 1.2
Ratio of Expenses to Average Net
Assets*......................... .60%
Ratio of Net Investment Income to
Average Net Assets*............. 5.58%
Portfolio Turnover Rate........... 42%
*If certain expenses had not been
assumed by the Adviser, Total
Return would have been lower and
the ratios would have been as
follows:
Ratio of Expenses to Average Net
Assets.......................... .95%
Ratio of Net Investment Income to
Average Net Assets.............. 5.23%
</TABLE>

- ---------------------
(1) Total return for periods of less than one year are not annualized. Total
return does not consider the effect of sales loads.

8
<PAGE> 13

FINANCIAL HIGHLIGHTS (CONTINUED)

The following financial highlights have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. The most
recent annual report is included in the Statement of Additional Information and
may be obtained by shareholders without charge by calling the telephone number
on the cover of this Prospectus. 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
(COMMENCEMENT OF
YEAR ENDED INVESTMENT OPERATIONS)
DECEMBER 31, THROUGH
1996 DECEMBER 31, 1995
------------ ----------------------
<S> <C> <C>
Net Asset Value, Beginning of the Period.................... $ 11.72 $10.00
------- ------
Net Investment Loss....................................... (.016) (.08)
Net Realized and Unrealized
Gain on Securities..................................... 1.956 1.80
------- ------
Total from Investment Operations............................ 1.940 1.72
------- ------
Net Asset Value, End of the Period.......................... $13.660 $11.72
======= ======
Total Return*............................................... 16.55% 17.20%(1)
Net Assets at End of the Period (In millions)............... $ 5.2 $ 2.3
Ratio of Expenses to Average Net Assets*.................... .85% 2.50%
Ratio of Net Investment Loss to Average Net Assets*......... (.17%) (1.45%)
Portfolio Turnover.......................................... 102% 41%(1)
Average Commission Per Equity Share Traded(2)............... $ .0470 --
*If certain expenses had not been assumed by the Adviser,
Total Return would have been lower and the ratios would
have been as follows:
Ratio of Expenses to Average Net Assets..................... 3.28% 5.40%
Ratio of Net Investment Loss to Average Net Assets.......... (2.60%) (4.35%)
</TABLE>

- ---------------------
(1) Non-Annualized

(2) Represents the average brokerage commission paid per equity share traded
during the period for trades where commissions were applicable. This
disclosure was not required in fiscal years prior to 1996.

9
<PAGE> 14

FINANCIAL HIGHLIGHTS (CONTINUED)

ENTERPRISE PORTFOLIO

<TABLE>
<CAPTION>
Period Ended December 31
-----------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987(2)
------- ------ ------ ------ ------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period.............................. $14.69 $12.39 $14.57 $14.21 $13.44 $10.09 $11.30 $8.70 $7.97 $9.33
------- ------ ------ ------ ------ ------ ------ ------ ------ -------
Net Investment Income............... .113 .32 .25 .21 .23 .265 .395 .40 .32 .18
Net Realized and Unrealized
Gain/Loss on Securities........... 3.417 4.22 (.7625) 1.0325 .77 3.37 (1.17) 2.57 .765 (1.1975)
------- ------ ------ ------ ------ ------ ------ ------ ------ -------
Total from Investment Operations...... 3.530 4.54 (.5125) 1.2425 1.00 3.635 (.775) 2.97 1.085 (1.0175)
------- ------ ------ ------ ------ ------ ------ ------ ------ -------
Less:
Distributions from Net Investment
Income............................ .109 .3175 .25 .215 .23 .285 .435 .37 .30 .2575
Distributions from Net Realized Gain
on Securities..................... 1.849 1.9225 1.4175 .6675 -0- -0- -0- -0- .055 .085
------- ------ ------ ------ ------ ------ ------ ------ ------ -------
Total Distributions................... 1.958 2.24 1.6675 .8825 .23 .285 .435 .37 .355 .3425
------- ------ ------ ------ ------ ------ ------ ------ ------ -------
Net Asset Value, End of the Period.... $16.262 $14.69 $12.39 $14.57 $14.21 $13.44 $10.09 $11.30 $8.70 $7.97
======= ====== ====== ====== ====== ====== ====== ====== ====== =======
Total Return*......................... 24.80% 36.98% (3.39%) 8.98% 7.48% 36.41% (6.84%) 34.23% 13.61% (11.12%)
Net Assets at End of the Period (in
millions)........................... $84.8 $76.0 $67.5 $72.3 $65.6 $57.8 $27.2 $31.8 $24.0 $31.0
Ratio of Expenses to Average Net
Assets*............................. .60% .60% .60% .60% .60% .60% .60% .60% .60% .60%
Ratio of Net Investment Income to
Average Net Assets*................. .68% 2.06% 1.72% 1.41% 1.78% 2.33% 3.64% 3.74% 3.13% 1.65%
Portfolio Turnover.................... 152% 145% 153% 139% 116% 95% 122% 86% 63% 75%
Average Commission Paid per Equity
Share Traded(1)..................... $.0435 -- -- -- -- -- -- -- -- --
*If certain expenses had not been
assumed by the Adviser. Total Return
would have been lower and the ratios
would have been as follows:
Ratio of Expenses to Average Net
Assets.............................. .75% .68% .68% .72% .74% .90% .93% .93% .95% .89%
Ratio of Net Investment Income to
Average Net Assets.................. .53% 1.98% 1.64% 1.29% 1.64% 2.03% 3.31% 3.41% 2.78% 1.36%
</TABLE>

- ---------------------
(1) Represents the average brokerage commission paid per equity share traded
during the period for trades where commissions were applicable. This
disclosure was not required in fiscal years prior to 1996.
(2) Based on average month-end shares outstanding.

10
<PAGE> 15

FINANCIAL HIGHLIGHTS (CONTINUED)

GOVERNMENT PORTFOLIO

<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31
----------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------ ------ ------ ------ ------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of the
Period............ $ 9.06 $ 8.28 $ 9.26 $ 9.13 $ 9.29 $ 8.70 $ 8.80 $ 8.48 $ 8.68 $ 9.91
------ ------ ------ ------ ------- ------ ------ ------ ------ ------
Net Investment
Income.......... .569 .60 .56 .57 .665 .74 .785 .84 .88 .76
Net Realized and
Unrealized
Gain/Loss on
Securities...... (.388) .78 (.985) .135 (.1575) .60 (.105) .325 (.215) (.97)
------ ------ ------ ------ ------- ------ ------ ------ ------ ------
Total from
Investment
Operations........ .181 1.38 (.425) .705 .5075 1.34 .68 1.165 .665 (.21)
------ ------ ------ ------ ------- ------ ------ ------ ------ ------
Less:
Distributions from
Net Investment
Income.......... .575 .60 .555 .575 .6675 .75 .78 .845 .865 .7525
Distributions from
Net Realized
Gain on
Securities...... -- -- -- -- -- -- -- -- -- .2675
------ ------ ------ ------ ------- ------ ------ ------ ------ ------
Total
Distributions..... .575 .60 .555 .575 .6675 .75 .78 .845 .865 1.02
------ ------ ------ ------ ------- ------ ------ ------ ------ ------
Net Asset Value, End
of the Period..... $8.666 $ 9.06 $ 8.28 $ 9.26 $ 9.13 $ 9.29 $ 8.70 $ 8.80 $ 8.48 $ 8.68
====== ====== ====== ====== ======= ====== ====== ====== ====== ======

Total Return(1)*.... 2.12% 17.17% (4.63%) 7.86% 5.73% 16.23% 8.31% 14.31% 6.74% (2.12%)
Net Assets at End of
the Period (In
millions)......... $ 57.3 $ 67.0 $ 65.5 $ 80.6 $ 74.8 $ 77.0 $ 73.2 $ 81.2 $ 90.6 $108.8
Ratio of Expenses to
Average Net
Assets*........... .60% .60% .60% .60% .60% .60% .60% .60% .60% .60%
Ratio of Net
Investment Income
to Average Net
Assets*........... 6.56% 6.89% 6.71% 6.45% 7.29% 8.37% 9.19% 9.56% 9.29% 8.37%

Portfolio Turnover
Rate.............. 143% 164% 192% 91% 36% 57% 164% 42% 88% 65%
*If certain expenses
had not been
assumed by the
Adviser, Total
Return would have
been lower and the
ratios would have
been as follows:
Ratio of Expenses to
Average Net
Assets............ .80% .72% .70% .70% .70% .70% .69% .66% .64% .64%
Ratio of Net
Investment Income
to Average Net
Assets............ 6.36% 6.77% 6.61% 6.35% 7.19% 8.27% 9.10% 9.50% 9.25% 8.33%
</TABLE>

- ---------------------
(1) Total return does not consider the effect of sales loads.

11
<PAGE> 16

FINANCIAL HIGHLIGHTS (CONTINUED)

GROWTH AND INCOME PORTFOLIO

<TABLE>
<CAPTION>
DECEMBER 23, 1996
(COMMENCEMENT
OF INVESTMENT
OPERATIONS) TO
DECEMBER 31, 1996
-----------------
<S> <C>
Net Asset Value, Beginning of the Period.................... $10.000
--------
Net Investment Income..................................... .011
Net Realized and Unrealized
Loss on Securities..................................... (.041)
--------
Total from Investment Operations............................ (.030)
--------
Net Asset Value, End of the Period.......................... $9.970
========
Total Return*............................................... (.30)%(1)
Net Assets at End of the Period (In millions)............... $0.5
Ratio of Expenses to Average Net Assets*.................... .75%
Ratio of Net Investment Income to Average Net Assets*....... 4.47%
Portfolio Turnover.......................................... 0%(1)
Average Commission Paid Per Equity Share Traded(2).......... $.0203
*If certain expenses had not been assumed by the Adviser,
Total Return would have been lower and the ratios would have
been as follows:
Ratio of Expenses to Average Net Assets..................... 45.97%
Ratio of Net Investment Income/Loss to Average Net Assets... (40.74)%
</TABLE>

- ---------------------
(1) Non-Annualized
(2) Represents the average brokerage commissions paid per equity share traded
during the period for trades where commissions were applicable.

12
<PAGE> 17

FINANCIAL HIGHLIGHTS (CONTINUED)

The following financial highlights have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. The most
recent annual report (which contains financial highlights for the last five
years) in included in the Statement of Additional Information and may be
obtained by shareholders without charge by calling the telephone number on the
cover of this Prospectus. This information should be read in conjunction with
the related financial statements and notes thereto included in the Statement of
Additional Information.

MONEY MARKET PORTFOLIO

<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31
-----------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
----- ------- ------- ------- ------- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
the Period.................... $1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
----- ------- ------- ------- ------- ------- ------ ------- ------- --------
Net Investment Income......... .048 .0533 .0365 .0262 .0331 .0546 .076 .0877 .0714 .0624
Net Realized and Unrealized
Loss on Securities.......... -- -- -- -- -- -- -- -- -- (.00002)
----- ------- ------- ------- ------- ------- ------ ------- ------- --------
Total from Investment
Operations.................... .048 .0533 .0365 .0262 .0331 .0546 .076 .0877 .0714 .06238
----- ------- ------- ------- ------- ------- ------ ------- ------- --------
Less Distributions From Net
Investment Income............. .048 (.0533) (.0365) (.0262) (.0331) (.0546) (.076) (.0877) (.0714) (.06238)
----- ------- ------- ------- ------- ------- ------ ------- ------- --------
Net Asset Value, End of the
Period........................ $1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
===== ======= ======= ======= ======= ======= ====== ======= ======= ========
Total Return(1)*................ 4.89% 5.46% 3.71% 2.66% 3.36% 5.46% 7.83% 9.13% 7.38% 6.41%
Net Assets at End of the Period
(In millions)................. $19.6 $ 21.6 $ 28.5 $ 30.0 $ 32.9 $ 38.0 $ 34.3 $ 29.0 $ 24.5 $ 18.6
Ratios to Average Net Assets
(annualized)
Ratios of Expenses to Average
Net Assets*................... .60% .60% .60% .60% .60% .60% .60% .60% .60% .60%
Ratios of Net Investment Income
to Average Net Assets*........ 4.78% 5.33% 3.63% 2.63% 3.32% 5.44% 7.59% 8.76% 7.22% 6.24%
*If certain expenses had not
been assumed by the Adviser,
Total Return would have been
lower and the ratios would have
been as follows:
Ratio of Expenses to Average Net
Assets........................ 1.29% .93% .87% .95% .89% .87% .89% .95% .95% .95%
Ratio of Net Investment Income
to Average Net Assets......... 4.10% 5.00% 3.37% 2.28% 3.03% 5.17% 7.30% 8.41% 6.87% 5.89%
</TABLE>

- ---------------------
(1) Total return does not consider the effect of sales loads.

13
<PAGE> 18

FINANCIAL HIGHLIGHTS (CONTINUED)

MORGAN STANLEY REAL ESTATE SECURITIES PORTFOLIO

<TABLE>
<CAPTION>
JULY 3, 1995
(COMMENCEMENT OF
YEAR ENDED INVESTMENT OPERATIONS) TO
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -------------------------
<S> <C> <C>
Net Asset Value, Beginning of the Period.................... $ 10.74 $ 10.00
------- -----------
Net Investment Income..................................... .217 .20
Net Realized and Unrealized Gain on Securities............ 4.117 .6325
------- -----------
Total from Investment Operations............................ 4.334 .8325
------- -----------
Less:
Distributions from Net Investment Income.................. (.199) (.0925)
Distributions from Net Realized Gain on Securities........ .091 --
------- -----------
Total Distributions......................................... .290 (.0925)
------- -----------
Net Asset Value, End of the Period.......................... $14.784 $ 10.74
======= ===========
Total Return*............................................... 40.53% 8.35%(1)
Net Assets at End of the Period (In Millions)............... $ 167.5 $ 8.6
Ratio of Expenses to Average Net Assets*.................... 1.10% 2.50%
Ratio of Net Investment Income to Average Net Assets*....... 5.06% 3.75%
Portfolio Turnover.......................................... 84% 85%(1)
Average Commission Paid Per Equity Share Traded(2).......... $ .0313 --
* If certain expenses had not been assumed by the Adviser,
Total Return would have been lower and the ratios would
have been as follows:
Ratio of Expenses to Average Net Assets..................... 1.27% 2.90%
Ratio of Net Investment Income to Average Net Assets........ 4.89% 3.36%
</TABLE>

- ---------------------
(1) Non-Annualized
(2) Represents the average brokerage commissions paid per equity share traded
during the period where commissions were applicable. This disclosure was not
required in fiscal periods prior to 1996.

(3) Based on average shares outstanding.

As of the date of this Prospectus the Strategic Stock Portfolio had not
commenced investment operations and, accordingly, no financial highlight
information is included for the Strategic Stock Portfolio.

14
<PAGE> 19

INTRODUCTION

The Trust is a duly organized Delaware business trust with ten separate
Portfolios, eight 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 Morgan Stanley Real Estate
Securities Portfolio, is a fundamental policy and may not be changed without
shareholder approval. With respect to the Morgan Stanley 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 primary investment objective of the Domestic Income Portfolio 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 at the time of 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 10% 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,

15
<PAGE> 20

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
value 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. 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.

16
<PAGE> 21

During the fiscal year ended December 31, 1996, 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....................................................... -0-
A/A......................................................... 11.7
BBB/Baa..................................................... 42.5
BB/Ba....................................................... 17.3
B/B......................................................... 10.5
*Nonrated................................................... 9.8
Preferred Stocks/Common Stocks/Warrants..................... 3.8
Cash and Equivalents........................................ 4.4
------
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- 9.8%.

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

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<PAGE> 22

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.

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<PAGE> 23

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 15% 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 so long as such investments aggregate less than 5% 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

19
<PAGE> 24

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

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<PAGE> 25

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.

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. 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 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 30 days thereafter).

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<PAGE> 26

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.

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

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<PAGE> 27

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.

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

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<PAGE> 28

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.

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

24
<PAGE> 29

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
5% 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."

MORGAN STANLEY REAL ESTATE SECURITIES PORTFOLIO

General. The Morgan Stanley 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 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

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<PAGE> 30

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 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.

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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.

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.

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.

STRATEGIC STOCK PORTFOLIO

General. The investment objective of the Strategic Stock Portfolio is to
seek an above average total return through a combination of potential capital
appreciation and dividend income, consistent with the preservation of invested
capital.

The Strategic Stock Portfolio invests primarily in dividend paying equity
securities of companies included in the DJIA or in the MSCI Index. The DJIA was
first published in The Wall Street Journal in 1896. Initially consisting of just
12 stocks, the DJIA expanded to 20 stocks in 1916 and to its present size of 30
stocks on October 1, 1928. The MSCI Index consists of approximately 370 large
domestic companies in the United States and has existed since January 1, 1970.

In selecting securities for the Fund, the Adviser intends to follow the
following policies (the "Strategic Selection Policies").

The ten highest dividend yielding securities in the DJIA will be identified
for investment. In addition, all companies having securities in the MSCI Index
will be reviewed by the Adviser and securities of companies in the financial or
utility sectors and of companies having securities included in the DJIA will be
excluded. The remaining pool of MSCI Index securities will be further evaluated
and securities of companies that do not have positive one- and three-year sales
and earnings growth rates and two years positive dividend growth will be
excluded. The Adviser also will exclude MSCI Index securities that are in the
bottom 25% of all MSCI Index securities measured in terms of total annual
trading volume. MSCI Index securities of the remaining companies will be ranked
by dividend yield, and the ten highest-yielding such MSCI Index securities will
be identified for investment. In the event that this process results in less
than 10 remaining MSCI Index securities, those companies with the most favorable
one- and three-year sales and earnings performance and two-year dividend
performance as determined by the Adviser will be added back until the number of
MSCI Index securities equals 10. Dividend yield for purposes of applying the
foregoing investment policies is calculated for each security by annualizing the
last quarterly or semi-annual ordinary dividend declared on the security and
dividing the result by the security's closing sale price on the applicable date.
This yield is historical and there can be no assurance that any dividends will
be declared or paid in the future.

The 20 securities so identified (the "Strategic Securities") initially will
represent the Portfolio's initial investments. Beginning at least 3 months after
the Portfolio commences investment operations, the Adviser periodically will
employ the same Strategic Selection Policies to identify a new list

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<PAGE> 32

of 20 Strategic Securities and will review and adjust a portion or all of the
Portfolio's assets so as to invest that portion of the Portfolio's assets
approximately equally in the new list of 20 Strategic Securities. In this
manner, the Adviser expects that beginning with the first reevaluation each
security in the Portfolio will be reviewed and potentially adjusted
approximately annually, although reviews and adjustments may be made more
frequently. For a more detailed discussion of the Portfolio's investment
policies, including the frequency of security reevaluations and the portion of
the Portfolio's assets that the Adviser presently expects to reevaluate at the
end of each period, see the Statement of Additional Information.

The Adviser generally will seek to allocate cash available for investment
due to the sale of new Shares of the Portfolio and the receipt of dividends and
interest income from the portfolio investments approximately proportionately
among all securities in the Portfolio. To the extent that the Strategic Stock
Portfolio is required to dispose of securities in order to satisfy redemption
requests, make distributions, pay expenses or otherwise raise cash for
operational purposes, the Adviser generally intends to sell approximately
proportionate amounts of securities from all securities in the Portfolio.

Application of the foregoing Strategic Selection Policies will be subject
to and limited by certain of the Portfolio's other investment policies and
restrictions, including restrictions and limitations which must be met in order
for the Portfolio to qualify to be treated for U.S. federal income tax purposes
as a "regulated investment company" under Subchapter M of the Internal Revenue
Code of 1986, as amended, or in order to comply with requirements of the
Investment Company Act of 1940, as amended. The Portfolio is subject to
investment diversification requirements that generally provide that the
Portfolio may not with respect to 75% of its assets, invest more than 5% of its
assets in the securities of any one issuer or purchase more than 10% of the
outstanding voting securities of any one issuer. Further, the Portfolio
generally may not invest more than 25% of the value of its total assets in
securities of issuers in any particular industry. In addition, the Portfolio's
ability to dispose of portfolio securities in order to adjust its assets may be
limited by the requirement that less than 30% of the Portfolio's gross income be
derived from the disposition of securities held for less than three months. The
Portfolio's satisfaction of these requirements will take precedent over the
Strategic Investment Policies. In addition, the Adviser will try to avoid
transacting in odd-lots of securities in order to minimize transaction costs.
These limitations may, at times, cause the composition of the Portfolio's
investment portfolio to differ significantly from that which would have resulted
had the Strategic Selection Policies been fully implemented. In selecting
securities for investment or disposition at times that the Portfolio's
investment policies and restrictions do not permit full implementation of the
Strategic Selection Policies, the Adviser will have sole discretion to select
securities for purchase or sale and generally will make such selections in a
manner that is consistent with the Portfolio's investment objective and in a
manner that it believes is consistent with the investment rationale that is the
basis for the Strategic Selection Policies.

The Portfolio will continue to hold securities, even though such securities
may not be included in the most recent list of Strategic Securities determined
for the review and adjustment of a portion of the Portfolio's assets. In
addition, although each new list of Strategic Securities will include only 20
securities, because only a portion of the Portfolio's assets may be reviewed and
adjusted at any given time, the Adviser expects that the number of securities
held by the Portfolio will over time increase and that the Portfolio may
eventually hold forty or more different securities.

The Strategic Stock Portfolio may invest up to 5% of its total assets in
options on equity securities indices, futures contracts on such indices and
options on such futures contracts for both hedging purposes and in an attempt to
enhance gain. The Strategic Stock Portfolio also may invest up to 5% of its
total assets in securities of other registered investment companies that seek to
provide investment results that generally correspond to the performance of
securities included in one or more broad market indices. Investment in
securities of other investment companies will subject the Portfolio to
additional and potentially duplicative costs and expenses, including investment
management fees charged by such registered investment companies. Pending invest-

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ment and for temporary defensive purposes the Portfolio may invest without limit
in short-term, high quality fixed income securities and in money-market
instruments. The Adviser expects that the portfolio turnover rate for the
Strategic Stock Portfolio will not exceed 100%. A high rate of portfolio
turnover may result in increased brokerage and other transaction expenses.

The DJIA is the property of Dow Jones & Company, Inc. Dow Jones & Company,
Inc. has not granted to the Strategic Stock Portfolio a license to use the DJIA.
Dow Jones & Company, Inc. has not participated in any way in the creation of the
Strategic Stock Portfolio or in the selection of the stocks included in such
Portfolio and has not approved any information herein relating thereto. Shares
of the Strategic Stock Portfolio are not designed so that their prices will
parallel or correlate with any movements in the DJIA, and it is expected that
their prices will not parallel or correlate with such movements.

The Strategic Stock Portfolio is not sponsored, endorsed, sold or promoted
by Morgan Stanley. Morgan Stanley makes no representation or warranty, express
or implied, to the owners of shares of the Portfolio or any member of the public
regarding the advisability of investing in investment portfolios generally or in
the Strategic Stock Portfolio particularly or the ability of the MSCI Index to
track general stock market performance. Morgan Stanley is the licensor of
certain trademarks, service marks and trade names of Morgan Stanley and of the
MSCI Index which is determined, composed and calculated by Morgan Stanley
without regard to this Portfolio. Morgan Stanley has no obligation to take the
needs of this Portfolio or the owners of this Portfolio into consideration in
determining, composing or calculating the MSCI Index. Morgan Stanley is not
responsible for and has not participated in the determination of the timing of,
prices at, or quantities of this Portfolio to be issued or in the determination
or calculation of the equation by which this Portfolio is redeemable for cash.
Morgan Stanley has no obligation or liability to owners of this Portfolio in
connection with the administration, marketing or trading of this Portfolio.

ALTHOUGH MORGAN STANLEY SHALL OBTAIN INFORMATION FOR INCLUSION IN OR FOR
USE IN THE CALCULATION OF THE INDEXES FROM SOURCES WHICH MORGAN STANLEY
CONSIDERS RELIABLE, NEITHER MORGAN STANLEY NOR ANY OTHER PARTY GUARANTEES THE
ACCURACY AND/OR THE COMPLETENESS OF THE INDEXES OR ANY DATA INCLUDED THEREIN.
NEITHER MORGAN STANLEY NOR ANY OTHER PARTY MAKES ANY WARRANTY, EXPRESS OR
IMPLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE, LICENSEE'S CUSTOMERS AND
COUNTERPARTIES, OWNERS OF THE PORTFOLIO, OR ANY OTHER PERSON OR ENTITY FROM THE
USE OF THE INDEXES OR ANY DATA INCLUDED THEREIN IN CONNECTION WITH THE RIGHTS
LICENSED HEREUNDER OR FOR ANY OTHER USE. NEITHER MORGAN STANLEY NOR ANY OTHER
PARTY MAKES ANY EXPRESS OR IMPLIED WARRANTIES, AND MORGAN STANLEY HEREBY
EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE WITH RESPECT TO THE INDEXES OR ANY DATA INCLUDED THEREIN.
WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL MORGAN STANLEY OR ANY
OTHER PARTY HAVE ANY LIABILITY FOR ANY DIRECT, INDIRECT, SPECIAL, PUNITIVE,
CONSEQUENTIAL OR ANY OTHER DAMAGES (INCLUDING LOST PROFITS) EVEN IF NOTIFIED OF
THE POSSIBILITY OF SUCH DAMAGES.

Risk Factors. There is no guarantee that the investment objective of the
Portfolio will be achieved because it is subject to the continuing ability of
the respective issuers of equities in which the Portfolio invests to declare and
pay dividends and because the market value of such equities can be affected by a
variety of factors. Common stocks may be especially susceptible to general stock
market movements and to volatile increases and decreases of value as market
confidence in and perceptions of the issuers change. There can be no assurance
that the value of the underlying securities will increase or that the issuers of
the securities will pay dividends on outstanding securities. The declaration of
dividends by any issuer depends upon several factors including the financial
condition of the issuer and general economic conditions. Risks associated with
an investment in the Portfolio include the possible deterioration of either the
financial condition of the issuers or the general condition of the stock market,
and general price volatility. The relatively high

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<PAGE> 34

dividend yield of certain securities that the Portfolio will acquire may reflect
the market's assessment of the risk that the company may reduce or eliminate the
dividend in the current period or in the future, or otherwise reflect the
market's unfavorable assessment of the company's performance outlook. The
Adviser generally will not take these considerations into account in
implementing the Strategic Selection Policies and, accordingly, the Portfolio
may at times acquire securities of companies that the market and the Adviser
believe are more susceptible to financial difficulty and corresponding adverse
market performance than are other companies with securities included in the DJIA
or in the MSCI Index.

In addition, investors should be aware that the Portfolio is not "managed."
Except to raise cash for operational purposes, the Portfolio ordinarily will not
sell securities or reevaluate its portfolio investments except as periodically
determined by the Adviser. In addition, only a portion of the Portfolio's assets
may be reviewed and adjusted for any given period. As a result, although the
Portfolio may (but need not) dispose of a security in certain events such as the
issuer having defaulted on the payment on any of its outstanding obligations or
the price of a security having declined to such an extent or other factors
existing so that in the opinion of the Adviser the retention of such security
would be detrimental to the Portfolio, the adverse financial condition of a
company will not result in its elimination from the Portfolio prior to scheduled
review and adjustment except under extraordinary circumstances. Similarly,
securities held in the Portfolio ordinarily will not be sold by the Portfolio
for the purpose of taking advantage of market fluctuations or changes in
anticipated rates of appreciation.

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., a 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. Repurchase
agreements involve certain risks in the event of a default by the other party.
In the event of a bankruptcy or other default of the seller of a repurchase
agreement, a 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 a 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 Morgan Stanley Real Estate Securities Portfolio, 15% of the
value of each Portfolio's net assets and, in the case of the Domestic Income
Portfolio, the Enterprise Portfolio, the Government Portfolio and the Money
Market Portfolio, 10% of the value of its net assets.

For the purpose of investing in repurchase agreements, the Adviser may
aggregate the cash that certain funds advised or subadvised by the Adviser or
certain of its affiliates 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 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 exemptive order authorizing this practice, which conditions are
designed to ensure the fair administration of the joint account and to protect
the amounts in that account.

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Loans of Portfolio Securities. Each Portfolio, except the Morgan Stanley
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 10% 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
Morgan Stanley 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 Morgan Stanley 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 a 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 a Portfolio's total return on such investments and the
amounts available for distributions by a 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 a Portfolio are not invested and no return is earned thereon. The
inability of a Portfolio to make intended security purchases due to settlement
problems could cause a Portfolio to miss attractive investment opportunities.
Inability to dispose of portfolio securities due to settlement problems could
result either in losses to a Portfolio due to subsequent declines in value of
the portfolio security or, if a 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,

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including custodial costs and foreign brokerage commissions, are generally
higher than with transactions in United States securities. In addition, the
Portfolio will incur costs in connection with conversions between various
currencies. There is generally less government supervision and regulation of
exchanges, financial institutions and issuers in foreign countries than there is
in the United States.

Foreign Currency Transactions. The value of 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 a Portfolio
purchases a foreign security traded in the hedged currency which a 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.

The Portfolio's custodian will place cash or liquid securities in a
segregated account having a value equal to the aggregate amount of the
Portfolio's commitments under forward contracts entered into with respect to
position hedges and cross-hedges. If the value of the securities placed in the
segregated account declines, additional cash or securities are placed in the
account on a daily basis so that the value of the account equals the amount of
the Portfolio's commitments with respect to such contracts. As an alternative to
maintaining all or part of the segregated account, the Portfolio may purchase a
call option permitting the Portfolio to purchase the amount of foreign currency
being hedged by a forward sale contract at a price no higher than the forward
contract price or the Portfolio may purchase a put option permitting the
Portfolio to sell the amount of foreign currency subject to a forward purchase
contract at a price as high or higher than the forward contract price.
Unanticipated changes in currency prices may result in poorer overall
performance for the Portfolio than if it had not entered into such contracts.

Restricted Securities. The Emerging Growth Portfolio, the Growth and
Income Portfolio and the Morgan Stanley 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 5%
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

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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 a 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 a 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 a 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 a Portfolio
impossible. Since market quotations are not readily available for restricted
securities, such securities will be valued by a method that a Portfolio's
Trustees believe accurately reflects fair value.

Forward Commitments. The Domestic Income Portfolio, the Government
Portfolio and the Morgan Stanley Real Estate Securities Portfolio may purchase
or sell U.S. Government securities (or debt securities with respect to the
Morgan Stanley 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, liquid securities or the security covered by the Forward
Commitment (in the case of a Forward Currency sale) 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,
Morgan Stanley Real Estate Securities Portfolio or the Strategic Stock
Portfolio. The annual turnover rates of each 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 a 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,

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Morgan Stanley Real Estate Securities Portfolio and the Strategic Stock
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 a
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 a Portfolio's investments, a Portfolio's performance
will be worse than if a Portfolio did not make such investments. In addition, a
Portfolio would pay commissions and other costs in connection with such
investments, which may increase a Portfolio's expenses and reduce its return.
Each Portfolio is authorized to purchase and sell over-the-counter options ("OTC
Options"). OTC Options are purchased from or sold to securities dealers,
financial institutions of other parties ("Counterparties") through direct
bilateral agreement with the Counterparty. A Portfolio will sell only OTC
Options (other than over-the-counter currency options) that are subject to a
buy-back provision permitting a Portfolio to require to the Counterparty to sell
the option back to a Portfolio at a formula price within seven days. The staff
of the SEC currently takes the position that, in general, OTC Options on
securities other than U.S. Government securities purchased by a Portfolio, and
portfolio securities covering OTC Options sold by a Portfolio, are illiquid
securities subject to a Portfolio limitation on illiquid securities described
below. A Portfolio will not enter into a futures contract or option (except for
closing transactions) for other than for bona fide hedging purposes if,
immediately thereafter, the sum of the amount of its initial margin and premiums
on open futures contracts and options would exceed 5% of the Portfolio's total
assets (taken at current value); however, in the case of an option that is
in-the-money at the time of the purchase, the in-the-money amount may be
excluded in calculating the 5% limitation. Certain state securities laws to
which the Portfolio may be subject may further restrict the Portfolio's ability
to engage in transactions in futures contracts and related options.

In order to prevent leverage in connection with the purchase of futures
contracts thereon by a Portfolio, an amount of cash or liquid 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 5% of its net assets (or 15%
for the Emerging Growth Portfolio, the Growth and Income Portfolio and the
Morgan Stanley 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 one or more investment companies advised by
the Adviser and its affiliates, including Van Kampen American Capital Small
Capitalization Fund ("Small Cap Fund") and Van Kampen American Capital Foreign
Securities Fund ("Foreign Securities Fund"). The shares of the Small Cap Fund
and Foreign Securities Fund are available for investment only by certain Van
Kampen American Capital funds. The Adviser believes that the use of the Small
Cap Fund and Foreign Securities Fund may, from time to time, provide such
Portfolios the most effective exposure to the performance of the small
capitalization sector of the stock market and to foreign securities while at the
same time minimizing costs. The advisers charge no advisory fees for managing
the Small Cap Fund or Foreign Securities Fund, nor are there any sales load or
other charges associated with distribution of its shares. Other expenses
incurred by the Small Cap Fund and Foreign Securities Fund are borne by them,
and thus indirectly by the Van Kampen American Capital funds that invest in
them. With respect to such other expenses, the Adviser anticipates that the

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efficiencies resulting from use of the Small Cap Fund or the Foreign Securities
Fund will result in cost savings for the Fund and other Van Kampen American
Capital funds. In large part, these savings are 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
or foreign securities will need to be performed only once. The Adviser expects
that the Small Cap Fund and Foreign Securities Fund will experience trading
costs that will be substantially less than the trading costs that would be
incurred if small capitalization or foreign securities were purchased separately
by a Portfolio and other Van Kampen American Capital funds. A Portfolio's
investment in the Small Cap Fund and the Foreign Securities Fund are subject to
the terms and conditions set forth in the SEC exemptive orders authorizing such
investments.

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 securities of foreign issuers
that the Foreign Securities Fund may invest in are subject to certain risks as
described under "Investment Practices -- Foreign Securities."

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 and
Foreign Securities Fund. For example, if a Portfolio's investment in the Small
Cap Fund were $10 million, and the Small Cap Fund had 5% 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 a 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, to
the extent permitted by law, with brokerage firms affiliated with the Trust and
with brokerage firms participating in the distribution of shares of a Portfolio
and other Van Kampen American Capital mutual funds if it reasonably believes
that the quality of the execution and the commission are comparable to that
available from other qualified brokerage firms. The Adviser is authorized to pay
higher commissions to brokerage firms that provide it with investment and
research information than to firms which do not provide such services if the
Adviser determines that such commissions are reasonable in relation to the
overall services provided. The information received may be used by the Adviser
in managing the assets of other advisory accounts as well as in the management
of the assets of the Portfolio.

THE TRUST AND ITS MANAGEMENT

The Trust is an open-end, diversified management investment company,
commonly known as a mutual fund. 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 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 $57 billion under management or supervision. Van
Kampen American Capital's more than 40 open-end and 38 closed-end funds and more
than 2,500 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

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the sponsor of the funds mentioned above, is also a wholly-owned subsidiary of
Van Kampen American Capital. Van Kampen American Capital is an indirect
wholly-owned subsidiary of Morgan Stanley, Dean Witter, Discover & Co. The
Adviser's principal office is located at One Parkview Plaza, Oakbrook Terrace,
Illinois 60181.

Morgan Stanley, Dean Witter, Discover & Co. and various of its directly or
indirectly owned subsidiaries, including 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 the date of this Prospectus, the Distributor owned beneficially and
of record all of the outstanding shares of the Strategic Stock Portfolio and
therefore may be deemed to control this Portfolio.

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 four investment advisory agreements designated herein as
"Emerging Growth Advisory Agreement", "Growth and Income Advisory Agreement",
"Real Estate Advisory Agreement" and the "Strategic Stock Advisory Agreement",
pursuant to which the Trust retains the Adviser to manage the investment of
assets and placement orders for the purchase and sale of portfolio securities
for the Emerging Growth Portfolio, the Growth and Income Portfolio, the Morgan
Stanley Real Estate Securities Portfolio and the Strategic Stock Portfolio,
respectively (such advisory agreements 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
(other than those who are affiliated persons, as defined in the 1940 Act, of the
Adviser, the Distributor or Van Kampen American Capital), 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.

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an amount sufficient to make up the deficiency, subject to readjustment during
the year. Expenses subject to such limitation do not include (1) interest and
taxes, (2) brokerage commissions, (3) certain litigation and indemnification
expenses as described in Advisory Agreement I, and (4) any distribution expenses
which may be incurred by a Portfolio in the event a Distribution Plan is
adopted. In addition to the contractual expense limitation, the Adviser also
voluntarily elected to reimburse the Domestic Income Portfolio, the Enterprise
Portfolio, the Governmental Portfolio and the Money Market Portfolio for all
ordinary business expenses in excess of 0.60% of the average daily net assets.
For the fiscal year ended December 31, 1996, advisory fees plus the cost of
accounting services payable by the Trust, before expense reimbursements
described above, equaled 0.70%, 0.57%, 0.59% and 0.72% 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.

Under the Emerging Growth Advisory Agreement, 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 fiscal year ended
December 31, 1996, advisory fees plus the cost of accounting services payable by
the Trust on behalf of the Emerging Growth Portfolio was 1.72% before a
voluntary waiver.

Under the Strategic Stock Advisory Agreement, 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
Strategic Stock Portfolio at an annual rate of 0.50% of the first $500 million
of the Strategic Stock Portfolio's average net assets and 0.45% of such
Portfolio's average net assets in excess of $500 million. The Adviser has also
voluntarily elected to reimburse the Strategic Stock Portfolio for all ordinary
business expenses in excess of 0.65% of the average daily net assets by reducing
the advisory fee and/or bearing other expenses of the Strategic Stock Portfolio
in excess of such limitation.

Under the Growth and Income Advisory Agreement, 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 Growth and Income Portfolio's average net assets; and 0.55% of the Growth
and Income Portfolio's average net assets in excess of $500 million. For the
fiscal year ended December 31, 1996, the Trust paid no advisory fees on behalf
of the Growth and Income Portfolio because the Adviser waived its fees with
respect thereto. Without the waiver of advisory fees, advisory fees plus the
cost of accounting services would have been 0.60%. There can be no assurance
that the Adviser will continue to waive its fees in the future.

Under the Real Estate Advisory Agreement, the Trust pays the Adviser a
monthly fee computed on average daily net assets of the Morgan Stanley Real
Estate Securities Portfolio at the annual rate of 1.00% of the Morgan Stanley
Real Estate Securities 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 Morgan Stanley Real Estate Securities
Portfolio and is not necessarily higher than the fees charged by certain mutual
funds with investment objectives and policies similar to those of the Morgan
Stanley Real Estate Securities Portfolio. For the fiscal year ended December 31,
1996, advisory fees plus the cost of accounting services payable by the Trust on
behalf of the Morgan Stanley Real Estate Securities Portfolio was 1.10%.

From time to time the Adviser may agree to waive its investment advisory
fees or any portion thereof or elect to reimburse any Portfolio for ordinary
business expenses in excess of an agreed upon amount.

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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.

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.

PORTFOLIO MANAGEMENT. The Portfolios have different portfolio managers.
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.

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.

Jeff New is the manager of the Enterprise Portfolio and is primarily
responsible for the day-to-day management of the Portfolio's investment
portfolio. Mr. New has been primarily responsible for managing the Portfolio's
investment portfolio since March 1996. Mr. New has been a portfolio manager with
the Adviser since 1994. Since 1991, Mr. New was an associate portfolio manager
with the Adviser.

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.

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.

Russell C. Platt and Theodore R. Bigman assumed responsibility for the
day-to-day management of the Morgan Stanley Real Estate Securities 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

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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.

John Cunniff is primarily responsible for the day-to-day management of the
Strategic Stock Portfolio's investment portfolio. Mr. Cunniff is a Vice
President of the Adviser and Van Kampen American Capital Advisory Corp, an
affiliate of the Adviser, and has been employed by the Adviser since October
1995. Prior to that time, Mr. Cunniff was Vice President, Portfolio Manager at
Templeton Quantitative Advisors.

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 Parkview Plaza, Oakbrook Terrace, Illinois 60181,
acts as the distributor of the shares. Net asset value is determined in the
manner set forth below under "Determination of Net Asset Value."

DETERMINATION OF NET ASSET VALUE

Net asset value per share is computed for 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 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

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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, the
Morgan Stanley Real Estate Securities Portfolio and the Strategic Stock
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 time by the Trustees, its net realized short-term
capital gains, including such gains realized from net premiums received from
expired options, net gains from closing purchase transactions and net short-term
gains from securities sold upon the exercise of options or otherwise, less any
net realized long-term capital loss. Net realized long-term capital gains, if
any, are generally distributed at least annually.

Tax Status of the Portfolios. Each Portfolio has elected to be taxed as a
"regulated investment company" under the Code. By maintaining its qualification
as a "regulated investment company," a Portfolio will not incur any liability
for federal income taxes to the extent its taxable ordinary income and any
capital gain net income is distributed in accordance with Subchapter M of the
Code. By qualifying as a regulated investment company, a Portfolio is not
subject to federal income taxes to the extent it distributes its taxable net
investment income and taxable net realized capital gains. If for any taxable
year a Portfolio does not qualify for the special tax treatment afforded
regulated

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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).

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
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 taxable 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.

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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 30-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. Distribution rate 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 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, the Money Market Portfolio and
the Strategic Stock 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, 1996, and a description of the method by which the yield was
calculated is contained in the Statement of Additional Information.

42
<PAGE> 47

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, the MSCI 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 nationally recognized financial publications. 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. The Trust was reorganized as a business trust under the laws of
Delaware on September 16, 1995 and adopted its current name at that time. The
authorized capitalization of the Trust consists of 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. However, the holders of 10% or more of the
outstanding shares may by written request require a meeting to consider the
removal of Trustees by a vote of two-thirds of the shares then outstanding cast
in person or by proxy at such meeting. The Fund will assist such holders in
communicating with other shareholders of the Fund to the extent required by the
1940 Act. 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.

43
<PAGE> 48

The fiscal year end of the Trust is December 31. The Trust sends to its
shareholders at least semi-annually reports showing each Portfolio's portfolio
and other information. An annual report, containing financial statements audited
by the Trust's independent accountants, is sent to shareholders each year. After
the end of each year, shareholders will receive federal income tax information
regarding dividends and capital gains distributions.

Shareholder inquiries should be directed to the Van Kampen American Capital
Life Investment Trust, One Parkview Plaza, Oakbrook Terrace, Illinois 60181,
Attn: Correspondence or by calling (800) 421-5666. For inquiries through
Telecommunications Device for the Deaf (TDD) dial (800) 421-2833.

44
<PAGE> 49

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.

45
<PAGE> 50

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.

46
<PAGE> 51

EXISTING SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE CALL
THE PORTFOLIO'S TOLL-FREE
NUMBER--(800) 341-2911

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) 421-2833
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
Attn: Van Kampen American Capital
Life Investment Trust Portfolios
Custodian

STATE STREET BANK AND
TRUST COMPANY
225 West 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> 52

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

LIFE INVESTMENT TRUST

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

P R O S P E C T U S

JULY , 1997

- ------ ------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH
VAN KAMPEN AMERICAN CAPITAL
- --------------------------------------------------------------------------------
<PAGE> 53

SUBJECT TO COMPLETION

DATED JULY 28, 1997

STATEMENT OF ADDITIONAL INFORMATION

JULY , 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, (the "Trust"), is a
diversified, open-end management investment company with ten Portfolios (the
"Portfolios"): Asset Allocation Portfolio (formerly Multiple Strategy Fund),
Domestic Income Portfolio (formerly Domestic Strategic Income Fund), Emerging
Growth Portfolio (formerly Emerging Growth Fund), Enterprise Portfolio (formerly
Common Stock Fund), Global Equity Portfolio (formerly Global Equity Fund),
Government Portfolio (formerly Government Fund), Growth and Income Portfolio
(formerly Growth and Income Fund), Money Market Portfolio (formerly Money Market
Fund), Morgan Stanley Real Estate Securities Portfolio (formerly Real Estate
Securities Portfolio) and Strategic Stock Portfolio. Each Portfolio is in effect
a separate mutual fund issuing its own shares.

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

This Statement of Additional Information is not a Prospectus. This
Statement of Additional Information should be read in conjunction with the
Trust's applicable prospectus (the "Prospectus") dated as of the same date as
this Statement of Additional Information. This Statement of Additional
Information does not include all the information a prospective investor should
consider before purchasing shares of the Trust. Investors should obtain and read
a Prospectus containing disclosure with respect to the Portfolio in which the
investor wishes to invest prior to purchasing shares of such Portfolio. A
Prospectus may be obtained without charge by writing or calling 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-5
Repurchase Agreements....................................... B-12
Forward Commitments......................................... B-12
Depositary Receipts......................................... B-12
Options, Futures Contracts and Options on Futures
Contracts................................................. B-13
Loans of Portfolio Securities............................... B-20
Investment Restrictions..................................... B-20
Trustees and Officers....................................... B-34
Legal Counsel............................................... B-44
Investment Advisory Agreements.............................. B-44
Distributor................................................. B-46
Transfer Agent.............................................. B-47
Portfolio Transactions and Brokerage........................ B-47
Portfolio Turnover.......................................... B-49
Determination of Net Asset Value............................ B-49
Purchase and Redemption of Shares........................... B-50
Tax Status of the Trust..................................... B-50
Portfolio Performance....................................... B-51
Money Market Portfolio Yield Information.................... B-52
Other Information........................................... B-53
Appendix.................................................... B-54
Report of Independent Accountants........................... B-56
Financial Statements........................................ B-57
Notes to Financial Statements............................... B-110
</TABLE>

This Statement of Additional Information is dated July , 1997.

<PAGE> 54

GENERAL INFORMATION

Van Kampen American Capital Life Investment Trust (the "Trust") was
organized under the laws of the Commonwealth of Massachusetts on June 3, 1985.
As of September 16, 1995, the Trust was reorganized as a Delaware business trust
and adopted its current name.

Van Kampen American Capital Asset Management, Inc. (the "Adviser"), Van
Kampen American Capital Distributors, Inc. (the "Distributor"), and ACCESS
Investor Services, Inc. ("ACCESS") are wholly-owned subsidiaries of Van Kampen
American Capital, Inc. ("VKAC"), which is a wholly-owned subsidiary of VK/AC
Holding, Inc. VK/AC Holding, Inc. is a wholly-owned subsidiary of MSAM Holdings
II, Inc. which, in turn, is a wholly-owned subsidiary of Morgan Stanley, Dean
Witter, Discover & Co. The principal office of the Fund, the Adviser, the
Distributor and VKAC is located at One Parkview Plaza, Oakbrook Terrace,
Illinois 60181.

Morgan Stanley, Dean Witter, Discover & Co. and various of its directly or
indirectly owned subsidiaries, including 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 July 22, 1997 no person was known by the Trust to own beneficially or
to hold of record 5% or more 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 JULY 22, 1997 PERCENT
------------------- -------------------------- -------
<S> <C> <C>
ASSET ALLOCATION FUND
Nationwide Life Insurance Co. 2,056,122 40.81%
Nationwide VL1 -- Separate Account
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
Nationwide Life Insurance Co. 2,752,388 54.63%
Nationwide Variable Account -- 3
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
MONEY MARKET PORTFOLIO
American General Life Insurance Company 4,932,282 21.44%
Separate Account D
Attn. James A. Totten
P.O. Box 1591
Houston, Texas 77251-1591
</TABLE>

B-2
<PAGE> 55

<TABLE>
<CAPTION>
AMOUNT OF RECORD OWNERSHIP
NAME AND ADDRESS OF OF THE PORTFOLIO
RECORD HOLDER AT JULY 22, 1997 PERCENT
------------------- -------------------------- -------
<S> <C> <C>
Nationwide Life Insurance Co. 8,148,336 35.42%
Nationwide VLI Separate Account
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
Nationwide Life Insurance Co. 7,724,208 33.57%
Nationwide Variable Account -- 3
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
Van Kampen American Capital 2,088,690 9.08%
Generations Variable Annuities
c/o American General Life Ins. Co.
P.O. Box 1591
Houston, TX 77251-1591

ENTERPRISE PORTFOLIO
American General Life Insurance Company 732,887 14.90%
Separate Account -- D
Attn. James A. Totten
P.O. Box 1591
Houston, Texas 77251-1591
Nationwide Life Insurance Co. 2,024,184 42.31%
Nationwide Variable Account -- 3
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
Nationwide Life Insurance Co. 1,712,323 35.79%
Nationwide VLI Separate Account
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029

GLOBAL EQUITY PORTFOLIO
Van Kampen American Capital 95,241 37.16%
Distributors, Inc.
One Chase Manhattan Plaza
37th Fl.
New York, NY 10005
Nationwide Life Insurance Co. 106,801 41.67%
Nationwide VLI Separate Account
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
Nationwide Life Insurance Co. 54,269 21.17%
Nationwide Variable Account -- 3
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
</TABLE>

B-3
<PAGE> 56

<TABLE>
<CAPTION>
AMOUNT OF RECORD OWNERSHIP
NAME AND ADDRESS OF OF THE PORTFOLIO
RECORD HOLDER AT JULY 22, 1997 PERCENT
------------------- -------------------------- -------
<S> <C> <C>

GOVERNMENT PORTFOLIO
Nationwide Life Insurance Co. 5,337,653 87.39%
Nationwide VLI Separate Account
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
Nationwide Life Insurance Co. 599,490 9.81%
Nationwide Variable Account -- 3
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029

DOMESTIC INCOME PORTFOLIO
American General Life Insurance Company 620,727 30.18%
Separate Account D
Attn. James A. Totten
P.O. Box 1591
Houston, Texas 77251-1591
Nationwide Life Insurance Co. 242,191 11.77%
Nationwide VLI Separate Account
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
Nationwide Life Insurance Co. 1,046,891 50.90%
Nationwide Variable Account -- 3
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
EMERGING GROWTH PORTFOLIO
Van Kampen American Capital 120,153 27.95%
Generations Variable Annuities
c/o American General Life Ins. Co.
P.O. Box 1591
Houston, TX 77251-1591
Nationwide Life Insurance Co. 200,155 46.56%
Nationwide Variable Account -- 3
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
Nationwide Life Insurance Co. 109,551 25.48%
Nationwide VLI Separate Account
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
</TABLE>

B-4
<PAGE> 57

<TABLE>
<CAPTION>
AMOUNT OF RECORD OWNERSHIP
NAME AND ADDRESS OF OF THE PORTFOLIO
RECORD HOLDER AT JULY 22, 1997 PERCENT
------------------- -------------------------- -------
<S> <C> <C>
MORGAN STANLEY REAL ESTATE SECURITIES PORTFOLIO
Nationwide Life Insurance Co. 13,549,681 93.18%
Nationwide Variable Account I
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
GROWTH AND INCOME PORTFOLIO
Van Kampen American Capital Distributors, Inc. 50,108 9.44%
Attn: Dominick Cogliandro
One Chase Manhattan Plaza
37th Floor
New York, NY 10005-1401
Van Kampen American Capital 480,808 90.56%
Generations Variable Annuities
c/o American General Life Insurance Co.
P.O. Box 1591
Houston, TX 77251-1591
</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.

ASSET ALLOCATION PORTFOLIO

The Fund seeks a high total investment return consistent with prudent risk
through a fully managed investment policy utilizing equity securities as well as
investment grade intermediate and long-term debt securities and money market
securities.

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 Ratings 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

B-5
<PAGE> 58

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 10% 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 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.

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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 15% 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."

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."

GLOBAL EQUITY PORTFOLIO

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

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.

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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 FHLMC 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.

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

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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 1% of the outstanding principal for providing its
guarantee, and the GNMA Certificate issuer is paid an annual servicing fee of
0.44 of 1% 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 1% more than
high grade corporate bonds and 1/2 of 1% 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 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

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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.

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 thirteen 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

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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 Ratings Group, 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.

MORGAN STANLEY REAL ESTATE SECURITIES PORTFOLIO

As its primary objective, the Portfolio seeks long-term growth of capital
by investing principally in securities of companies operating in the real estate
industry. Current income is a secondary consideration.

STRATEGIC STOCK PORTFOLIO

The Strategic Stock Portfolio invests primarily in dividend paying equity
securities of companies included in the DJIA or in the MSCI Index. In selecting
securities for the Portfolio, the Adviser presently intends to follow the
following procedures, subject to and limited by the Portfolio's other investment
policies and restrictions.

The Portfolio will reflect on its books twelve separate sub-accounts (each
a "Strategic Sub-Account") and will divide its assets approximately equally
among the Strategic Sub-Accounts. Strategic Sub-Accounts will be successively
designated Strategic Sub-Account 1 through Strategic Sub-Account 12.

As of the close of business on (i) the business day immediately prior to
the Portfolio's commencement of investment operations, (ii) the last business
day of the third full month after the Portfolio commences investment operations
and (iii) the last business day of each month thereafter (each a "Strategic
Determination Date"), the Adviser will identify 20 securities pursuant to the
Strategic Selection Policies discussed in the Prospectus (the "Current Period
Strategic Securities").

As of commencement of investment operations, the Portfolio will invest the
assets of each Strategic Sub-Account approximately equally in each of the
Current Period Strategic Securities determined on the first Strategic
Determination Date. This will result in approximately 5% of the Portfolio's
assets being invested in each of the initial Current Period Strategic
Securities. On the second Strategic Determination Date, the Adviser will again
identify 20 Current Period Strategic Securities and will review and adjust the
investments of Strategic Sub-Account 1 so as to invest the assets of Sub-Account
1 approximately equally in each of the Current Period Strategic Securities
identified on the second Strategic Determination Date. On each subsequent
Strategic Determination Date, the Adviser will review and adjust the investments
of the next successive Strategic Sub-Account so as to invest the assets of that
Strategic Sub-Account approximately equally in each of the Current Period
Strategic Securities for that Strategic Determination Date. In this manner, the
assets of one Strategic Sub-Account will be evaluated and adjusted each month
and, commencing with the second Strategic Determination Date, each Strategic
Sub-Account will be reviewed and adjusted once every 12 months.

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Consistent with the Portfolio's investment objective, the Adviser may
modify these procedures without prior notice to investors to adjust the
frequency of portfolio review and adjustment and to adjust the portion of the
Portfolio's assets that is reviewed and adjusted during each period.

The following disclosures supplement disclosures set forth in the
Prospectus. Readers must refer also to the Prospectus for a complete
presentation.

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. In the event of a bankruptcy or other default of a seller of a
repurchase agreement, a Portfolio could experience both delays in liquidating
the underlying securities and loss including: (a) possible decline in the value
of the underlying security during the period while a Portfolio seeks to enforce
its rights thereto, (b) possible lack of access to income on the underlying
security during this period, and (c) expenses of enforcing its rights. See the
Prospectus for further information.

FORWARD COMMITMENTS

The Government Portfolio, the Domestic Income Portfolio and the Morgan
Stanley 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 or
currency which the Portfolio owns or has the right to acquire. Only the
Government Portfolio and the Morgan Stanley 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. See the Prospectus for further
information.

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

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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. See the
Prospectus for further information.

WRITING CALL AND PUT OPTIONS

Purpose. Options may be utilized to hedge various market or 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 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 collateralizes the option by maintaining in a segregated account with
the Portfolio's Custodian, cash or liquid 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 or liquid 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

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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, the Morgan Stanley Real Estate Securities Portfolio and
the Strategic Stock 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.

Put options may 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, the Morgan Stanley Real
Estate Securities Portfolio and the Strategic Stock 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

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writing of a call option. For so long as the call option is outstanding, the
Portfolio will hold the Treasury bills in a segregated account with its
Custodian so that it will be treated as being covered.

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

OPTIONS ON STOCK INDEXES (ASSET ALLOCATION PORTFOLIO, EMERGING GROWTH PORTFOLIO,
ENTERPRISE PORTFOLIO, GLOBAL EQUITY PORTFOLIO, GROWTH AND INCOME PORTFOLIO,
MORGAN STANLEY REAL ESTATE SECURITIES PORTFOLIO AND STRATEGIC STOCK 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

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"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.

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. Such 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 or liquid securities equal to a
percentage (which will

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normally range between 2% and 10%) 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
otherwise fully invested ("anticipatory hedge"). Such purchase of a futures
contract serves as a temporary substitute for the purchase of individual
securities, which may be purchased in an orderly fashion once the market has
stabilized. As individual securities are purchased, an equivalent amount of
futures contracts could be terminated by offsetting sales. A Portfolio may sell
futures contracts in anticipation of or in a general market or market sector
decline that may adversely affect the market value of the Portfolio's securities
("defensive hedge"). To the extent that the Portfolio's portfolio of securities
changes in value in correlation with the underlying security or index, the sale
of futures contracts substantially reduces the risk to the Portfolio of a market
decline and, by so doing, provides an alternative to the liquidation of
securities positions in the Portfolio with attendant transaction costs. Relative
to the Government Portfolio, ordinarily commissions on futures transactions are
lower than transaction costs incurred in the purchase and sale of 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 or losses in liquidating open positions purchased 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.

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

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

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

ADDITIONAL RISKS OF OPTIONS AND FUTURES TRANSACTIONS

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

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

A Portfolio will not enter into a futures contract or option (except for
closing transactions) for other than for bona fide hedging purposes if,
immediately thereafter, the sum of the amount of its initial margin and

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premiums on open futures contracts and options would exceed 5% of the Fund's
total assets (taken at current value); however, in the case of an option that is
in-the-money at the time of the purchase, the in-the-money amount may be
excluded in calculating the 5% limitation. Certain state securities laws to
which the Fund may be subject may further restrict the Fund's ability to engage
in transactions in futures contracts and related options. In order to prevent
leverage in connection with the purchase of futures contracts by a Portfolio, an
amount of cash or liquid 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, 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.

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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 Morgan Stanley Real Estate Securities
Portfolio, may lend an amount up to 10% 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 approval by the vote of a majority of its outstanding voting
shares; which is defined by the 1940 Act as the lesser of (i) 67% or more of the
voting securities present at a meeting, if the holders of more than 50% of the
outstanding voting securities of the Portfolio are present or represented by
proxy; or (ii) more than 50% of the Portfolio's outstanding voting securities.
The percentage limitations need only be met at the time the investment is made
or after relevant action is taken. 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 ASSET ALLOCATION PORTFOLIO, THE
DOMESTIC INCOME PORTFOLIO, THE EMERGING GROWTH PORTFOLIO, THE ENTERPRISE
PORTFOLIO, THE GLOBAL EQUITY 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 1/2 of 1% of the outstanding
securities of such company, and such officers and trustees own more than
5% of the outstanding securities of such issuer;

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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 10% 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 ASSET ALLOCATION
PORTFOLIO AND THE ENTERPRISE PORTFOLIO:

A Portfolio shall not:

1. With respect to 75% of its assets, invest more than 5% 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 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;

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 5%
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 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 10% 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";

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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 5% 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 10% of the market or other fair value of its total
assets, or pledge its assets to an extent greater than 5% 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 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. Furthermore, the Enterprise Portfolio may not invest
in the securities of a foreign issuer if, at the time of acquisition, more
than 10% 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.

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

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

The Domestic Income Portfolio shall not:

B-22
<PAGE> 75

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 5% 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 10% 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 10% of the market or other fair value of its total
assets, or pledge its assets to an extent greater than 5% of the market
or other fair value of its total assets. Any such borrowings shall be
from banks and shall be undertaken only as a temporary measure for
extraordinary or emergency purposes. Deposits in escrow in connection
with the writing of covered call or secured put options, or in
connection with the purchase or sale of futures contracts and related
options are not deemed or to be a pledge or other encumbrance; or

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

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<PAGE> 76

THE FOLLOWING RESTRICTIONS ARE APPLICABLE TO THE EMERGING GROWTH PORTFOLIO:

The Emerging Growth 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 5% 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 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;

9. Invest in warrants in excess of 5% of its net assets (including, but not
to exceed 2% 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 5% 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;

11. Invest more than 15% 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;

B-24
<PAGE> 77

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 10% of the offering price of the Portfolio's shares.

THE FOLLOWING RESTRICTIONS ARE APPLICABLE TO THE GLOBAL EQUITY PORTFOLIO:

The Global Equity Portfolio shall not:

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

2. With respect to 75% of its assets, invest more than 5% 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 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 except through the purchase of (i) United States and foreign
government securities, commercial paper, bankers' acceptances,
certificates of deposit similar evidences of indebtedness, both foreign
and domestic, and (ii) repurchase agreements; or lend securities in an
amount exceeding 15% of the total assets of the Portfolio. The purchase
of a portion of an issue of securities described under (i) above
distributed publicly, whether or not the purchase is made on the
original issuance, is not considered the making of a loan;

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

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

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

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

B-25
<PAGE> 78

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

10. Invest in the securities of other open-end investment companies, or
invest in the securities of closed-end investment companies except (a)
through purchase in the open market in a transaction involving no
commission or profit to a sponsor or dealer (other than the customary
broker's commission) or as part of a merger, consolidation or other
acquisition; or (b) to 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. 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;

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

13. Invest more than 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 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;

14. 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 includes repurchase agreements maturing in
more than seven days and over-the-counter options held by the Portfolio
and that portion of assets used to cover such options. This policy does
not apply to restricted securities eligible for resale pursuant to Rule
144A under the Securities Act of 1933 which the Trustees or the Adviser
under Board approved guidelines, may determine are liquid nor does it
apply to other securities, for which, notwithstanding legal or
contractual restrictions on resale, a liquid market exists.
Notwithstanding the foregoing, this limitation excludes shares of other
open-end investment companies owned by the Portfolio but includes the
Portfolio's pro rata portion of the securities and other assets owned by
any such investment company.

THE FOLLOWING ADDITIONAL RESTRICTIONS ARE APPLICABLE TO THE GOVERNMENT
PORTFOLIO:

The Government Portfolio shall not:

1. With respect to 75% of its assets, invest more than 5% 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 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;

B-26
<PAGE> 79

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 5%
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;

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. 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 10% of the market or other fair value of its total
assets, or pledge its assets to an extent greater than 5% 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 10% of its total assets, and

B-27
<PAGE> 80

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 5% 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:

The Growth and Income Portfolio shall not:

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 5% 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 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 5% 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 10% 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 Growth and Income 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.

B-28
<PAGE> 81

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 15%
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 5% 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.

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

The Money Market Portfolio shall not:

1. With respect to 75% of its assets, invest more than 5% 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 10% 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 5%
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-29
<PAGE> 82

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 10% of the market or other fair
value of its total net assets. See "Repurchase Agreements";

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

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

10. Invest more than 5% 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;

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

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

The Morgan Stanley Real Estate Securities 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

B-30
<PAGE> 83

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

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

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

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

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

9. Write, purchase or sell puts, calls or combinations thereof, except that
the Portfolio may (a) write covered or fully collateralized call
options, write secured put options, and enter into closing or offsetting
purchase transactions with respect to such options, (b) purchase and
sell options to the extent that the premiums paid for all such options
owned at any time do not exceed 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;
or

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 Morgan Stanley Real Estate Securities
Portfolio is subject to the following policies which may be amended by the
Morgan Stanley Real Estate Securities 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;

B-31
<PAGE> 84

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 1/2 of 1%
of the outstanding securities of such company, and such officers and
trustees who own more than 1/2 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 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

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.

THE FOLLOWING RESTRICTIONS ARE APPLICABLE TO THE STRATEGIC STOCK PORTFOLIO.

The Strategic Stock Portfolio shall not:

2. Purchase any securities (other than obligations issued or guaranteed by
the United States Government or by its instrumentalities), if, as a
result, more than 5% of the Portfolio's total assets (taken at current
value) would then be invested in securities of a single issuer or, if as
a result, such Portfolio would hold more than 10% of the outstanding
voting securities of an issuer, except that up to 25% of the Portfolio's
total assets may be invested without regard to such limitations. Neither
limitation shall apply to the acquisition of shares of other open-end
investment companies to the extent permitted by rule or order of the SEC
exempting the Portfolio from the limitations imposed by Section 12(d)(1)
of the 1940 Act.

3. Invest more than 25% of its assets in a single 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. (Neither

B-32
<PAGE> 85

the U.S. Government nor any of its agencies or instrumentalities will be
considered an industry for purposes of this restriction.)

4. 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;

5. 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;

6. Issue senior securities, borrow money from banks or enter into reverse
repurchase agreements with banks in the aggregate in excess of 33 1/3%
of the Portfolio's total assets (after giving effect to any such
borrowing); which amount excludes no more than 5% of its total assets in
borrowings and reverse repurchase agreements with any entity for
temporary purposes. The Portfolio will not mortgage, pledge or
hypothecate any assets other than in connection with issuances of senior
securities, borrowings, delayed delivery, and when issued transactions,
options, futures contracts, options on futures contracts, forward
contracts, forward commitments and other investment strategies and
instruments;

7. Make loans of money or property to any person, except (i) to the extent
the securities in which the Portfolio may invest are considered to be
loans, (ii) through the loan of portfolio securities, and (iii) to the
extent that the Portfolio may lend money or property in connection with
maintenance of the value of, or the Portfolio's interest with respect
to, the securities owned by the Portfolio.

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

1. 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.

2. 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;

3. 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;

4. 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 as part of a merger, consolidation or other
acquisition and 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;

5. 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)

B-33
<PAGE> 86

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;

6. 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 1/2 of 1%
of the outstanding securities of such company, and such officers and
trustees who own more than 1/2 of 1% own in the aggregate more than 5%
of the outstanding securities of such issuer;

7. 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;

8. 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 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

9. 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 OFFICERS

The tables below list the trustees and officers of the Trust (of which the
Fund is a separate series) and other executive officers of the Fund's investment
adviser and their principal occupations for the last five years and their
affiliations, if any, with VK/AC Holding, Inc. ("VKAC Holding"), Van Kampen
American Capital, Inc. ("Van Kampen American Capital" or "VKAC"), Van Kampen
American Capital Investment Advisory Corp. ("Advisory Corp."), Van Kampen
American Capital Asset Management, Inc. (the "Adviser" or "Asset Management"),
Van Kampen American Capital Distributors, Inc., the distributor of the Fund's
shares (the "Distributor") and ACCESS Investors Services Inc., the Fund's
transfer agent ("ACCESS"). Advisory Corp. and Asset Management sometimes are
referred to herein collectively as the "Advisers". For purposes hereof, the term
"Fund Complex" includes each of the open-end investment companies advised by the
Advisory Corp. and each of the open-end investment companies advised by the
Asset Management (excluding the American Capital Exchange Fund and the Common
Sense Trust).

TRUSTEES

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>

J. Miles Branagan......................... Private investor. Co-founder, and prior to August 1996,
1632 Morning Mountain Road Chairman, Chief Executive Officer and President, MDT
Raleigh, NC 27614 Corporation (now known as Getinge/Castle, Inc., a
Date of Birth: 07/14/32 subsidiary of Getinge Industrier AB), a company which
develops, manufactures, markets and services medical and
scientific equipment. Trustee of each of the funds in the
Fund Complex.

</TABLE>

B-34
<PAGE> 87

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- --------------------- --------------------------
<S> <C>
Richard M. DeMartini...................... President and Chief Operating Officer, Dean Witter
Two World Trade Center Capital, a division of Dean Witter Reynolds Inc. Mr.
66th Floor DeMartini is a Director of InterCapital Funds, Dean
New York, NY 10048 Witter Distributors, Inc. and Dean Witter Trust Company.
Date of Birth: 10/12/52 Trustee of the TCW/DW Funds. Director of the National
Healthcare Resources, Inc. Formerly Vice Chairman of the
Board of the National Association of Securities Dealers,
Inc. and Chairman of the Board of the Nasdaq Stock
Market, Inc. Trustee of each of the funds in the Fund
Complex.
Linda Hutton Heagy........................ Co-Managing Partner of Heidrick & Stuggles, an executive
Sears Tower search firm. Prior to 1997, Partner, Ray & Berndtson,
233 South Wacker Drive Inc, an executive recruiting and management consulting
Suite 7000 firm. Formerly, Executive Vice President of ABN AMRO,
Chicago, IL 60606 N.A., a Dutch bank holding company. Prior to 1992,
Date of Birth: 06/03/48 Executive Vice President of La Salle National Bank.
Trustee on the University of Chicago Hospitals Board, The
International House Board and the Women's Board of the
University of Chicago. Trustee of each of the funds in
the Fund Complex.
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
Date of Birth: 02/29/52 Officer, Director and Member of the Investment Committee
of the Joyce Foundation, a private foundation. Trustee of
each of the funds in the Fund Complex.
Jack E. Nelson............................ President, Nelson Investment Planning Services, Inc., a
423 Country Club Drive financial planning company and registered investment
Winter Park, FL 32789 adviser. President, Nelson Ivest Brokerage Services Inc.,
Date of Birth: 02/13/36 a member of the National Association of Securities
Dealers, Inc. ("NASD") and Securities Investors
Protection Corp. ("SIPC"). Trustee of each of the funds
in the Fund Complex.
Jerome L. Robinson........................ President, Robinson Technical Products Corporation, a
115 River Road manufacturer and processor of welding alloys, supplies
Edgewater, NJ 07020 and equipment. Director, Pacesetter Software, a software
Date of Birth: 10/10/22 programming company specializing in white collar
productivity. Director, Panasia Bank. Trustee of each of
the funds in the Fund Complex.
Phillip B. Rooney......................... Vice Chairman and Director of the ServiceMaster Company,
One ServiceMaster Way a business and consumer services company since May 1997.
Downers Grove, IL 60515 Private investor. Director, Illinois Tool Works, Inc., a
Date of Birth: 07/08/44 manufacturing company. Director, Urban Shopping Centers
Inc., a retail mall management company; Director, Stone
Container Corp., a paper manufacturing company. Trustee,
University of Notre Dame. Formerly, President and Chief
Executive Officer, Waste Management Inc., an
environmental services company, and prior to that
President and Chief Operating Officer, Waste Management
Inc. Trustee of each of the funds in the Fund Complex.
Fernando Sisto............................ Professor Emeritus and, prior to 1995, Dean of the
155 Hickory Lane Graduate School, Stevens Institute of Technology.
Closter, NJ 07624 Director, Dynalysis of Princeton, a firm engaged in
Date of Birth: 08/02/24 engineering research. Trustee of each of the funds in the
Fund Complex.
</TABLE>

B-35
<PAGE> 88

<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 funds in the Fund
Chicago, IL 60606 Complex, open-end funds advised by Van Kampen American
Date of Birth: 08/22/39 Capital Management, Inc. and closed-end funds advised by
Advisory Corp. Trustee of each of the funds in the Fund
Complex, open-end funds advised by Van Kampen American
Capital Management, Inc. and closed-end funds advised by
Advisory Corp.
</TABLE>

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

* Such trustees are "interested persons" (within the meaning of Section 2(a)(19)
of the 1940 Act). Mr. Whalen is an interested person of the Fund by reason of
his firm currently acting as legal counsel to the Fund and is an interested
person of Asset Management with respect to certain funds advised by Asset
Management by reason of his firm in the past acting as legal counsel to Asset
Management.

OFFICERS

Messrs. McDonnell, Hegel, Nyberg, Wood, Sullivan, Dalmaso, Martin,
Wetherell and Hill are located at One Parkview Plaza, Oakbrook Terrace, IL
60181. The Fund's other officers are located at 2800 Post Oak Blvd., Houston, TX
77056.

<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>

Dennis J. McDonnell*........ President President and a Director of VKAC.
Date of Birth: 05/20/42 President, Chief Operating Officer and a
Director of the Advisers. Director or
officer of certain other subsidiaries of
VKAC. Prior to November 1996, Executive
Vice President and a Director of VKAC
Holding. President and of each of
the funds in the Fund Complex. President,
Chairman of the Board and Trustee of other
investment companies advised by the
Advisers or their affiliates.

Peter W. Hegel.............. Vice President Executive Vice President of the Advisers.
Date of Birth: 06/25/56 Director of Asset Management. Officer of
certain other subsidiaries of VKAC. Vice
President of each of the funds in the Fund
Complex and certain other investment
companies advised by the Advisers or their
affiliates.

Curtis W. Morell............ Vice President and Chief Senior Vice President of the Advisers, Vice
Date of Birth: 08/04/46 Accounting Officer President and Chief Accounting Officer of
each of the funds in the Fund Complex and
certain other investment companies advised
by the Advisers or their affiliates.
</TABLE>

B-36
<PAGE> 89

<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>
Ronald A. Nyberg............ Vice President and Secretary Executive Vice President, General Counsel
Date of Birth: 07/29/53 and Secretary of VKAC. Executive Vice
President, General Counsel, Assistant
Secretary and a Director of the Advisers
and the Distributor. Executive Vice
President, General Counsel and Assistant
Secretary of ACCESS. Director or officer of
certain other subsidiaries of VKAC.
Director of ICI Mutual Insurance Co., a
provider of insurance to members of the
Investment Company Institute. Prior to
November 1996, Executive Vice President,
General Counsel and Secretary of VKAC
Holding. Vice President and Secretary of
each of the funds in the Fund Complex and
certain other investment companies advised
by the Advisers or their affiliates.
Don G. Powell............... Not applicable Chairman, and a Director of VKAC.
2800 Post Oak Blvd. Chairman, Chief Executive Officer and a
Houston, TX 77056 Director of the Advisers and the
Distributor.
Date of Birth: 10/19/39 Chairman and a Director of ACCESS. Director
or officer of certain other subsidiaries of
VKAC. Chairman of the Board of Governors
and the Executive Committee of the
Investment Company Institute. Trustee of
certain open end investment companies
advised by Advisory Corp. Prior to
November, 1996, President, Chief Executive
Officer and a Director of VKAC Holding.
President, Chief Executive Officer and a
Trustee/Director of certain investment
companies advised by Asset Management and
prior to July 1996, President, Chief
Executive Officer and a Trustee of the
funds in the Fund Complex and closed-end
investment companies advised by Advisory
Corp.

Alan T. Sachtleben.......... Vice President Executive Vice President of the Advisers.
Date of Birth: 04/20/42 Director of Asset Management. Director or
officer of certain other subsidiaries of
VKAC. Vice President of each of the funds
in the Fund Complex and certain other
investment companies advised by the
Advisers or their affiliates.

Paul R. Wolkenberg.......... Vice President Executive Vice President of VKAC, the
Date of Birth: 11/10/44 Advisers and the Distributor. President,
Chief Executive Officer and a Director of
ACCESS. Director or officer of certain
other subsidiaries of VKAC. Vice President
of each of the funds in the Fund Complex
and certain other investment companies
advised by the Advisers or their
affiliates.
</TABLE>

B-37
<PAGE> 90

<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
- ----------------------------- --------------------------- ------------------------------------------------------
<S> <C> <C>
Edward C. Wood III........... Vice President and Chief Senior Vice President of the Advisers. Vice President
Date of Birth: 01/11/56 Financial Officer and Chief Financial Officer of each of the funds in
the Fund Complex and certain other investment
companies advised by the Advisers or their affiliates.
John L. Sullivan............. Treasurer First Vice President of the Advisers. Treasurer of
Date of Birth: 08/20/55 each of the funds in the Fund Complex and certain
other investment companies advised by the Advisers or
their affiliates.
Tanya M. Loden............... Controller Vice President of the Advisers. Controller of each of
Date of Birth: 11/19/59 the funds in the Fund Complex and other investment
companies advised by the Advisers or the affiliates.
Nicholas Dalmaso............. Assistant Secretary Assistant Vice President and Senior Attorney of VKAC.
Date of Birth: 03/01/65 Assistant Vice President and Assistant Secretary of
the Advisers and the Distributor. Officer of certain
other subsidiaries of VKAC. Assistant Secretary of
each of the funds in the Fund Complex and other
investment companies advised by the Advisers or the
affiliates.
Huey P. Falgout, Jr.......... Assistant Secretary Assistant Vice President and Senior Attorney of VKAC.
Date of Birth: 11/15/63 Assistant Vice President and Assistant Secretary of
the Advisers, the Distributor and ACCESS. Officer of
certain other subsidiaries of VKAC. Assistant
Secretary of each of the funds in the Fund Complex and
other investment companies advised by the Advisers or
the affiliates.
Scott E. Martin.............. Assistant Secretary Senior Vice President, Deputy General Counsel and
Date of Birth: 08/20/56 Assistant Secretary of VKAC. Senior Vice President,
Deputy General Counsel and Secretary of the Advisers,
the Distributor and ACCESS. Officer of certain other
subsidiaries of VKAC. Prior to November 1996, Senior
Vice President, Deputy General Counsel and Assistant
Secretary of VKAC Holding. Assistant Secretary of each
of the funds in the Fund Complex and other investment
companies advised by the Advisers or the affiliates.
Weston B. Wetherell.......... Assistant Secretary Vice President, Associate General Counsel and
Date of Birth: 06/15/56 Assistant Secretary of VKAC, the Advisers and the
Distributor. Officer of certain other subsidiaries of
VKAC. Assistant Secretary of each of the funds in the
Fund Complex and other investment companies advised by
the Advisers or the affiliates.
Steven M. Hill............... Assistant Treasurer Assistant Vice President of the Advisers. Assistant
Date of Birth: 10/16/64 Treasurer of each of the funds in the Fund Complex and
other investment companies advised by the Advisers or
the affiliates.
</TABLE>

B-38
<PAGE> 91

<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>
M. Robert Sullivan........... Assistant Controller Assistant Vice President of the Advisers. Assistant
Date of Birth: 03/30/33 Controller of each of the funds in the Fund Complex
and other investment companies advised by the Advisers
or the affiliates.
</TABLE>

Each of the trustees holds the same position with each of the funds in the
Fund Complex. As of December 31, 1996, there were 51 funds in the Fund Complex.
Each trustee who is not an affiliated person of VKAC, the Advisers, the
Distributor, ACCESS or Morgan Stanley (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
their compensation and earn a return on such deferred amounts based upon the
return of the common shares of the funds in the Fund Complex as more fully
described below. Each fund in the Fund Complex also provides a retirement plan
to its Non-Affiliated Trustees that provides Non-Affiliated Trustees with
compensation after retirement, provided that certain eligibility requirements
are met as more fully described below.

The compensation of each Non-Affiliated Trustee from each fund in the Fund
Complex advised by Advisory Corp. (each a "VK Fund" and collectively the "VK
Funds") includes an annual retainer in an amount equal to $2,500 per calendar
year, due in four quarterly installments on the first business day of each
calendar quarter. Each Non-Affiliated Trustee receives a per meeting fee from
each VK Fund in the amount of $125 per regular quarterly 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. Each Non-Affiliated Trustee receives a per meeting fee
from each VK Fund 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 compensation of each Non-Affiliated Trustee from the funds in the Fund
Complex advised by Asset Management (each an "AC Fund" or collectively the "AC
Funds") includes an annual retainer 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-Affiliated Trustee in connection with his or her
services as a trustee. Payment of the annual retainer and the regular meeting
fee is 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 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 which is the subject of a 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 approved an aggregate compensation cap with respect to funds
in 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 funds in the Fund Complex as of July
21, 1995 and certain other exceptions. For the calendar year ended December 31,
1996, certain trustees received aggregate compensation from the funds in the
Fund Complex over $84,000 due to compensation received but not subject to the
cap, including compensation from new funds added to the Fund Complex after July
22, 1995 and certain special meetings in 1996. In addition, each of Advisory
Corp. or Asset Management, as the case may be, 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.

B-39
<PAGE> 92

Each Non-Affiliated Trustee generally 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 Fund and earn a rate of return
determined by reference to the return on the common shares of such Fund or other
funds in the Fund Complex as selected by the respective Non-Affiliated Trustee,
with the same economic effect as if such Non-Affiliated Trustee had invested in
one or more funds in the Fund Complex. To the extent permitted by the 1940 Act,
the Fund may invest in securities of those 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 the Fund.

Each fund in the Fund Complex has adopted a retirement plan. Under the
Fund's retirement plan, a Non-Affiliated Trustee who is receiving trustee's
compensation from the Fund prior to such Non-Affiliated Trustee's retirement,
has at least 10 years of service (including years of service prior to adoption
of the retirement plan) 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 from the Fund. Trustees
retiring prior to the age of 60 or with fewer than 10 years but more than 5
years of service may receive reduced retirement benefits from the Fund. Each
trustee has served as a member of the Board of Trustees since he or she was
first appointed or elected in the year set forth below. The retirement plan
contains a Fund Complex retirement benefit cap of $60,000 per year. Asset
Management has reimbursed each AC Fund for the expenses related to the
retirement plan through December 31, 1996.

Additional information regarding compensation and benefits for trustees is
set forth below. As indicated in the notes accompanying the table, the amounts
relate to either the Trust's most recently completed fiscal year or the Fund
Complex' most recently completed calendar year ended December 31, 1996.

1996 COMPENSATION TABLE

<TABLE>
<CAPTION>
TOTAL
COMPENSATION
PENSION OR ESTIMATED MAXIMUM BEFORE DEFERRAL
AGGREGATE COMPENSATION RETIREMENT BENEFITS ANNUAL BENEFITS FROM FUND
BEFORE DEFERRAL FROM THE ACCRUED AS PART OF FROM THE TRUST UPON COMPLEX PAID
NAME(1) TRUST(2) EXPENSES(3) RETIREMENT(4) TO TRUSTEE(5)
------- ------------------------ ------------------- ------------------- ---------------
<S> <C> <C> <C> <C>
J. Miles Branagan* $12,034 $ 4,879 $22,500 $104,875
Philip P. Gaughan 1,290 0 0 16,875
Linda Hutton Heagy* 7,950 565 22,500 104,875
Dr. Roger Hilsman 7,950 19,128 12,500 103,750
R. Craig Kennedy* 7,950 373 22,500 104,875
Donald C. Miller 12,034 0 0 104,875
Jack E. Nelson* 12,034 2,361 22,500 97,875
David Rees 1,590 12,516 12,000 22,000
Jerome L. Robinson* 9,685 0 0 101,625
Lawrence J. Sheehan 1,590 0 0 22,000
Dr. Fernando Sisto* 7,950 9,346 19,500 104,875
Wayne W. Whalen* 12,034 1,598 22,500 104,875
William S. Woodside 7,950 19,128 12,500 104,875
</TABLE>

- ---------------
* Currently a member of the Board of Trustees. Mr. Phillip B. Rooney also is a
current member of the Board of Trustees but is not included in the
compensation table because he did not serve on the Board of Trustees or
receive any compensation from the Trust prior to April 14, 1997. Messrs.
McDonnell and Powell, also trustees of the Trust during all or a portion of
the Trust's last fiscal year, are not included in the compensation table
because they are affiliated persons of the Advisers and are not eligible for
compensation or retirement benefits from the Trust.

B-40
<PAGE> 93

(1) Persons not designated by an asterisk are not currently members of the Board
of Trustees, but were members of the Board of Trustees during the Trust's
most recently completed fiscal year. Messrs. Gaughan and Rees retired from
the Board of Trustees on January 26, 1996 and January 29, 1996,
respectively. Mr. Sheehan was removed from the Board of Trustees effective
January 29, 1996. Messrs. Hilsman, Miller and Woodside retired from the
Board of Trustees on December 31, 1996.

(2) The amounts shown in this column represent the aggregate compensation before
deferral from all series of the Trust, including the Fund, with respect to
the Trust's fiscal year ended December 31, 1996. As of the date of this
Statement of Additional Information the Strategic Stock Portfolio had not
commenced investment operations and, accordingly, no trustees received
compensation related to its operation. The detail of aggregate compensation
before deferral for each series, including the Fund, are shown in Table A
below. Certain trustees deferred compensation from the Trust during the
fiscal year ended December 31, 1996; the aggregate compensation deferred
from all eight series of the Trust, including the Fund, is as follows: Mr.
Branagan, $7,826; Mr. Gaughan, $1,290; Ms. Heagy, $5,730; Mr. Kennedy,
$3,180; Mr. Miller, $14,501; Mr. Nelson, $14,501; Mr. Robinson, $8,950; and
Mr. Whalen, $12,596. The details of amounts deferred for each series,
including the Fund, are shown in Table B below. Amounts deferred are
retained by the respective fund and earn a rate of return determined by
reference to either the return on the common shares of such fund or other
funds in the Fund Complex as selected by the respective Non-Affiliated
Trustee, with the same economic effect as if such Non-Affiliated Trustee had
invested in one or more funds in the Fund Complex. To the extent permitted
by the 1940 Act, each fund may invest in securities of those funds selected
by the Non-Affiliated Trustees in order to match the deferred compensation
obligation. The cumulative deferred compensation (including interest)
accrued with respect to each trustee from all nine portfolios of the Trust,
including the Fund, as of the Trust's fiscal year ended December 31, 1996 is
as follows: Mr. Branagan, $7,794; Mr. Gaughan, $2,728; Ms. Heagy, $7,292;
Mr. Kennedy, $5,486; Mr. Miller, $13,288; Mr. Nelson, $13,288; Mr. Robinson,
$8,743; Mr. Sisto, $30,486; and Mr. Whalen, $13,349. The details of
cumulative deferred compensation (including interest) for each series,
including the Fund, are shown in Table C below. The deferred compensation
plan is described above the Compensation Table.

(3) The amounts shown in this column represent the retirement benefits accrued
by all series of the Trust, including the Fund, with respect to the Trust's
fiscal year ended December 31, 1996. As of the date of this Statement of
Additional Information the Strategic Stock Portfolio had not commenced
investment operations and, accordingly, no trustees received any benefits
related to its operation. The details of retirement benefits accrued for
each series, including the Fund, are shown in Table D below. The retirement
plan is described above the Compensation Table.

(4) This is the estimated maximum annual benefits payable by the Trust in each
year of the 10-year period commencing in the year of such trustee's
retirement from the Trust. The estimated maximum annual benefit, except for
trustees who have retired or are near retirement, is based upon $2,500 per
series assuming: the trustee has 10 or more years of service on the Board of
Trustees (including years of service prior to the adoption of the retirement
plan) and retires at or after attaining the age of 60. Trustees retiring
prior to the age of 60 or with fewer than 10 years of service for a series
of the Trust may receive reduced retirement benefits from such series. The
actual annual benefit may be less if the trustee is subject to the Fund
Complex retirement benefit cap or if the trustee is not fully vested at the
time of retirement. Each Non-Affiliated Trustee of the Board of Trustees has
served as a member of the Board of Trustees since he or she was first
appointed or elected in the year set forth in Table E below.

(5) The amounts shown in this column represent the aggregate compensation paid
by all 51 of the investment companies in the Fund Complex as of December 31,
1996 before deferral by the trustees under the deferred compensation plan.
Certain trustees deferred all or a portion of their aggregate compensation
from the Fund Complex during the calendar year ended December 31, 1996. The
deferred compensation earns a rate of return determined by reference to the
return on the shares of the funds in the Fund Complex as selected by the
respective Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund
Complex. To the extent permitted by the 1940 Act, the Fund may invest in
securities of those investment companies selected by the Non-Affiliated
Trustees in order to match the deferred compensation obligation. The
trustees' Fund Complex

B-41
<PAGE> 94

compensation cap covered the period July 22, 1995 through December 31, 1996.
For the calendar year ended December 31, 1996, certain trustees received
compensation over $84,000 in the aggregate due to compensation received but
not subject to the cap, including compensation from new funds added to the
Fund Complex after July 22, 1995 and certain special meetings in 1996. The
Advisers and their affiliates also serve as investment adviser for other
investment companies; however, with the exception of Messrs. McDonnell,
Powell and Whalen, the trustees were not trustees of such investment
companies. Combining the Fund Complex with other investment companies
advised by the Advisers and their affiliates, Mr. Whalen received Total
Compensation of $243,375 during the calendar year ended December 31, 1996.

As of July 22, 1977, the trustees and officers of the Fund as a group owned
less than 1% of the shares of the Fund.

B-42
<PAGE> 95

TABLE A
1996 AGGREGATE COMPENSATION FROM THE TRUST AND EACH PORTFOLIO
<TABLE>
<CAPTION>
TRUSTEE
---------------------------------------------------------------------------------------------
PORTFOLIO NAME BRANAGAN GAUGHAN HEAGY HILSMAN KENNEDY MILLER NELSON REES ROBINSON SHEEHAN
- -------------- -------- ------- ----- ------- ------- ------ ------ ---- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>

<CAPTION>
TRUSTEE
-------------------------
PORTFOLIO NAME SISTO WHALEN WOODSIDE
- -------------- ----- ------ --------
<S> <C> <C> <C>

LIT Asset Allocation Portfolio.... 1,627 170 1,035 1,035 1,035 1,627 1,627 210 1,160 210
LIT Domestic Income Portfolio..... 1,577 160 995 995 995 1,577 1,577 200 1,120 200
LIT Emerging Growth Portfolio..... 1,487 150 925 925 925 1,487 1,487 180 1,150 180
LIT Enterprise Portfolio.......... 1,677 180 1,075 1,075 1,075 1,677 1,677 220 1,200 220
LIT Global Equity Portfolio*...... 925 150 925 925 925 925 925 180 925 180
LIT Government Portfolio.......... 1,637 170 1,045 1,045 1,045 1,637 1,637 210 1,170 210
LIT Growth and Income Portfolio... 0 0 0 0 0 0 0 0 0 0
LIT Money Market Portfolio........ 1,577 160 995 995 995 1,577 1,577 200 1,120 200
LIT Morgan Stanley Real Estate
Securities Portfolio............ 1,527 150 955 955 955 1,527 1,527 190 1,840 190
LIT Strategic Stock Portfolio..... 0 0 0 0 0 0 0 0 0 0
Life Investment Trust Total..... 12,034 1,290 7,950 7,950 7,950 12,034 12,034 1,590 9,685 1,590

<CAPTION>
LIT Asset Allocation Portfolio.... 1,035 1,627 1,035
LIT Domestic Income Portfolio..... 995 1,577 995
LIT Emerging Growth Portfolio..... 925 1,487 925
LIT Enterprise Portfolio.......... 1,075 1,677 1,075
LIT Global Equity Portfolio*...... 925 925 925
LIT Government Portfolio.......... 1,045 1,637 1,045
LIT Growth and Income Portfolio... 0 0 0
LIT Money Market Portfolio........ 995 1,577 995
LIT Morgan Stanley Real Estate
Securities Portfolio............ 955 1,527 955
LIT Strategic Stock Portfolio..... 0 0 0
Life Investment Trust Total..... 7,950 12,034 7,950
</TABLE>

TABLE B

1996 AGGREGATE COMPENSATION DEFERRED FROM THE TRUST AND EACH PORTFOLIO

<TABLE>
<CAPTION>
TRUSTEE
---------------------------------------------------------------------------------------------
PORTFOLIO NAME BRANAGAN GAUGHAN HEAGY HILSMAN KENNEDY MILLER NELSON REES ROBINSON SHEEHAN
- -------------- -------- ------- ----- ------- ------- ------ ------ ---- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LIT Asset Allocation Portfolio..... 997 170 750 0 420 3,532 3,532 210 1,160 0
LIT Domestic Income Portfolio...... 977 160 710 0 400 1,577 1,577 200 1,120 0
LIT Emerging Growth Portfolio...... 947 150 670 0 360 1,487 1,487 180 1,050 0
LIT Enterprise Portfolio........... 1,017 180 790 0 440 1,677 1,677 220 1,200 0
LIT Global Equity Portfolio*....... 947 150 670 0 360 1,487 1,487 180 1,050 0
LIT Government Portfolio........... 1,007 170 760 0 420 1,637 1,637 210 1,170 0
LIT Growth and Income Portfolio.... 0 0 0 0 0 0 0 0 0 0
LIT Money Market Portfolio......... 977 160 710 0 400 1,577 1,577 200 1,120 0
LIT Morgan Stanley Real Estate
Securities Portfolio............. 957 150 670 0 380 1,527 1,527 190 1,080 0
LIT Strategic Stock Portfolio...... 0 0 0 0 0 0 0 0 0 0
Life Investment Trust Total:..... 7,826 1,290 5,730 0 3,180 14,501 14,501 1,590 8,950 0

<CAPTION>
TRUSTEE
-------------------------
PORTFOLIO NAME SISTO WHALEN WOODSIDE
- -------------- ----- ------ --------
<S> <C> <C> <C>
LIT Asset Allocation Portfolio.... 0 1,627 0
LIT Domestic Income Portfolio..... 0 1,577 0
LIT Emerging Growth Portfolio..... 0 1,487 0
LIT Enterprise Portfolio.......... 0 1,677 0
LIT Global Equity Portfolio*...... 0 1,487 0
LIT Government Portfolio.......... 0 1,637 0
LIT Growth and Income Portfolio... 0 0 0
LIT Money Market Portfolio........ 0 1,577 0
LIT Morgan Stanley Real Estate
Securities Portfolio............ 0 1,527 0
LIT Strategic Stock Portfolio..... 0 0 0
Life Investment Trust Total:.... 0 12,596 0
</TABLE>

TABLE C

CUMULATIVE COMPENSATION DEFERRED (PLUS INTEREST) FROM THE TRUST
AND EACH PORTFOLIO

<TABLE>
<CAPTION>
TRUSTEE
----------------------------------------------------------------------------------------------
PORTFOLIO NAME BRANAGAN GAUGHAN HEAGY HILSMAN KENNEDY MILLER NELSON REES ROBINSON SHEEHAN
-------------- -------- ------- ----- ------- ------- ------ ------ ---- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LIT Asset Allocation Portfolio.... 993 354 951 0 716 1,717 1,709 4,798 1,133 0
LIT Domestic Income Portfolio..... 973 310 860 0 648 1,662 1,655 3,974 1,095 0
LIT Emerging Growth Portfolio..... 943 326 843 0 618 1,566 1,559 187 1,026 0
LIT Enterprise Portfolio.......... 1,013 409 1,050 0 802 1,773 1,765 6,032 1,169 0
LIT Global Equity Portfolio*...... 943 320 840 0 618 1,567 1,559 187 1,026 0
LIT Government Portfolio.......... 1,003 317 891 0 658 1,726 1,719 6,650 1,144 0
LIT Growth and Income Portfolio... 0 0 0 0 0 0 0 0 0 0
LIT Money Market Portfolio........ 973 303 828 0 629 1,663 1,656 6,067 1,096 0
LIT Morgan Stanley Real Estate
Securities Portfolio............ 953 389 1,029 0 797 1,614 1,606 198 1,054 0
LIT Strategic Stock Portfolio..... 0 0 0 0 0 0 0 0 0 0
Life Investment Trust Total..... 7,794 2,728 7,292 0 5,486 13,288 13,228 28,093 8,743 0

<CAPTION>
TRUSTEE
--------------------------
PORTFOLIO NAME SISTO WHALEN WOODSIDE
-------------- ----- ------ --------
<S> <C> <C> <C>
LIT Asset Allocation Portfolio.... 6,506 1,725 0
LIT Domestic Income Portfolio..... 5,479 1,670 0
LIT Emerging Growth Portfolio..... 0 1,573 0
LIT Enterprise Portfolio.......... 7,898 1,782 0
LIT Global Equity Portfolio*...... 0 1,573 0
LIT Government Portfolio.......... 5,615 1,734 0
LIT Growth and Income Portfolio... 0 0 0
LIT Money Market Portfolio........ 4,988 1,671 0
LIT Morgan Stanley Real Estate
Securities Portfolio............ 0 1,621 0
LIT Strategic Stock Portfolio..... 0 0 0
Life Investment Trust Total..... 30,486 13,349 0
</TABLE>

TABLE D

1996 RETIREMENT BENEFITS ACCRUED AS PART OF EXPENSES FOR THE TRUST
AND EACH PORTFOLIO

<TABLE>
<CAPTION>
TRUSTEE
----------------------------------------------------------------------------------------------
PORTFOLIO NAME BRANAGAN GAUGHAN HEAGY HILSMAN KENNEDY MILLER NELSON REES ROBINSON SHEEHAN
- -------------- -------- ------- ----- ------- ------- ------ ------ ---- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LIT Asset Allocation Portfolio.... 629 0 71 3,906 47 0 297 2,346 0 0
LIT Domestic Income Portfolio..... 629 0 71 3,906 47 0 297 2,346 0 0
LIT Emerging Growth Portfolio..... 578 0 70 0 46 0 292 0 0 0
LIT Enterprise Portfolio.......... 629 0 71 3,772 47 0 297 2,608 0 0
LIT Global Equity Portfolio*...... 578 0 70 0 46 0 292 0 0 0
LIT Government Portfolio.......... 629 0 71 3,772 47 0 297 2,608 0 0
LIT Growth and Income Portfolio... 0 0 0 0 0 0 0 0 0 0
LIT Money Market Portfolio........ 629 0 71 3,772 47 0 297 2,608 0 0
LIT Morgan Stanley Real Estate
Securities Portfolio............ 578 0 70 0 46 0 292 0 0 0
LIT Strategic Stock Portfolio..... 0 0 0 0 0 0 0 0 0 0
Life Investment Trust Total..... 4,879 0 565 19,128 373 0 2,361 12,516 0 0

<CAPTION>
TRUSTEE
-------------------------
PORTFOLIO NAME SISTO WHALEN WOODSIDE
- -------------- ----- ------ --------
<S> <C> <C> <C>
LIT Asset Allocation Portfolio.... 1,325 202 3,906
LIT Domestic Income Portfolio..... 1,325 202 3,906
LIT Emerging Growth Portfolio..... 917 197 0
LIT Enterprise Portfolio.......... 1,315 201 3,772
LIT Global Equity Portfolio*...... 917 197 0
LIT Government Portfolio.......... 1,315 201 3,772
LIT Growth and Income Portfolio... 0 0 0
LIT Money Market Portfolio........ 1,315 201 3,772
LIT Morgan Stanley Real Estate
Securities Portfolio............ 917 197 0
LIT Strategic Stock Portfolio..... 0 0 0
Life Investment Trust Total..... 9,346 1,598 19,128
</TABLE>

B-43
<PAGE> 96

TABLE E

YEAR OF ELECTION OR APPOINTMENT TO EACH PORTFOLIO OF THE TRUST

<TABLE>
<CAPTION>
TRUSTEE
-------------------------------------------------------------------------
PORTFOLIO NAME BRANAGAN HEAGY KENNEDY NELSON ROONEY ROBINSON SISTO WHALEN
- -------------- -------- ----- ------- ------ ------ -------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LIT Asset Allocation Portfolio....................... 1991 1995 1995 1995 1997 1995 1987 1995
LIT Domestic Income Portfolio........................ 1991 1995 1995 1995 1997 1995 1987 1995
LIT Emerging Growth Portfolio........................ 1995 1995 1995 1995 1997 1995 1995 1995
LIT Enterprise Portfolio............................. 1991 1995 1995 1995 1997 1995 1986 1995
LIT Global Equity Portfolio*......................... 1995 1995 1995 1995 1997 1995 1995 1995
LIT Government Portfolio............................. 1991 1995 1995 1995 1997 1995 1986 1995
LIT Growth and Income Portfolio...................... 1995 1995 1995 1995 1997 1995 1995 1995
LIT Money Market Portfolio........................... 1991 1995 1995 1995 1997 1995 1986 1995
LIT Morgan Stanley Real Estate Securities
Portfolio.......................................... 1995 1995 1995 1995 1997 1995 1995 1995
</TABLE>

As of the date of this Statement of Additional Information the Strategic
Stock Portfolio had not commenced investment operations and, accordingly, no
tabular information is included for its Strategic Stock Portfolio.

LEGAL COUNSEL

Skadden, Arps Slate, Meagher & Flom (Illinois).

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 Asset Allocation
Portfolio, 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 five
advisory agreements designated herein as "Emerging Growth Advisory Agreement,"
"Global Equity Advisory Agreement," "Growth and Income Advisory Agreement",
"Real Estate Advisory Agreement" and the "Strategic Stock Advisory Agreement"
for the Emerging Growth Portfolio, the Global Equity Portfolio, the Growth and
Income Portfolio, Morgan Stanley Real Estate Securities Portfolio and the
Strategic Stock Portfolio, respectively (such advisory agreements together with
Advisory Agreement-I 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. A portion of these amounts were
paid to the Adviser or its parent as reimbursement of personnel, office space,
facilities and equipment costs attributable to the provision of accounting
services to the Trust. 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. The Advisory
Agreements also provide that the Adviser shall not be liable to the company for
any actions or omissions if it acted without willful misfeasance, bad faith,
negligence or reckless disregard of its obligations.

B-44
<PAGE> 97

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 the Emerging Growth Advisory
Agreement, 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 the Global Equity Advisory Agreement, 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 Global Equity Portfolio. Under the Growth and
Income Advisory Agreement, 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 the Morgan Stanley Real Estate Advisory Agreement, 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 Morgan Stanley Real Estate Securities
Portfolio. Under the Strategic Stock Advisory Agreement, 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 Strategic Stock Portfolio at an annual rate of 0.50% of the first $500
million of the Strategic Stock Portfolio's average net assets and 0.45% of such
Portfolio's average net assets in excess of $500 million. The Adviser has also
voluntarily elected to reimburse the Strategic Stock Portfolio for all ordinary
business expenses in excess of 0.65% of the average daily net assets by reducing
the advisory fee and/or bearing other expenses of the Strategic Stock Portfolio
in excess of such limitation.

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.

Advisory Agreement - I also provides that, in the event the ordinary
business expenses of the Asset Allocation Portfolio, 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 the other Advisory Agreements.

In addition to the contractual expense limitation, the Adviser elected to
reimburse the Asset Allocation Portfolio, the Domestic Income Portfolio, the
Enterprise Portfolio, the Government Portfolio and the Money Market Portfolio
for all ordinary business expenses in excess of 0.60% of the average daily net
assets.

B-45
<PAGE> 98

The following table shows expenses paid under the Advisory Agreements
during the periods ended December 31, 1994, 1995 and 1996.

GROWTH
ASSET DOMESTIC EMERGING GLOBAL AND MONEY
PERIOD ENDING ALLOCATION INCOME GROWTH ENTERPRISE EQUITY GOVERNMENT INCOME MARKET
DECEMBER 31, 1994: PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------------ ---------- --------- --------- ---------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Advisory fees $307,894 $130,474 N/A $346,359 N/A $351,674 N/A $152,665
Accounting Services $ 55,826 $51,604 N/A $ 52,665 N/A $ 58,043 N/A $ 51,778
Contractual expense
reimbursement $ -- $ 302 N/A $ -- N/A $ -- N/A $ --
Voluntary expense
reimbursement $ 75,169 $91,332 N/A $ 57,464 N/A $ 68,843 N/A $ 80,915

<CAPTION>
MORGAN
STANLEY
REAL
ESTATE
PERIOD ENDING SECURITIES
DECEMBER 31, 1994: PORTFOLIO
------------------ -----------
<S> <C>
Advisory fees N/A
Accounting Services N/A
Contractual expense
reimbursement N/A
Voluntary expense
reimbursement N/A
</TABLE>

<TABLE>
<CAPTION>
PERIOD ENDING
DECEMBER 31, 1995:
------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Advisory fees $302,141 $130,064 $ 4,798 $355,715 $ 10,893 $333,447 N/A $121,552 $ 18,136
Accounting Services $ 57,576 $49,819 $ 3,222 $ 55,772 $ 7,200 $ 57,526 N/A $ 48,109 $ 3,153
Contractual expense
reimbursement $ -- $ -- $19,858 $ -- $ 43,031 $ -- N/A $ 19,858 $ 7,173
Voluntary expense
reimbursement $ 85,602 $86,887 $ -- $ 56,680 $ -- $ 77,421 N/A $ 80,637 --
</TABLE>

<TABLE>
<CAPTION>
PERIOD ENDING
DECEMBER 31, 1996:
------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Advisory fees $316,002 $110,243 $28,284 $407,693 $ 28,416 $303,695 $ 74 $104,808 $428,166
Accounting Services $ 56,837 $44,328 $41,089 $ 52,282 $ 29,400 $ 55,531 $ -- $ 76,975 $ 44,869
Contractual expense
reimbursement $ -- $ -- $97,987 $ -- $177,139 $ -- $ -- $ -- $ 70,941
Voluntary expense
reimbursement $113,873 $151,102 $ -- $123,582 $ -- $122,474 $5,591 $143,892 --
</TABLE>

As of the date of this Statement of Additional Information the Strategic
Stock Portfolio had not commenced investment operations and, accordingly, no
expenses have been paid under the Strategic Stock Portfolio Advisory Agreement.

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.

DISTRIBUTOR

The Distributor acts as the principal underwriter of the shares of the
Trust pursuant to written agreements (the "Distribution and Service 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
Distribution and Service 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 Distribution and Service Agreement or
interested persons of any party, by votes cast in person at a meeting called for
that purpose. The Distribution and Service 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 certain other costs
including the cost of supplemental sales literature and advertising. The Trust
pays all expenses attributable to the registrations of its shares under federal
law, including registration and

B-46
<PAGE> 99

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, 1994, 1995, and 1996, ACCESS
received fees in the amount of $15,000 from each of the Portfolios of the Trust
for transfer agency services, excluding the Growth and Income Portfolio from
which ACCESS received no fees and, excluding the Strategic Stock Portfolio which
had not commenced investment operations as of December 31, 1996. 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.

Consistent with the Rules of Fair Practice of the NASD 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.

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 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.

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

B-47
<PAGE> 100

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.

Prior to December 20, 1994, the Portfolios 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
October 31, 1996, Morgan Stanley Group Inc. became an affiliate of the Adviser.
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.

Portfolios that paid affiliated brokerage commissions during 1994 are set
forth below:

Commissions Paid:

<TABLE>
<CAPTION>
SMITH BARNEY ROBINSON MORGAN
SHEARSON HUMPHREY STANLEY
------------ -------- -------
<S> <C> <C> <C>
Fiscal 1994
Money Market Portfolio -- -- --
Enterprise Portfolio $36,136 $1,330 --
Government Portfolio $ 2,578 -- --
Asset Allocation Portfolio $27,550 $ 42 --
Domestic Income Portfolio -- -- --
</TABLE>

No commissions were paid to affiliated brokers during the fiscal year ended
1995. Asset Allocation Portfolio and Enterprise Portfolio paid commissions to
Morgan Stanley during the fiscal year ended 1996 in the amounts of $10,732 and
18,166, respectively.

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.

<TABLE>
<CAPTION>
MORGAN
STANLEY
ASSET DOMESTIC EMERGING GLOBAL REAL ESTATE
ALLOCATION ENTERPRISE GOVERNMENT INCOME GROWTH EQUITY SECURITIES
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
----------- ----------- ---------- --------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1994
- ---------------------
Total brokerage
commissions $ 212,116 $ 340,219 $15,213 $395 -- -- --
Commissions for
research
services $ 90,649 $ 144,248 -- -- -- -- --
Value of research
transactions $72,221,352 $84,974,336 -- -- -- -- --
</TABLE>

B-48
<PAGE> 101
<TABLE>
<CAPTION>
MORGAN
STANLEY
ASSET DOMESTIC EMERGING GLOBAL REAL ESTATE
ALLOCATION ENTERPRISE GOVERNMENT INCOME GROWTH EQUITY SECURITIES
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
----------- ----------- ---------- --------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1995
- ---------------------
Total brokerage
commissions $ 157,404 $ 305,770 $30,598 -- $ 2,474 $9,763 $ 14,076
Commissions for
research
services $ 64,689 $ 114,552 -- -- 2,143 -- 12,934
Value of research
transactions $48,252,618 $66,483,840 -- -- 2,340,642 -- 12,044,246
</TABLE>

<TABLE>
<CAPTION>
MORGAN STANLEY GROWTH
ASSET DOMESTIC EMERGING GLOBAL REAL ESTATE AND
ALLOCATION ENTERPRISE GOVERNMENT INCOME GROWTH EQUITY SECURITIES INCOME
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
----------- ----------- ---------- --------- ---------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996
- ---------------------
Total brokerage
commissions $ 160,187 $ 203,035 $49,075 $134 $ 7,373 $12,654 $ 222,173 --
Commissions for
research services $ 62,566 $ 118,119 -- -- $ 5,803 -- $ 163,059 $ 187
Value of research
transactions $28,024,814 $68,820,181 -- -- $5,170,364 -- $19,899,335 $481,917

MONEY
MARKET
PORTFOLIO
---------
<S> <C>
1996
- ---------------------
Total brokerage
commissions --
Commissions for
research services --
Value of research
transactions --
</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).

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 thirteen
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

B-49
<PAGE> 102

sales and redemptions at $1.00. These procedures include review by the Trustees,
at such intervals as the Portfolio or the Trustees deem appropriate, to
determine the extent, if any, to which the new asset value per share calculated
by using available market quotations deviates from $1.00 per share based on
amortized cost. In the event such deviation should exceed four tenths of one
percent, the Trustees are required to promptly consider what action, if any,
should be initiated. If the Trustees believe that the extent of any deviation
from a $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.

ASSET ALLOCATION, DOMESTIC INCOME, EMERGING GROWTH, ENTERPRISE, GLOBAL EQUITY,
GROWTH AND INCOME, MORGAN STANLEY REAL ESTATE SECURITIES AND STRATEGIC STOCK
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-50
<PAGE> 103

Redemptions are not made on days during which the New York Stock Exchange
is closed. 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.

TAX STATUS OF THE TRUST

The Trust and any of its series will be treated as separate corporations
for federal income tax purposes. Each Portfolio intends to qualify each year and
to elect to be treated as a regulated investment company under the Code. If a
Portfolio so qualifies and distributes each year to its shareholders at least
90% of its net investment income (including tax-exempt interest, taxable income
and net short-term capital gain, but not net capital gains, which are the excess
of net long-term capital gains over net short-term capital losses) in each year,
it will not be required to pay federal income taxes on any income distributed to
shareholders. Each Portfolio intends to distribute at least the minimum amount
of net investment income necessary to satisfy the 90% distribution requirement.
No Portfolio will not be subject to federal income tax on any net capital gains
distributed to shareholders.

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 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.

B-51
<PAGE> 104

PORTFOLIO PERFORMANCE

The Adviser has voluntarily elected to limit the ordinary business expenses
of the Asset Allocation Portfolio, 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.
In addition, the Adviser voluntarily elected to limit the ordinary business
expenses of the Strategic Stock Portfolio to 0.65% per year of the average net
assets of such Portfolio by reducing the advisory fee and/or bearing other
expenses of such Portfolio in excess of such limitation.

The average annual total return (computed in the manner described in the
Prospectus) and yield, if applicable, for each Portfolio are shown in the table
below. 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 each Portfolio's investment
objectives and policies as well as the risks incurred in each Portfolio's
investment practices. All total return figures are for the period ended December
31, 1996.

<TABLE>
<CAPTION>
TOTAL RETURN TOTAL RETURN TOTAL RETURN
FOR ONE YEAR FOR FIVE YEAR FOR TEN YEAR TOTAL RETURN
PERIOD PERIOD PERIOD SINCE INCEPTION YIELD
------------ ------------- ------------ --------------- -----
<S> <C> <C> <C> <C> <C>
Asset Allocation Portfolio
commencement date 06/30/87.......... 13.87% 10.74% -- 10.84% --
Domestic Income Portfolio*
commencement date 11/04/87.......... 6.68% 10.14% -- 7.93% 7.55%*
Emerging Growth Portfolio
commencement date 07/03/95.......... 16.55% -- -- 23.11% --
Enterprise Portfolio
commencement date 04/07/86.......... 24.80% 14.11% 12.80% 11.14% --
Global Equity Portfolio
commencement date 07/03/95.......... 16.72% -- -- 13.14% --
Government Portfolio*
commencement date 04/07/86.......... 2.12% 5.41% 6.96% 6.87% 6.25%*
Growth and Income Portfolio
commencement date 12/23/96.......... -- -- -- (13.95%) --
Money Market Portfolio**
commencement date 04/07/86.......... -- -- -- -- 4.86%*
Morgan Stanley Real Estate Securities
Portfolio
commencement date 07/03/95.......... 40.53% -- -- 32.35% --
</TABLE>

- -------------------------
* For the 30-day period ended December 31, 1996. The Portfolio's 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.

** For the seven-day period ended December 31, 1996. The compound effective
yield for this same period was 4.98%.

As of the date of this Statement of Additional Information the Strategic
Stock Portfolio had not commenced investment operations and, accordingly, no
performance information is included for the Strategic Stock Portfolio.

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.

B-52
<PAGE> 105

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.

MONEY MARKET PORTFOLIO YIELD INFORMATION

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

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

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 Portfolios 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, Suite 2900,
Houston, Texas 77002, the independent accountants for the Trust, performs an
annual audit of the Trust's financial statements.

B-53
<PAGE> 106

APPENDIX

Description of the highest commercial paper, bond and other short- and
long-term rating categories assigned by Standard & Poor's Ratings Group ("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-54
<PAGE> 107

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-55
<PAGE> 108

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 positions of the Asset
Allocation Fund, Domestic Income Fund, Emerging Growth Fund, Enterprise Fund,
Global Equity Fund, Government Fund, Growth and Income Fund, Money Market Fund
and Real Estate Securities Fund (constituting Van Kampen American Capital Life
Investment Trust, hereafter referred to as the "Trust") at December 31, 1996,
and the results of each of their operations, the changes in each of their net
assets and the financial highlights for each of the 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, 1996 by correspondence with the custodian and
brokers and the application of alternative auditing procedures for unsettled
security transactions, provide a reasonable basis for the opinion expressed
above.

PRICE WATERHOUSE LLP

Houston, Texas
February 7, 1997

B-56
<PAGE> 109

ASSET ALLOCATION FUND PORTFOLIO OF INVESTMENTS

December 31, 1996
<TABLE>
<CAPTION>
Security Description Shares Market Value
- --------------------------------------------------------------------------------
COMMON STOCK 52.5%
CONSUMER DISTRIBUTION 2.4%
<S> <C> <C>
Dayton Hudson Corp.......................................... 6,100 $ 239,425
Dillard Department Stores, Inc., Class A.................... 8,600 265,525
Federated Department Stores, Inc. (b)....................... 12,200 416,325
Kroger Co. (b).............................................. 6,100 283,650
Pier 1 Imports, Inc......................................... 11,600 204,450
Tupperware Corp............................................. 2,000 107,250
----------
1,516,625
----------
CONSUMER DURABLES 1.3%
Chrysler Corp............................................... 4,400 145,200
Cooper Tire & Rubber........................................ 6,200 122,450
Ford Motor Co............................................... 3,400 108,375
Masco Corp.................................................. 3,500 126,000
Maytag Corp................................................. 8,900 175,775
Newell Co................................................... 5,300 166,950
----------
844,750
----------
CONSUMER NON-DURABLES 5.9%
American Brands, Inc........................................ 8,900 441,663
First Brands Corp........................................... 6,100 173,088
Philip Morris Cos., Inc..................................... 13,100 1,475,387
Quaker Oats Co.............................................. 3,200 122,000
RJR Nabisco Holdings Corp................................... 31,500 1,071,000
Tambrands, Inc.............................................. 3,200 130,800
Unilever NV - New York Shares (Netherlands)................. 2,100 368,025
----------
3,781,963
----------
CONSUMER SERVICES 4.4%
Comcast Corp., Class A...................................... 9,600 171,000
Cox Communications, Inc., Class A (b)....................... 8,900 205,813
Gannett, Inc................................................ 2,300 172,213
Harcourt General, Inc....................................... 5,800 267,525
Tele-Communications, Inc., Class A (b)...................... 84,600 1,105,087
Time Warner, Inc............................................ 24,100 903,750
----------
2,825,388
----------
ENERGY 6.1%
Amerada Hess Corp........................................... 6,000 347,250
Amoco Corp.................................................. 2,500 201,250
Atlantic Richfield Co....................................... 1,900 251,750
British Petroleum PLC - ADR (United Kingdom)................ 1,100 155,513
Coastal Corp................................................ 3,400 166,175
Coflexip SA - ADR (France) (b).............................. 4,700 123,375
J. Ray McDermott SA (b)..................................... 9,400 206,800
Occidental Petroleum Corp................................... 7,200 168,300
PanEnergy Corp.............................................. 12,100 544,500
Repsol SA - ADR (Spain)..................................... 7,800 297,375
Seagull Energy Corp. (b).................................... 7,900 173,800
Sonat, Inc.................................................. 800 41,200
Texaco, Inc................................................. 2,700 264,937
Total SA - ADR (France)..................................... 3,956 152,950
Unocal Corp................................................. 6,500 264,062
USX Marathon Group.......................................... 10,000 238,750
YPF Sociedad Anonima - ADR (Argentina), Class D............. 12,500 315,625
----------
3,913,612
----------
</TABLE>

B-57

See Notes to Financial Statements
<PAGE> 110

ASSET ALLOCATION FUND PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1996
<TABLE>
<CAPTION>
Security Description Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
FINANCE 8.4%
Aetna, Inc.................................................. 8,400 $ 672,000
AFLAC, Inc.................................................. 7,200 307,800
Allstate Corp............................................... 4,000 231,500
AMBAC, Inc.................................................. 3,900 258,862
American Bankers Insurance Group, Inc....................... 8,400 429,450
BankAmerica Corp............................................ 2,600 259,350
Bankers Trust New York Corp................................. 2,300 198,375
Bear Stearns Cos., Inc...................................... 10,465 291,712
Chase Manhattan Corp........................................ 3,600 321,300
CIGNA Corp.................................................. 2,500 341,562
CMAC Investment Corp........................................ 7,600 279,300
Conseco, Inc................................................ 2,500 159,375
Everest Reinsurance Holdings................................ 6,400 184,000
First USA, Inc.............................................. 4,100 141,963
Great Western Financial Corp................................ 5,200 150,800
J.P. Morgan & Co., Inc...................................... 3,200 312,400
MBIA, Inc................................................... 4,400 445,500
PNC Financial Corp.......................................... 5,800 218,225
Travelers Group, Inc........................................ 4,133 187,535
----------
5,391,009
----------
HEALTHCARE 2.7%
American Home Products Corp................................. 7,800 457,275
Lincare Holdings, Inc. (b).................................. 4,500 184,500
Mallinckrodt, Inc........................................... 13,600 600,100
Schering Plough Corp........................................ 1,700 110,075
SmithKline Beecham PLC - ADR (United Kingdom)............... 1,900 129,200
Warner Lambert Co........................................... 2,400 180,000
Wellpoint Health Networks, Inc., Class A (b)................ 700 24,063
----------
1,685,213
----------
PRODUCER MANUFACTURING 4.8%
Bouygues Offshore SA - ADR (France) (b)..................... 14,800 190,550
Browning Ferris Industries, Inc............................. 12,800 336,000
Caterpillar, Inc............................................ 2,700 203,175
Dover Corp.................................................. 2,600 130,650
Ingersoll Rand Co........................................... 6,000 267,000
Johnson Controls, Inc....................................... 1,000 82,875
LucasVarity PLC - ADR (United Kingdom) (b).................. 4,300 163,400
Rockwell International Corp................................. 1,900 115,662
Stewart & Stevenson Services, Inc........................... 4,600 133,975
TRW, Inc.................................................... 2,400 118,800
WMX Technologies, Inc....................................... 41,200 1,344,150
----------
3,086,237
----------
RAW MATERIALS/PROCESSING INDUSTRIES 3.6%
Bethlehem Steel Corp. (b)................................... 44,900 404,100
Boise Cascade Corp.......................................... 22,600 717,550
Dow Chemical Co............................................. 3,700 289,987
LTV Corp.................................................... 14,500 172,187
Lyondell Petrochemical Co................................... 6,900 151,800
Mead Corp................................................... 2,100 122,063
Stone Container Corp........................................ 6,600 98,175
Weyerhaeuser Co............................................. 3,600 170,550
Willamette Industries, Inc.................................. 2,100 146,213
----------
2,272,625
----------
</TABLE>

B-58

See Notes to Financial Statements
<PAGE> 111

ASSET ALLOCATION FUND PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1996
<TABLE>
<CAPTION>
Security Description Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
TECHNOLOGY 2.5%
Avnet, Inc.................................................. 4,500 $ 262,125
BMC Software, Inc. (b)...................................... 4,200 173,775
Computer Associates International, Inc...................... 2,800 139,300
Ericsson L M Telephone Co. - ADR (Sweden), Class B.......... 4,500 135,844
Gateway 2000, Inc. (b)...................................... 1,900 101,769
Hewlett Packard Co.......................................... 2,600 130,650
International Business Machines Corp........................ 1,300 196,300
Nokia Corp. - ADR (Finland)................................. 2,900 167,112
Pitney Bowes, Inc........................................... 1,500 81,750
SunGard Data Systems, Inc. (b).............................. 4,800 189,600
-----------
1,578,225
-----------
TRANSPORTATION 0.4%
Canadian National Railway Co................................ 7,100 269,800
-----------
UTILITIES 10.0%
Ameritech Corp. ............................................ 3,000 181,875
AT & T Corp. ............................................... 17,000 739,500
Baltimore Gas & Electric Co. ............................... 3,700 98,975
Bell Atlantic Corp. ........................................ 3,400 220,150
Bellsouth Corp. ............................................ 2,700 109,013
Boston Edison Co. .......................................... 4,000 107,500
Carolina Power & Light Co. ................................. 3,100 113,150
Central & South West Corp. ................................. 3,300 84,563
Cincinnati Bell, Inc. ...................................... 3,250 200,281
CMS Energy Corp. ........................................... 3,200 107,600
DTE Energy Co. ............................................. 9,000 291,375
Entergy Corp. .............................................. 4,800 133,200
FPL Group, Inc. ............................................ 2,600 119,600
GPU, Inc. .................................................. 4,200 141,225
Houston Industries, Inc. ................................... 14,100 319,012
Idaho Power Co. ............................................ 5,500 171,187
Illinova Corp. ............................................. 7,700 211,750
MCI Communications Corp. ................................... 30,000 980,625
Nipsco Industries, Inc. .................................... 1,700 67,363
Oklahoma Gas & Electric Co. ................................ 8,300 346,525
Pacificorp.................................................. 4,900 100,450
Peco Energy Co. ............................................ 6,800 171,700
Pinnacle West Capital Corp. ................................ 4,400 139,700
Public Service Co. of New Mexico............................ 6,800 133,450
SBC Communications, Inc. ................................... 5,500 284,625
Sierra Pacific Resources.................................... 2,400 69,000
Southwestern Public Service Co. ............................ 3,900 137,962
Sprint Corp. ............................................... 8,000 319,000
Texas Utilities Co. ........................................ 6,800 277,100
-----------
6,377,456
-----------
TOTAL COMMON STOCK................................................. 33,542,903
-----------
</TABLE>

B-59

See Notes to Financial Statements
<PAGE> 112

ASSET ALLOCATION FUND PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
CORPORATE DEBT 19.8%
CONSUMER DISTRIBUTION 1.5%
$1,000 Sears Roebuck Acceptance Corp.......... 6.750% 09/15/05 $ 984,790
-----------
CONSUMER NON-DURABLES 1.6%
1,000 Anheuser Busch Co., Inc................ 7.000 09/01/05 1,001,090
-----------
CONSUMER SERVICES 1.5%
1,000 Cox Communications, Inc................ 6.875 06/15/05 984,210
-----------
ENERGY 3.4%
1,000 Burlington Resources, Inc.............. 9.125 10/01/21 1,174,800
1,000 Enron Corp............................. 6.875 10/15/07 989,450
-----------
2,164,250
-----------
FINANCE 1.7%
1,000 American General Corp.................. 9.625 02/01/18 1,065,900
-----------
HEALTHCARE 1.6%
1,000 Aetna, Inc............................. 7.125 08/15/06 1,007,550
-----------
PRODUCER MANUFACTURING 1.8%
1,000 Caterpillar, Inc....................... 9.000 04/15/06 1,144,900
-----------
TECHNOLOGY 3.4%
1,000 Boeing, Inc............................ 8.100 11/15/06 1,089,800
1,000 Phillips Electronics NV................ 8.375 09/15/06 1,087,900
-----------
2,177,700
-----------
UTILITIES 3.3%
1,000 Baltimore Gas & Electric Co............ 7.500 01/15/07 1,042,000
1,000 Texas Utilities Electric Co............ 8.250 04/01/04 1,073,750
-----------
2,115,750
-----------
TOTAL CORPORATE DEBT.................................... 12,646,140
-----------
U.S. GOVERNMENT OBLIGATIONS 15.9%
3,000 U.S. Treasury Bond..................... 7.250 05/15/16 3,172,020
4,200 U.S. Treasury Bond..................... 7.125 02/15/23 4,385,724
2,500 U.S. Treasury Note..................... 7.250 08/15/04 2,633,975
-----------
TOTAL U.S. GOVERNMENT OBLIGATIONS....................... 10,191,719
-----------
GOVERNMENT AND AGENCY FIXED-INCOME
OBLIGATIONS 1.6%
1,000 Province of Nova Scotia (Canada)....... 7.250 07/27/13 1,010,500
-----------
TOTAL LONG-TERM INVESTMENTS 89.8%
(Cost $52,474,795) (a)....................................... 57,391,262
REPURCHASE AGREEMENT 8.8%
BA Securities ($5,650,000 par collateralized by U.S.
Government obligations in a pooled cash account, dated
12/31/96, to be sold on 01/02/97 at $5,652,175)............. 5,650,000
OTHER ASSETS IN EXCESS OF LIABILITIES 1.4%.................... 907,803
-----------
NET ASSETS 100.0%............................................. $63,949,065
-----------
</TABLE>

(a) At December 31, 1996, for federal income tax purposes cost is $52,576,003,
the aggregate gross unrealized appreciation is $5,557,365 and the aggregate
gross unrealized depreciation is $742,106, resulting in net unrealized
appreciation of $4,815,259.
(b) Non-income producing security as this stock currently does not declare
dividends.

B-60

See Notes to Financial Statements
<PAGE> 113

ASSET ALLOCATION FUND STATEMENT OF ASSETS AND LIABILITIES

December 31, 1996

- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Long-Term Investments, at Market Value (Cost $52,474,795) (Note 1). $57,391,262
Repurchase Agreement (Note 1)...................................... 5,650,000
Cash............................................................... 5,090
Receivables:
Securities Sold................................................... 822,495
Interest.......................................................... 502,024
Dividends......................................................... 86,961
Other.............................................................. 15,551
-----------
Total Assets...................................................... 64,473,383
-----------
LIABILITIES:
Payables:
Fund Shares Repurchased........................................... 228,869
Securities Purchased.............................................. 205,612
Investment Advisory Fee (Note 2).................................. 20,115
Distributor and Affiliates (Note 2)............................... 2,562
Deferred Compensation and Retirement Plans (Note 2)................ 39,272
Accrued Expenses................................................... 27,888
-----------
Total Liabilities................................................. 524,318
-----------
NET ASSETS......................................................... $63,949,065
-----------
NET ASSETS CONSIST OF:
Capital (Note 3)................................................... $57,866,139
Accumulated Net Realized Gain on Securities........................ 1,119,228
Net Unrealized Appreciation on Securities.......................... 4,916,467
Accumulated Undistributed Net Investment Income.................... 47,231
-----------
NET ASSETS......................................................... $63,949,065
-----------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE
(Based on net assets of $63,949,065 and 5,633,242 shares of
beneficial interest issued and outstanding)....................... $ 11.35
-----------
</TABLE>

B-61

See Notes to Financial Statements
<PAGE> 114

ASSET ALLOCATION FUND STATEMENT OF OPERATIONS

For the Year Ended December 31, 1996
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Interest........................................................... $ 1,889,646
Dividends.......................................................... 879,270
-----------
Total Income...................................................... 2,768,916
-----------
EXPENSES:
Investment Advisory Fee (Note 2)................................... 316,002
Accounting (Note 2)................................................ 51,837
Trustees Fees and Expenses (Note 2)................................ 30,314
Custody............................................................ 22,628
Audit.............................................................. 19,433
Shareholder Services (Note 2)...................................... 15,323
Legal (Note 2)..................................................... 9,796
Other ............................................................. 45,742
-----------
Total Expenses.................................................... 511,075
Less Fees Waived and Expenses Reimbursed ($113,873 and $18,000,
respectively) (Note 2)............................................ 131,873
-----------
Net Expenses...................................................... 379,202
-----------
NET INVESTMENT INCOME.............................................. $ 2,389,714
-----------
REALIZED AND UNREALIZED GAIN/LOSS ON SECURITIES:
Net Realized Gain on Investments................................... $ 6,901,393
-----------
Unrealized Appreciation/Depreciation on Securities:
Beginning of the Period........................................... 6,032,972
End of the Period:
Investments....................................................... 4,916,467
-----------
Net Unrealized Depreciation on Securities During the Period........ (1,116,505)
-----------
NET REALIZED AND UNREALIZED GAIN ON SECURITIES..................... $ 5,784,888
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS......................... $ 8,174,602
-----------
</TABLE>

STATEMENT OF CHANGES IN NET ASSETS

For the Years Ended December 31, 1996 and 1995

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1996 December 31, 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income.................... $ 2,389,714 $ 2,324,931
Net Realized Gain on Securities.......... 6,901,393 6,122,759
Net Unrealized Appreciation/Depreciation
on Securities During the Period......... (1,116,505) 7,920,361
------------ ------------
Change in Net Assets from Operations..... 8,174,602 16,368,051
------------ ------------
Distributions from Net Investment Income. (2,362,025) (2,326,257)
Distributions from Net Realized Gain on
Securities (Note 1)..................... (6,874,314) (4,841,441)
------------ ------------
Total Distributions...................... (9,236,339) (7,167,698)
------------ ------------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES............................... (1,061,737) 9,200,353
------------ ------------
FROM CAPITAL TRANSACTIONS (NOTE 3):
Proceeds from Shares Sold................ 4,725,803 1,931,514
Net Asset Value of Shares Issued Through
Dividend Reinvestment.................... 9,236,339 7,167,697
Cost of Shares Repurchased............... (11,932,457) (11,954,380)
------------ ------------
NET CHANGE IN NET ASSETS FROM CAPITAL
TRANSACTIONS............................. 2,029,685 (2,855,169)
------------ ------------
TOTAL INCREASE IN NET ASSETS............. 967,948 6,345,184
NET ASSETS:
Beginning of the Period.................. 62,981,117 56,635,933
------------ ------------
End of the Period (Including accumulated
undistributed net investment income of
$47,231 and $19,542, respectively)...... $ 63,949,065 $ 62,981,117
------------ ------------
</TABLE>

B-62

See Notes to Financial Statements
<PAGE> 115

ASSET ALLOCATION FUND FINANCIAL HIGHLIGHTS

The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated.

- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period.. $11.64 $9.99 $11.80 $11.92 $12.08
------- ------ ------ ------ ------
Net Investment Income.................... .482 .48 .45 .29 .37
Net Realized and Unrealized
Gain/Loss on Securities................. 1.083 2.6425 (.89) .6025 .493
------- ------ ------ ------ ------
Total from Investment Operations.......... 1.565 3.1225 (.44) .8925 .863
------- ------ ------ ------ ------
Less:
Distributions from Net Investment Income. .478 .4775 .45 .2925 .3689
Distributions from Net Realized
Gain on Securities...................... 1.375 .995 .90 .63 .6541
Distributions in Excess of Net Realized
Gain on Securities...................... -0- -0- .02 .09 -0-
------- ------ ------ ------ ------
Total Distributions....................... 1.853 1.4725 1.37 1.0125 1.023
------- ------ ------ ------ ------
Net Asset Value, End of the Period........ $11.352 $11.64 $9.99 $11.80 $11.92
------- ------ ------ ------ ------
Total Return*............................. 13.87% 31.36% (3.66%) 7.71% 7.28%
Net Assets at End of the Period (In
millions)................................. $63.9 $63.0 $56.6 $64.9 $59.6
Ratio of Expenses to Average Net Assets*.. .60% .60% .60% .60% .60%
Ratio of Net Investment Income to Average
Net Assets*............................... 3.78% 3.85% 3.70% 2.34% 3.05%
Portfolio Turnover........................ 118% 124% 163% 150% 126%
Average Commission Paid Per Equity Share
Traded (a)................................ $.0561 -- -- -- --
*If certain expenses had not been assumed by VKAC, Total Return would have
been lower and the ratios would have been as follows:
Ratio of Expenses to Average Net Assets... .81% .74% .72% .74% .77%
Ratio of Net Investment Income to Average
Net Assets................................ 3.57% 3.71% 3.58% 2.20% 2.88%
</TABLE>
(a) Represents the average brokerage commissions paid per equity share traded
during the period for trades where commissions were applicable. This
disclosure was not required in fiscal periods prior to 1996.

See Notes to Financial Statements

B-63

<PAGE> 116

DOMESTIC INCOME FUND PORTFOLIO OF INVESTMENTS

December 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
CORPORATE DEBT OBLIGATIONS 81.9%
CONSUMER DISTRIBUTION 15.8%
$ 500 Borden, Inc............................ 7.875% 02/15/23 $ 447,800
500 CompUSA, Inc........................... 9.500 06/15/00 513,750
300 ConAgra, Inc........................... 9.750 03/01/21 374,730
500 Nabisco, Inc........................... 7.550 06/15/15 497,500
500 Orchard Supply......................... 9.375 02/15/02 531,875
500 Petro PSC Properties................... 12.500 06/01/02 508,750
250 Specialty Retailers, Inc............... 11.000 08/15/03 261,875
----------
3,136,280
----------
CONSUMER NON-DURABLES 2.7%
500 Dimon, Inc............................. 8.875 06/01/06 524,750
----------
CONSUMER SERVICES 15.3%
500 Circus Circus Enterprises, Inc......... 6.450 02/01/06 481,300
500 Cox Communications, Inc................ 7.250 11/15/15 488,400
500 News America Holdings, Inc............. 10.125 10/15/12 578,290
500 TCI Communications, Inc................ 8.750 08/01/15 497,700
500 Valassis Communications, Inc........... 9.550 12/01/03 523,500
500 Viacom, Inc............................ 7.625 01/15/16 463,500
----------
3,032,690
----------
ENERGY 12.5%
455 Coastal Corp........................... 10.250 10/15/04 539,995
500 HS Resources, Inc...................... 9.875 12/01/03 522,500
300 Noram Energy Corp...................... 10.000 11/15/19 337,875
500 Occidental Petroleum Corp.............. 10.125 11/15/01 570,850
500 PDV America, Inc....................... 7.875 08/01/03 497,550
----------
2,468,770
----------
FINANCE 4.9%
376 First PV Funding Corp., Ser 1986A...... 10.300 01/15/14 399,970
540 Phoenix RE Corp........................ 9.750 08/15/03 580,500
----------
980,470
----------
HEALTHCARE 8.0%
500 Allegiance Corp........................ 7.800 10/15/16 511,600
500 Manor Care, Inc........................ 7.500 06/15/06 513,900
500 Quorum Health Group.................... 11.875 12/15/02 550,000
----------
1,575,500
----------
PRODUCER MANUFACTURING 3.9%
500 Tarkett International GMBH (Germany)
(Yankee Bond).......................... 9.000 03/01/02 513,750
250 U.S. Can Corp., 144A Private Placement
(c).................................... 10.125 10/15/06 263,125
----------
776,875
----------
RAW MATERIALS/PROCESSING INDUSTRIES 2.9%
500 Georgia-Pacific Corp................... 9.950 06/15/02 571,600
----------
TRANSPORTATION 9.6%
500 Delta Airlines, Inc.................... 9.750 05/15/21 605,500
500 International Shipholding Corp......... 9.000 07/01/03 505,000
500 Southwest Airlines Co.................. 9.400 07/01/01 553,415
200 United Airlines, Inc................... 10.020 03/22/14 241,200
----------
1,905,115
----------
</TABLE>

B-64

See Notes to Financial Statements
<PAGE> 117

DOMESTIC INCOME FUND PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
UTILITIES 6.3%
$ 500 360 Communications Co.................. 7.500% 03/01/06 $ 497,300
350 Monongahela Power Co................... 8.375 07/01/22 374,150
350 Public Service Co. of Colorado......... 8.750 03/01/22 378,175
-----------
1,249,625
-----------
TOTAL CORPORATE DEBT OBLIGATIONS....... 16,221,675
-----------
GOVERNMENT OBLIGATIONS 9.9%
839 Federal National Mortgage Association,
Pool................................... 10.000 04/01/21 918,967
500 Republic of South Africa (South
Africa)................................ 8.375 10/17/06 504,050
500 United Mexican States (Mexico)......... 11.375 09/15/16 526,250
-----------
TOTAL GOVERNMENT OBLIGATIONS........... 1,949,267
-----------
COMMON AND PREFERRED STOCK 3.8%
FF Holdings Co., 2,500 common shares (b)................ 25
Supermarkets General Holdings Corp., 6,889 preferred
shares, dividends of $3.52 per share (d)................ 175,669
Time Warner, Inc., 537 Series M preferred shares,
dividend rate of $10.251 (c)............................ 583,108
-----------
TOTAL COMMON AND PREFERRED STOCK........................ 758,802
-----------
TOTAL LONG-TERM INVESTMENTS 95.6%
(Cost $18,265,945) (a)........................................ 18,929,744
REPURCHASE AGREEMENT 3.0%
BA Securities ($585,000 par collateralized by U.S. Government
obligations in a pooled cash
account, dated 12/31/96, to be sold on 01/02/97 at $585,225).. 585,000
OTHER ASSETS IN EXCESS OF LIABILITIES 1.4%..................... 282,553
-----------
NET ASSETS 100.0%.............................................. $19,797,297
-----------
</TABLE>

(a) At December 31, 1996, for federal income tax purposes cost is $18,268,915,
the aggregate gross unrealized appreciation is $786,395 and the aggregate
gross unrealized depreciation is $125,565 resulting in net unrealized
appreciation of $660,830.

(b) Non-income producing security as this stock currently does not declare
dividends.

(c) 144A securities are those which are exempt from registration under Rule
144A of the Securities Act of 1933. These securities may be resold in
transactions exempt from registration which are normally transactions with
qualified institutional buyers.

(d) Payment-in-kind security.

B-65

See Notes to Financial Statements
<PAGE> 118

DOMESTIC INCOME FUND STATEMENT OF ASSETS AND LIABILITIES

December 31, 1996
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
ASSETS:
Long-Term Investments, at Market Value (Cost $18,265,945) (Note
1)................................................................ $18,929,744
Repurchase Agreement (Note 1)..................................... 585,000
Cash.............................................................. 1,401
Interest Receivable............................................... 371,587
Other............................................................. 1,132
-----------
Total Assets..................................................... 19,888,864
-----------
LIABILITIES:
Payables:
Fund Shares Repurchased.......................................... 34,998
Distributor and Affiliates (Note 2).............................. 2,510
Deferred Compensation and Retirement Plans (Note 2)............... 44,659
Accrued Expenses.................................................. 9,400
-----------
Total Liabilities................................................ 91,567
-----------
NET ASSETS........................................................ $19,797,297
-----------
NET ASSETS CONSIST OF:
Capital (Note 3).................................................. $20,772,963
Net Unrealized Appreciation on Securities......................... 663,799
Accumulated Undistributed Net Investment Income................... 34,326
Accumulated Net Realized Loss on Securities....................... (1,673,791)
-----------
NET ASSETS........................................................ $19,797,297
-----------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE
(Based on net assets of $19,797,297 and 2,472,121 shares of
beneficial interest issued and outstanding)...................... $ 8.01
-----------
</TABLE>

B-66

See Notes to Financial Statements
<PAGE> 119

DOMESTIC INCOME FUND STATEMENT OF OPERATIONS

For the Year Ended December 31, 1996
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Interest............................................................ $1,836,107
Dividends........................................................... 38,241
Other............................................................... 15,000
----------
Total Income....................................................... 1,889,348
----------
EXPENSES:
Investment Advisory Fee (Note 2).................................... 110,243
Accounting (Note 2)................................................. 44,328
Trustees Fees and Expenses (Note 2)................................. 38,560
Audit............................................................... 20,174
Shareholder Services (Note 2)....................................... 15,317
Printing............................................................ 13,977
Custody............................................................. 12,116
Legal (Note 2)...................................................... 7,282
Other .............................................................. 21,397
----------
Total Expenses..................................................... 283,394
Less Fee Waived and Expenses Reimbursed ($110,243 and $40,859,
respectively) (Note 2)............................................. 151,102
----------
Net Expenses....................................................... 132,292
----------
NET INVESTMENT INCOME............................................... $1,757,056
----------
REALIZED AND UNREALIZED GAIN/LOSS ON SECURITIES:
Realized Gain/Loss on Securities:
Investments........................................................ $ 372,946
Forward Commitments................................................ (22,031)
----------
Net Realized Gain on Securities..................................... 350,915
----------
Unrealized Appreciation/Depreciation on Securities:
Beginning of the Period............................................ 1,508,520
End of the Period:
Investments........................................................ 663,799
----------
Net Unrealized Depreciation on Securities During the Period......... (844,721)
----------
NET REALIZED AND UNREALIZED LOSS ON SECURITIES...................... $ (493,806)
----------
NET INCREASE IN NET ASSETS FROM OPERATIONS.......................... $1,263,250
----------
</TABLE>

STATEMENT OF CHANGES IN NET ASSETS

For the Years Ended December 31, 1996 and 1995

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year Ended Year Ended
December 31, 1996 December 31, 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income.................... $ 1,757,056 $ 2,110,912
Net Realized Gain on Securities.......... 350,915 222,049
Net Unrealized Appreciation/Depreciation
on Securities During the Period......... (844,721) 2,671,771
----------- -----------
Change in Net Assets from Operations..... 1,263,250 5,004,732
Distributions from Net Investment Income. (1,735,294) (2,098,216)
----------- -----------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES............................... (472,044) 2,906,516
----------- -----------
FROM CAPITAL TRANSACTIONS (NOTE 3):
Proceeds from Shares Sold................ 6,174,993 7,719,168
Net Asset Value of Shares Issued Through
Dividend Reinvestment.................... 1,735,294 2,098,217
Cost of Shares Repurchased............... (14,203,241) (7,435,575)
----------- -----------
NET CHANGE IN NET ASSETS FROM CAPITAL
TRANSACTIONS............................. (6,292,954) 2,381,810
----------- -----------
TOTAL INCREASE/DECREASE IN NET ASSETS.... (6,764,998) 5,288,326
NET ASSETS:
Beginning of the Period.................. 26,562,295 21,273,969
----------- -----------
End of the Period (Including accumulated
undistributed net investment income of
$34,326 and $16,531, respectively)...... $19,797,297 $26,562,295
----------- -----------
</TABLE>

B-67

See Notes to Financial Statements
<PAGE> 120

DOMESTIC INCOME FUND FINANCIAL HIGHLIGHTS

The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated.

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year Ended December 31,
---------------------------------------
1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period................................. $8.21 $7.35 $8.58 $8.00 $7.74
------ ------ -------- ------ -------
Net Investment Income................. .755 .71 .85 .72 .69
Net Realized and Unrealized
Gain/Loss on Securities.............. (.212) .8525 (1.2275) .5825 .2725
------ ------ -------- ------ -------
Total from Investment Operations....... .543 1.5625 (.3775) 1.3025 .9625
Less Distributions from Net Investment
Income................................. .745 .7025 .8525 .7225 .7025
------ ------ -------- ------ -------
Net Asset Value, End of the Period..... $8.008 $8.21 $7.35 $8.58 $8.00
------ ------ -------- ------ -------
Total Return*.......................... 6.68% 21.37% (4.33%) 16.32% 12.50%
Net Assets at End of the Period (In
millions).............................. $19.8 $26.6 $21.3 $27.4 $21.1
Ratio of Expenses to Average Net
Assets*................................ .60% .60% .60% .60% .60%
Ratio of Net Investment Income to
Average Net Assets*.................... 7.97% 8.11% 8.35% 7.80% 8.89%
Portfolio Turnover..................... 77% 54% 94% 130% 117%
*If certain expenses had not been assumed by VKAC, Total Return would have
been lower and the ratios would have been as follows:
Ratio of Expenses to Average Net
Assets................................. 1.29% .93% .95% .95% .95%
Ratio of Net Investment Income to
Average Net Assets..................... 7.28% 7.78% 8.00% 7.40% 8.54%
</TABLE>

B-68

See Notes to Financial Statements

<PAGE> 121

EMERGING GROWTH FUND PORTFOLIO OF INVESTMENTS

December 31, 1996

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Security Description Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK 94.0%
CONSUMER DISTRIBUTION 8.8%
Bed Bath & Beyond, Inc. (b)................................ 1,050 $ 25,462
CDW Computer Centers, Inc. (b)............................. 400 23,725
Central Garden & Pet Co. (b)............................... 300 6,319
CompUSA, Inc. (b).......................................... 1,100 22,688
Consolidated Stores Corp. (b).............................. 812 26,085
Danka Business Systems--ADR (United Kingdom)............... 325 11,497
Dollar General Corp........................................ 350 11,200
Eagle Hardware & Garden, Inc. (b).......................... 600 12,450
Finish Line, Inc., Class A (b)............................. 600 12,675
Hughes Supply, Inc......................................... 200 8,625
Inacom Corp. (b)........................................... 375 15,000
Ingram Micro, Inc., Class A (b)............................ 500 11,500
Interstate Bakeries Corp................................... 500 24,562
Just for Feet, Inc. (b).................................... 450 11,813
Kroger Co. (b)............................................. 450 20,925
Miller (Herman) Inc........................................ 100 5,663
Richfood Holdings, Inc..................................... 525 12,731
Ross Stores, Inc........................................... 550 27,500
Safeway, Inc. (b).......................................... 950 40,612
Saks Holdings, Inc......................................... 400 10,800
Sports Authority, Inc. (b)................................. 300 6,525
Staples, Inc. (b).......................................... 700 12,644
Tiffany & Co............................................... 550 20,144
TJX Cos., Inc.............................................. 450 21,319
U.S. Office Products Co. (b)............................... 250 8,531
Vons Cos., Inc. (b)........................................ 750 44,906
--------
455,901
--------
CONSUMER DURABLES 0.4%
Blyth Industries, Inc. (b)................................. 200 9,125
Ethan Allen Interiors, Inc................................. 300 11,550
--------
20,675
--------
CONSUMER NON-DURABLES 5.3%
Borders Group, Inc. (b).................................... 350 12,556
Coca-Cola Enterprises, Inc................................. 500 24,250
Gadzooks, Inc. (b)......................................... 350 6,388
Gucci Group NV (b)......................................... 275 17,566
Liz Claiborne, Inc......................................... 450 17,381
Nautica Enterprises, Inc. (b).............................. 1,050 26,512
Nike, Inc., Class B........................................ 1,275 76,181
St. John Knits, Inc........................................ 550 23,925
Tommy Hilfiger Corp. (b)................................... 750 36,000
USA Detergents, Inc. (b)................................... 400 16,650
Wolverine World Wide, Inc.................................. 625 18,125
--------
275,534
--------
CONSUMER SERVICES 10.9%
AccuStaff, Inc. (b)........................................ 706 14,914
Amresco, Inc. (b).......................................... 800 21,400
APAC Teleservices, Inc. (b)................................ 700 26,862
Apollo Group, Inc., Class A (b)............................ 500 16,719
Boston Chicken, Inc. (b)................................... 250 8,969
Caribiner International, Inc. (b).......................... 150 7,538
CKE Restaurants, Inc....................................... 100 3,600
</TABLE>

B-69

See Notes to Financial Statements
<PAGE> 122

EMERGING GROWTH FUND PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1996

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Security Description Shares Market Value
- -------------------------------------------------------------------------------
<S> <C> <C>
CONSUMER SERVICES (CONTINUED)
Consolidated Graphics, Inc. (b)............................ 250 $ 14,000
COREstaff, Inc. (b)........................................ 450 10,659
Corrections Corp. of America (b)........................... 900 27,562
Doubletree Corp. (b)....................................... 900 40,500
Evergreen Media, Class A (b)............................... 675 16,875
Gartner Group, Inc., Class A (b)........................... 650 25,309
HA-LO Industries, Inc. (b)................................. 437 12,017
HFS, Inc. (b).............................................. 1,000 59,750
Imperial Credit Industries, Inc. (b)....................... 1,800 37,800
Infinity Broadcasting Corp. (b)............................ 300 10,088
International Game Technology.............................. 500 9,125
Interpublic Group of Cos., Inc............................. 350 16,625
Landry's Seafood Restaurant, Inc. (b)...................... 200 4,275
Meredith Corp.............................................. 600 31,650
MGM Grand, Inc. (b)........................................ 200 6,975
National Data Corp......................................... 450 19,575
Omnicom Group.............................................. 400 18,300
Penske Motorsports, Inc. (b)............................... 200 5,050
Prime Hospitality Corp. (b)................................ 300 4,838
Promus Hotel Corp. (b)..................................... 450 13,331
Rainforest Cafe, Inc. (b).................................. 350 8,225
Regal Cinemas, Inc. (b).................................... 900 27,675
Reynolds & Reynolds Co., Class A........................... 725 18,850
Robert Half International, Inc. (b)........................ 300 10,313
Sitel Corp. (b)............................................ 1,000 14,125
Whittman-Hart, Inc......................................... 100 2,563
--------
566,057
--------
ENERGY 10.3%
Baker Hughes, Inc.......................................... 300 10,350
Barrett Resources Corp. (b)................................ 300 12,788
Benton Oil & Gas Co. (b)................................... 400 9,050
BJ Services Co. (b)........................................ 300 15,300
Chesapeake Energy Corp. (b)................................ 850 47,281
Cliffs Drilling Co. (b).................................... 250 15,813
Comstock Resources, Inc. (b)............................... 700 9,100
Cooper Cameron Corp. (b)................................... 500 38,250
Diamond Offshore Drilling, Inc. (b)........................ 600 34,200
ENSCO International, Inc. (b).............................. 375 18,188
Falcon Drilling (b)........................................ 300 11,775
Flores & Rucks, Inc. (b)................................... 400 21,300
Forcenergy Gas Exploration, Inc. (b)....................... 550 19,938
Global Marine, Inc. (b).................................... 1,100 22,687
Marine Drilling Cos., Inc. (b)............................. 750 14,766
Noble Drilling Corp. (b)................................... 650 12,919
Nuevo Energy Co. (b)....................................... 200 10,400
Pogo Producing Co.......................................... 650 30,712
Reading & Bates Corp. (b).................................. 1,000 26,500
Rowan Cos., Inc. (b)....................................... 1,350 30,544
Smith International, Inc. (b).............................. 750 33,656
Tidewater, Inc............................................. 550 24,887
Transocean Offshore, Inc................................... 650 40,706
United Meridian Corp. (b).................................. 450 23,287
--------
534,397
--------
</TABLE>
B-70

See Notes to Financial Statements
<PAGE> 123

EMERGING GROWTH FUND PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1996

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Security Description Shares Market Value
- -------------------------------------------------------------------------------
<S> <C> <C>
FINANCE 10.7%
Aames Financial Corp....................................... 450 $ 16,144
American Bankers Insurance Group, Inc...................... 250 12,781
Astoria Financial Corp..................................... 200 7,375
Bank of Boston Corp........................................ 500 32,125
CMAC Investment Corp....................................... 800 29,400
Conseco, Inc............................................... 700 44,625
ContiFinancial Corp. (b)................................... 200 7,225
CRA Managed Care, Inc. (b)................................. 100 4,500
Cullen Frost Bankers, Inc.................................. 300 9,975
Finova Group, Inc.......................................... 600 38,550
First Bank System, Inc..................................... 250 17,063
Green Tree Financial Corp.................................. 700 27,037
GreenPoint Financial Corp.................................. 275 12,994
Household International, Inc............................... 400 36,900
Money Store, Inc........................................... 600 16,575
North Fork Bancorp, Inc.................................... 250 8,906
Old Republic International Corp............................ 400 10,700
Penncorp Financial Group, Inc.............................. 600 21,600
Peoples Heritage Financial Group........................... 350 9,800
RAC Financial Group, Inc. (b).............................. 400 8,450
Star Banc Corp............................................. 175 16,078
Student Loan Marketing Assn................................ 350 32,594
SunAmerica, Inc............................................ 1,200 53,250
TCF Financial Corp. (b).................................... 600 26,100
TIG Holdings Inc........................................... 250 8,469
Washington Mutual, Inc..................................... 1,000 43,312
--------
552,528
--------
HEALTHCARE 7.5%
Curative Health Services, Inc. (b)......................... 300 8,306
Dura Pharmaceuticals, Inc. (b)............................. 1,400 66,850
ESC Medical Systems, Ltd. (b).............................. 200 5,100
HBO & Co................................................... 550 32,656
Health Management Association, Inc., Class A (b)........... 1,000 22,500
Healthsouth Corp. (b)...................................... 1,050 40,556
Henry Schein, Inc. (b)..................................... 200 6,875
Jones Medical Industries, Inc.............................. 500 18,313
Medicis Pharmaceutical Corp., Class A (b).................. 400 17,600
Mentor Corp................................................ 600 17,700
MiniMed Inc. (b)........................................... 400 12,900
Omnicare, Inc.............................................. 1,650 53,006
Parexel International Corp. (b)............................ 200 10,325
Quintiles Transnational Corp. (b).......................... 350 23,187
Renal Treatment Centers, Inc. (b).......................... 750 19,125
Rexall Sundown, Inc. (b)................................... 350 9,516
Total Renal Care Holdings, Inc. (b)........................ 350 12,688
Universal Health Services, Inc., Class B (b)............... 350 10,019
--------
387,222
--------
PRODUCER MANUFACTURING 4.2%
American Power Conversion Corp. (b)........................ 400 10,900
Camco International, Inc................................... 300 13,838
Danaher Corp............................................... 425 19,816
ITT Hartford Group, Inc.................................... 200 13,500
Mastec, Inc. (b)........................................... 300 15,900
</TABLE>

B-71

See Notes to Financial Statements
<PAGE> 124

EMERGING GROWTH FUND PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1996

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Security Description Shares Market Value
- -------------------------------------------------------------------------------
<S> <C> <C>
PRODUCER MANUFACTURING (CONTINUED)
Mueller Industries, Inc. (b)............................... 250 $ 9,625
Precision Castparts Corp................................... 350 17,369
Shaw Group, Inc. (b)....................................... 200 4,675
U.S. Filter Corp. (b)...................................... 1,050 33,337
United Waste Systems, Inc. (b)............................. 1,000 34,375
USA Waste Services, Inc. (b)............................... 1,285 40,959
--------
214,294
--------
RAW MATERIALS/PROCESSING INDUSTRIES 2.2%
Cytec Industries, Inc. (b)................................. 200 8,125
Goodrich (B.F.) Co......................................... 600 24,300
Praxair, Inc............................................... 550 25,369
Raychem Corp............................................... 400 32,050
Sealed Air Corp. (b)....................................... 250 10,406
Titanium Metals Corp. (b).................................. 400 13,150
--------
113,400
--------
TECHNOLOGY 31.4%
Acxiom Corp. (b)........................................... 1,000 24,000
ADC Telecommunications, Inc. (b)........................... 1,100 34,237
Andrew Corp. (b)........................................... 500 26,531
Applied Magnetics Corp. (b)................................ 200 5,975
Ascend Communications, Inc................................. 1,400 86,975
Aspect Telecommunications Corp. (b)........................ 600 38,100
Aspen Technology, Inc. (b)................................. 300 24,075
BMC Industries, Inc........................................ 350 11,025
BMC Software, Inc. (b)..................................... 1,350 55,856
Cadence Design Systems, Inc. (b)........................... 1,100 43,725
Cambridge Technology Partners (b).......................... 700 23,494
Cascade Communications Corp. (b)........................... 850 46,856
CBT Group PLC--ADR (Ireland) (b)........................... 100 5,425
Ciber, Inc. (b)............................................ 400 12,000
Cisco Systems, Inc. (b).................................... 1,200 76,350
Citrix Systems, Inc. (b)................................... 500 19,531
Clarify, Inc. (b).......................................... 400 19,200
Cognos, Inc. (b)........................................... 400 11,250
Compuware Corp. (b)........................................ 700 35,087
Comverse Technology, Inc. (b).............................. 450 17,016
Concord EFS, Inc. (b)...................................... 475 13,419
Dell Computer Corp. (b).................................... 1,600 85,000
DSP Communications, Inc. (b)............................... 300 5,813
Dynatech Corp. (b)......................................... 650 28,763
Encad, Inc. (b)............................................ 300 12,375
Engineering Animation, Inc. (b)............................ 100 2,425
Intel Corp................................................. 325 42,555
Legato Systems Inc. (b).................................... 450 14,681
Lucent Technologies, Inc................................... 400 18,500
McAfee Associates, Inc. (b)................................ 2,187 96,228
National TechTeam, Inc. (b)................................ 250 5,000
Network General Corp. (b).................................. 300 9,075
Oracle Systems Corp. (b)................................... 550 22,963
PairGain Technologies, Inc. (b)............................ 2,900 88,269
Parametric Technology Corp. (b)............................ 900 46,237
Paychex, Inc............................................... 600 30,862
</TABLE>

B-72

See Notes to Financial Statements
<PAGE> 125

EMERGING GROWTH FUND PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1996

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Security Description Shares Market Value
- -------------------------------------------------------------------------------
<S> <C> <C>
TECHNOLOGY (CONTINUED)
Peoplesoft, Inc. (b)....................................... 1,950 $ 93,478
Rational Software Corp. (b)................................ 350 13,847
Remedy Corp. (b)........................................... 200 10,750
Sanmina Corp. (b).......................................... 250 14,125
Saville Systems PLC--ADR (Ireland) (b)..................... 300 12,188
SCI Systems, Inc. (b)...................................... 500 22,313
Security Dynamics Technology (b)........................... 700 22,050
Sun Microsystems, Inc. (b)................................. 900 23,119
SunGard Data Systems, Inc. (b)............................. 700 27,650
Technology Solutions Co. (b)............................... 400 16,600
Tellabs, Inc. (b).......................................... 1,300 48,912
3Com Corp. (b)............................................. 500 36,687
Ultrak, Inc. (b)........................................... 150 4,575
Uniphase Corp. (b)......................................... 250 13,125
Vanstar Corp. (b).......................................... 800 19,600
Vantive Corp. (b).......................................... 400 12,500
Viasoft, Inc. (b).......................................... 1,000 47,250
Visio Corp. (b)............................................ 100 4,950
Vitesse Semiconductor Corp. (b)............................ 550 25,025
Wind River Systems, Inc. (b)............................... 400 18,950
----------
1,626,567
----------
TRANSPORTATION 0.7%
Comair Holdings, Inc....................................... 450 10,800
Continental Airlines, Inc., Class B (b).................... 600 16,950
Trico Marine Services, Inc. (b)............................ 200 9,600
----------
37,350
----------
UTILITIES 1.6%
ACC Corp. (b).............................................. 400 12,100
AES Corp. (b).............................................. 350 16,275
Billing Information Concepts Corp. (b)..................... 500 14,375
Cincinnati Bell, Inc....................................... 600 36,975
VideoServer, Inc. (b)...................................... 100 4,250
----------
83,975
----------
TOTAL LONG-TERM INVESTMENTS 94.0%
(Cost $3,923,841) (a)............................................ 4,867,900
REPURCHASE AGREEMENT 5.9%
BA Securities ($305,000 par collateralized by U.S. Government
obligations in a pooled cash account, dated 12/31/96, to be sold
on 01/02/97 at $305,117)......................................... 305,000
OTHER ASSETS IN EXCESS OF LIABILITIES 0.1%........................ 5,287
----------
NET ASSETS 100.0%................................................. $5,178,187
----------
</TABLE>

(a) At December 31, 1996, for federal income tax purposes cost is $3,933,227,
the aggregate gross unrealized appreciation is $1,047,590 and the aggregate
gross unrealized depreciation is $112,917, resulting in net unrealized ap-
preciation of $934,673.

(b) Non-income producing security as this stock currently does not declare div-
idends.

B-73

See Notes to Financial Statements
<PAGE> 126

EMERGING GROWTH FUND STATEMENT OF ASSETS AND LIABILITIES

December 31, 1996

<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
ASSETS:
Long-Term Investments, at Market Value (Cost $3,923,841) (Note 1).. $4,867,900
Repurchase Agreement (Note 1)...................................... 305,000
Cash............................................................... 4,586
Receivables:
Securities Sold................................................... 44,738
Fund Shares Sold.................................................. 4,419
Dividends......................................................... 1,142
Unamortized Organizational Expenses (Note 1)....................... 4,779
----------
Total Assets...................................................... 5,232,564
----------
LIABILITIES:
Payables:
Fund Shares Repurchased........................................... 28,363
Distributor and Affiliates (Note 2)............................... 2,150
Accrued Expenses................................................... 18,937
Deferred Compensation and Retirement Plans (Note 2)................ 4,927
----------
Total Liabilities................................................. 54,377
----------
NET ASSETS......................................................... $5,178,187
----------
NET ASSETS CONSIST OF:
Capital (Note 3)................................................... $4,650,241
Net Unrealized Appreciation on Securities.......................... 944,059
Accumulated Net Investment Loss.................................... (4,926)
Accumulated Net Realized Loss on Securities........................ (411,187)
----------
NET ASSETS......................................................... $5,178,187
----------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE
(Based on net assets of $5,178,187 and 379,065 shares of
beneficial interest issued and outstanding)....................... $ 13.66
----------
</TABLE>

B-74

See Notes to Financial Statements

<PAGE> 127

EMERGING GROWTH FUND STATEMENT OF OPERATIONS

For the Year Ended December 31, 1996

<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Interest............................................................ $ 15,312
Dividends........................................................... 12,069
---------
Total Income....................................................... 27,381
---------
EXPENSES:
Accounting (Note 2)................................................. 41,089
Investment Advisory Fee (Note 2).................................... 28,284
Audit............................................................... 15,874
Shareholder Services (Note 2)....................................... 15,534
Printing............................................................ 13,817
Trustees Fees and Expenses (Note 2)................................. 9,414
Legal (Note 2)...................................................... 6,223
Amortization of Organizational Expenses (Note 1).................... 1,365
Other .............................................................. 732
---------
Total Expenses..................................................... 132,332
Less Fees Waived and Expenses Reimbursed ($28,284 and $69,703,
respectively) (Note 2)............................................. 97,987
---------
Net Expenses....................................................... 34,345
---------
NET INVESTMENT LOSS................................................. $ (6,964)
---------
REALIZED AND UNREALIZED GAIN/LOSS ON SECURITIES:
Net Realized Loss on Investments.................................... $(353,684)
---------
Unrealized Appreciation/Depreciation on Securities:
Beginning of the Period............................................ 244,665
End of the Period:
Investments........................................................ 944,059
---------
Net Unrealized Appreciation on Securities During the Period......... 699,394
---------
NET REALIZED AND UNREALIZED GAIN ON SECURITIES...................... $ 345,710
---------
NET INCREASE IN NET ASSETS FROM OPERATIONS.......................... $ 338,746
---------
</TABLE>

STATEMENT OF CHANGES IN NET ASSETS

For the Year Ended December 31, 1996 and the Period July 3, 1995 (Commencement
of Investment Operations) to December 31, 1995

B-75

See Notes to Financial Statements
<PAGE> 128

EMERGING GROWTH FUND FINANCIAL HIGHLIGHTS

The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated.

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
July 3, 1995
(Commencement
of Investment
Year Ended Operations)
December 31, to December
1996 31, 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Net Asset Value, Beginning of the Period......... $11.72 $10.00
------- ------
Net Investment Loss............................. (.016) (.08)
Net Realized and Unrealized
Gain on Securities............................. 1.956 1.80
------- ------
Total from Investment Operations................. 1.940 1.72
------- ------
Net Asset Value, End of the Period............... $13.660 $11.72
------- ------
Total Return*.................................... 16.55% 17.20%**
Net Assets at End of the Period (In millions).... $5.2 $2.3
Ratio of Expenses to Average Net Assets*......... .85% 2.50%
Ratio of Net Investment Loss to Average Net
Assets*.......................................... (.17%) (1.45%)
Portfolio Turnover............................... 102% 41%**
Average Commission Per Equity Share Traded (a)... $ .0470 --
*If certain expenses had not been assumed by VKAC, Total Return would have
been lower and the ratios would have been as follows:
Ratio of Expenses to Average Net Assets.......... 3.28% 5.40%
Ratio of Net Investment Loss to Average Net
Assets........................................... (2.60%) (4.35%)
</TABLE>

**Non-Annualized
(a) Represents the average brokerage commission paid per equity share traded
during the period for trades where commissions were applicable. This
disclosure was not required in fiscal periods prior to 1996.

B-76

See Notes to Financial Statements

<PAGE> 129

ENTERPRISE FUND PORTFOLIO OF INVESTMENTS

December 31, 1996

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Security Description Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK 97.0%
CONSUMER DISTRIBUTION 9.1%
Bed Bath & Beyond, Inc. (b)................................. 10,000 $ 242,500
CompUSA, Inc. (b)........................................... 20,000 412,500
Gap, Inc.................................................... 9,800 295,225
General Nutrition Companies, Inc. (b)....................... 16,000 270,000
Kroger Co. (b).............................................. 16,500 767,250
Lear Corp. (b).............................................. 7,100 242,288
Lowe's Companies, Inc....................................... 10,000 355,000
Ross Stores, Inc............................................ 11,500 575,000
Safeway, Inc. (b)........................................... 36,300 1,551,825
Sears Roebuck & Co.......................................... 10,800 498,150
Tiffany & Co................................................ 13,000 476,125
TJX Companies, Inc.......................................... 14,300 677,462
U.S. Office Products Co. (b)................................ 14,600 498,225
Vons Companies, Inc. (b).................................... 14,500 868,187
----------
7,729,737
----------
CONSUMER DURABLES 1.0%
Chrysler Corp............................................... 14,100 465,300
Harley Davidson, Inc........................................ 8,700 408,900
----------
874,200
----------
CONSUMER NON-DURABLES 8.8%
Fila Holdings SpA - ADR (Italy) (b)......................... 7,600 441,750
Liz Claiborne, Inc.......................................... 12,800 494,400
Nautica Enterprises, Inc. (b)............................... 15,800 398,950
Nike, Inc., Class B......................................... 7,000 418,250
Philip Morris Companies, Inc................................ 37,900 4,268,487
Procter & Gamble Co......................................... 4,500 483,750
RJR Nabisco Holdings Corp................................... 19,000 646,000
Tommy Hilfiger Corp. (b).................................... 7,000 336,000
----------
7,487,587
----------
CONSUMER SERVICES 6.7%
AccuStaff, Inc. (b)......................................... 16,524 349,070
Boston Chicken, Inc. (b).................................... 12,000 430,500
Equifax, Inc................................................ 17,500 535,937
Evergreen Media Corp., Class A (b).......................... 23,700 592,500
Hilton Hotels Corp.......................................... 14,000 365,750
Knight Ridder, Inc.......................................... 3,000 114,750
Marriot International, Inc.................................. 13,700 756,925
Omnicom Group............................................... 19,000 869,250
Promus Hotel Corp. (b)...................................... 10,500 311,063
RAC Financial Group, Inc. (b)............................... 17,400 367,575
Scripps Co. (EW), Class A (b)............................... 5,000 175,000
Service Corp. International................................. 30,000 840,000
----------
5,708,320
----------
ENERGY 5.4%
Apache Corp................................................. 10,000 353,750
Baker Hughes, Inc........................................... 9,800 338,100
Exxon Corp.................................................. 6,500 637,000
Phillips Petroleum Co....................................... 16,000 708,000
Smith International, Inc. (b)............................... 19,500 875,062
Texaco, Inc................................................. 5,000 490,625
Transocean Offshore, Inc.................................... 6,000 375,750
Williams Companies, Inc..................................... 21,975 824,063
----------
4,602,350
----------
</TABLE>
B-77

See Notes to Financial Statements
<PAGE> 130

ENTERPRISE FUND PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1996

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Security Description Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
FINANCE 20.0%
Aames Financial Corp........................................ 10,650 $ 382,069
Alex Brown, Inc............................................. 7,300 529,250
Bank of Boston Corp......................................... 13,000 835,250
BankAmerica Corp............................................ 10,200 1,017,450
Charles Schwab Corp......................................... 10,000 320,000
Chase Manhattan Corp........................................ 14,300 1,276,275
Citicorp.................................................... 5,100 525,300
CMAC Investment Corp........................................ 16,600 610,050
Conseco, Inc................................................ 19,100 1,217,625
Federal National Mortgage Association....................... 68,000 2,533,000
First Bank System, Inc...................................... 6,500 443,625
Green Tree Financial Corp................................... 24,500 946,312
Merrill Lynch & Co., Inc.................................... 14,645 1,193,567
MGIC Investment Corp........................................ 7,200 547,200
Money Store, Inc............................................ 15,100 417,138
Penncorp Financial Group, Inc............................... 11,800 424,800
Student Loan Marketing Association.......................... 8,900 828,813
SunAmerica, Inc............................................. 34,800 1,544,250
Travelers Group, Inc........................................ 30,000 1,361,250
-----------
16,953,224
-----------
HEALTHCARE 13.6%
Amgen, Inc. (b)............................................. 12,300 668,812
Bristol Myers Squibb Co..................................... 12,100 1,315,875
Columbia / HCA Healthcare Corp.............................. 15,000 611,250
ESC Medical Systems, Ltd. (b)............................... 8,900 226,950
Health Management Association, Inc., Class A (b)............ 18,500 416,250
Healthsouth Corp. (b)....................................... 17,900 691,387
Johnson & Johnson........................................... 23,700 1,179,075
Lincare Holdings, Inc. (b).................................. 14,000 574,000
Medtronic, Inc.............................................. 8,300 564,400
Merck & Co., Inc............................................ 18,400 1,458,200
Pfizer, Inc................................................. 14,900 1,234,837
Physician Reliance Network, Inc. (b)........................ 9,200 71,300
Renal Treatment Centers, Inc. (b)........................... 15,800 402,900
Schering Plough Corp........................................ 13,200 854,700
Universal Health Services, Inc., Class B (b)................ 13,700 392,163
Warner Lambert Co........................................... 6,000 450,000
Watson Pharmaceuticals, Inc. (b)............................ 9,800 440,388
-----------
11,552,487
-----------
PRODUCER MANUFACTURING 6.4%
Allied Signal, Inc.......................................... 6,400 428,800
Deere & Co.................................................. 14,700 597,187
Dover Corp.................................................. 12,200 613,050
Illinois Tool Workers, Inc.................................. 5,500 439,313
Textron Inc................................................. 4,500 424,125
Tyco International, Ltd..................................... 11,600 613,350
United Technologies Corp.................................... 11,600 765,600
United Waste Systems, Inc. (b).............................. 30,000 1,031,250
USA Waste Services, Inc. (b)................................ 15,400 490,875
-----------
5,403,550
-----------
</TABLE>
B-78

See Notes to Financial Statements
<PAGE> 131

ENTERPRISE FUND PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1996

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Security Description Shares Market Value
- -------------------------------------------------------------------------------
<S> <C> <C>
RAW MATERIALS/PROCESSING INDUSTRIES 3.6%
Air Products & Chemicals, Inc.............................. 7,000 $ 483,875
Cytec Industries, Inc. (b)................................. 11,100 450,938
Praxair, Inc............................................... 25,700 1,185,412
Raychem Corp............................................... 8,000 641,000
Union Carbide Corp......................................... 6,200 253,425
-----------
3,014,650
-----------
TECHNOLOGY 21.8%
3Com Corp. (b)............................................. 17,300 1,269,387
ADC Telecommunications, Inc. (b)........................... 21,000 653,625
Altera Corp. (b)........................................... 5,000 363,438
Analog Devices, Inc. (b)................................... 7,500 254,063
Ascend Communications, Inc. (b)............................ 10,000 621,250
Aspect Telecommunications Corp. (b)........................ 9,700 615,950
Atmel Corp. (b)............................................ 12,000 397,500
BMC Industries, Inc........................................ 9,100 286,650
BMC Software, Inc. (b)..................................... 26,000 1,075,750
Boeing Co.................................................. 8,700 925,462
Cadence Design Systems, Inc. (b)........................... 17,000 675,750
Cisco Systems, Inc. (b).................................... 19,400 1,234,325
Compaq Computer Corp. (b).................................. 8,700 645,975
Computer Associates International, Inc..................... 14,450 718,887
Compuware Corp. (b)........................................ 5,000 250,625
DST Systems, Inc. (b)...................................... 13,900 436,112
Input/Output, Inc. (b)..................................... 6,800 125,800
Intel Corp................................................. 13,900 1,820,031
International Business Machines Corp....................... 4,200 634,200
Linear Technology Corp..................................... 7,700 337,838
Lucent Technologies, Inc................................... 7,500 346,875
Microsoft Corp. (b)........................................ 17,400 1,437,675
PairGain Technologies, Inc. (b)............................ 10,000 304,375
Sanmina Corp. (b).......................................... 10,000 565,000
SCI Systems, Inc. (b)...................................... 8,500 379,313
Sun Microsystems, Inc. (b)................................. 38,000 976,125
Tellabs, Inc. (b).......................................... 20,000 752,500
Wind River Systems, Inc. (b)............................... 7,300 345,838
-----------
18,450,319
-----------
UTILITIES 0.6%
Worldcom, Inc. (b)......................................... 20,000 521,250
-----------
TOTAL LONG-TERM INVESTMENTS 97.0%
(Cost $63,240,692) (a)........................................... 82,297,674
REPURCHASE AGREEMENT 4.1%
BA Securities ($3,470,000 par collateralized by U.S. Government
obligations in a pooled cash account,
dated 12/31/96, to be sold on 01/02/97 at $3,471,336)........... 3,470,000
LIABILITIES IN EXCESS OF OTHER ASSETS (1.1%)...................... (962,504)
-----------
NET ASSETS 100.0%................................................. $84,805,170
-----------
</TABLE>

(a) At December 31, 1996, for federal income tax purposes cost is $63,335,245,
the aggregate gross unrealized appreciation is $19,634,505 and the
aggregate gross unrealized depreciation is $672,076, resulting in net
unrealized appreciation of $18,962,429.

(b) Non-income producing security as this stock currently does not declare
dividends.

B-79
See Notes to Financial Statements

<PAGE> 132

ENTERPRISE FUND STATEMENT OF ASSETS AND LIABILITIES

December 31, 1996
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
ASSETS:
Long-Term Investments, at Market Value (Cost $63,240,692) (Note 1). $82,297,674
Repurchase Agreement (Note 1)...................................... 3,470,000
Cash............................................................... 2,257
Receivables:
Securities Sold................................................... 690,496
Dividends......................................................... 91,618
Other.............................................................. 1,856
-----------
Total Assets...................................................... 86,553,901
-----------
LIABILITIES:
Payables:
Securities Purchased.............................................. 1,584,170
Fund Shares Repurchased........................................... 83,451
Investment Advisory Fee (Note 2).................................. 13,203
Distributor and Affiliates (Note 2)............................... 2,750
Deferred Compensation and Retirement Plans (Note 2)................ 44,929
Accrued Expenses................................................... 20,228
-----------
Total Liabilities................................................. 1,748,731
-----------
NET ASSETS......................................................... $84,805,170
-----------
NET ASSETS CONSIST OF:
Capital (Note 3)................................................... $64,671,892
Net Unrealized Appreciation on Securities.......................... 19,056,982
Accumulated Net Realized Gain on Securities........................ 1,016,856
Accumulated Undistributed Net Investment Income.................... 59,440
-----------
NET ASSETS......................................................... $84,805,170
-----------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE
(Based on net assets of $84,805,170 and 5,214,950 shares of
beneficial interest issued and outstanding)....................... $ 16.26
-----------
</TABLE>

B-80

See Notes to Financial Statements
<PAGE> 133

ENTERPRISE FUND STATEMENT OF OPERATIONS

For the Year Ended December 31, 1996

<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Dividends.......................................................... $ 946,594
Interest........................................................... 99,309
-----------
Total Income...................................................... 1,045,903
-----------
EXPENSES:
Investment Advisory Fee (Note 2)................................... 407,693
Accounting (Note 2)................................................ 53,732
Custody............................................................ 23,024
Shareholder Services (Note 2)...................................... 15,628
Trustees Fees and Expenses (Note 2)................................ 13,897
Legal (Note 2)..................................................... 10,696
Other ............................................................. 88,143
-----------
Total Expenses.................................................... 612,813
Less Fees Waived and Expenses Reimbursed ($104,582 and $19,000,
respectively) (Note 2)............................................ 123,582
-----------
Net Expenses...................................................... 489,231
-----------
NET INVESTMENT INCOME.............................................. $ 556,672
-----------
REALIZED AND UNREALIZED GAIN/LOSS ON SECURITIES:
Net Realized Gain on Investments................................... $ 7,574,164
-----------
Unrealized Appreciation/Depreciation on Securities:
Beginning of the Period........................................... 9,274,444
End of the Period:
Investments....................................................... 19,056,982
-----------
Net Unrealized Appreciation on Securities During the Period........ 9,782,538
-----------
NET REALIZED AND UNREALIZED GAIN ON SECURITIES..................... $17,356,702
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS......................... $17,913,374
-----------
</TABLE>

STATEMENT OF CHANGES IN NET ASSETS

For the Years Ended December 31, 1996 and 1995

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year Ended Year Ended
December 31, 1996 December 31, 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income.................... $ 556,672 $ 1,464,956
Net Realized Gain on Securities.......... 7,574,164 10,869,574
Net Unrealized Appreciation on Securities
During the Period....................... 9,782,538 9,837,636
----------- ------------
Change in Net Assets from Operations..... 17,913,374 22,172,166
----------- ------------
Distributions from Net Investment Income. (530,417) (1,446,938)
Distributions from Net Realized Gain on
Securities (Note 1)..................... (9,089,491) (8,808,250)
----------- ------------
Total Distributions...................... (9,619,908) (10,255,188)
----------- ------------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES............................... 8,293,466 11,916,978
----------- ------------
FROM CAPITAL TRANSACTIONS (NOTE 3):
Proceeds from Shares Sold................ 7,883,906 6,340,082
Net Asset Value of Shares Issued Through
Dividend Reinvestment.................... 9,619,909 10,255,188
Cost of Shares Repurchased............... (17,001,971) (19,974,310)
----------- ------------
NET CHANGE IN NET ASSETS FROM CAPITAL
TRANSACTIONS............................. 501,844 (3,379,040)
----------- ------------
TOTAL INCREASE IN NET ASSETS............. 8,795,310 8,537,938
NET ASSETS:
Beginning of the Period.................. 76,009,860 67,471,922
----------- ------------
End of the Period (Including accumulated
undistributed net investment income of
$59,440 and $33,185, respectively)...... $84,805,170 $ 76,009,860
----------- ------------
</TABLE>

B-81

See Notes to Financial Statements
<PAGE> 134

ENTERPRISE FUND
FINANCIAL HIGHLIGHTS

The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated.

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year Ended December 31,
-------------------------------------
1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period. $14.69 $12.39 $14.57 $14.21 $13.44
------- ------ ------- ------ ------
Net Investment Income................... .113 .32 .25 .21 .23
Net Realized and Unrealized Gain/Loss on
Securities............................. 3.417 4.22 (.7625) 1.0325 .77
------- ------ ------- ------ ------
Total from Investment Operations......... 3.530 4.54 (.5125) 1.2425 1.00
------- ------ ------- ------ ------
Less:
Distributions from Net Investment
Income.................................. .109 .3175 .25 .215 .23
Distributions from Net Realized Gain on
Securities............................. 1.849 1.9225 1.4175 .6675 -0-
------- ------ ------- ------ ------
Total Distributions...................... 1.958 2.24 1.6675 .8825 .23
------- ------ ------- ------ ------
Net Asset Value, End of the Period....... $16.262 $14.69 $12.39 $14.57 $14.21
------- ------ ------- ------ ------
Total Return*............................ 24.80% 36.98% (3.39)% 8.98% 7.48%
Net Assets at End of the Period (In
millions)................................ $84.8 $76.0 $67.5 $72.3 $65.6
Ratio of Expenses to Average Net Assets*. .60% .60% .60% .60% .60%
Ratio of Net Investment Income to Average
Net Assets*.............................. .68% 2.06% 1.72% 1.41% 1.78%
Portfolio Turnover....................... 152% 145% 153% 139% 116%
Average Commission Paid per Equity Share
Traded (a)............................... $.0435 -- -- -- --
*If certain expenses had not been assumed by VKAC, Total Return would have
been lower and the ratios would have been as follows:
Ratio of Expenses to Average Net Assets.. .75% .68% .68% .72% .74%
Ratio of Net Investment Income to Average
Net Assets............................... .53% 1.98% 1.64% 1.29% 1.64%
</TABLE>
(a) Represents the average brokerage commission paid per equity share traded
during the period for trades where commissions were applicable. This
disclosure was not required in fiscal years prior to 1996.

B-82

See Notes to Financial Statements

<PAGE> 135

GLOBAL EQUITY FUND PORTFOLIO OF INVESTMENTS

December 31, 1996

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Security Description Shares Market Value
- -------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK & EQUIVALENTS 95.0%
AUSTRIA 4.2%
Flughafen Wien............................................. 300 $ 15,293
Scala ECE (b).............................................. 200 27,797
Slovakofarma (b)........................................... 300 39,710
Wolford.................................................... 200 24,195
--------
106,995
--------
CROATIA 0.3%
Pliva d.d. (GDR) (b)....................................... 168 8,820
--------
CZECH REPUBLIC 4.8%
Ceske Radiokomunikace (b).................................. 500 70,228
Inzenyrske a Prumyslove Stavby Praha (b)................... 2,200 23,458
Komercni Banka (GDR) (b)................................... 1,000 26,600
--------
120,286
--------
FRANCE 5.9%
Adecco SA.................................................. 102 25,812
Cap Gemini Sogeti (b)...................................... 500 24,178
Christian Dior SA.......................................... 280 45,169
Cie De St. Gobain.......................................... 200 28,293
Compagnie Financiere de Paris (GDR)........................ 600 18,150
Sidel SA (b)............................................... 120 8,257
--------
149,859
--------
GERMANY 3.7%
Adidas AG.................................................. 500 43,215
Deutsche Telekom (b)....................................... 1,000 21,088
SAP AG..................................................... 200 27,944
--------
92,247
--------
HONG KONG 1.6%
First Pacific Co........................................... 7,000 9,096
Henderson Land Development................................. 1,000 10,085
Jilin Chemical Industries, Class H (b)..................... 70,000 10,860
Swire Pacific.............................................. 1,000 9,535
--------
39,576
--------
HUNGARY 3.1%
Graboplast Textiles........................................ 1,000 33,828
Tiszai Vegyi Kombinat (GDR) (b)............................ 4,000 44,800
--------
78,628
--------
INDONESIA 0.5%
BK Bira.................................................... 10,000 11,854
--------
IRELAND 1.5%
Adare Printing Group....................................... 2,000 19,188
Bank of Ireland............................................ 2,000 18,263
--------
37,451
--------
ITALY 4.6%
Bulgari SpA................................................ 2,000 40,606
Gucci Group................................................ 875 55,891
Mediolanum SpA (b)......................................... 2,000 18,932
--------
115,429
--------
JAPAN 10.5%
Bank of Tokyo.............................................. 1,600 29,704
Fuji Photo Film Co......................................... 1,000 32,985
Honda Motor Co............................................. 1,000 28,581
Japan Radio Co............................................. 1,000 10,707
Kawasaki Heavy Industries.................................. 6,000 24,817
</TABLE>

B-83
See Notes to Financial Statements
<PAGE> 136

GLOBAL EQUITY FUND PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1996

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Security Description Shares Market Value
- -------------------------------------------------------------------------------
<S> <C> <C>
JAPAN (CONTINUED)
Matsushita Electric Industries............................. 1,000 $ 16,320
Mitsubishi Chemical........................................ 4,000 12,952
Mitsubishi Estate.......................................... 2,000 20,551
Nichiei Construction....................................... 2,000 13,850
Nomura Securities.......................................... 1,000 15,025
NTT Data Communications Systems............................ 1 29,272
Takashimaya Co............................................. 1,000 12,002
Toshiba Corp............................................... 3,000 18,858
--------
265,624
--------
MALAYSIA 0.8%
Jaya Tiasa Holdings........................................ 2,000 10,612
Metacorp Berhad............................................ 4,000 10,216
--------
20,828
--------
MEXICO 1.4%
Cemex SA (ADR)............................................. 1,100 8,456
Empresas ICA Sociedad Controladora (ADR) (b)............... 1,000 14,625
Telefonos de Mexico (ADR).................................. 400 13,200
--------
36,281
--------
NETHERLANDS 6.2%
ASM Lithography Holding (b)................................ 400 19,994
Cap Gemini Group........................................... 1,000 29,076
ING Groep.................................................. 1,100 39,629
PolyGram................................................... 500 25,485
Ver Ned Uitgevers.......................................... 2,000 41,819
--------
156,003
--------
NORWAY 3.4%
Tandberg (b)............................................... 1,000 30,886
Uni-Storebrand ASA (b)..................................... 5,500 31,584
VISMA...................................................... 4,500 23,048
--------
85,518
--------
POLAND 0.6%
Bank Gdanski SA (GDR)...................................... 1,000 12,520
Krosno SA.................................................. 71 1,362
--------
13,882
--------
SINGAPORE 1.0%
Fraser & Neave............................................. 1,400 14,407
Singapore Land............................................. 2,000 11,077
--------
25,484
--------
SWEDEN 2.7%
Astra, Class B............................................. 800 38,593
Nobel Biocare.............................................. 1,600 28,153
--------
66,746
--------
SWITZERLAND 3.0%
Adecco SA.................................................. 100 25,103
Novartis AG (b)............................................ 21 24,430
Schweizerischer Bankverein................................. 140 26,619
--------
76,152
--------
THAILAND 0.1%
Thai Military Bank PLC..................................... 1,100 2,166
--------
UNITED KINGDOM 7.9%
Astec (BSR)................................................ 10,000 26,884
BOC Group.................................................. 1,000 14,973
</TABLE>
B-84

See Notes to Financial Statements
<PAGE> 137

GLOBAL EQUITY FUND PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1996

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Security Description Shares Market Value
- -------------------------------------------------------------------------------
<S> <C> <C>
UNITED KINGDOM (CONTINUED)
Boots Co................................................... 2,000 $ 20,627
Carlton Communications..................................... 3,000 26,294
Dixons Group............................................... 4,000 37,211
Marks & Spencer............................................ 2,800 23,601
National Westminster Bank.................................. 2,000 23,505
Reuters Holdings........................................... 2,000 25,715
--------
198,810
--------
UNITED STATES 27.2%
Aames Financial Corp....................................... 150 5,381
AccuStaff, Inc. (b)........................................ 107 2,260
ADC Telecommunications, Inc. (b)........................... 140 4,357
Air Products & Chemicals, Inc.............................. 70 4,839
Alex Brown, Inc............................................ 70 5,075
Allied Signal, Inc......................................... 60 4,020
Amgen, Inc. (b)............................................ 120 6,525
Apache Corp................................................ 70 2,476
Ascend Communications, Inc. (b)............................ 50 3,106
Aspect Telecommunications Corp. (b)........................ 70 4,445
Atmel Corp. (b)............................................ 100 3,312
Baker Hughes, Inc.......................................... 70 2,415
Bank of Boston Corp........................................ 90 5,782
BankAmerica Corp........................................... 70 6,982
Bed Bath & Beyond, Inc. (b)................................ 150 3,637
BMC Industries, Inc........................................ 70 2,205
BMC Software, Inc. (b)..................................... 200 8,275
Boeing Co.................................................. 50 5,319
Boston Chicken, Inc. (b)................................... 70 2,511
Bristol-Myers Squibb Co.................................... 90 9,787
Cadence Design Systems, Inc. (b)........................... 110 4,372
Chase Manhattan Corp. (c).................................. 120 10,710
Chrysler Corp.............................................. 100 3,300
Cisco Systems, Inc. (b)(c)................................. 190 12,089
Citicorp................................................... 50 5,150
CMAC Investment Corp....................................... 140 5,145
Columbia / HCA Healthcare Corp............................. 100 4,075
Compaq Computer Corp. (b).................................. 50 3,712
CompUSA, Inc. (b).......................................... 140 2,887
Computer Associates International, Inc..................... 200 9,950
Compuware Corp. (b)........................................ 50 2,506
Conseco, Inc............................................... 150 9,563
Cytec Industries, Inc. (b)................................. 220 8,938
Deere & Co................................................. 70 2,844
Dover Corp................................................. 70 3,518
DST Systems, Inc. (b)...................................... 70 2,196
Equifax, Inc............................................... 180 5,513
Evergreen Media Corp., Class A (b)......................... 220 5,500
Exxon Corp................................................. 60 5,975
Federal National Mortgage Association (b)(c)............... 590 21,978
First Bank System, Inc..................................... 50 3,413
Gap, Inc................................................... 120 3,615
General Nutrition Cos., Inc. (b)........................... 150 2,531
Green Tree Financial Corp. (c)............................. 260 10,043
</TABLE>

B-85

See Notes to Financial Statements
<PAGE> 138

GLOBAL EQUITY FUND PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1996

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Security Description Shares Market Value
- -------------------------------------------------------------------------------
<S> <C> <C>
UNITED STATES (CONTINUED)
Harley-Davidson, Inc....................................... 70 $ 3,290
Health Management Associates, Inc., Class A (b)............ 190 4,275
Healthsouth Corp. (b)...................................... 150 5,794
Illinois Tool Workers, Inc................................. 70 5,591
Input/Output, Inc. (b)..................................... 70 1,295
Intel Corp. (c)............................................ 130 17,022
International Business Machines............................ 30 4,530
Johnson & Johnson.......................................... 175 8,706
Kroger Co. (b)............................................. 150 6,975
Lear Corp. (b)............................................. 70 2,389
Lincare Holdings, Inc. (b)................................. 150 6,150
Liz Claiborne, Inc......................................... 125 4,828
Lowe's Co., Inc............................................ 75 2,663
Lucent Technologies, Inc................................... 70 3,238
Marriott International, Inc................................ 150 8,288
Medtronic, Inc............................................. 70 4,760
Merck & Co., Inc. (c)...................................... 150 11,888
Merrill Lynch & Co., Inc. (c).............................. 125 10,188
Metalclad Corp. (b)........................................ 3,000 5,437
MGIC Investment Corp....................................... 70 5,320
Microsoft Corp. (b)(c)..................................... 120 9,915
Money Store, Inc........................................... 150 4,144
Nautica Enterprises, Inc. (b).............................. 150 3,788
Nike, Inc., Class B........................................ 50 2,988
Omnicom Group, Inc......................................... 150 6,863
PairGain Technologies, Inc. (b)............................ 100 3,044
Penncorp Financial Group, Inc.............................. 110 3,960
Pfizer, Inc................................................ 120 9,945
Philip Morris Cos., Inc. (c)............................... 325 36,603
Phillips Petroleum Co...................................... 110 4,868
Physician Reliance Network, Inc. (b)....................... 150 1,163
Praxair, Inc. (c).......................................... 220 10,148
Procter & Gamble Co........................................ 40 4,300
Promus Hotel Corp. (b)..................................... 70 2,074
RAC Financial Group, Inc. (b).............................. 140 2,958
Raychem Corp............................................... 70 5,609
Renal Treatment Centers, Inc. (b).......................... 150 3,825
RJR Nabisco Holdings Corp.................................. 170 5,756
Ross Stores, Inc........................................... 70 3,500
Safeway, Inc. (b)(c)....................................... 330 14,108
Sanmina Corp. (b).......................................... 70 3,955
Schering-Plough Corp....................................... 100 6,475
Schwab (Charles) Corp...................................... 100 3,200
SCI Systems, Inc. (b)...................................... 70 3,124
Scripps Howard, Inc., Class A.............................. 50 1,750
Service Corp. International................................ 300 8,400
Smith International, Inc. (b).............................. 150 6,731
Student Loan Marketing Association......................... 70 6,519
Sun Microsystems, Inc. (b)................................. 300 7,706
SunAmerica, Inc. (c)....................................... 300 13,313
Tellabs, Inc. (b).......................................... 250 9,406
Texaco, Inc................................................ 70 6,869
</TABLE>

B-86

See Notes to Financial Statements
<PAGE> 139

GLOBAL EQUITY FUND PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1996

(a) At December 31, 1996, for federal income tax purposes cost is $2,125,213,
the aggregate gross unrealized appreciation is $488,693 and the aggregate
gross unrealized depreciation is $90,784, resulting in net unrealized
appreciation of $397,909.

(b) Non-income producing security as this stock currently does not declare
dividends.

B-87

See Notes to Financial Statements
<PAGE> 140

GLOBAL EQUITY FUND STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996

<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
ASSETS:
Long-Term Investments, at Market Value (Cost $2,034,679) (Note 1).. $2,430,947
Foreign Currency, at Market Value (Cost $90,172) (Note 1).......... 92,175
Cash............................................................... 21,012
Receivables:
Dividends......................................................... 3,484
Securities Sold................................................... 3,452
Interest.......................................................... 27
Unamortized Organizational Expenses (Note 1)....................... 4,770
----------
Total Assets...................................................... 2,555,867
----------
LIABILITIES:
Payables:
Securities Purchased.............................................. 13,483
Distributor and Affiliates (Note 2)............................... 3,050
Fund Shares Repurchased........................................... 991
Accrued Expenses................................................... 15,172
Deferred Compensation and Retirement Plans (Note 2)................ 4,642
Forward Currency Contracts (Note 5)................................ 1,505
----------
Total Liabilities................................................. 38,843
----------
NET ASSETS......................................................... $2,517,024
----------
NET ASSETS CONSIST OF:
Capital (Note 3)................................................... $2,102,301
Net Unrealized Appreciation on Securities.......................... 396,734
Accumulated Net Realized Gain on Securities........................ 27,719
Accumulated Distributions in Excess of Net Investment Income (Note
1)................................................................. (9,730)
----------
NET ASSETS......................................................... $2,517,024
----------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE
(Based on net assets of $2,517,024 and 215,901 shares of
beneficial interest issued and outstanding)....................... $ 11.66
----------
</TABLE>

B-88

See Notes to Financial Statements
<PAGE> 141

GLOBAL EQUITY FUND
STATEMENT OF OPERATIONS

For the Year Ended December 31, 1996

<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Dividends (Net of foreign withholding taxes of $4,658)................ $ 38,087
Interest.............................................................. 3,720
--------
Total Income......................................................... 41,807
--------
EXPENSES:
Custody and Accounting................................................ 116,865
Investment Advisory Fee (Note 2)...................................... 28,416
Audit................................................................. 18,897
Shareholder Services (Note 2)......................................... 15,384
Printing.............................................................. 15,219
Trustees Fees and Expenses (Note 2)................................... 8,980
Legal (Note 2)........................................................ 5,843
Amortization of Organizational Expenses (Note 1)...................... 1,369
Other ................................................................ 265
--------
Total Expenses....................................................... 211,238
Less Fees Waived and Expenses Reimbursed ($28,416 and $148,723,
respectively) (Note 2)............................................... 177,139
--------
Net Expenses......................................................... 34,099
--------
NET INVESTMENT INCOME................................................. $ 7,708
--------
REALIZED AND UNREALIZED GAIN/LOSS ON SECURITIES:
Realized Gain/Loss on Securities:
Investments.......................................................... $ 73,020
Forward Currency Contracts........................................... 34,640
--------
Net Realized Gain on Securities....................................... 107,660
--------
Unrealized Appreciation/Depreciation on Securities:
Beginning of the Period.............................................. 102,678
--------
End of the Period:
Investments.......................................................... 396,268
Forward Currency Contracts........................................... (1,505)
Foreign Currency Translation......................................... 1,971
--------
396,734
--------
Net Unrealized Appreciation on Securities During the Period........... 294,056
--------
NET REALIZED AND UNREALIZED GAIN ON SECURITIES........................ $401,716
--------
NET INCREASE IN NET ASSETS FROM OPERATIONS............................ $409,424
--------
</TABLE>

B-89

See Notes to Financial Statements
<PAGE> 142

GLOBAL EQUITY FUND
STATEMENT OF CHANGES IN NET ASSETS

For the Year Ended December 31, 1996 and the Period July 3, 1995 (Commencement
of Investment Operations) to December 31, 1995

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Year Ended Period Ended
December 31, 1996 December 31, 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income/Loss.............. $ 7,708 $ (30,335)
Net Realized Gain/Loss on Securities.... 107,660 (6,056)
Net Unrealized Appreciation on
Securities During the Period........... 294,056 102,678
---------- ----------
Change in Net Assets from Operations.... 409,424 66,287
---------- ----------
Distributions from Net Investment
Income.................................. (7,708) -0-
Distributions in Excess of Net
Investment Income (Note 1).............. (32,197) -0-
---------- ----------
Distributions from and in Excess of Net
Investment Income....................... (39,905) -0-
Distributions from Net Realized Gain on
Securities (Note 1)..................... (37,458) -0-
---------- ----------
Total Distributions..................... (77,363) -0-
---------- ----------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES.............................. 332,061 66,287
---------- ----------
FROM CAPITAL TRANSACTIONS (NOTE 3):
Proceeds from Shares Sold............... 1,241,023 2,319,291
Net Asset Value of Shares Issued through
Dividend Reinvestment................... 42,743 -0-
Cost of Shares Repurchased.............. (1,473,972) (10,509)
---------- ----------
NET CHANGE IN NET ASSETS FROM CAPITAL
TRANSACTIONS............................ (190,206) 2,308,782
---------- ----------
TOTAL INCREASE IN NET ASSETS............ 141,855 2,375,069
NET ASSETS:
Beginning of the Period................. 2,375,169 100
---------- ----------
End of the Period (Including accumulated
distributions in excess of net
investment income of $9,730 and
$12,173, respectively)................. $2,517,024 $2,375,169
---------- ----------
</TABLE>

FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of the
Fundoutstanding throughout the periods indicated.

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
July 3, 1995
(Commencement
Year of Investment
Ended Operations)
December 31, to December
1996 31, 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Net Asset Value, Beginning of the Period......... $10.30 $10.00
------- ------
Net Investment Income/Loss...................... .035 (.16)
Net Realized and Unrealized Gain on Securities.. 1.687 .46
------- ------
Total from Investment Operations................. 1.722 .30
------- ------
Less:
Distributions from and in Excess of Net
Investment Income............................... .188 -0-
Distributions from Net Realized Gain on
Securities...................................... .176 -0-
------- ------
Total Distributions.............................. .364 -0-
------- ------
Net Asset Value, End of the Period............... $11.658 $10.30
------- ------
Total Return*.................................... 16.72% 3.00%**
Net Assets at End of the Period (In millions).... $2.5 $2.4
Ratio of Expenses to Average Net Assets*......... 1.20% 4.35%
Ratio of Net Investment Income/Loss to Average
Net Assets*...................................... .27% (2.76%)
Portfolio Turnover............................... 94% 42%**
Average Commission Rate per Equity Share Traded
(a).............................................. $.0245 --
*If certain expenses had not been assumed by VKAC, Total Return would have
been lower and the ratios would have been as follows:
Ratio of Expenses to Average Net Assets.......... 7.43% 8.27%
Ratio of Net Investment Loss to Average Net
Assets........................................... (5.96%) (6.68%)
</TABLE>

B-90

See Notes to Financial Statements
<PAGE> 143

GOVERNMENT FUND PORTFOLIO OF INVESTMENTS
December 31, 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
UNITED STATES GOVERNMENT
AGENCY OBLIGATIONS 67.6%
$2,399 Federal Home Loan Mortgage
Corp. CMO................. 6.088% 11/15/18 $ 2,341,379
2,603 Federal Home Loan Mortgage
Corp. Gold 30 Year Pool
(b)....................... 7.000 05/01/24 to 07/01/24 2,554,113
1,479 Federal Home Loan Mortgage
Corp. Gold 30 Year Pool
(b)....................... 7.500 06/01/24 to 10/01/24 1,479,908
1,507 Federal Home Loan Mortgage
Corp. Gold 30 Year Pool... 8.000 09/01/24 to 10/01/24 1,535,527
1,985 Federal National Mortgage
Association Var Rate Cpn
(b)....................... 6.149 03/25/09 1,986,364
2,066 Federal National Mortgage
Association CMO Var Rate
Cpn....................... 6.169 03/25/09 2,071,656
1,943 Federal National Mortgage
Association 15 Year Dwarf
Pool...................... 6.500 06/01/09 to 04/01/11 1,907,791
1,980 Federal National Mortgage
Association 15 Year Dwarf
Pool...................... 7.000 07/01/10 to 12/01/11 1,979,387
997 Federal National Mortgage
Association Pool.......... 6.500 03/01/26 to 05/01/26 950,350
1,781 Federal National Mortgage
Association Pool.......... 7.000 12/01/23 to 06/01/24 1,743,821
1,638 Federal National Mortgage
Association Pool.......... 7.500 05/01/24 to 10/01/24 1,636,947
744 Federal National Mortgage
Association Pool.......... 8.000 06/01/24 to 10/01/24 757,678
1,985 Federal National Mortgage
Association Pool (b)...... 9.000 02/01/17 2,112,158
1,134 Federal National Mortgage
Association Pool.......... 11.000 11/01/20 1,257,610
6,355 Government National
Mortgage Association Pool. 7.000 04/15/23 to 10/15/24 6,214,371
2,195 Government National
Mortgage Association Pool. 7.500 04/15/22 to 06/15/24 2,195,812
2,855 Government National
Mortgage Association Pool. 8.000 05/15/17 to 11/15/24 2,913,926
2,632 Government National
Mortgage Association Pool
(b)....................... 8.500 03/15/17 to 07/15/17 2,770,516
240 Government National
Mortgage Association Pool. 11.000 09/15/10 to 08/15/20 267,934
-----------
TOTAL UNITED STATES GOVERNMENT AGENCY OBLIGATIONS...... 38,677,248
-----------
UNITED STATES TREASURY
OBLIGATIONS 26.8%
1,000 United States Treasury
Notes (b)................. 5.000 02/15/99 982,030
2,000 United States Treasury
Notes (b)................. 5.625 02/15/06 1,893,760
3,000 United States Treasury
Notes (b)................. 6.750 05/31/99 3,052,020
4,000 United States Treasury
Notes (b)................. 7.750 11/30/99 4,180,640
1,000 United States Treasury
Notes (b)................. 7.875 04/15/98 1,025,780
4,000 United States Treasury
Notes (b)................. 8.000 08/15/99 to 05/15/01 4,235,020
-----------
TOTAL UNITED STATES TREASURY OBLIGATIONS............... 15,369,250
-----------
OTHER MORTGAGE-BACKED
SECURITIES 1.3%
720 FBC Mortgage Securities
Trust 7 Var Rate Cpn...... 5.963 01/25/17 720,361
-----------
FORWARD PURCHASE COMMITMENT 3.7%
2,000 Government National
Mortgage Association,
January Forward........... 9.000 TBA 2,141,260
-----------
TOTAL LONG-TERM INVESTMENTS 99.4%
(Cost $56,238,811) (a)....................................... 56,908,119
SHORT-TERM INVESTMENTS AT AMORTIZED COST 4.1%
Federal Home Loan Mortgage Corp. Discount Note ($2,325,000
par yielding 6.502%, maturity 01/02/97)...................... 2,324,160
LIABILITIES IN EXCESS OF OTHER ASSETS (3.5%).................. (1,977,897)
-----------
NET ASSETS 100.0%............................................. $57,254,382
-----------
</TABLE>

(a) At December 31, 1996, for federal income tax purposes cost is $56,242,249,
the gross unrealized appreciation is $833,009 and the gross unrealized
depreciation is $191,607, resulting in net unrealized appreciation
including open forward commitments of $641,402.

(b) Assets segregated as collateral for open forward commitments and open
futures transactions.

TBA--To be announced, maturity date has not yet been established. Upon
settlement and delivery of the mortgage pools, maturity dates will be
assigned.

B-91

See Notes to Financial Statements
<PAGE> 144

GOVERNMENT FUND STATEMENT OF ASSETS AND LIABILITIES

December 31, 1996
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
ASSETS:
Long-Term Investments, at Market Value (Cost $56,238,811) (Note
1)................................................................ $56,908,119
Short-Term Investments (Note 1)................................... 2,324,160
Cash.............................................................. 2,070
Interest Receivable............................................... 460,013
Other............................................................. 14,566
-----------
Total Assets..................................................... 59,708,928
-----------
LIABILITIES:
Payables:
Securities Purchased............................................. 2,156,057
Variation Margin on Futures (Note 5)............................. 143,170
Fund Shares Repurchased.......................................... 32,974
Forward Commitments (Note 6)..................................... 24,468
Distributor and Affiliates (Note 2).............................. 2,650
Deferred Compensation and Retirement Plans (Note 2)............... 41,849
Accrued Expenses.................................................. 53,378
-----------
Total Liabilities................................................ 2,454,546
-----------
NET ASSETS........................................................ $57,254,382
-----------
NET ASSETS CONSIST OF:
Capital (Note 3).................................................. $70,107,395
Net Unrealized Appreciation on Securities......................... 446,722
Accumulated Distributions in Excess of Net Investment Income (Note
1)................................................................ (11,355)
Accumulated Net Realized Loss on Securities....................... (13,288,380)
-----------
NET ASSETS........................................................ $57,254,382
-----------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE
(Based on net assets of $57,254,382 and 6,606,459 shares of
beneficial interest issued and outstanding)...................... $ 8.67
-----------
</TABLE>

B-92

See Notes to Financial Statements
<PAGE> 145

GOVERNMENT FUND STATEMENT OF OPERATIONS

For the Year Ended December 31, 1996
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Interest.......................................................... $ 4,347,277
-----------
EXPENSES:
Investment Advisory Fee (Note 2).................................. 303,695
Accounting Services (Note 2)...................................... 55,531
Shareholder Services (Note 2)..................................... 15,421
Trustees Fees and Expenses (Note 2)............................... 12,119
Legal (Note 2).................................................... 9,843
Custody........................................................... 8,206
Other ............................................................ 82,093
-----------
Total Expenses................................................... 486,908
Less Fees Waived and Expenses Reimbursed ($103,474 and $19,000,
respectively) (Note 2)........................................... 122,474
-----------
Net Expenses..................................................... 364,434
-----------
NET INVESTMENT INCOME............................................. $ 3,982,843
-----------
REALIZED AND UNREALIZED GAIN/LOSS ON SECURITIES:
Realized Gain/Loss on Securities:
Investments...................................................... $ (703,703)
Futures.......................................................... (103,280)
Forward Commitments.............................................. (86,987)
-----------
Net Realized Loss on Securities................................... (893,970)
-----------
Unrealized Appreciation/Depreciation on Securities:
Beginning of the Period.......................................... 2,397,568
-----------
End of the Period:
Investments...................................................... 669,308
Futures.......................................................... (198,118)
Forward Commitments.............................................. (24,468)
-----------
446,722
-----------
Net Unrealized Depreciation on Securities During the Period....... (1,950,846)
-----------
NET REALIZED AND UNREALIZED LOSS ON SECURITIES.................... $(2,844,816)
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS........................ $ 1,138,027
-----------
</TABLE>

STATEMENT OF CHANGES IN NET ASSETS

For the Years Ended December 31, 1996 and 1995

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year Ended Year Ended
December 31, 1996 December 31, 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income.................... $ 3,982,843 $ 4,592,403
Net Realized Gain/Loss on Securities..... (893,970) 1,258,015
Net Unrealized Appreciation/Depreciation
on Securities During the Period......... (1,950,846) 4,705,976
----------- -----------
Change in Net Assets from Operations..... 1,138,027 10,556,394
----------- -----------
Distributions from Net Investment Income. (3,998,258) (4,588,452)
Distributions in Excess of Net Investment
Income (Note 1)......................... (25,823) -0-
----------- -----------
Distributions from and in Excess of Net
Investment Income....................... (4,024,081) (4,588,452)
----------- -----------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES............................... (2,886,054) 5,967,942
----------- -----------
FROM CAPITAL TRANSACTIONS (NOTE 3):
Proceeds from Shares Sold................ 1,607,635 2,668,721
Net Asset Value of Shares Issued Through
Dividend Reinvestment.................... 4,024,080 4,588,452
Cost of Shares Repurchased............... (12,510,487) (11,719,168)
----------- -----------
NET CHANGE IN NET ASSETS FROM CAPITAL
TRANSACTIONS............................. (6,878,772) (4,461,995)
----------- -----------
TOTAL INCREASE/DECREASE IN NET ASSETS.... (9,764,826) 1,505,947
NET ASSETS:
Beginning of the Period.................. 67,019,208 65,513,261
----------- -----------
End of the Period (Including accumulated
undistributed net investment income of
$(11,355) and $15,415, respectively).... $57,254,382 $67,019,208
----------- -----------
</TABLE>
B-93

See Notes to Financial Statements

<PAGE> 146

GOVERNMENT FUND FINANCIAL HIGHLIGHTS

The following schedule presents financial highlights for one share of the
Fundoutstanding throughout the periods indicated.

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Year Ended December 31,
-----------------------------------
1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period.. $9.06 $8.28 $9.26 $9.13 $9.29
------ ------ ------ ----- ------
Net Investment Income.................... .569 .60 .56 .57 .665
Net Realized and Unrealized Gain/Loss on
Securities.............................. (.388) .78 (.985) .135 (.1575)
------ ------ ------ ----- ------
Total from Investment Operations.......... .181 1.38 (.425) .705 .5075
Less Distributions from and in Excess of
Net Investment Income (Note 1)............ .575 .60 .555 .575 .6675
------ ------ ------ ----- ------
Net Asset Value, End of the Period........ $8.666 $9.06 $8.28 $9.26 $9.13
------ ------ ------ ----- ------
Total Return*............................. 2.12% 17.17% (4.63%) 7.86% 5.73%
Net Assets at End of the Period (In
millions)................................. $57.3 $67.0 $65.5 $80.6 $74.8
Ratio of Expenses to Average Net Assets*.. .60% .60% .60% .60% .60%
Ratio of Net Investment Income to Average
Net Assets*............................... 6.56% 6.89% 6.71% 6.45% 7.29%
Portfolio Turnover........................ 143% 164% 192% 91% 36%
*If certain expenses had not been assumed by VKAC, Total Return would have
been lower and the ratios would have been as follows:
Ratio of Expenses to Average Net Assets... .80% .72% .70% .70% .70%
Ratio of Net Investment Income to Average
Net Assets................................ 6.36% 6.77% 6.61% 6.35% 7.19%
</TABLE>
B-94

See Notes to Financial Statements
<PAGE> 147

GROWTH AND INCOME FUND PORTFOLIO OF INVESTMENTS

December 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Security Description Shares Market Value
- -------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK 98.7%
CONSUMER DISTRIBUTION 5.4%
Dayton Hudson Corp......................................... 110 $ 4,318
Federated Department Stores, Inc. (b)...................... 260 8,873
Gymboree Corp. (b)......................................... 70 1,601
Revco D.S., Inc. (b)....................................... 40 1,480
Sears Roebuck & Co......................................... 60 2,768
Talbots, Inc............................................... 100 2,863
Toys R Us, Inc. (b)........................................ 60 1,800
Vons Companies, Inc. (b)................................... 50 2,994
-------
26,697
-------
CONSUMER DURABLES 1.9%
Eastman Kodak Co........................................... 40 3,210
Masco Corp................................................. 100 3,600
Newell Co.................................................. 90 2,835
-------
9,645
-------
CONSUMER NON-DURABLES 9.0%
Adidas AGS (Germany)....................................... 100 4,263
American Brands, Inc....................................... 80 3,970
Campbell Soup Co........................................... 30 2,408
Colgate Palmolive Co....................................... 40 3,690
Nabisco Holdings Corp., Class A............................ 140 5,443
Philip Morris Companies, Inc............................... 100 11,259
Procter & Gamble Co........................................ 30 3,225
Quaker Oats Co............................................. 80 3,050
Ralston Purina Group....................................... 30 2,201
RJR Nabisco Holdings Corp.................................. 160 5,440
-------
44,949
-------
CONSUMER SERVICES 3.2%
Cognizant Corp............................................. 40 1,320
Deluxe Corp................................................ 70 2,293
H&R Block, Inc............................................. 90 2,610
Omnicom Group.............................................. 70 3,203
Time Warner, Inc........................................... 50 1,875
Tribune Co................................................. 30 2,366
Walt Disney Co............................................. 30 2,089
-------
15,756
-------
ENERGY 9.2%
Apache Corp................................................ 70 2,476
Burlington Resources, Inc.................................. 80 4,030
Coastal Corp............................................... 50 2,444
Exxon Corp................................................. 25 2,450
Royal Dutch Petroleum Co.--ADR (Netherlands)............... 50 8,538
Texaco, Inc................................................ 160 15,695
Unocal Corp................................................ 160 6,500
USX-Marathon Group......................................... 150 3,581
-------
45,714
-------
</TABLE>

B-95

See Notes to Financial Statements
<PAGE> 148

GROWTH AND INCOME FUND PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Security Description Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
FINANCE 17.9%
Aetna, Inc.................................................. 45 $ 3,600
Allstate Corp............................................... 100 5,788
American International Group, Inc........................... 60 6,495
BankAmerica Corp............................................ 110 10,973
Bankers Trust Corp.......................................... 50 4,313
Chase Manhattan Corp........................................ 60 5,355
Comerica, Inc............................................... 70 3,666
Conseco, Inc................................................ 50 3,188
Everest Reinsurance Holdings................................ 130 3,738
Federal National Mortgage Association....................... 210 7,823
First Bank System, Inc...................................... 50 3,413
First Union Corp............................................ 30 2,220
Horace Mann Educators Corp.................................. 80 3,230
J.P. Morgan & Co., Inc...................................... 50 4,881
MBIA, Inc................................................... 40 4,050
NationsBank Corp............................................ 30 2,933
Student Loan Marketing Association.......................... 60 5,588
Travelers Group, Inc........................................ 110 4,991
USF&G Corp.................................................. 150 3,131
-------
89,376
-------
HEALTHCARE 11.6%
Abbott Labs................................................. 110 5,583
Amgen, Inc. (b)............................................. 70 3,806
Bristol Myers Squibb Co..................................... 60 6,525
Glaxo Wellcome--ADR (United Kingdom)........................ 160 5,080
Merck & Co., Inc............................................ 80 6,340
Nellcor Puitan Bennett, Inc. (b)............................ 60 1,313
Novartis AG--ADR (Switzerland) (b).......................... 100 5,700
Pacificare Health Sysem, Inc., Class B (b).................. 60 5,115
SmithKline Beecham--ADR (United Kingdom).................... 110 7,480
Teva Pharmaceutical Industries Ltd.--ADR (Israel)........... 60 3,015
Warner Lambert Co........................................... 70 5,250
Watsons Pharmaceuticals, Inc. (b)........................... 60 2,696
-------
57,903
-------
PRODUCER MANUFACTURING 8.5%
Allied Signal, Inc.......................................... 100 6,700
Canadian Pacific Ltd........................................ 260 6,890
General Electric Co......................................... 50 4,944
Honeywell, Inc.............................................. 80 5,260
Ingersoll Rand Co........................................... 110 4,895
Johnson Controls, Inc....................................... 40 3,315
Keystone International, Inc................................. 60 1,208
Stewart & Stevenson Services, Inc........................... 160 4,660
WMX Technologies, Inc....................................... 140 4,568
-------
42,440
-------
RAW MATERIALS/PROCESSING INDUSTRIES 4.9%
Betzdearborn, Inc........................................... 60 3,510
Crown Cork & Seal, Inc...................................... 160 8,700
James River Corp............................................ 90 2,981
Monsanto Co................................................. 40 1,555
Morton International, Inc................................... 60 2,445
Praxair, Inc................................................ 110 5,074
-------
24,265
-------
</TABLE>

B-96

See Notes to Financial Statements
<PAGE> 149

GROWTH AND INCOME FUND PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Security Description Shares Market Value
- -------------------------------------------------------------------------------
<S> <C> <C>
TECHNOLOGY 15.4%
3Com Corp. (b)............................................. 90 $ 6,604
BMC Software, Inc. (b)..................................... 120 4,965
Boeing Co.................................................. 60 6,383
Cisco Systems, Inc. (b).................................... 60 3,818
Computer Associates International, Inc..................... 120 5,970
Ericsson (LM) Class B--ADR (Sweden)........................ 140 4,226
General Instruments Corp. (b).............................. 170 3,676
General Signal Corp........................................ 100 4,275
Hewlett Packard Co......................................... 40 2,010
Intel Corp................................................. 50 6,547
International Business Machines, Inc....................... 40 6,040
Linear Technology Corp..................................... 50 2,194
Lucent Technologies, Inc................................... 90 4,163
Microsoft Corp. (b)........................................ 50 4,131
Newbridge Networks Corp. (b)............................... 150 4,238
Nokia Corp.--ADR (Finland)................................. 80 4,610
Tellabs, Inc. (b).......................................... 80 3,010
--------
76,860
--------
TRANSPORTATION 1.5%
Canadian National Railway Co............................... 120 4,560
Union Pacific Corp......................................... 50 3,006
--------
7,566
--------
UTILITIES 10.2%
Allegheny Power Systems, Inc. ............................. 70 2,126
AT&T Corp. ................................................ 350 15,220
Boston Edison Co. ......................................... 120 3,225
Cable & Wireless--ADR (United Kingdom)..................... 110 2,709
Cincinnati Bell, Inc. ..................................... 70 4,314
DTE Energy Co. ............................................ 220 7,123
Edison International....................................... 130 2,584
Frontier Corp. ............................................ 120 2,715
Houston Industries, Inc. .................................. 60 1,358
Nipsco Industries, Inc. ................................... 10 396
Ohio Edison Co. ........................................... 150 3,413
Scana Corp. ............................................... 90 2,408
Unicom Corp. .............................................. 110 2,984
--------
50,575
--------
TOTAL LONG-TERM INVESTMENTS 98.7%
(Cost $493,716) (a).............................................. 491,746
OTHER ASSETS IN EXCESS OF LIABILITIES 1.3%........................ 6,756
--------
NET ASSETS 100.0%................................................. $498,502
--------
</TABLE>

(a) At December 31, 1996, for federal income tax purposes cost is $493,716, the
aggregate gross unrealized appreciation is $5,528 and the aggregate gross
unrealized depreciation is $7,498, resulting in net unrealized depreciation
of $1,970.

(b) Non-income producing security as this stock currently does not declare
dividends.

B-97

See Notes to Financial Statements
<PAGE> 150

GROWTH AND INCOME FUND STATEMENT OF ASSETS AND LIABILITIES

December 31, 1996
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
ASSETS:
Long-Term Investments, at Market Value (Cost $493,716) (Note 1)...... $491,746
Cash................................................................. 22,120
Receivables:
Securities Sold..................................................... 1,699
Dividends........................................................... 363
--------
Total Assets........................................................ 515,928
--------
LIABILITIES:
Payable for Securities Purchased..................................... 17,333
Accrued Expenses..................................................... 93
--------
Total Liabilities................................................... 17,426
--------
NET ASSETS........................................................... $498,502
--------
NET ASSETS CONSIST OF:
Capital (Note 3)..................................................... $500,000
Accumulated Undistributed Net Investment Income...................... 553
Accumulated Net Realized Loss on Securities.......................... (81)
Net Unrealized Depreciation on Securities............................ (1,970)
--------
NET ASSETS........................................................... $498,502
--------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE (Based
on net assets of $498,502 and 50,000 shares of
beneficial interest issued and outstanding)......................... $ 9.97
--------
</TABLE>
B-98

See Notes to Financial Statements

<PAGE> 151

GROWTH AND INCOME FUND STATEMENT OF OPERATIONS

For the Period December 23, 1996 (Commencement of Investment Operations) to
December 31, 1996
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Dividends............................................................. $ 363
Interest.............................................................. 283
-------
Total Income......................................................... 646
-------
EXPENSES:
Audit................................................................. 5,000
Printing.............................................................. 200
Registration.......................................................... 160
Custody............................................................... 150
Investment Advisory Fee (Note 2)...................................... 74
Other................................................................. 100
-------
Total Expenses....................................................... 5,684
Less Fees Waived and Expenses Reimbursed ($74 and $5,517,
respectively) (Note 2)............................................... 5,591
-------
Net Expenses......................................................... 93
-------
NET INVESTMENT INCOME................................................. $ 553
-------
REALIZED AND UNREALIZED GAIN/LOSS ON SECURITIES:
Net Realized Loss on Investments...................................... $ (81)
-------
Unrealized Appreciation/Depreciation on Securities:
Beginning of the Period.............................................. 0
End of the Period:
Investments.......................................................... (1,970)
-------
Net Unrealized Depreciation on Securities During the Period........... (1,970)
-------
NET REALIZED AND UNREALIZED LOSS ON SECURITIES........................ $(2,051)
-------
NET DECREASE IN NET ASSETS FROM OPERATIONS............................ $(1,498)
-------
</TABLE>

STATEMENT OF CHANGES IN NET ASSETS

For the Period December 23, 1996 (Commencement of Investment Operations) to
December 31, 1996

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Period Ended
December 31, 1996
- --------------------------------------------------------------------------------
<S> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income ...................................... $ 553
Net Realized Loss on Securities............................. (81)
Net Unrealized Depreciation on Securities During the Period. (1,970)
--------
TOTAL DECREASE IN NET ASSETS................................ (1,498)
NET ASSETS:
Beginning of the Period..................................... 500,000
--------
End of the Period (Including accumulated undistributed net
investment income of $553)................................. $498,502
--------
</TABLE>

B-99

See Notes to Financial Statements
<PAGE> 152

GROWTH AND INCOME FUND FINANCIAL HIGHLIGHTS

The following schedule presents financial highlights for one share of the Fund
outstanding throughout the period indicated.

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
December 23, 1996
(Commencement
of Investment
Operations) to
December 31,
1996
- --------------------------------------------------------------------------------
<S> <C>
Net Asset Value, Beginning of the Period.................... $10.000
-------
Net Investment Income...................................... .011
Net Realized and Unrealized
Loss on Securities........................................ (.041)
-------
Total from Investment Operations............................ (.030)
-------
Net Asset Value, End of the Period.......................... $9.970
-------
Total Return*............................................... (.30)%**
Net Assets at End of the Period (In millions)............... $0.5
Ratio of Expenses to Average Net Assets*.................... .75%
Ratio of Net Investment Income to Average Net Assets*....... 4.47%
Portfolio Turnover.......................................... 0%**
Average Commission Paid Per Equity Share Traded (a)......... $.0203
*If certain expenses had not been assumed by VKAC, Total Return would have
been lower and the ratios would have been as follows:
Ratio of Expenses to Average Net Assets..................... 45.97%
Ratio of Net Investment Loss to Average Net Assets.......... (40.74)%
</TABLE>

**Non-Annualized

(a) Represents the average brokerage commission paid per equity share traded
during the period for trades where commissions were applicable.

B-100

See Notes to Financial Statements

<PAGE> 153

MONEY MARKET FUND PORTFOLIO OF INVESTMENTS

December 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Discount
Par Yield on
Amount Date of Amortized
(000) Description Maturity Purchase Cost
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS
77.5%.
$2,000 Federal Farm Credit Bank Discount
Note.................................. 01/09/97 5.387% $ 1,997,315
1,000 Federal Home Loan Bank Discount Note.. 01/06/97 5.241 999,132
1,000 Federal Home Loan Bank Discount Note.. 03/17/97 5.571 988,558
1,000 Federal Home Loan Mortgage Corp.
Discount Note......................... 01/07/97 5.304 998,981
1,000 Federal Home Loan Mortgage Corp.
Discount Note......................... 03/19/97 5.413 988,408
1,000 Federal National Mortgage Association
Discount Note......................... 01/17/97 5.379 997,507
1,000 Federal National Mortgage Association
Discount Note......................... 02/18/97 5.433 992,772
1,000 Federal National Mortgage Association
Discount Note......................... 03/06/97 5.637 990,106
1,000 Federal National Mortgage Association
Discount Note......................... 03/27/97 5.457 987,315
1,000 Federal National Mortgage Association
Discount Note......................... 06/10/97 5.281 977,012
2,260 Student Loan Marketing Association
Discount Note......................... 01/02/97 6.502 2,259,184
2,000 Tennessee Valley Authority Discount
Note.................................. 01/28/97 5.296 1,991,818
-----------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS............... 15,168,108
-----------
COMMERCIAL PAPER 23.0%
900 Associates Corp. of North America..... 01/10/97 5.404 898,655
900 Chevron Oil Finance Corp.............. 01/06/97 5.211 899,214
900 General Electric Capital Corp......... 01/10/97 5.424 898,650
900 Metlife Funding Inc................... 02/18/97 5.376 893,483
900 Toronto Dominion Holdings............. 01/13/97 5.307 898,290
-----------
TOTAL COMMERCIAL PAPER................................. 4,488,292
-----------
TOTAL INVESTMENTS 100.5% (A).................................... 19,656,400
LIABILITIES IN EXCESS OF OTHER ASSETS (0.5%).................... (90,465)
-----------
NET ASSETS 100.0%............................................... $19,565,935
-----------
</TABLE>

(a) At December 31, 1996, cost is identical for both book and federal income
tax purposes.

B-101

See Notes to Financial Statements
<PAGE> 154

MONEY MARKET FUND STATEMENT OF ASSETS AND LIABILITIES

December 31, 1996
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments, at Amortized Cost which Approximates Market (Note 1). $19,656,400
Cash.............................................................. 3,525
Other............................................................. 18,092
-----------
Total Assets..................................................... 19,678,017
-----------
LIABILITIES:
Payables:
Fund Shares Repurchased.......................................... 49,883
Distributor and Affiliates (Note 2).............................. 2,188
Deferred Compensation and Retirement Plans (Note 2)............... 40,062
Accrued Expenses.................................................. 19,949
-----------
Total Liabilities................................................ 112,082
-----------
NET ASSETS........................................................ $19,565,935
-----------
NET ASSETS CONSIST OF:
Capital (Note 3).................................................. $19,565,725
Accumulated Undistributed Net Investment Income................... 210
-----------
NET ASSETS (Equivalent to $1.00 per share for 19,565,725 shares
outstanding)...................................................... $19,565,935
-----------
</TABLE>

B-102

See Notes to Financial Statements

<PAGE> 155

MONEY MARKET FUND STATEMENT OF OPERATIONS

STATEMENT OF CHANGES IN NET ASSETS

For the Years Ended December 31, 1996 and 1995

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year Ended Year Ended
December 31, 1996 December 31, 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income.................... $ 1,002,363 $ 1,294,856
Net Realized Gain on Securities.......... 415 -0-
------------ ------------
Change in Net Assets from Operations..... 1,002,778 1,294,856
------------ ------------
Distributions from Net Investment Income. (1,001,453) (1,295,753)
Distributions from Net Realized Gain on
Securities (Note 1)..................... (415) -0-
------------ ------------
Total Distributions...................... (1,001,868) (1,295,753)
------------ ------------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES............................... 910 (897)
------------ ------------
FROM CAPITAL TRANSACTIONS (NOTE 3):
Proceeds from Shares Sold................ 15,915,843 10,862,643
Net Asset Value of Shares Issued Through
Dividend Reinvestment.................... 1,001,868 1,295,753
Cost of Shares Repurchased............... (18,927,603) (19,130,257)
------------ ------------
NET CHANGE IN NET ASSETS FROM CAPITAL
TRANSACTIONS............................. (2,009,892) (6,971,861)
------------ ------------
TOTAL DECREASE IN NET ASSETS............. (2,008,982) (6,972,758)
NET ASSETS:
Beginning of the Period.................. 21,574,917 28,547,675
------------ ------------
End of the Period (Including accumulated
undistributed net investment income of
$210 and $(700), respectively).......... $ 19,565,935 $ 21,574,917
------------ ------------
</TABLE>

B-103

See Notes to Financial Statements

<PAGE> 156

MONEY MARKET FUND FINANCIAL HIGHLIGHTS

The following schedule presents financial highlights for one share of the
Fundoutstanding throughout the periods indicated.

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year Ended December 31,
-----------------------------
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period........ $1.00 $1.00 $1.00 $1.00 $1.00
----- ----- ----- ----- -----
Net Investment Income........................... .048 .0533 .0365 .0262 .0331
Less Distributions from Net Investment Income... .048 .0533 .0365 .0262 .0331
----- ----- ----- ----- -----
Net Asset Value, End of the Period.............. $1.00 $1.00 $1.00 $1.00 $1.00
----- ----- ----- ----- -----
Total Return*................................... 4.89% 5.46% 3.71% 2.66% 3.36%
Net Assets at End of the Period (In millions)... $19.6 $21.6 $28.5 $30.0 $32.9
Ratio of Expenses to Average Net Assets*........ .60% .60% .60% .60% .60%
Ratio of Net Investment Income to Average Net
Assets*......................................... 4.78% 5.33% 3.63% 2.63% 3.32%
*If certain expenses had not been assumed by
VKAC, Total Return would have
been lower and the ratios would have been as
follows:
Ratio of Expenses to Average Net Assets......... 1.29% .93% .87% .95% .89%
Ratio of Net Investment Income to Average Net
Assets.......................................... 4.10% 5.00% 3.37% 2.28% 3.03%
</TABLE>

B-104

See Notes to Financial Statements

<PAGE> 157

REAL ESTATE SECURITIES FUND PORTFOLIO OF INVESTMENTS

December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Security Description
Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK 87.5%
APARTMENTS 18.1%
Ambassador Apartments, Inc................................ 138,800 $ 3,279,150
Avalon Properties, Inc.................................... 105,900 3,044,625
Bay Apartment Communities, Inc............................ 126,500 4,554,000
BRE Properties, Inc., Class A............................. 121,100 2,997,225
Camden Property Trust..................................... 96,600 2,765,175
Columbus Realty Trust..................................... 103,900 2,363,725
Equity Residential Properties Trust....................... 94,700 3,906,375
Gables Residential Trust.................................. 98,500 2,856,500
Oasis Residential, Inc.................................... 82,600 1,879,150
Summit Properties, Inc.................................... 121,100 2,679,337
-----------
30,325,262
-----------
HEALTHCARE FACILITIES 3.9%
Nationwide Health Properties, Inc......................... 96,700 2,344,975
Omega Healthcare Investors................................ 128,600 4,275,950
-----------
6,620,925
-----------
HOTELS 9.7%
American General Hospitality Corp......................... 96,700 2,296,625
Felcor Suite Hotels, Inc.................................. 60,200 2,129,575
Innkeepers USA Trust...................................... 216,500 3,003,938
Patriot American Hospitality, Inc......................... 74,200 3,199,875
Starwood Lodging Trust.................................... 101,600 5,600,700
-----------
16,230,713
-----------
MANUFACTURED HOME COMMUNITIES 2.1%
Sun Communities, Inc...................................... 100,300 3,460,350
-----------
NET LEASE 5.9%
Excel Realty Trust, Inc................................... 140,200 3,557,575
Franchise Finance Corp. of America........................ 125,000 3,453,125
Trinet Corporate Realty Trust, Inc........................ 81,700 2,900,350
-----------
9,911,050
-----------
OFFICE/INDUSTRIAL 24.0%
Arden Realty Group, Inc................................... 126,500 3,510,375
Beacon Properties Corp.................................... 98,300 3,600,237
Bedford Property Investors, Inc........................... 173,700 3,039,750
Cali Realty Corp.......................................... 137,800 4,254,575
CarrAmerica Realty Corp................................... 108,400 3,170,700
Crescent Real Estate Equities Trust....................... 75,100 3,961,525
First Industrial Realty Trust, Inc........................ 123,800 3,760,425
Highwoods Properties, Inc................................. 98,300 3,317,625
Meridan Industrial Trust, Inc............................. 118,100 2,480,100
Reckson Associates Realty Corp. .......................... 84,700 3,578,575
Security Capital Industrial Trust......................... 95,700 2,045,588
Spieker Properties, Inc. ................................. 95,700 3,445,200
-----------
40,164,675
-----------
SELF-STORAGE 5.2%
Public Storage, Inc. ..................................... 156,700 4,857,700
Storage Trust Realty...................................... 143,900 3,885,300
-----------
8,743,000
-----------
SHOPPING CENTERS 9.1%
Bradley Real Estate, Inc. ................................ 197,400 3,553,200
JDN Realty Corp. ......................................... 137,100 3,787,387
Kimco Realty Corp. ....................................... 78,200 2,727,225
</TABLE>

B-105

See Notes to Financial Statements
<PAGE> 158

REAL ESTATE SECURITIES FUND PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1996

(a) At December 31, 1996, for federal income tax purposes cost is $124,672,190;
the aggregate gross unrealized appreciation is $21,955,365 and the
aggregate gross unrealized depreciation is $29,427, resulting in net
unrealized appreciation of $21,925,938.

B-106

See Notes to Financial Statements
<PAGE> 159

REAL ESTATE SECURITIES FUND STATEMENT OF ASSETS AND LIABILITIES

December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Long-Term Investments, at Market Value (Cost $124,552,063) (Note
1)................................................................ $146,598,128
Repurchase Agreement (Note 1)..................................... 9,385,000
Cash.............................................................. 1,836
Receivables:
Fund Shares Sold................................................. 10,697,189
Dividends........................................................ 952,583
Unamortized Organizational Expenses (Note 1)...................... 5,007
------------
Total Assets..................................................... 167,639,743
------------
LIABILITIES:
Payables:
Investment Advisory Fee (Note 2)................................. 125,871
Distributor and Affiliates (Note 2).............................. 2,950
Fund Shares Repurchased.......................................... 114
Accrued Expenses.................................................. 22,194
Deferred Compensation and Retirement Plans (Note 2)............... 4,860
------------
Total Liabilities................................................ 155,989
------------
NET ASSETS........................................................ $167,483,754
------------
NET ASSETS CONSIST OF:
Capital (Note 3).................................................. $144,550,380
Net Unrealized Appreciation on Securities......................... 22,046,065
Accumulated Net Realized Gain on Securities....................... 558,446
Accumulated Undistributed Net Investment Income................... 328,863
------------
NET ASSETS........................................................ $167,483,754
------------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE
(Based on net assets of $167,483,754 and 11,328,283 shares of
beneficial interest issued and outstanding)...................... $14.78
------------
</TABLE>

B-107
See Notes to Financial Statements
<PAGE> 160

REAL ESTATE SECURITIES FUND STATEMENT OF OPERATIONS

For the Year Ended December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends........................................................... $ 2,436,458
Interest............................................................ 199,508
-----------
Total Income....................................................... 2,635,966
-----------
EXPENSES:
Investment Advisory Fee (Note 2).................................... 428,166
Accounting (Note 2)................................................. 44,869
Shareholder Services (Note 2)....................................... 16,205
Trustees Fees and Expenses (Note 2)................................. 9,612
Legal (Note 2)...................................................... 7,214
Custody............................................................. 2,824
Amortization of Organizational Expenses (Note 1) ................... 1,138
Other .............................................................. 31,896
-----------
Total Expenses..................................................... 541,924
Less Fees Waived (Note 2).......................................... 70,941
-----------
Net Expenses....................................................... 470,983
-----------
NET INVESTMENT INCOME............................................... $ 2,164,983
-----------
REALIZED AND UNREALIZED GAIN/LOSS ON SECURITIES:
Net Realized Gain on Investments.................................... $ 1,465,073
-----------
Unrealized Appreciation/Depreciation on Securities:
Beginning of the Period............................................ 332,105
End of the Period:
Investments........................................................ 22,046,065
-----------
Net Unrealized Appreciation on Securities During the Period......... 21,713,960
-----------
NET REALIZED AND UNREALIZED GAIN ON SECURITIES...................... $23,179,033
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS.......................... $25,344,016
-----------
</TABLE>

STATEMENT OF CHANGES IN NET ASSETS

For the Year Ended December 31, 1996 and the Period July 3, 1995
(Commencement of Investment Operations) to December 31, 1995

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year Ended Period Ended
December 31, 1996 December 31, 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income.................. $ 2,164,983 $ 68,091
Net Realized Gain/Loss on Securities... 1,465,073 (32,530)
Net Unrealized Appreciation on
Securities During the Period.......... 21,713,960 332,105
------------ -----------
Change in Net Assets from Operations... 25,344,016 367,666
------------ -----------
Distributions from Net Investment
Income................................ (1,844,832) (60,786)
Distributions from Net Realized Gain on
Securities (Note 1)................... (874,097) -0-
------------ -----------
Total Distributions.................... (2,718,929) (60,786)
------------ -----------
NET CHANGE IN NET ASSETS FROM
INVESTMENT ACTIVITIES.................. 22,625,087 306,880
------------ -----------
FROM CAPITAL TRANSACTIONS (NOTE 3):
Proceeds from Shares Sold.............. 178,078,191 11,796,374
Net Asset Value of Shares Issued
Through Dividend Reinvestment.......... 2,718,725 60,786
Cost of Shares Repurchased............. (44,523,570) (3,578,819)
------------ -----------
NET CHANGE IN NET ASSETS FROM CAPITAL
TRANSACTIONS........................... 136,273,346 8,278,341
TOTAL INCREASE IN NET ASSETS........... 158,898,433 8,585,221
NET ASSETS:
Beginning of the Period................ 8,585,321 100
------------ -----------
End of the Period (Including
accumulated undistributed net
investment income of $328,863 and
$8,712, respectively)................. $167,483,754 $ 8,585,321
------------ -----------
</TABLE>

B-108

See Notes to Financial Statements
<PAGE> 161

REAL ESTATE SECURITIES FUND FINANCIAL HIGHLIGHTS

The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated.

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
July 3, 1995
(Commencement of
Year Ended Investment Operations)
December 31, 1996 to December 31, 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Net Asset Value, Beginning of the
Period.............................. $ 10.74 $10.00
------- ------
Net Investment Income.............. .217 .20
Net Realized and Unrealized Gain on
Securities........................ 4.117 .6325
------- ------
Total from Investment Operations.... 4.334 .8325
------- ------
Less:
Distributions from Net Investment
Income............................. .199 .0925
Distributions from Net Realized
Gain on Securities (Note 1)........ .091 -0-
------- ------
Total Distributions................. .290 .0925
------- ------
Net Asset Value, End of the Period.. $14.784 $10.74
------- ------
Total Return*....................... 40.53% 8.35%**
Net Assets at End of the Period (In
millions)........................... $167.5 $8.6
Ratio of Expenses to Average Net
Assets*............................. 1.10% 2.50%
Ratio of Net Investment Income to
Average Net Assets*................. 5.06% 3.75%
Portfolio Turnover.................. 84% 85%**
Average Commission Paid Per Equity
Share Traded (a).................... $.0313 --
*If certain expenses had not been assumed by VKAC, Total Return would have
been lower and the ratios would have been as follows:
Ratio of Expenses to Average Net
Assets.............................. 1.27% 2.90%
Ratio of Net Investment Income to
Average Net Assets.................. 4.89% 3.36%
</TABLE>

**Non-Annualized

(a) Represents the average brokerage commissions paid per equity share traded
during the period where commissions were applicable. This disclosure was
not required in fiscal periods prior to 1996.

B-109

See Notes to Financial Statements
<PAGE> 162

NOTES TO FINANCIAL STATEMENTS

December 31, 1996
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen American Capital Life Investment Trust (the "Trust") is registered
under the Investment Company Act of 1940, as amended, as a diversified open-end
management investment company comprised of nine Portfolios, hereafter referred
to as Funds: Asset Allocation Fund ("Asset Allocation", formerly known as
Multiple Strategy Fund), Domestic Income Fund ("Domestic", formerly known as
Domestic Strategic Income Fund), Emerging Growth Fund ("Emerging Growth"),
Enterprise Fund ("Enterprise", formerly known as Common Stock Fund), Global
Equity Fund ("Global Equity"), Government Fund ("Government"), Growth and Income
Fund ("Growth and Income"), Money Market Fund ("Money Market") and Real Estate
Securities Fund ("Real Estate") (collectively the "Funds"). Each Fund is
accounted for as a separate entity.
The goals of the Funds are as follows: Asset Allocation seeks a high total
investment return consistent with prudent risk; Domestic seeks income as its
primary objective and capital appreciation as a secondary objective; Emerging
Growth seeks capital appreciation by investing principally in common stocks of
small and medium sized companies; Enterprise seeks capital appreciation by
investing principally in common stocks; Global Equity seeks long-term growth of
capital through an internationally diversified portfolio of equity securities
of any nation, including the United States; Government seeks high current
return consistent with preservation of capital; Growth and Income seeks
long-term growth of capital and income by investing primarily in income-
producing equity securities including common stocks and convertible securities;
Money Market seeks protection of capital and high current income by investing
in short-term money market instruments; and Real Estate seeks long-term growth
of capital by investing principally in securities of companies operating in
the real estate industry.
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 reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

A. SECURITY VALUATION-Investments in securities listed on a securities exchange
are valued at their sales price as of the close of such securities exchange.
Fixed income investments are stated at value using market quotations. Unlisted
securities and listed securities for which the last sales price is not
available are valued at the last bid price. For those securities where prices or
quotations are not available, valuations are determined in accordance with
procedures established in good faith by the Board of Trustees. Short-term
securities with remaining maturities of 60 days or less are valued at
amortized cost. For Money Market, all investments are valued at amortized cost.
Domestic's investments include lower rated and unrated debt securities which
may be more susceptible to a decline in value due to adverse economic
conditions than other investment grade holdings. These securities are often
subordinated to the prior claims of other senior lenders and uncertainties
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 41% of Domestic's net assets at December 31, 1996.

B. SECURITY TRANSACTIONS-Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Fund may purchase and sell securities on a "when issued" or "delayed delivery"
basis, with settlement to occur at a later date. The value of the security so
purchased is subject to market fluctuations during this period. The Fund will
maintain, in a segregated account with its custodian, assets having an aggre-
gate value at least equal to the amount of the when issued or delayed delivery
purchase commitments until payment is made.

B-110

<PAGE> 163

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

December 31, 1996

- --------------------------------------------------------------------------------
The Fund may invest in repurchase agreements which are short-term investments
in which the Fund acquires ownership of a debt security and the seller agrees
to repurchase the security at a future time and specified price. The 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")
or its affiliates, the daily aggregate of which is invested in repurchase
agreements. Repurchase agreements are fully collateralized by the underlying
debt security. The 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 maintain the value of the underlying
security at not less than the repurchase proceeds due the Fund.
Domestic, Global Equity, Government and Real Estate may trade certain
securities under the terms of forward commitments, whereby the settlement for
payment and delivery occurs at a specified future date. Forward commitments are
privately negotiated transactions between the Fund and dealers. Upon executing a
forward commitment and during the period of obligation, the 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 the 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 the Fund, changes
in the value of the commitment are recognized by marking the commitment to
market on a daily basis. During the term of the commitment, the Fund may sell
the forward commitment and enter into a new forward commitment, the effect of
which is to extend the settlement date. In addition, the Fund may occasionally
close such forward commitments prior to delivery.

C. INVESTMENT INCOME-Dividend income is recorded on the ex-dividend date and
interest income is recorded on an accrual basis. Issuers of Payment-in-Kind
securities may make dividend or interest payments by issuing additional stocks
or bonds in lieu of cash payments. Original issue discounts on debt securities
purchased are amortized over the expected life of each applicable 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.

D. ORGANIZATIONAL EXPENSES-Emerging Growth, Global Equity and Real Estate have
reimbursed Van Kampen American Capital Distributors, Inc. or its affiliates
(collectively "VKAC") for costs incurred in connection with each Fund's
organization in the amount of $6,828 per Fund. These costs are being amortized
on a straight line basis over the 60 month period ending July 2, 2000. The
Adviser has agreed that in the event any of the initial shares of the Funds
originally purchased by VKAC are redeemed during the amortization period, the
Funds will be reimbursed for any unamortized organizational expenses in the
same proportion as the number of shares redeemed bears to the number of
initial shares held at the time of redemption.

E. FEDERAL INCOME TAXES-It is each Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Therefore, no provision for federal income taxes is required.
Each Fund intends to utilize provisions of the federal income tax laws which
allow each Fund to carry a realized capital loss forward for eight years
following the year of the loss and offset such losses against any future
realized capital gains. The following table presents the realized capital loss
carryforward for each applicable Fund at December 31, 1996, along with its
expiration period:

<TABLE>
<CAPTION>
GROWTH
EMERGING AND MONEY
DOMESTIC GROWTH GOVERNMENT INCOME MARKET
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Realized capital loss
carryforward................... $1,670,821 $ 318,252 $13,378,887 $ 81 $1,644
Expiration dates of capital loss
carryforward.................... 1998-2002 2003-2004 1997-2004 2004 2003
Amount expiring on 12/31/97..... -- -- $ 3,377,875 -- --
</TABLE>

B-111

<PAGE> 164

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

December 31, 1996

- --------------------------------------------------------------------------------
Net realized gains or losses may differ for financial and tax reporting
purposes primarily as a result of post October 31 losses which are not
recognized for tax purposes until the first day of the following fiscal year,
gains or losses recognized for tax purposes on the mark-to-market of open
futures at December 31, 1996, and the deferral of losses for tax purposes
resulting from wash sales.

F. DISTRIBUTION OF INCOME AND GAINS-Government and Money Market declare
dividends from net investment income on each business day. Asset Allocation,
Domestic, Emerging Growth, Enterprise, Global Equity, Growth and Income and
Real Estate declare dividends annually. Government declares distributions
from short-term capital gains, if any, monthly. Asset Allocation, Domestic,
Emerging Growth, Enterprise, Global Equity, Growth and Income, Money Market and
Real Estate distribute net realized gains, if any, annually. Distributions from
net realized gains for book purposes may include short-term capital gains and
gains on option and futures transactions. All short-term capital gains and a
portion of option and futures gains are included in ordinary income for tax
purposes.
The following table presents the amount of long-term capital gains
distributed during the period:

<TABLE>
<CAPTION>
FUND AMOUNT
- --------------------------------------------------------------------------
<S> <C>
Allocation..................................................... $2,465,254
Enterprise..................................................... 4,855,272
Global Equity.................................................. 20,006
Real Estate.................................................... 24,014
</TABLE>

Due to inherent differences in the recognition of income, expenses and
realized gains/losses under generally accepted accounting principles and for
federal income tax purposes, the amount of distributable net investment income
may differ between book and federal income tax purposes for a particular
period. These differences are temporary in nature, but may result in book
basis distribution in excess of net investment income for certain periods. The
following permanent differences between book and tax basis reporting for the
1996 fiscal year have been identified and appropriately reclassified:

<TABLE>
<CAPTION>
EMERGING GLOBAL
DOMESTIC GROWTH EQUITY GOVERNMENT
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Accumulated
Undistributed Net
Investment Income....... $(3,967)(c) $ 3,088 (a) $ 34,640 (b) $14,468 (c)
Accumulated Net Realized
Gain/Loss on Securities. 3,967 (c) -- (34,640) (b) 1,150,219 (c,d)
Capital................. -- (3,088)(a) -- (1,164,687)(d)
</TABLE>

(a) For federal income tax purposes, net operating losses may not be used to
offset income generated in future tax years, therefore, these losses have
been reclassified from accumulated undistributed net investment income to
capital.

(b) For federal income tax purposes, realized gains and losses on transactions
in foreign currencies are included as ordinary income. These realized gains
and losses are included in net realized gain/loss on securities for
financial reporting purposes and have been reclassified from accumulated
net realized gain/loss on securities to accumulated undistributed net
investment income.

(c) Accretion of market discounts on bonds and paydowns of mortgage pool
obligations are recognized as ordinary income/loss for federal income tax
purposes but as realized gains or losses for book purposes. These permanent
differences have been reclassified from accumulated net realized gain/loss
on securities to accumulated undistributed net investment income.

(d) At December 31, 1996, all or a portion of capital loss carryforward expired
creating a permanent difference between book and tax basis reporting. These
items have been reclassified from accumulated net realized loss on
securities to capital.

G. FOREIGN CURRENCY TRANSLATION-The market values of foreign securities,
forward currency exchange contracts and other assets and liabilities denominated
in a foreign currency are translated into U.S. dollars based on quoted exchange
rates as of noon Eastern Standard Time. The cost of securities is determined
using historical exchange rates. Income and expenses are translated at
prevailing exchange 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

B-112

<PAGE> 165

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

December 31, 1996

- -------------------------------------------------------------------------------
exchange rates and amounts arising from changes in the market prices of
securities. Realized gain and loss on foreign currency includes the net realized
amount from the sale of currency and the amount realized between trade date and
settlement date on security transactions.

H. 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
transaction 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 securities within specified time periods or increase the interest
paid on such securities.

2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES Under
the terms of the Trust's Investment Advisory Agreement, the Adviser will
provide investment advice and facilities to the Trust for an annual fee
payable monthly based on the combined average daily net assets of Asset
Allocation, Domestic, Enterprise, Government and Money Market as follows:

AVERAGE NET ASSETS % PER ANNUM
- -------------------------------------------------------------------------------
<S> <C>
First $500 million.................................................. .50 of 1%
Next $500 million................................................... .45 of 1%
Over $1 billion..................................................... .40 of 1%
</TABLE>

The resulting fee is prorated to Asset Allocation, Domestic, Enterprise,
Government and Money Market based on their respective average daily net assets.
Under the terms of the advisory agreement, if the total ordinary business
expenses, exclusive of taxes, distribution fees and interest, exceed .60% of
average daily net assets, the Adviser will reimburse Asset Allocation, Domestic,
Enterprise, Government, and Money Market for the amount of the excess. The
contractual expense reimbursement shall be made monthly.
For Emerging Growth, the Adviser will provide investment advice and
facilities to the Fund for an annual fee payable monthly of .70% of the average
daily net assets of the Fund.
For Global Equity, the Adviser has entered into a subadvisory agreement which
will terminate on March 31, 1997 with John Govett & Co., Limited
("Subadviser--Global Equity"), who provides advisory services to Global Equity
and the Adviser with respect to Global Equity's investments in foreign
securities. Advisory 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 advisory fee to the Subadviser--Global Equity. Shareholders have
approved a change in the Subadvisor--Global Equity from John Govett & Co.,
Limited to Morgan Stanley Asset Management Inc. effective April 1, 1997.
For Growth and Income, the Adviser will provide investment advice and
facilities to the Fund for an annual fee payable monthly, based on the average
daily net assets of the Fund, of .60% for the first $500 million and .55% for
the amount in excess of $500 million.
For Real Estate, the Adviser will provide investment advice and facilities to
the Fund for an annual fee equal to 1.00% of the average net assets of the
Fund. This fee is payable monthly. During the period, the Adviser had a
subadvisory agreement with Hines Interest Realty Advisers Limited Partnership
("Hines"), who provided advisory services to the Fund and the Adviser with
respect to the Fund's investments in real estate. The Adviser paid 50% of its
investment advisory fee to Hines for these services. Effective December 31,
1996, the subadvisory agreement was terminated.
For the period, the Adviser has volunteered to reimburse all expenses in
excess of .85% for Emerging Growth, 1.20% for Global Equity, .75% for Growth and
Income and 1.10% for Real Estate, of each of the Funds' average daily net
assets.

B-113

<PAGE> 166

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

December 31, 1996

Other transactions with affiliates during the period were approximately as
follows:

<TABLE>
<CAPTION>
GROWTH
ASSET EMERGING GLOBAL AND MONEY REAL
ALLOCATION DOMESTIC GROWTH ENTERPRISE EQUITY GOVERNMENT INCOME MARKET ESTATE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accounting.............. $51,800 $44,300 $41,100 $53,700 $29,400 $55,500 -- $47,000 $44,900
Shareholder servicing
agent's fees........... 15,000 15,000 15,000 15,000 15,000 15,000 -- 15,000 15,000
</TABLE>

For the year ended December 31, 1996, the Funds incurred expenses as shown in
the table above representing VKAC's cost of providing accounting and cash
management services to the Funds. These services are provided by VKAC at cost.
ACCESS Investor Services, Inc. ("ACCESS"), an affiliate of the Adviser,
serves as the shareholder servicing agent for the Funds. For the year ended
December 31, 1996, the Funds incurred expenses as shown in the table above,
representing ACCESS' cost of providing transfer agency and shareholder services
plus a profit.
Certain officers and trustees of the Funds are also officers and directors of
VKAC. The Funds do not compensate their officers or trustees who are officers
of VKAC.
Certain legal expenses are paid to Skadden, Arps, Slate, Meagher & Flom
(Illinois), counsel to the Funds, of which a trustee of the Funds is an
affiliated person.
The Funds have implemented deferred compensation and retirement plans for
their trustees. Under the deferred compensation plan, trustees may elect to
defer all or a portion of their compensation to a later date. The retirement
plan covers those trustees who are not officers of VKAC. During the year ended
December 31, 1996, VKAC reimbursed the Fund for all expenses related to the
retirement plan. At December 31, 1996, VKAC owned 10 shares of Emerging Growth,
95,241 shares of Global Equity, 50,000 shares of Growth and Income and 10
shares of Real Estate.

3. CAPITAL TRANSACTIONS
The Funds have outstanding shares of beneficial interest with a par value of
$.01 per share. There are an unlimited number of shares authorized.
For the year ended December 31, 1996, share transactions were as follows:

<CAPTION>
GLOBAL GROWTH AND MONEY REAL
EQUITY GOVERNMENT INCOME MARKET ESTATE
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Beginning Shares........ 230,530 7,399,648 50,000/1/ 21,575,617 799,347
Sales................... 110,151 184,739 -0- 15,915,843 13,855,117
Dividend Reinvestment... 3,772 464,018 -0- 1,001,868 197,332
Repurchases............. (128,552) (1,441,946) -0- (18,927,603) (3,523,513)
-------- ---------- --------- ----------- ----------
Ending Shares........... 215,901 6,606,459 50,000 19,565,725 11,328,283
-------- ---------- --------- ----------- ----------
</TABLE>

/1/Fund commenced investment operations during the period.

B-114

<PAGE> 167

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

December 31, 1996

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

For the year ended December 31, 1995, share transactions were as follows:

<TABLE>
<CAPTION>
ASSET EMERGING
ALLOCATION DOMESTIC GROWTH ENTERPRISE
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning Shares............ 5,668,898 2,894,700 10 5,444,930
Sales....................... 166,906 997,934 217,875 438,275
Dividend Reinvestment....... 619,366 258,208 -0- 703,905
Repurchases................. (1,045,554) (915,148) (22,465) (1,413,351)
----------- ----------- ---------- -----------
Ending Shares............... 5,409,616 3,235,694 195,420 5,173,759
----------- ----------- ---------- -----------
Ending Capital.............. $55,836,454 $27,065,917 $2,103,545 $64,170,048
----------- ----------- ---------- -----------
<CAPTION>
GLOBAL MONEY REAL
EQUITY GOVERNMENT MARKET ESTATE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning Shares............ 10 7,914,930 28,547,478 10
Sales....................... 231,560 307,711 10,862,643 1,140,133
Dividend Reinvestment....... -0- 524,601 1,295,753 5,789
Repurchases................. (1,040) (1,347,594) (19,130,257) (346,585)
---------- ----------- ---------- -----------
Ending Shares............... 230,530 7,399,648 21,575,617 799,347
---------- ----------- ---------- -----------
Ending Capital.............. $2,292,507 $78,150,854 $21,575,617 $ 8,277,034
---------- ----------- ---------- -----------
</TABLE>

4. INVESTMENT TRANSACTIONS
During the period, the cost of purchases and proceeds from sales of
investments, including principal paydowns and excluding forward commitment
transactions and short-term investments, were:

<TABLE>
<CAPTION>
GROWTH
ASSET EMERGING GLOBAL AND
ALLOCATION DOMESTIC GROWTH ENTERPRISE EQUITY GOVERNMENT INCOME REAL ESTATE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Purchases............... $66,177,988 $16,681,252 $6,028,295 $121,174,572 $2,507,479 $ 84,157,768 $495,497 $151,556,550
Sales................... 70,975,721 22,906,157 3,768,758 128,112,318 2,773,679 106,194,527 1,700 35,707,086
</TABLE>

5. DERIVATIVE FINANCIAL INSTRUMENTS
A derivative financial instrument in very general terms refers to a security
whose value is "derived" from the value of an underlying asset, reference rate
or index.
The Funds have a variety of reasons to use derivative instruments, such as to
attempt to protect the Funds against possible changes in the market value of
its portfolio, manage the portfolio's effective yield, foreign currency
exposure, maturity and duration or generate potential gain. All of the Funds'
portfolio holdings, including derivative instruments, are marked to market
each day with the change in value reflected in the unrealized appreciation/
depreciation on securities. Upon disposition, a realized gain or loss is
recognized accordingly, except when taking delivery of a security underlying a
futures or forward contract. In these instances, the recognition of gain or
loss is postponed until the disposal of the security underlying the futures or
forward contract.
Summarized below are the specific types of derivative financial instruments
used by the Funds.

B-115

<PAGE> 168

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

December 31, 1996

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

A. FUTURES CONTRACTS--A futures contract is an agreement involving the delivery
of a particular asset on a specified future date at an agreed upon price. The
Funds generally invests in futures on U.S. Treasury Bonds and Notes. Upon
entering into futures contracts, the Funds maintain, in a segregated account
with its custodian, securities with a value equal to its obligation under the
futures contracts. During the period the futures contract is open, payments are
received from or made to the broker based upon changes in the value of the
contract (the variation margin).
Transactions in futures contracts for the year ended December 31, 1996 for
Government, were as follows:

<TABLE>
<CAPTION>
CONTRACTS
- ------------------------------------------------------------------------------
<S> <C>
Outstanding at December 31, 1995..................................... 175
Futures Opened....................................................... 2,021
Futures Closed....................................................... (2,086)
------
Outstanding at December 31, 1996..................................... 110
------
</TABLE>

The futures contracts outstanding at December 31, 1996, and the descriptions
and unrealized depreciation for Government are as follows:

<TABLE>
<CAPTION>
UNREALIZED
CONTRACTS DEPRECIATION
- --------------------------------------------------------------------------------
<S> <C> <C>
BUYS TO OPEN
U.S. Treasury Bonds--Mar 1997 (Current Notional Value
$112,625 per contract)................................ 99 $183,214
U.S. Treasury Notes--Mar 1997 (Five Year) (Current
Notional Value $106,593 per contract)................. 5 5,453
U.S. Treasury Notes--Mar 1997 (Ten Year) (Current
Notional Value $109,125 per contract)................. 6 9,451
--- --------
110 $198,118
--- --------
</TABLE>

B. FORWARD CURRENCY CONTRACTS-A forward currency contract is a commitment to
purchase or sell a foreign currency at a future date at a negotiated forward
rate. Upon the settlement of the contract, a realized gain or loss is
recognized and is included as a component of realized gain/loss on forwards.
The following forward currency contracts were outstanding in Global Equity as
of December 31, 1996:

<TABLE>
<CAPTION>
UNREALIZED
ORIGINAL CURRENT APPRECIATION/
DESCRIPTION VALUE VALUE DEPRECIATION
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
SELLS TO OPEN
British Pound Sterling, 66,698, expiring
07/16/97..................................... $100,000 $113,650 $(13,650)
Japanese Yen, 10,140,000, expiring 01/24/97... 100,000 87,855 12,145
--------
$ (1,505)
--------
</TABLE>

6. FORWARD COMMITMENTS
Government trades certain securities under the terms of forward commitments, as
described in Note 1. The change in value of these items is reflected as a
component of unrealized appreciation/depreciation on forward commitments.

B-116

<PAGE> 169

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

December 31, 1996

- --------------------------------------------------------------------------------
The following forward commitments were outstanding in Government as of December
31, 1996:

<TABLE>
<CAPTION>
UNREALIZED
PAR AMOUNT ORIGINAL CURRENT APPRECIATION/
(000) DESCRIPTION EXPIRATION VALUE VALUE DEPRECIATION
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BUYS TO OPEN
$4,000 U.S. T-Note, 7.25%,
08/15/04 maturity...... 01/16/97 $4,250,313 $4,212,400 $(37,913)
SELLS TO OPEN
1,000 FHLMC Gold 30 Yr, 8.00%,
12/31/23 maturity...... 01/14/97 1,021,875 1,019,060 2,815
2,000 GNMA, 7.00%, 12/31/23
maturity............... 01/21/97 1,966,250 1,955,620 10,630
--------
$(24,468)
--------
</TABLE>

B-117
<PAGE> 170

PART C. OTHER INFORMATION

ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.

(a) Financial Statements

Included in the Prospectus:
Financial Highlights

Included in the Statement of Additional Information:
Report of Independent Accountants
Financial Statements
Notes to Financial Statements

(b) Exhibits

(1) (a) First Amended and Restated Agreement and Declaration of
Trust(6)
(b) Certificate of Amendment(6)
(c) Amended and Restated Certificate of Designation of
Enterprise Portfolio(8)
(d) Amended and Restated Certificate of Designation of Domestic
Income Portfolio(8)
(e) Certificate of Designation of Emerging Growth Portfolio(6)
(f) Certificate of Designation of Global Equity Portfolio(6)
(g) Certificate of Designation of Government Portfolio(6)
(h) Certificate of Designation of Money Market Portfolio(6)
(i) Amended and Restated Certificate of Designation of Asset
Allocation Portfolio(8)
(j) Certificate of Designation of Morgan Stanley Real Estate
Securities Portfolio(6)
(k) Certificate of Designation of Growth and Income Portfolio(8)
(l) Certificate of Designation of Strategic Stock Portfolio+
(2) Amended and Restated Bylaws(6)
(5) (a) Investment Advisory Agreement for Asset Allocation
Portfolio, Domestic Income Portfolio, Enterprise Portfolio,
Government Portfolio and Money Market Portfolio(8)
(b) Investment Advisory Agreement for Emerging Growth
Portfolio(8)
(c) Investment Advisory Agreement for Global Equity Portfolio(8)
(d) Investment Sub-Advisory Agreement for Global Equity
Portfolio(8)
(e) Investment Advisory Agreement for Morgan Stanley Real Estate
Securities Portfolio(8)
(f) Investment Advisory Agreement for Growth and Income
Portfolio(8)
(g) Investment Advisory Agreement for Strategic Stock Portfolio+
(6) Distribution and Service Agreement(8)
(8) (a) Custodian Agreement(8)
(b) Transfer Agency and Servicing Agreement(6)
(9) (a) Data Access Services Agreement(8)
(b) Fund Accounting Agreement(8)
(10) Opinion of Counsel+
(11) Consent of Independent Accountants+
(13) (a) Investment Letter(2)
(b) Investment Letter dated July 3, 1995 for the Emerging Growth
Portfolio, Global Equity Portfolio and Morgan Stanley Real
Estate Securities Portfolio(7)
(16) Computation Measure for Performance Information(8)

C-1
<PAGE> 171

(17)(a) List of certain investment companies in response to Item
29(a)(8)
(b) List of officers and directors of Van Kampen American
Capital Distributors, Inc. in response to Item 29(b)(8)
(19) Power of Attorney+
(27) Financial Data Schedules+

- ---------------
(2) Incorporated herein by reference to Pre-Effective Amendment No. 3 to
Registrant's Registration Statement on Form N-1A, File Number 33-628, filed
April 11, 1986.

(6) Incorporated herein by reference to Post-Effective Amendment No. 20 to
Registrant's Registration Statement on Form N-1A, File Number 33-628, filed
December 22, 1995.

(7) Incorporated herein by reference to Post-Effective Amendment No. 21 to
Registrant's Registration Statement on Form N-1A, File Number 33-628, filed
March 6, 1996.

(8) Incorporated herein by reference to Post-Effective Amendment No. 22 to
Registrant's Registration Statement on Form N-1A, File Number 33-628, filed
April 30, 1997.

+ Filed herewith.

ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.

None.

ITEM 26. NUMBER OF HOLDERS OF SECURITIES.

AS OF JULY 22, 1997

NUMBER OF RECORD
TITLE OF CLASS HOLDERS
-------------- ----------------
Asset Allocation Portfolio 4
Domestic Income Portfolio 6
Emerging Growth Portfolio 5
Enterprise Portfolio 7
Global Equity Portfolio 4
Government Portfolio 5
Growth and Income Portfolio 2
Money Market Portfolio 6
Morgan Stanley Real Estate Securities Portfolio 13

ITEM 27. INDEMNIFICATION.

Reference is made to Article 8, Section 8.4 of the Registrant's Agreement
and Declaration of Trust.

Article 8; Section 8.4 of the Agreement and Declaration of Trust provides
that each officer and trustee of the Registrant shall be indemnified by the
Registrant against all liabilities incurred in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or criminal,
in which the officer or trustee may be or may have been involved by reason of
being or having been an officer or trustee, except that such indemnity shall not
protect any such person against a liability to the Registrant or any shareholder
thereof to which such person would otherwise be subject by reason of (i) not
acting in good faith in the reasonable belief that such person's actions were
not in the best interest of the Trust, (ii) willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his or her office, (iii) for a criminal proceeding, not having a reasonable
cause to believe that such conduct was unlawful (collectively "Disabling
Conduct"). Absent a court determination that an officer or trustee seeking
indemnification was not liable on the merits or guilty of Disabling Conduct in
the conduct of his or her office, the decision by the Registrant to indemnify
such person must be based upon the reasonable determination of independent
counsel or non-party independent trustees, after review of the facts, that such
officer or trustee is not guilty of Disabling Conduct in the conduct of his or
her office.

C-2
<PAGE> 172

The Registrant has purchased insurance on behalf of its officers and
trustees protecting such persons from liability arising from their activities as
officers or trustees of the Registrant. The insurance does not protect or
purport to protect such persons from liability to the Registrant or to its
shareholders to which such officer or trustee would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of their office.

Conditional advancing of indemnification monies may be made if the trustee
or officer undertakes to repay the advance unless it is ultimately determined
that he or she is entitled to the indemnification and only if the following
conditions are met: (1) the trustee or officer provides a security for the
undertaking; (2) the Registrant is insured against losses arising from lawful
advances; or (3) a majority of a quorum of the Registrant's disinterested,
non-party trustees, or an independent legal counsel in a written opinion, shall
determine, based upon a review of readily available facts, that a recipient of
the advance ultimately will be found entitled to indemnification.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to trustees, officers and controlling
persons of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by the trustee, officer, or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such trustee, officer or controlling person in connection with the
shares being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.

ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.

See "Investment Advisory Services" in the Prospectus and "Trustees and
Officers" in the Statement of Additional Information for information regarding
the business of the Adviser. For information as to the business, profession,
vocation and employment of a substantial nature of directors and officers of the
Adviser, reference is made to the Adviser's current Form ADV (File No. 801-1669)
filed under the Investment Advisers Act of 1940, as amended, incorporated herein
by reference.

ITEM 29. PRINCIPAL UNDERWRITERS.

(a) The sole principal underwriter is Van Kampen American Capital
Distributors, Inc., which acts as principal underwriter for certain investment
companies and unit investment trusts set forth in Exhibit 17(a) incorporated by
reference herein.

(b) Van Kampen American Capital Distributors, Inc. is an affiliated person
of an affiliated person of Registrant and is the only principal underwriter for
Registrant. The name, principal business address and positions and offices with
Van Kampen American Capital Distributors, Inc. of each of the directors and
officers thereof are set forth in Exhibit 17(b). Except as disclosed under the
heading, "Trustees and Executive Officers" in Part B of this Registration
Statement, none of such persons has any position or office with Registrant.

C-3
<PAGE> 173

ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.

All accounts, books and other documents required by Section 31(a) of the
Investment Company Act of 1940 and the Rules thereunder to be maintained (i) by
Registrant will be maintained at its offices, located at One Parkway Plaza,
Oakbrook Terrace, Illinois 60181, ACCESS Investor Services, Inc., 7501 Tiffany
Springs Parkway, Kansas City, Missouri 64153, or at the State Street Bank and
Trust Company, 1776 Heritage Drive, North Quincy, MA; (ii) by the Adviser, will
be maintained at its offices, located at One Parkview Plaza, Oakbrook Terrace,
Illinois 60181; and (iii) by the Distributor, the principal underwriter, will be
maintained at its offices located at One Parkview Plaza, Oakbrook Terrace,
Illinois 60181.

ITEM 31. MANAGEMENT SERVICES.

Not applicable.

ITEM 32. UNDERTAKINGS.

Registrant hereby undertakes to furnish to each person to whom a prospectus
is delivered a copy of the Registrant's latest annual report to shareholders,
upon request and without charge.

Registrant hereby undertakes, if requested to do so by the holders of at
least 10% of the Registrant's outstanding shares, to call a meeting of
shareholders for the purpose of voting upon the question of removal of a trustee
or trustees and to assist in communications with other shareholders as required
by Section 16(c) of the Investment Company Act of 1940.

C-4
<PAGE> 174

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, VAN KAMPEN AMERICAN CAPITAL LIFE
INVESTMENT TRUST, has duly caused this Amendment to the Registration Statement
to be signed on its behalf by the undersigned, thereto duly authorized in the
City of Oakbrook Terrace, and State of Illinois, on the 28th day of July, 1997.

VAN KAMPEN AMERICAN CAPITAL LIFE
INVESTMENT TRUST

By /s/ RONALD A. NYBERG

----------------------------------------------
Ronald A. Nyberg,
Vice President and Secretary

Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed on July 28, 1997 by the following
persons in the capacities indicated:

<TABLE>
<S> <S>
Principal Executive Officer:

/s/ DENNIS J. MCDONNELL President
- -----------------------------------------------------
Dennis J. McDonnell

Principal Financial Officer:

/s/ EDWARD C. WOOD III* Vice President and Chief Financial
- ----------------------------------------------------- Officer
Edward C. Wood III

Trustees:

/s/ J. MILES BRANAGAN* Trustee
- -----------------------------------------------------
J. Miles Branagan

/s/ RICHARD M. DEMARTINI* Trustee
- -----------------------------------------------------
Richard M. DeMartini

/s/ LINDA HUTTON HEAGY* Trustee
- -----------------------------------------------------
Linda Hutton Heagy

/s/ R. CRAIG KENNEDY* Trustee
- -----------------------------------------------------
R. Craig Kennedy

/s/ JACK E. NELSON* Trustee
- -----------------------------------------------------
Jack E. Nelson

/s/ JEROME L. ROBINSON* Trustee
- -----------------------------------------------------
Jerome L. Robinson

/s/ PHILLIP B. ROONEY* Trustee
- -----------------------------------------------------
Phillip B. Rooney

/s/ FERNANDO SISTO, SC.D.* Trustee
- -----------------------------------------------------
Fernando Sisto, Sc.D.

/s/ WAYNE W. WHALEN* Trustee and Chairman
- -----------------------------------------------------
Wayne W. Whalen

* Signed by Ronald A. Nyberg pursuant to a
power of attorney.

/s/ RONALD A. NYBERG
- -----------------------------------------------------
Ronald A. Nyberg
Attorney-in-Fact
</TABLE>

July 28, 1997

<PAGE> 175

VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST

INDEX TO EXHIBITS TO FORM N-1A
REGISTRATION STATEMENT

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <S> <C>
(1) (l) Certificate of Designation of Strategic Stock Portfolio
(5) (g) Investment Advisory Agreement for Strategic Stock Portfolio
(10) Opinion of Counsel
(11) Consent of Independent Accountants
(19) Power of Attorney
(27) Financial Data Schedules
</TABLE>

<PAGE> 1
(EXHIBIT 1(i))
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
Certificate of Designation
of
Strategic Stock Portfolio

The undersigned, being the Secretary of Van Kampen American Capital Life
Investment Trust, a Delaware business trust (the "Trust"), pursuant to the
authority conferred upon the Trustees of the Trust by Section 6.1 of the
Trust's First Amended and Restated Agreement and Declaration of Trust
("Declaration"), and by the affirmative vote of a Majority of the Trustees
does hereby establish and designate as a Series of the Trust the Strategic
Stock Portfolio (the "Portfolio") with the following rights, preferences and
characteristics:

1. Shares. The beneficial interest in the Portfolio shall be divided into
Shares, all of one class, having a nominal or par value of $0.01 per Share, of
which an unlimited number may be issued, which Shares shall represent
interests only in the Portfolio. The Trustees shall have the authority from
time to time to authorize separate Series of Shares for the Trust as they deem
necessary or desirable.

2. Other Rights Governed by Declaration. All other rights, preferences,
qualifications, limitations and restrictions with respect to Shares of any
Series of the Trust set forth in the Declaration shall apply to Shares of the
Portfolio unless otherwise specified in this Certificate of Designation, in
which case this Certificate of Designation shall govern.

3. Amendments, etc. Subject to the provisions and limitations of Section 9.5
of the Declaration and applicable law, this Certificate of Designation may be
amended by an instrument signed in writing by a Majority of the Trustees (or
by an officer of the Trust pursuant to the vote of a Majority of the Trustees)
or when authorized to do so by the vote in accordance with the Declaration of
the holders of a majority of all the Shares of the Portfolio outstanding and
entitled to vote or, if such amendment affects the Shares of one or more but
not all of the Classes of the Portfolio, the holders of a majority of all the
Shares of the affected Classes outstanding and entitled to vote.

4. Incorporation of Defined Terms. All capitalized terms which are not defined
herein shall have the same meaning as ascribed to those terms in the
Declaration.

July 24, 1997

- ---------------------------
Ronald A. Nyberg,
Secretary

<PAGE> 1

(EXHIBIT 5(g))
FORM OF
INVESTMENT ADVISORY AGREEMENT

AGREEMENT (herein so called) made this [DATE], by and between VAN KAMPEN
AMERICAN CAPITAL FUND, a Delaware business trust (hereinafter referred to as
the "FUND"), and VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT, INC., a
Delaware corporation (hereinafter referred to as the "ADVISER").

The FUND and the ADVISER agree as follows:

(1) SERVICES RENDERED AND EXPENSES PAID BY ADVISER

The ADVISER, subject to the control, direction and supervision of the
FUND's Trustees and in conformity with applicable laws, the FUND's Agreement
and Declaration of Trust ("Declaration of Trust"), By-laws, registration
statements, prospectus and stated investment objectives, policies and
restrictions, shall:

a. manage the investment and reinvestment of the FUND's assets including,
by way of illustration, the evaluation of pertinent economic, statistical,
financial and other data, determination of the industries and companies to be
represented in the FUND's portfolio, and formulation and implementation of
investment programs;

b. maintain a trading desk and place all orders for the purchase and sale
of portfolio investments for the FUND's account with brokers or dealers
selected by the ADVISER;

c. conduct and manage the day-to-day operations of the FUND including, by
way of illustration, the preparation of registration statements, prospectuses,
reports, proxy solicitation materials and amendments thereto, the furnishing
of routine legal services except for services provided by outside counsel to
the FUND selected by the Trustees, and the supervision of the FUND's Treasurer
and the personnel working under his direction; and

d. furnish to the FUND office space, facilities, equipment and personnel
adequate to provide the services described in paragraphs a., b., and c. above
and pay the compensation of each FUND trustee and Fund officer who is an
affiliated person of the ADVISER, except the compensation of the FUND's
Treasurer and related expenses as provided below.

In performing the services described in paragraph b. above, the ADVISER
shall use its best efforts to obtain for the FUND the most favorable price and
execution available and shall maintain records adequate to demonstrate
compliance with this requirement. Subject to prior authorization by the FUND's
Trustees of appropriate policies and procedures, the ADVISER may, to the
extent authorized by law, cause the FUND to pay a broker or dealer that
provides brokerage and research services to the ADVISER an amount of
commission for effecting a portfolio investment transaction in excess of the
amount of commission another broker or dealer would have charged for effecting
that transaction. In the event of such authorization and to the extent
authorized by law, the ADVISER shall not be deemed to have acted unlawfully or
to have breached any duty created by this Agreement or otherwise solely by
reason of such action.

Except as otherwise agreed, or as otherwise provided herein, the FUND
shall pay, or arrange for others to pay, all its expenses other than those
expressly stated to be payable by the ADVISER hereunder, which expenses
payable by the FUND shall include (i) interest and taxes; (ii) brokerage
commissions and other costs in connection with the purchase and sale of
portfolio investments; (iii) compensation of its trustees and officers other
than those who are affiliated persons of the ADVISER; (iv) compensation of its
Treasurer, compensation of personnel working under the Treasurer's direction,
and expenses of office space, facilities, and equipment used by the Treasurer
and such personnel in the Performance of their

<PAGE> 2

normal duties for the FUND which consist of maintenance of the accounts, books
and other documents which constitute the record forming the basis for the
FUND's financial statements, preparation of such financial statements and
other FUND documents and reports of a financial nature required by federal and
state laws, and participation in the production of the FUND's registration
statement, prospectuses, proxy solicitation materials and reports to
shareholders; (v) fees of outside counsel to and of independent accountants of
the FUND selected by the Trustees; (vi) custodian, registrar and shareholder
service agent fees and expenses; (vii) expenses related to the repurchase or
redemption of its shares including expenses related to a program of periodic
repurchases or redemptions; (viii) expenses related to the issuance of its
shares against payment therefor by or on behalf of the subscribers thereto;
(ix) fees and related expenses of registering and qualifying the FUND and its
shares for distribution under state and federal securities laws; (x) expenses
of printing and mailing of registration statements, prospectuses, reports,
notices and proxy solicitation materials of the FUND; (xi) all other expenses
incidental to holding meetings of the FUND's shareholders including proxy
solicitations therefor; (xii) expenses for servicing shareholder accounts;
(xiii) insurance premiums for fidelity coverage and errors and omissions
insurance; (xiv) dues for the FUND's membership in trade associations approved
by the Trustees; and (xv) such nonrecurring expenses as may arise, including
those associated with actions, suits or proceedings to which the FUND is a
party and the legal obligation which the FUND may have to indemnify its
officers and trustees with respect thereto. To the extent that any of the
foregoing expenses are allocated between the FUND and any other party, such
allocations shall be pursuant to methods approved by the Trustees.

For a period of one year commencing on the effective date of this
Agreement, the ADVISER and the FUND agree that the retention of (i) the chief
executive officer, president, chief financial officer and secretary of the
ADVISER and (ii) each director, officer and employee of the ADVISER or any of
its Affiliates (as defined in the Investment Company Act of 1940, as amended
(the "1940 Act") who serves as an officer of the FUND each person referred to
in (i) or (ii) hereinafter being referred to as an "Essential Person"), in his
or her current capacities, is in the best interest of the FUND and the FUND's
shareholders. In connection with the ADVISER'S acceptance of employment
hereunder, the ADVISER hereby agrees and covenants for itself and on behalf of
its Affiliates that neither the ADVISER nor any of its Affiliates shall make
any material or significant personnel changes or replace or seek to replace
any Essential Person or cause to be replaced any Essential Person, in each
case without first informing the Board of Trustees of the FUND in a timely
manner. In addition, neither the ADVISER nor any Affiliate of the ADVISER
shall change or seek to change or cause to be changed, in any material
respect, the duties and responsibilities of any Essential Person, in each case
without first informing the Board of Trustees of the FUND in a timely manner.

(2) ROLE OF ADVISER

The ADVISER, and any person controlled by or under common control with
the ADVISER, shall be free to render similar services to others and engage in
other activities, so long as the services rendered to the FUND are not
impaired.

Except as otherwise required by the Investment Company Act of 1940 (the
"1940 Act"), any of the shareholders, trustees, officers and employees of the
FUND may be a shareholder, trustee, director, officer or employee of, or be
otherwise interested in, the ADVISER, and in any person controlled by or
under common control with the ADVISER, and the ADVISER, and any person
controlled by or under common control with the ADVISER, may have an interest
in the FUND.

Except as otherwise agreed, in the absence of willful misfeasance, bad
faith, negligence or reckless disregard of obligations or duties hereunder on
the part of the ADVISER, neither the ADVISER nor any subadviser shall be
subject to liability to the FUND, or to any shareholder of the FUND, for any
act or omission in the course of, or connected with, rendering services
hereunder or for any losses that may be sustained in the purchase, holding or
sale of any security.

<PAGE> 3

(3) COMPENSATION PAYABLE TO THE ADVISER

The FUND shall pay to the ADVISER, as compensation for the services
rendered, facilities furnished and expenses paid by the ADVISER, a monthly fee
computed at the following annual rate:

[advisory fee schedule]

Average daily net assets shall be determined by taking the average of the
net assets for each business day during a given calendar month calculated in
the manner provided in the FUND's Declaration of Trust. Such fee shall be
payable for each calendar month as soon as practicable after the end of that
month.

The fees payable to the ADVISER by the FUND pursuant to this Section 3
shall be reduced by any commissions, tender solicitation and other fees,
brokerage or similar payments received by the ADVISER, or any other direct or
indirect majority owned subsidiary of VK/AC Holding, Inc., in connection with
the purchase and sale of portfolio investments of the FUND, less any direct
expenses incurred by such person, in connection with obtaining such
commissions, fees, brokerage or similar payments. The ADVISER shall use its
best efforts to recapture all available tender offer solicitation fees and
exchange offer fees in connection with the FUND's portfolio transactions and
shall advise the Trustees of any other commissions, fees, brokerage or similar
payments which may be possible for the ADVISER or any other direct or indirect
majority owned subsidiary of VK/AC Holding, Inc. to receive in connection with
FUND's portfolio transactions or other arrangements which may benefit the
FUND.

In the event that the ordinary business expenses of the FUND for any
fiscal year should exceed 1.5% of the first $30 million of the FUND's average
daily net assets plus 1% of any excess over $30 million, the compensation due
the ADVISER for such fiscal year shall be reduced by the amount of such
excess. The Adviser's compensation shall be so reduced by a reduction or a
refund thereof, at the time such compensation is payable after the end of each
calendar month during such fiscal year of the FUND, and if such amount should
exceed such monthly compensation, the ADVISER shall pay the FUND an amount
sufficient to make up the deficiency, subject to readjustment during the
FUND's fiscal year. For purposes of this paragraph, all ordinary business
expenses of the FUND shall include the investment advisory fee and other
operating expenses paid by the FUND except (i) for interest and taxes; (ii)
brokerage commissions; (iii) as a result of litigation in connection with a
suit involving a claim for recovery by the FUND; (iv) as a result of
litigation involving a defense against a liability asserted against the FUND,
provided that, if the ADVISER made the decision or took the actions which
resulted in such claim, it acted in good faith without negligence or
misconduct; (v) any indemnification paid by the FUND to its officers and
trustees and the ADVISER in accordance with applicable state and federal laws
as a result of such litigation; and (vi) amounts paid to Van Kampen American
Capital Distributors, Inc., the distributor of the FUND's shares, in
connection with a distribution plan adopted by the FUND's Trustees pursuant to
Rule 12b-1 under the Investment Company Act of 1940.

If the ADVISER shall serve for less than the whole of any month, the
foregoing compensation shall be prorated.

<PAGE> 4

(4) BOOKS AND RECORDS

In compliance with the requirements of Rule 31a-3 under the 1940 Act, the
ADVISER hereby agrees that all records which it maintains for the FUND are the
property of the FUND and further agrees to surrender promptly to the FUND any
of such records upon the FUND's request. The ADVISER further agrees to
preserve for the periods prescribed by Rule 31a-2 under the 1940 Act the
records required to be maintained by Rule 31a-1 under the Act.

(5) DURATION OF AGREEMENT

This Agreement shall become effective on the date hereof, and shall
remain in full force until May 31, 1999 unless sooner terminated as
hereinafter provided. This Agreement shall continue in force from year to year
thereafter, but only so long as such continuance is approved at least annually
by the vote of a majority of the FUND's Trustees who are not parties to this
Agreement or interested persons of any such parties, cast in person at a
meeting called for the purpose of voting on such approval, and by a vote of a
majority of the FUND's Trustees or a majority of the FUND's outstanding voting
securities.

This Agreement shall terminate automatically in the event of its
assignment. The Agreement may be terminated at any time by the FUND's
Trustees, by vote of a majority of the FUND's outstanding voting securities,
or by the ADVISER, on 60 days' written notice, or upon such shorter notice as
may be mutually agreed upon. Such termination shall be without payment of any
penalty.

(6) MISCELLANEOUS PROVISIONS

For the purposes of this Agreement, the terms "affiliated person,"
"assignment," "interested person," and "majority of the outstanding voting
securities" shall have their respective meanings defined in the 1940 Act and
the Rules and Regulations thereunder, subject, however, to such exemptions as
may be granted to either the ADVISER or the FUND by the Securities and
Exchange Commission (the "Commission"), or such interpretive positions as may
be taken by the Commission or its staff, under the 1940 Act, and the term
"brokerage and research services" shall have the meaning given in the
Securities Exchange Act of 1934 and the Rules and Regulations thereunder.

The execution of this Agreement has been authorized by the FUND's
Trustees and by the sole shareholder. This Agreement is executed on behalf of
the Fund or the Trustees of the FUND as Trustees and not individually and that
the obligations of this Agreement are not binding upon any of the Trustees,
officers or shareholders of the FUND individually but are binding only upon
the assets and property of the FUND. A Certificate of Trust in respect of the
Fund is on file with the Secretary of State of Delaware.

All questions concerning the validity, meaning and effect of this
agreement shall be determined in accordance with the laws (without giving
effect to the conflict-of-law principles thereof) of the State of Delaware
applicable to contracts made and to be performed in that state.

In connection with its employment hereunder, the ADVISER hereby agrees
and covenants not to change its name without the prior consent of the Board of
Trustees of the FUND.

<PAGE> 5

The parties hereto each have caused this Agreement to be signed in
duplicate on its behalf by its duly authorized officer on the above date.

VAN KAMPEN AMERICAN CAPITAL VAN KAMPEN AMERICAN CAPITAL
ASSET MANAGEMENT, INC. [ ] FUND

By: By:
---------------------- ----------------------

Name: Name:

Its: Its:

<PAGE> 1
EXHIBIT 10

[SKADDEN, ARPS, MEAGHER & FLOM, ILLINOIS]

July 28, 1997

Van Kampen American Capital
Life Investment Trust
One Parkview Plaza
Oakbrook Terrace, Illinois 60181

Re: Van Kampen American Capital
Life Investment Trust
Registration Statement on Form N-1A
(File Nos. 33-628 and 811-4425)

Ladies and Gentlemen:

We have acted as counsel to Van Kampen American Capital Life Investment
Trust (the "Trust"), a Delaware business trust, on behalf of the Strategic Stock
Portfolio series of the Trust (the "Fund"), in connection with the preparation
of Post-Effective Amendment No. 23 to the Trust's Registration Statement on
Form N-1A (as amended, the "Registration Statement") to be filed under the
Securities Act of 1933, as amended (the "1933 Act"), and the Investment Company
Act of 1940, as amended (the "1940 Act"), with the Securities and Exchange
Commission (the "Commission") on or about July 28, 1997. The Registration
Statement relates to the registration under the 1933 Act and 1940 Act of an
indefinite number of shares of beneficial interest, $.01 par value per share, of
the Fund (collectively, the "Shares").

This opinion is delivered in accordance with the requirements of Item
24(b)(10) of Form N-1A under the 1933 Act and the 1940 Act.

In connection with this opinion, we have examined originals or copies,
certified or otherwise identified to our satisfaction, of (i) the Certificate of
Trust filed with the Secretary of State of Delaware, (ii) the

<PAGE> 2
Van Kampen American Capital
Life Investment Trust
July 28, 1997
Page 2

Agreement and Declaration of Trust and By-Laws of the Trust, each as amended
to date (the "Declaration of Trust" and "By-Laws", respectively), (iii) the
Certificate of Designation Establishing the Fund and (iv) such other documents
as we have deemed necessary or appropriate as a basis for the opinions set
forth herein.

In such examination we have assumed the legal capacity of natural persons,
the genuineness of all signatures, the authenticity of all documents submitted
to us as originals, the conformity to original documents of all documents
submitted to us as certified, conformed, photostatic or other copies and the
authenticity of the originals of such latter documents. As to any facts
material to such opinion which were not independently established, we have
relied on statements or representations of officers and other representatives of
the Trust or others.

Members of our firm are admitted to the practice of law in the State of
Illinois, and we do not express any opinion as to the laws of any jurisdiction
other than matters relating to the Delaware business organizational statutes
(including statutes relating to Delaware business trusts).

Based upon and subject to the foregoing, we are of the opinion that when
(i) the Board of Trustees of the Trust has duly adopted resolutions authorizing
the issuance and sale of the Shares and the filing of the Registration
Statement and (ii) certificates for the Shares have been duly executed,
countersigned, registered and delivered or the shareholders' accounts have been
duly credited and the Shares represented thereby have been fully paid for, the
issuance and sale of Shares by the Trust will have been validly authorized and
such Shares will be validly issued, fully paid and nonassessable.

We hereby consent to the filing of this opinion with the Commission as
Exhibit 10 to the Registration Statement. We also consent to the reference
to our firm under the heading "Legal Counsel" in the Registration
<PAGE> 3
Van Kampen American Capital
Life Investment Trust
July 28, 1997
Page 3

Statement. In giving this consent, we do not hereby admit that we are in the
category of persons whose consent is required under Section 7 of the 1933 Act
or the rules and regulations of the Commission.

Very truly yours,

Skadden, Arps, Meagher & Flom, Illinois

<PAGE> 1

EXHIBIT (11)

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 23, Amendment No. 25 to
the registration statement on Form N-1A (the "Registration Statement") of our
report dated February 7, 1997, relating to the financial statements and
financial highlights of the Asset Allocation Portfolio, Domestic Income
Portfolio, Enterprise Portfolio, Government Portfolio, Money Market Portfolio,
Morgan Stanley Real Estate Securities Portfolio, Emerging Growth Portfolio,
Global Equity Portfolio and Growth and Income Portfolio (constituting Van Kampen
American Capital Life Investment Trust) which appears in such Statement of
Additional Information, and to the incorporation by reference of our report into
the Prospectuses which constitute part of this Registration Statement. We also
consent to the references to us under the headings "Financial Highlights" and
"Independent Accountants" in such Prospectuses and to the reference to us under
the heading "Independent Accountants" in such Statement of Additional
Information.

/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP

Houston, Texas
July 25, 1997

<PAGE> 1

(EXHIBIT 19)

POWER OF ATTORNEY

The undersigned, being officers and trustees of each of the Van Kampen
American Capital Open End Trusts (with the exception of Don G. Powell), as
indicated on Schedule 1 attached hereto and incorporated by reference, each a
Delaware business trust, except for the Van Kampen American Capital
Pennsylvania Tax Free Income Fund, being a Pennsylvania business trust
(individually, a "Trust"), do hereby, in the capacities shown below,
individually appoint Dennis J. McDonnell and Ronald A. Nyberg, each of
Oakbrook Terrace, Illinois, and each of them, as the agents and
attorneys-in-fact with full power of substitution and resubstitution, for each
of the undersigned, to execute and deliver, for and on behalf of the
undersigned, any and all amendments to the Registration Statement filed by
each Trust with the Securities and Exchange Commission pursuant to the
provisions of the Securities Act of 1933 and the Investment Company Act of
1940.

This Power of Attorney may be executed in multiple counterparts, each of
which shall be deemed an original, but which taken together shall constitute
one instrument.

Dated: July 24, 1997

Signature Title
--------- -----

/s/ J. Miles Branagan Trustee
- ---------------------------
J. Miles Branagan

/s/ Richard M. DeMartini Trustee
- ---------------------------
Richard M. DeMartini

/s/ Linda Hutton Heagy Trustee
- ---------------------------
Linda Hutton Heagy

/s/ R. Craig Kennedy Trustee
- ---------------------------
R. Craig Kennedy

/s/ Jack E. Nelson Trustee
- ---------------------------
Jack E. Nelson

/s/ Don G. Powell Trustee (For Former Van
- --------------------------- Kampen Funds only)
Don G. Powell

/s/ Jerome L. Robinson Trustee
- ---------------------------
Jerome L. Robinson

/s/ Phillip B. Rooney Trustee
- ---------------------------
Phillip B. Rooney

/s/ Fernando Sisto, Sc.D. Trustee
- ---------------------------
Fernando Sisto, Sc.D.

/s/ Wayne W. Whalen Trustee and Chairman
- ---------------------------
Wayne W. Whalen

/s/ Edward C. Wood III Vice President and
- --------------------------- Chief Financial Officer
Edward C. Wood III

<PAGE> 2

SCHEDULE 1

I. FUNDS ADVISED BY VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP.
("INVESTMENT ADVISORY CORP.") (COLLECTIVELY, THE "FORMER VAN KAMPEN FUNDS"):

Van Kampen American Capital U.S. Government Trust ("U.S. Government Trust")
on behalf of its series
Van Kampen American Capital U.S. Government Fund ("U.S. Government Fund")

Van Kampen American Capital Tax Free Trust ("Tax Free Trust")
on behalf of its series
Van Kampen American Capital Insured Tax Free Income Fund ("Insured Tax Free
Income Fund")
Van Kampen American Capital Tax Free High Income Fund ("Tax Free High Income
Fund")
Van Kampen American Capital California Insured Tax Free Fund ("California
Insured Tax Free Fund")
Van Kampen American Capital Municipal Income Fund ("Municipal Income Fund")
Van Kampen American Capital Intermediate Term Municipal Income Fund
("Intermediate Term Municipal Income Fund") (f/k/a Limited Term Municipal
Income Fund)
Van Kampen American Capital Florida Insured Tax Free Income Fund ("Florida
Insured Tax Free Income Fund")
Van Kampen American Capital New Jersey Tax Free Income Fund ("New Jersey Tax
Free Income Fund")
Van Kampen American Capital New York Tax Free Income Fund ("New York Tax Free
Income Fund")
Van Kampen American Capital California Tax Free Income Fund ("California Tax
Free Income Fund")
Van Kampen American Capital Michigan Tax Free Income Fund ("Michigan Tax Free
Income Fund")
Van Kampen American Capital Missouri Tax Free Income Fund ("Missouri Tax Free
Income Fund")
Van Kampen American Capital Ohio Tax Free Income Fund ("Ohio Tax Free Income
Fund")

Van Kampen American Capital Trust ("VKAC Trust")
on behalf of its series
Van Kampen American Capital High Yield Fund ("VKAC High Yield Fund")
Van Kampen American Capital Short-Term Global Income Fund ("Short-Term Global
Income Fund")
Van Kampen American Capital Strategic Income Fund ("Strategic Income Fund")

Van Kampen American Capital Equity Trust ("Equity Trust")
on behalf of its series
Van Kampen American Capital Utility Fund ("Utility Fund")
Van Kampen American Capital Value Fund ("Value Fund")
Van Kampen American Capital Great American Companies Fund ("Great American
Companies Fund")
Van Kampen American Capital Growth Fund ("Growth Fund")
Van Kampen American Capital Prospector Fund ("Prospector Fund")

Van Kampen American Capital Pennsylvania Tax Free Income Fund
("Pennsylvania Tax Free Income Fund")

Van Kampen American Capital Tax Free Money Fund ("Tax Free Money Fund")

<PAGE> 3

II. FUNDS ADVISED BY VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT, INC.
("ASSET MANAGEMENT, INC.") (COLLECTIVELY, THE "FORMER AMERICAN CAPITAL FUNDS"):

Van Kampen American Capital Comstock Fund ("Comstock Fund")
Van Kampen American Capital Corporate Bond Fund ("Corporate Bond Fund")
Van Kampen American Capital Emerging Growth Fund ("Emerging Growth Fund")
Van Kampen American Capital Enterprise Fund ("Enterprise Fund")
Van Kampen American Capital Equity Income Fund ("Equity Income Fund")
Van Kampen American Capital Limited Maturity Government Fund ("Limited
Maturity Government Fund")
Van Kampen American Capital Global Managed Assets Fund ("Global Managed Assets
Fund")
Van Kampen American Capital Government Securities Fund ("Government Securities
Fund")
Van Kampen American Capital Government Target Fund ("Government Target Fund")
Van Kampen American Capital Growth and Income Fund ("Growth and Income Fund")
Van Kampen American Capital Harbor Fund ("Harbor Fund")
Van Kampen American Capital High Income Corporate Bond Fund ("High Income
Corporate Bond Fund")

Van Kampen American Capital Life Investment Trust ("Life Investment Trust" or
"LIT") on behalf of its Series
Enterprise Portfolio ("LIT Enterprise Portfolio")
Domestic Income Portfolio ("LIT Domestic Income Portfolio")
Emerging Growth Portfolio ("LIT Emerging Growth Portfolio")
Global Equity Portfolio ("LIT Global Equity Portfolio")
Government Portfolio ("LIT Government Portfolio")
Asset Allocation Portfolio ("LIT Asset Allocation Portfolio")
Money Market Portfolio ("LIT Money Market Portfolio")
Morgan Stanley Real Estate Securities Portfolio ("LIT Morgan Stanley Real
Estate Securities Portfolio")
Growth and Income Portfolio ("LIT Growth and Income Portfolio")
Strategic Stock Portfolio ("LIT Strategic Stock Portfolio")

Van Kampen American Capital Pace Fund ("Pace Fund")
Van Kampen American Capital Real Estate Securities Fund ("Real Estate
Securities Fund")
Van Kampen American Capital Reserve Fund ("Reserve Fund")
Van Kampen American Capital Small Capitalization Fund ("Small Capitalization
Fund")

Van Kampen American Capital Tax-Exempt Trust ("Tax-Exempt Trust")
on behalf of its Series
Van Kampen American Capital High Yield Municipal Fund ("High Yield
Municipal Fund")

Van Kampen American Capital U.S. Government Trust for Income ("U.S.
Government Trust for Income")

Van Kampen American Capital World Portfolio Series Trust ("World Portfolio
Series Trust") on behalf of its Series
Van Kampen American Capital Global Equity Fund ("Global Equity Fund")
Van Kampen American Capital Global Government Securities Fund ("Global
Government Securities Fund")

<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> DOMESTIC INCOME PORTFOLIO

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 18850945
<INVESTMENTS-AT-VALUE> 19514744
<RECEIVABLES> 371587
<ASSETS-OTHER> 1132
<OTHER-ITEMS-ASSETS> 1401
<TOTAL-ASSETS> 19888864
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 91567
<TOTAL-LIABILITIES> 91567
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 20772963
<SHARES-COMMON-STOCK> 2472121
<SHARES-COMMON-PRIOR> 3235694
<ACCUMULATED-NII-CURRENT> 34326
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1673791)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 663799
<NET-ASSETS> 19797297
<DIVIDEND-INCOME> 38241
<INTEREST-INCOME> 1836107
<OTHER-INCOME> 15000
<EXPENSES-NET> (132292)
<NET-INVESTMENT-INCOME> 1757056
<REALIZED-GAINS-CURRENT> 350915
<APPREC-INCREASE-CURRENT> (844721)
<NET-CHANGE-FROM-OPS> 1263250
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1735294)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 755420
<NUMBER-OF-SHARES-REDEEMED> (1736394)
<SHARES-REINVESTED> 217401
<NET-CHANGE-IN-ASSETS> (6764998)
<ACCUMULATED-NII-PRIOR> 16531
<ACCUMULATED-GAINS-PRIOR> (2028673)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 110243
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 283394
<AVERAGE-NET-ASSETS> 22048650
<PER-SHARE-NAV-BEGIN> 8.21
<PER-SHARE-NII> 0.755
<PER-SHARE-GAIN-APPREC> (0.212)
<PER-SHARE-DIVIDEND> (0.745)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.008
<EXPENSE-RATIO> 0.60
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> EMERGING GROWTH PORTFOLIO

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 4228841
<INVESTMENTS-AT-VALUE> 5172900
<RECEIVABLES> 50299
<ASSETS-OTHER> 4779
<OTHER-ITEMS-ASSETS> 4586
<TOTAL-ASSETS> 5232564
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 54377
<TOTAL-LIABILITIES> 54377
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4650241
<SHARES-COMMON-STOCK> 379065
<SHARES-COMMON-PRIOR> 195420
<ACCUMULATED-NII-CURRENT> (4926)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (411187)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 944059
<NET-ASSETS> 5178187
<DIVIDEND-INCOME> 12069
<INTEREST-INCOME> 15312
<OTHER-INCOME> 0
<EXPENSES-NET> 34345
<NET-INVESTMENT-INCOME> (6965)
<REALIZED-GAINS-CURRENT> (353684)
<APPREC-INCREASE-CURRENT> 699394
<NET-CHANGE-FROM-OPS> 338746
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 366538
<NUMBER-OF-SHARES-REDEEMED> (182893)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 2888530
<ACCUMULATED-NII-PRIOR> (1050)
<ACCUMULATED-GAINS-PRIOR> (57503)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 28284
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 132332
<AVERAGE-NET-ASSETS> 4040636
<PER-SHARE-NAV-BEGIN> 11.72
<PER-SHARE-NII> (.016)
<PER-SHARE-GAIN-APPREC> 1.956
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.660
<EXPENSE-RATIO> 0.85
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 003
<NAME> ENTERPRISE PORTFOLIO

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 66710692
<INVESTMENTS-AT-VALUE> 85767674
<RECEIVABLES> 782114
<ASSETS-OTHER> 1856
<OTHER-ITEMS-ASSETS> 2257
<TOTAL-ASSETS> 86553901
<PAYABLE-FOR-SECURITIES> 1584170
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 164561
<TOTAL-LIABILITIES> 1748731
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 64671892
<SHARES-COMMON-STOCK> 5214950
<SHARES-COMMON-PRIOR> 5173759
<ACCUMULATED-NII-CURRENT> 59440
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1016856
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 19056982
<NET-ASSETS> 84805170
<DIVIDEND-INCOME> 946594
<INTEREST-INCOME> 99309
<OTHER-INCOME> 0
<EXPENSES-NET> (489231)
<NET-INVESTMENT-INCOME> 556672
<REALIZED-GAINS-CURRENT> 7574164
<APPREC-INCREASE-CURRENT> 9782538
<NET-CHANGE-FROM-OPS> 17913374
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (530417)
<DISTRIBUTIONS-OF-GAINS> (9089491)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 489441
<NUMBER-OF-SHARES-REDEEMED> (1059404)
<SHARES-REINVESTED> 611154
<NET-CHANGE-IN-ASSETS> 8795310
<ACCUMULATED-NII-PRIOR> 33185
<ACCUMULATED-GAINS-PRIOR> 2532183
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 407693
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 612813
<AVERAGE-NET-ASSETS> 81538525
<PER-SHARE-NAV-BEGIN> 14.69
<PER-SHARE-NII> 0.113
<PER-SHARE-GAIN-APPREC> 3.417
<PER-SHARE-DIVIDEND> (0.109)
<PER-SHARE-DISTRIBUTIONS> (1.849)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.262
<EXPENSE-RATIO> 0.60
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 004
<NAME> GOVERNMENT PORTFOLIO

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 58562971
<INVESTMENTS-AT-VALUE> 59232279
<RECEIVABLES> 581371
<ASSETS-OTHER> 2070
<OTHER-ITEMS-ASSETS> 14566
<TOTAL-ASSETS> 59830286
<PAYABLE-FOR-SECURITIES> 2277415
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 298489
<TOTAL-LIABILITIES> 2575904
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 70107395
<SHARES-COMMON-STOCK> 6606459
<SHARES-COMMON-PRIOR> 7399648
<ACCUMULATED-NII-CURRENT> (11355)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (13288380)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 446,722
<NET-ASSETS> 57254382
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 4347277
<OTHER-INCOME> 0
<EXPENSES-NET> (364434)
<NET-INVESTMENT-INCOME> 3982843
<REALIZED-GAINS-CURRENT> (893970)
<APPREC-INCREASE-CURRENT> (1950846)
<NET-CHANGE-FROM-OPS> 1138027
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (4024081)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 184739
<NUMBER-OF-SHARES-REDEEMED> (1441945)
<SHARES-REINVESTED> 464017
<NET-CHANGE-IN-ASSETS> (9764826)
<ACCUMULATED-NII-PRIOR> 15415
<ACCUMULATED-GAINS-PRIOR> (13544629)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 303695
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 486908
<AVERAGE-NET-ASSETS> 60738975
<PER-SHARE-NAV-BEGIN> 9.060
<PER-SHARE-NII> 0.569
<PER-SHARE-GAIN-APPREC> (0.388)
<PER-SHARE-DIVIDEND> (0.575)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.666
<EXPENSE-RATIO> 0.60
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 005
<NAME> VKAC-GROWTH AND INCOME PORTFOLIO

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> DEC-23-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 493716
<INVESTMENTS-AT-VALUE> 491746
<RECEIVABLES> 2062
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 22120
<TOTAL-ASSETS> 515928
<PAYABLE-FOR-SECURITIES> 17333
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 93
<TOTAL-LIABILITIES> 17426
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 500000
<SHARES-COMMON-STOCK> 50000
<SHARES-COMMON-PRIOR> 50000
<ACCUMULATED-NII-CURRENT> 553
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (81)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1970)
<NET-ASSETS> 498502
<DIVIDEND-INCOME> 363
<INTEREST-INCOME> 283
<OTHER-INCOME> 0
<EXPENSES-NET> (93)
<NET-INVESTMENT-INCOME> 553
<REALIZED-GAINS-CURRENT> (81)
<APPREC-INCREASE-CURRENT> (1970)
<NET-CHANGE-FROM-OPS> (1498)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (1498)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 74
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5684
<AVERAGE-NET-ASSETS> 502834
<PER-SHARE-NAV-BEGIN> 10.000
<PER-SHARE-NII> 0.011
<PER-SHARE-GAIN-APPREC> (0.041)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.97
<EXPENSE-RATIO> 0.75
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 006
<NAME> MONEY MARKET PORTFOLIO

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 19656400
<INVESTMENTS-AT-VALUE> 19656400
<RECEIVABLES> 0
<ASSETS-OTHER> 18092
<OTHER-ITEMS-ASSETS> 3525
<TOTAL-ASSETS> 19678017
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 112082
<TOTAL-LIABILITIES> 112082
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 19565725
<SHARES-COMMON-STOCK> 19565725
<SHARES-COMMON-PRIOR> 21575617
<ACCUMULATED-NII-CURRENT> 210
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 19565935
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1128132
<OTHER-INCOME> 0
<EXPENSES-NET> (125769)
<NET-INVESTMENT-INCOME> 1002363
<REALIZED-GAINS-CURRENT> 415
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 1002778
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1001453)
<DISTRIBUTIONS-OF-GAINS> (415)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 15915843
<NUMBER-OF-SHARES-REDEEMED> (18927603)
<SHARES-REINVESTED> 1001868
<NET-CHANGE-IN-ASSETS> (2008982)
<ACCUMULATED-NII-PRIOR> (700)
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 104808
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 269661
<AVERAGE-NET-ASSETS> 20961631
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.48
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (0.48)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 0.60
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 007
<NAME> REAL ESTATE PORTFOLIO

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 133937063
<INVESTMENTS-AT-VALUE> 155983128
<RECEIVABLES> 11649772
<ASSETS-OTHER> 5007
<OTHER-ITEMS-ASSETS> 1836
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