BT INVESTMENT FUNDS, 485BPOS, 1999-01-28

BT INVESTMENT FUNDS
485BPOS, 1999-01-28

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As filed with the Commission on January 28, 1999
1933 Act File No. 33-07404
1940 Act File No. 811-4760

SECURITIES AND EXCHANGE COMMISSION
-----------------------------------
Washington, D.C. 20549
----------------------
Form N-1A
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<TABLE>
<CAPTION>
<S> <C> <C>

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
-----

Pre-Effective Amendment No. ..............................................

Post-Effective Amendment No. 56 .................................................. X
--- -----

and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
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Amendment No. 56 .............................................................. X
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</TABLE>

BT INVESTMENT FUNDS
(Exact Name of Registrant as Specified in Charter)

One South Street
Baltimore, Maryland 21202
(Address of Principal Executive Offices)

(410) 895-5000
(Registrant's Telephone Number)

Daniel O. Hirsch Copies To: Burton M .Leibert, Esq.
One South Street Willkie Farr & Gallagher
Baltimore, MD 21202 One Citicorp Center
(Name and Address of Agent for Service) 153 East 53rd Street
New York, New York 10022

It is proposed that this filing will become effective (check appropriate box)

[ ] immediately upon filing pursuant to paragraph (b)
[X] on January 31, 1999 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on ____ pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) 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.

BT Investment Portfolios has also executed this Amendment to the Registration
Statement.

PROSPECTUS: JANUARY 31, 1999

[BT MUTUAL FUNDS LOGO APPEARS HERE]

BT Mutual Funds

Intermediate
Tax Free Fund

With the goal of achieving a high level of current income
exempt from Federal income tax consistent with moderate
risk of capital

TRUST: BT INVESTMENT FUNDS

INVESTMENT ADVISER: BANKERS TRUST COMPANY

[Like shares of all mutual funds, these securities have not
been approved or disapproved by the Securities and Exchange
Commission nor has the Securities and Exchange Commission
passed upon the accuracy or adequacy of this prospectus.
Any representation to the contrary is a criminal offense.]

<PAGE>

Overview
of the Intermediate Tax Free Fund

Goal: The Fund invests for a high level of current income
exempt from Federal income tax consistent with moderate risk
of capital.

Core Strategy: The Fund invests primarily in high-quality
tax-exempt municipal bonds. The Fund seeks to hold a
portfolio with an intermediate-term duration.

Intermediate Tax Free Fund
Overview of the Intermediate Tax Free Fund

3 Goal
3 Core Strategy
3 Investment Policies and Strategies
4 Principal Risks of Investing in the Fund
4 Who Should Consider Investing in the Fund
5 Total Returns, After Fees and Expenses
6 Annual Fund Operating Expenses

A Detailed Look at the Intermediate Tax Free Fund

7 Objective
7 Strategy
7 Principal Investments
7 Investment Process
8 Risks
9 Management of the Fund
10 Calculating the Fund's Share Price
10 Performance Information
10 Dividends and Distributions
10 Tax Considerations
10 Buying and Selling Fund Shares
11 Financial Highlights

INVESTMENT POLICIES AND STRATEGIES
The Fund invests all of its assets in a master portfolio with the same
investment objective of the Fund. The Fund, through the master portfolio, seeks
to achieve that objective by investing in high-quality tax-exempt municipal
bonds. The Fund seeks to increase its income by managing the duration of its
portfolio and by capturing temporary variations in the "spread" among different
types of municipal bonds.

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3
<PAGE>

Overview of the Intermediate Tax Free Fund

PRINCIPAL RISKS OF INVESTING IN THE FUND
An investment in the Fund could lose money, or the Fund's performance could
trail that of other investments. For example:
- - A municipal bond held by the Fund could perform poorly;
- - A bond issuer's creditworthiness could decline, which causes the value of the
securities it has issued to decline;

- - A bond issuer could pay off a high-yielding bond before it comes due and the
Fund may not be able to advantageously re-invest the proceeds; or

- - The municipal bond market could decline in value as a result of a rise in
interest rates.

WHO SHOULD CONSIDER INVESTING IN THE FUND
You should consider investing in the Intermediate Tax Free Fund if you are
seeking the intermediate or long-term goal of high current income that is
exempt from Federal income tax and has a moderate level of risk. There is, of
course, no guarantee that the Fund will realize its goal. In addition, you must
be willing to accept the possibility of short-term price fluctuations, which
though typically less than those associated with long-term bonds or stocks, do
occur from time to time.

You should not consider investing in the Intermediate Tax Free Fund if you are
pursuing a short-term financial goal or are investing to achieve capital
appreciation.

The Fund by itself does not constitute a balanced investment program. Although
past performance is not indicative of future results, diversifying with other
types of long-term investments (such as long-term bond and stock mutual funds)
has in the past delivered higher returns. However, long-term bond and stock
mutual funds typically incur more short-term volatility.

An investment in the Intermediate Tax Free Fund is not a deposit of Bankers
Trust Company or any other bank and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency.

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4
<PAGE>

Overview of the Intermediate Tax Free Fund

Year-by-Year Returns
(each full calendar year since inception)

[BAR CHART APPEARS BELOW WITH THE FOLLOWING INFORMATION:]

1993 1994 1995 1996 1997 1998
- ---- ---- ---- ---- ---- ----
9.93% -3.81% 13.71% 3.34% 7.45% 5.77%

Since inception, the Fund's highest return in any calendar quarter was 5.52%
and its lowest quarterly return was -3.80%. Past performance offers no
indication of how the Fund will perform in the future.

TOTAL RETURNS, AFTER FEES AND EXPENSES
The bar chart and table below can help you evaluate the potential risks and
rewards of investing in the Fund by showing changes in the Fund's performance
year to year. The bar chart shows the Fund's actual return for each full
calendar year since it began selling shares on July 20, 1992 (its inception
date). The table compares the Fund's average annual return with the Lehman
Brothers 7-Year General Obligation Municipal Bond Index over the last one and
five years, and since inception. The Index is a passive measure of municipal
bond returns. It does not factor in the costs of buying, selling and holding
securities -- costs which are reflected in the Fund's results.

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

The Lehman Brothers General Obligation Municipal Bond Index is a widely
accepted benchmark of municipal bond performance. It covers more than 47,000
municipal securities. The 7-Year Index tracks the returns of general obligation
municipal bonds scheduled to mature in six to eight years, a subset of some
1,700 securities. Their maturity range corresponds to the maturity range of the
bonds in the Fund. Indexes are models, not actual portfolios.

Average Annual Returns

(as of December 31, 1998)

<TABLE>
<CAPTION>
Since Inception
1 year 5 years (July 20, 1992)*
---------- --------- -----------------
<S> <C> <C> <C>
Intermediate Tax Free Fund 5.77% 5.13% 5.75%
- ---------------------------- ---- ---- ----
Lehman Brothers 7-Year 6.36% 5.83% 6.42%
- ---------------------------- ---- ---- ----
</TABLE>

*The Lehman Brothers 7-Year General Obligation Municipal Bond Index is
calculated as of July 31, 1992.

---
5

<PAGE>

Overview of the Intermediate Tax Free Fund

ANNUAL FUND OPERATING EXPENSES

(expenses paid from Fund assets)

The Annual Fees and Expenses table to the right describes the fees and expenses
you may pay if you buy and hold shares of the Intermediate Tax Free Fund.

Expense Example. The example below illustrates the expenses you would have
incurred on a $10,000 investment in the Fund. The numbers assume that the Fund
earned an annual return of 5% over the periods shown, that the Fund's operating
expenses remained the same and you sold your shares at the end of the period.

You may use this hypothetical example to compare the Fund's expense history
with other funds.(1) Your actual costs may be higher or lower.

1 Information on the annual operating expenses reflects the expenses of both the
Fund and the Intermediate Tax Free Portfolio, the master fund in which the
Intermediate Tax Free Fund invests its assets. (A further discussion of the
relationship between the Fund and the Portfolio appears in the "Organizational
Structure" section of this prospectus).

2 Bankers Trust has agreed, for the 16-month period from the Fund's fiscal year
end of September 30, 1998, to waive its fees and reimburse expenses so that
total expenses will not exceed 0.85%.

3 Based on expenses, after fee waivers and reimbursements for the first 16
months only.

Annual Fees and Expenses

<TABLE>
<CAPTION>
Percentage of Average
Daily Net Assets(1)
-----------------------------
<S> <C>
Management Fees 0.40%
- --------------------------------------- -----
Distribution and Service (12b-1) Fees none
- --------------------------------------- -----
Other Expenses 0.82%
- --------------------------------------- -----
Total Fund Operating Expenses 1.22%
- --------------------------------------- -----
Less Fee Waivers or Expense
Reimbursement (0.37)%(2)
- --------------------------------------- ----------
Net Expenses 0.85%
- --------------------------------------- ----------
</TABLE>

<TABLE>
<CAPTION>
Expense Example (3)
1 Year 3 Years 5 Years 10 Years
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
$87 $347 $643 $1,486
</TABLE>

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6
<PAGE>

A detailed look
at the Intermediate Tax Free Fund

OBJECTIVE
The Intermediate Tax Free Fund seeks a high level of current income exempt from
Federal income tax consistent with moderate risk of capital.

The Fund invests for income from interest payments; capital appreciation is not
an objective of the Fund. While we give priority to earning income, we cannot
offer any assurance of achieving this objective. The Fund's objective is not a
fundamental policy. We must notify shareholders before we change it, but we do
not require their approval to do so.

STRATEGY
The Fund seeks a current yield from interest income that is greater than
generally obtainable from short-term tax-exempt bonds with the highest
investment ratings.

PRINCIPAL INVESTMENTS
The Fund attempts to invest all of its assets in tax-exempt municipal
securities. The Fund invests in securities that receive investment grade
ratings from a major rating service.

The Fund may purchase a particular bond even if the rating agencies have not
reviewed it, if our analysis concludes that its credit quality compares to the
top ratings, and it may continue to hold a bond if its rating declines after
purchase.

The Fund may invest up to 20% of its total assets in taxable securities to
maintain liquidity, manage cash flow, or respond to adverse market conditions.
It can invest in U.S. Treasury bonds or bonds guaranteed by Federal agencies or
corporate debt that meets the Fund's quality requirements. The interest income
on these securities is subject to Federal income tax.

- --------------------------------------------------------------------------------
A bond's current yield is not necessarily the same as its coupon, the interest
rate a borrower contracts to pay when issuing the bond. For example, a $1,000
bond with a 5% coupon requires the borrower to make annual interest payments of
$50. If buyers can purchase the bond on the open market for $950, their yield
will be 5.3% ($50/$950). If they purchase the bond for $1050, their yield will
be 4.8% ($50/$1050).

Interest income from notes and bonds issued by a state or local government
entity is exempt from Federal income tax.

Portfolio Turnover. The portfolio turnover rate measures the frequency that the
Portfolio sells and replaces the securities it holds within a given period.
Historically, this Fund has had a high portfolio turnover rate. High turnover
can increase the Fund's transaction costs, thereby lowering its returns. It may
also increase your tax liability.

INVESTMENT PROCESS
We adjust the average duration of the bonds held by the Fund according to
current market and credit conditions and the Bankers Trust interest rate
forecast.
- - If our analysis indicates that yields are not likely to change, we attempt to
align the Fund's average duration to that of the intermediate-duration
municipal market as a whole.
- - If we expect yields to rise, we will shorten the Fund's duration by buying
shorter maturity and selling longer maturity bonds, a tactic that should
insulate the value of its shares from falling bond prices.
- - If we expect yields to fall, we will lengthen the Fund's duration by selling
shorter bonds and buying bonds with maturities up to 20 years to capture the
gain in prices.

The Fund's duration can vary approximately 12 months in either direction from
the duration of the whole intermediate-term market.

The Fund also attempts to increase current income by capturing temporary
variations in the "spread" among different kinds of municipal bonds. The
difference, or spread, in the yield from different kinds of bonds normally
remains fairly constant. If yields change on the highest rated general
obligation bonds, they should change by a predictable amount on less highly
rated bonds secured only by revenues from licensing fees. But outside economic
influences, political considerations or the marketplace law of supply and
demand may alter the normal spread. This deviation from the expected pattern
may offer the Fund the opportunity to earn more than usual from bonds at a
given level of risk.

- --------------------------------------------------------------------------------
Duration measures the sensitivity of bond prices to changes in interest rates.
The longer the duration of a bond, the longer it will take to repay the
principal and interest obligations and the more sensitive it is to changes in
interest rates. Investors in longer-duration bonds face more risk as interest
rates rise--but also are more likely to receive more income from their
investment to compensate for the risk.

Maturity measures the time remaining until an issuer must repay a bond's
principal (and the issuer's debt) in full.

Municipal bonds must be rated Aaa, Aa, A, MIG-1 or Prime-1 by Moody's Investors
Service, Inc. or AAA, AA, A, SP-1 or A-1 by Standard & Poor's Ratings Service
at the time the Fund purchases them.

------
7
<PAGE>

A Detailed Look at the Intermediate Tax Free Fund

RISKS
Below we set forth some of the prominent risks associated with municipal bond
investing, as well as investing in general. We also detail our methods for
dealing with these risks. Although we attempt to assess the likelihood that
these risks may actually occur and to limit them, we make no guarantee that we
will succeed in every case.

Primary Risks

Market Risk. The Fund faces the risk that the overall market for municipal
bonds may decline. National and global economic events may prompt this decline,
as may economic events in locales in which the Fund has invested. Developments
in other bond markets or the stock market could also adversely affect the Fund
by reducing the relative attractiveness of municipal bonds as an investment.

Interest Rate Risk. A significant risk for the Fund is interest rate risk --
the risk that fixed-income securities will decline in value because of changes
in interest rates. Generally, investments subject to interest rate risk will
decrease in value when interest rates rise (and increase in value when interest
rates decline). To address movements in interest rates, the Investment Adviser
attempts to adjust the Fund's holdings of long-and short-term securities to
reflect our expectations of changes in interest rates.

Credit Risk. An investor purchasing a municipal bond faces the risk that the
creditworthiness of the issuer may decline, causing the value of the bond
itself to decline. In addition, issuers may not be able to pay the interest on
the bonds they have issued. As a way of reducing these risks, the Fund invests
only in the highest investment-grade securities to provide an added level of
protection when economic conditions deteriorate. In addition, we continuously
monitor the financial well-being of the issuers of the bonds that the Fund
owns. We may sell those that show the signs of weakness that may lead to a
ratings downgrade or even to default.

Prepayment Risk. When a bond issuer retains the right to pay off a high
yielding bond before it comes due, the Fund may have no choice but to reinvest
the proceeds at lower interest rates. Thus, prepayment may reduce the Fund's
income. In addition, it may create a capital gains tax liability, because bond
issuers usually pay a premium for the right to pay off bonds early. The Fund
protects itself against this type of risk through a combination of approaches:

- - It may purchase "callable" bonds early in the life of the loan, when the
issuer is least likely to call them in for prepayment;
- - It may purchase callable bonds that offer extra yield income as an incentive
for assuming prepayment risk; or
- - It may purchase non-callable bonds that offer yield income comparable to
callables.

Secondary Risks

Information Risk. Unlike Treasury bonds and stocks, municipal bonds do not
trade on highly centralized exchanges. Specialized dealers make the markets for
municipal bonds. This means that prices on bonds of comparable safety and
maturity may vary widely. It poses the risk the Fund may buy or sell a bond on
unfavorable terms. We try to minimize this risk by investing only in high
quality, readily marketable bonds and cultivating business relationships with
established, reputable dealers.

Liquidity Risk. A decentralized market, like that for municipal bonds, faces a
greater liquidity risk than a centralized market consisting of many more buyers
and sellers. Investors in municipal bonds may not be able to sell a bond
quickly or receive a price that reflects its intrinsic value. The Fund attempts
to minimize this risk by buying only investment-grade municipal bonds from
large, well-known bond issuers.

Pricing Risk. When price quotations for securities are not readily available,
we determine their value by the method that most accurately reflects their
current worth in the judgement of the Board of Trustees. This procedure implies
an unavoidable risk, the risk that our prices are higher or lower than the
prices that the securities might actually command if we sold them. If we have
valued the securities too highly, you may end up paying too much for Fund
shares when you buy. If we underestimate their price, you may not receive the
full market value for your Fund shares when you sell.

Year 2000 Risk. As with most businesses, the Fund faces the risk that the
computer systems of its Investment Adviser and other companies on which it
relies for service or in which it invests will not accommodate the changeovers
necessary from dates in the year 1999 to dates in the year 2000. These risks
could adversely affect:
- - The companies in which the Fund invests, which could impact the value of the
Fund's investments;
- - Our ability to service your Fund account, including our ability to meet your
requests to buy and sell Fund shares; and
- - Our ability to trade securities held by the Fund or to accurately price
securities held by the Fund.

We are working both internally and with our business partners and service
providers to address this problem. If we -- or our business partners, service
providers, government agencies or other market participants -- do not succeed,
it could materially affect shareholder services or the value of the Fund's
shares.

Temporary Defensive Position. We may from time to time adopt a temporary
defensive position in response to extraordinary adverse political, economic or
market events. We could place up to 100% of the Fund's assets in short-term
municipal obligations and taxable securities with the highest investment
ratings. To

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8
<PAGE>

A Detailed Look at the Intermediate Tax Free Fund

the extent we might adopt such a position, the Fund may not meet its goal of a
high level of current tax-free income.

MANAGEMENT OF THE FUND

Board of Trustees. The Fund's shareholders, voting in proportion to the amount
of shares each owns, elect a Board of Trustees, and the Trustees supervise all
the Fund's activities on their behalf.

Investment Adviser. Under the supervision of the Board of Trustees, Bankers
Trust Company, with headquarters at 130 Liberty Street, New York, New York
1006, acts as the Fund's investment adviser, exercises day-to-day oversight and
assumes responsibility for the securities the Fund owns. Bankers Trust received
a fee of 0.40% of the Fund's average daily net assets for its services in the
last fiscal year.

As of December 31, 1998, Bankers Trust was the eighth largest bank holding
company in the United States with total assets of approximately $156 billion.
Bankers Trust is a worldwide merchant bank dedicated to servicing the needs of
corporations, governments, financial institutions and private clients through a
global network of over 96 offices in more than 43 countries.

Bankers Trust's officers bring wide experience to managing both the Fund and
its Portfolio. And the firm's own record dates back to its founding as a trust
company in 1903. It has invested retirement assets on behalf of the nation's
largest corporations and institutions for more than 50 years. Today, the assets
under its global management exceed $338 billion. The scope of the firm's
capability is broad: It is a leader in both the active and passive quantitative
investment disciplines and maintains a major presence in stock and bond markets
worldwide.

The Investment Adviser is a wholly owned subsidiary of Bankers Trust
Corporation. On November 30, 1998, Bankers Trust Corporation entered into an
Agreement and Plan of Merger with Deutsche Bank AG under which Bankers Trust
Corporation would merge with and into a subsidiary of Deutsche Bank AG.
Deutsche Bank AG is a major global banking institution that is engaged in a
wide range of financial services, including retail and commercial banking,
investment banking and insurance. The transaction is contingent upon various
regulatory approvals, as well as the approval of the Fund's Board of Trustees
and the Fund's shareholders. If the transaction is approved and completed,
Deutsche Bank AG, as the Investment Adviser's new parent company, will control
the operations of the Investment Adviser. Bankers Trust believes that, under
this new arrangement, the services provided to the Fund will be maintained at
their current level.

Portfolio Manager. Gary Pollack is responsible for the day-to-day management of
the master portfolio:
- - Principal of Bankers Trust and Portfolio Manager of the Fund.
- - Joined Bankers Trust in 1978.

- - Portfolio Manager of the Fund since its inception.
- - 20 years of investment research experience.
- - Bachelors degree in economics and mathematics, masters degree in economics
from the State University of New York at Albany.

Other Services. Bankers Trust provides administrative services -- such as
portfolio accounting, legal services and others -- for the Fund. Bankers Trust
- -- or your broker or financial advisor -- performs the functions necessary to
establish and maintain your account. In addition to setting up the account and
processing your purchase and sale orders, these functions include:
- - keeping accurate, up-to-date records for your individual Fund account;
- - implementing any changes you wish to make in your account information;
- - processing your request for cash dividends and distributions from the Fund;
- - answering your questions on the Fund's investment performance or
administration;
- - sending proxy reports and updated prospectus information to you; and
- - collecting your executed proxies.

Brokers and financial advisors may charge additional fees to investors only for
those services not otherwise included in the Bankers Trust servicing agreement,
such as cash management or special trust or retirement-investment reporting.

Organizational Structure. The Intermediate Tax Free Fund is a "feeder fund"
that invests all of its assets in a "master portfolio," the Intermediate Tax
Free Portfolio. The Fund and the Master Portfolio have the same investment
objective. The Master Portfolio is advised by Bankers Trust.

The Master Portfolio may accept investments from other feeder funds. The
feeders bear the Master Portfolio's expenses in proportion to their assets.
Each feeder can set its own transaction minimums, fund-specific expenses, and
other conditions. This arrangement allows the Fund's Trustees to withdraw the
Fund's assets from the Master Portfolio if they believe doing so is in the
shareholder's best interests. If the Trustees withdraw the Fund's assets, they
would then consider whether the Fund should hire its own investment adviser,
invest in a different master portfolio, or take other action.

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9
<PAGE>

A Detailed Look at the Intermediate Tax Free Fund

CALCULATING THE FUND'S SHARE PRICE
We calculate the daily price of the Fund's shares (also known as the "Net Asset
Value" or "NAV") in accordance with the standard formula for valuing mutual
fund shares at the close of regular trading on the New York Stock Exchange
every day the Exchange is open for business.

We value the securities in the Fund at their stated market value if price
quotations are available. When price quotes for a particular security are not
readily available, we determine their value by the method that most accurately
reflects their current worth in the judgment of the Board of Trustees. You can
find the Fund's daily share price in the mutual fund listings of most major
newspapers.

PERFORMANCE INFORMATION
The Fund's performance can be used in advertisements that appear in various
publications. It may be compared to the performance of various indexes and
investments for which reliable performance data is available. The Fund's
performance may also be compared to averages, performance rankings, or other
information prepared by recognized mutual fund statistical services.

DIVIDENDS AND DISTRIBUTIONS

Income dividends, if any, for the Fund are declared daily and paid monthly. The
Fund pays any capital gains on an annual basis. We automatically reinvest all
dividends and any capital gains, unless you tell us otherwise.

TAX CONSIDERATIONS

The Fund attempts to invest 100% of its assets in tax exempt municipal
securities that generate tax-exempt income. However, the Fund may invest up to
20% (or greater while maintaining a temporary defensive position) of the value
of its total assets in securities that generate income subject to federal or
alternative minimum tax. Income exempt from federal income tax may be subject
to state and local income tax. Any capital gains distributed by the Fund may be
taxable.

- --------------------------------------------------------------------------------
The Exchange is open every week, Monday through Friday, except when the
following holidays are celebrated: New Year's Day, Martin Luther King, Jr. Day
(the third Monday in January), Presidents' Day (the third Monday in February),
Good Friday, Memorial Day (the last Monday in May), July 4, Labor Day (the
first Monday in September), Thanksgiving Day (the fourth Thursday in November)
and Christmas Day.

Because each investor's tax circumstances are unique and because the tax laws
are subject to change, we recommend that you consult your tax advisor about
your investment.

BUYING AND SELLING FUND SHARES
You can purchase or redeem shares in the Fund by mail, wire transfer or through
an authorized broker or financial advisor. Contact your broker or financial
advisor for details. You may also call the BT Service Center at 1-800-730-1313.

We may close your Fund account on 30 days' notice if it fails to meet minimum
balance requirements for any reason other than a change in market value. In
addition, if your sell order exceeds $250,000, we reserve the right to redeem
it "in kind" with a pro-rata distribution of securities actually held by the
Fund, rather than in cash.

Your broker or financial advisor may charge a transaction fee for the purchase
and sale of Fund shares.

Exchange Privileges. You can exchange all or part of your shares for shares of
another BT Mutual Fund up to four times a year without paying a fee. Before
buying shares through an exchange you should be sure to get a copy of that
Fund's prospectus and read it carefully. Please note also that you may have to
pay taxes on the shares you sell in the exchange.

Account Minimums. The Fund requires a minimum investment of $2,500 to open
accounts, $250 for subsequent investments and a minimum balance of $1,000 to
maintain them. It requires a $500 minimum investment to open a retirement
account, $100 for subsequent investments, but imposes no minimum balance.
Automatic investment accounts, which credit money from your checking account to
the purchase of Fund shares biweekly, monthly, quarterly, or semi-annually,
call for a minimum $1,000 opening investment and at least $100 for each
subsequent purchase of shares.

The Fund's Shareholder Guide and Statement of Additional Information contain
complete information on buying and selling Fund shares and maintaining a Fund
account. If you have not already received your free copy of the Shareholder
Guide or wish to obtain a free copy of the Statement of Additional Information,
please call the BT Service Center at 1-800-730-1313.

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10
<PAGE>

A Detailed Look at the Intermediate Tax Free Fund

The table below provides a picture of the Fund's financial performance for the
past five years. The information selected reflects financial results for a
single Fund share. The total returns in the table represent the rate of return
that an investor would have earned on an investment in the Fund, assuming
reinvestment of all interest income and distributions. This information has
been audited by PricewaterhouseCoopers LLP, whose report, along with the Fund's
financial statements, is included in the Fund's annual report. The annual
report is available free of charge by calling the BT Service Center at
1-800-730-1313.

Financial Highlights

<TABLE>
<CAPTION>
For the
period
For the For the January 1, For the For the
year ended year ended 1996 to year ended year ended
September 30, September 30, September 30, December 31, December 31,
1998 1997 19961 1995 1994
--------------- --------------- --------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net Asset Value, Beginning of Period $ 10.65 $ 10.34 $ 10.56 $ 9.72 $ 10.54
- ------------------------------------------- ------- ------- ------- ------- -------
Income from Investment Operations
Net Investment Income 0.42 0.44 0.33 0.47 0.42
Net Realized and Unrealized Gain (Loss) on
Investments 0.38 0.31 (0.22) 0.84 (0.82)
- ------------------------------------------- ------- ------- ------- ------- -------
Total Income (Loss) from Investment
Operations 0.80 0.75 0.11 1.31 (0.40)
- ------------------------------------------- ------- ------- ------- ------- -------
Distributions to Shareholders
Net Investment Income (0.42) (0.44) (0.33) (0.47) (0.42)
- ------------------------------------------- ------- ------- ------- ------- -------
Net Realized Gains (0.01) -- -- -- --
- ------------------------------------------- ------- ------- ------- ------- -------
Total Distributions (0.43) (0.44) (0.33) (0.47) (0.42)
- ------------------------------------------- ------- ------- ------- ------- -------
Net Asset Value, End of Period $ 11.02 $ 10.65 $ 10.34 $ 10.56 $ 9.72
- ------------------------------------------- ------- ------- ------- ------- -------
Total Investment Return 7.71% 7.43% 4.09% 13.71% (3.81)%
- ------------------------------------------- ------- ------- ------- ------- -------
Supplemental Data and Ratios:
Net Assets, End of Period (000s omitted) $24,072 $18,732 $ 22,008 $22,213 $25,303
- ------------------------------------------- ------- ------- -------- ------- -------
Ratios to Average Net Assets:
Net Investment Income 3.91% 4.23% 4.25%(2) 4.58% 4.20%
- ------------------------------------------- ------- ------- ---------- ------- -------
Expenses, including Expenses of the
Intermediate Tax Free Portfolio 0.85% 0.85% 0.85%(2) 0.85% 0.85%
Decrease Reflected in above Expense
Ration Due to absorption of Expenses by
Bankers Trust 0.37% 0.30% 0.38%(2) 0.28% 0.36%
- ------------------------------------------- ------- ------- ---------- ------- -------
Portfolio Turnover Rate3 64% 171% 130% 95% 118%
- ------------------------------------------- ------- ------- ---------- ------- -------
</TABLE>

1 The Fund changed its fiscal year end from December 31 to September 30.
2 Annualized
3 The portfolio turnover rate is the rate for the master fund in which the Fund
invests its assets.

---
11
<PAGE>

[BANKERS TRUST LOGO APPEARS HERE]

Additional information about the Fund's investments and performance is available
in the Fund's annual and semi-annual reports to shareholders. In the Fund's
annual report, you will find a discussion of the market conditions and
investment strategies that significantly affected the Fund's performance during
its last fiscal year.

You can find more detailed information about the Fund in the current Statement
of Additional Information, dated January 31, 1999, which we have filed
electronically with the Securities and Exchange Commission (SEC) and which is
incorporated by reference into this Prospectus. To receive your free copy of the
Statement of Additional Information, the annual or semi-annual report, or if you
have any questions about investing in this Fund, you can write to us at:

BT Service Center
P.O. Box 419210
Kansas City, MO 64141-6210
or call our toll-free number: 1-800-730-1313

You can find reports and other information about the Fund on the SEC website
(http://www.sec.gov), or you can get copies of this information, after payment
of a duplicating fee, by writing to the Public Reference Section of the SEC,
Washington, D.C. 20549-6009. Information about the Fund, including its Statement
of Additional Information, can be reviewed and copied at the SEC's Public
Reference Room in Washington, D.C. For information on the Public Reference Room,
call the SEC at 1-800-SEC-0330.

You can get information about buying and selling shares in the Fund in the
Shareholder Guide. If you have not received a copy of the Guide, call the BT
Service Center to obtain one free of charge.

Intermediate Tax Free Fund CUSIP #055922801
BT Investment Funds STA467300 (1/99)

811-4760
Distributed by:
ICC Distributions, INC.
Two Portland Square
Portland, ME 04101

<PAGE>

PROSPECTUS: JANUARY 31, 1999

[BT MUTUAL FUNDS LOGO APPEARS HERE]

BT MUTUAL FUNDS

CAPITAL APPRECIATION
FUND

With the goal of achieving long-term capital growth,
primarily through investment in stocks and other equity
securities of medium-sized U.S. companies with strong
growth potential

TRUST: BT INVESTMENT FUNDS

INVESTMENT ADVISER: BANKERS TRUST COMPANY

<PAGE>

OVERVIEW

OF THE CAPITAL APPRECIATION FUND

GOAL: The Fund invests for long-term capital growth.

CORE STRATEGY: The Fund invests primarily in the stocks and
other equity securities of medium-sized U.S. companies with
strong growth potential.

<TABLE>
<S> <C>
Capital Appreciation Fund
Overview of the Capital Appreciation Fund

A DETAILED LOOK AT THE CAPITAL APPRECIATION FUND

7 Objective
7 Strategy
7 Principal Investments
7 Investment Process
8 Risks
8 Management of the Fund
9 Calculating the Fund's Share Price
10 Performance Information
10 Dividends and Distributions
10 Tax Considerations
10 Buying and Selling Fund Shares
11 Financial Highlights
</TABLE>

INVESTMENT POLICIES AND STRATEGIES
The Fund invests all of its assets in a master portfolio with the same
investment objective of the Fund. The Fund, through the master portfolio, seeks
to achieve that objective by investing in stocks and other equity securities.
The Fund's research team searches for medium-sized companies with strong growth
prospects. Companies are selected based on factors such as the company's
business prospects, its record of earnings growth and its stock price relative
to industry peers.

3
------

<PAGE>

OVERVIEW OF THE CAPITAL APPRECIATION FUND

PRINCIPAL RISKS OF INVESTING IN THE FUND
An investment in the Fund could lose money, or the Fund's performance could
trail that of other investments. For example:

- - Stocks that the Investment Adviser has selected could perform poorly;
- - Medium-sized company stock returns could trail stock market returns generally
because of risks specific to medium-sized company investing, i.e., greater
share price volatility and fewer buyers for medium-sized company shares in
periods of economic or stock market stress. Such risks may hurt the prices of
the stocks in the Fund's portfolio and limit the Fund's ability to exit from an
unsuccessful investment; or
- - The stock market could decline, or could underperform other types of
investments.

WHO SHOULD CONSIDER INVESTING IN THE FUND

You should consider investing in the Capital Appreciation Fund if you are
seeking long-term capital growth. There is, of course, no guarantee that the
Fund will realize its goal. Moreover, you should be willing to accept greater
short-term fluctuations in the value of your investment than you would
typically experience investing in certain bonds or money market funds.

You should not consider investing in the Capital Appreciation Fund if you are
pursuing a short-term financial goal, if you seek regular income or if you
cannot tolerate fluctuations in the value of your investments.

The Fund by itself does not constitute a balanced investment program. It can,
however, afford you exposure to investment opportunities not available to
someone who invests in established large company stocks or small company
stocks.

AN INVESTMENT IN THE CAPITAL APPRECIATION FUND IS NOT A DEPOSIT OF BANKERS
TRUST COMPANY OR ANY OTHER BANK AND IS NOT INSURED OR GUARANTEED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.

4
------
<PAGE>

OVERVIEW OF THE CAPITAL APPRECIATION FUND

YEAR-BY-YEAR RETURNS
(each full calendar year since inception)

1994 1995 1996 1997 1998
- ---- ---- ---- ---- ----
3.24% 37.43% 8.68% 14.46% 18.51%

Since inception, the Fund's highest return in any calendar quarter was 27.67%
and its lowest quarterly return was -19.58%. Past performance offers no
indication of how the Fund will perform in the future.

TOTAL RETURNS, AFTER FEES AND EXPENSES
The bar chart and table on this page can help you evaluate the potential risk
and rewards of investing in the Fund by showing changes in the Fund's
performance year to year. The bar chart shows the Fund's actual return for each
full calendar year since the Fund began selling shares on March 9, 1993 (its
inception date). The table compares the Fund's average annual return with the
S&P Mid-Cap 400 Index over the last one and five years, and since inception.
The Index is a passive measure of stock performance. It does not factor in the
costs of buying, selling and holding stocks -- costs which are reflected in the
Fund's results.

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

THE S&P MID-CAP 400 INDEX IS A WIDELY ACCEPTED BENCHMARK OF MEDIUM-SIZED
COMPANY PERFORMANCE. THE INDEX IS A MODEL, NOT AN ACTUAL PORTFOLIO, THAT TRACKS
THE PERFORMANCE OF 400 PUBLICLY HELD MEDIUM-SIZED U.S. COMPANIES. THE WEIGHTED
AVERAGE MARKET CAP FOR THE COMPANIES IN THE INDEX WAS APPROXIMATELY $9 BILLION
AS OF DECEMBER 31, 1998. THAT COMPARES TO $88 BILLION FOR THE COMPANIES IN THE
S&P 500, A CORRESPONDING LARGE COMPANY BENCHMARK.

AVERAGE ANNUAL RETURNS
(as of December 31, 1998)

<TABLE>
<CAPTION>
Since Inception
1 year 5 years (March 9, 1993)*
----------- ----------- -----------------
<S> <C> <C> <C>
CAPITAL APPRECIATION FUND 18.51% 15.90% 16.68%
=========================== ===== ====== =====
S&P Mid-Cap 400 Index 18.25% 18.67% 17.83%
- --------------------------- ----- ----- -----
</TABLE>

*The S&P Mid-Cap 400 Index is calculated from February 28, 1993.

5
------
<PAGE>

OVERVIEW OF THE CAPITAL APPRECIATION FUND

ANNUAL FUND OPERATING EXPENSES
(EXPENSES PAID FROM FUND ASSETS)

The Annual Fees and Expenses table to the right describes the fees and expenses
you may pay if you buy and hold shares of the Capital Appreciation Fund.

Expense Example. The example below illustrates the expenses you would have
incurred on a $10,000 investment in the Fund. The numbers assume that the Fund
earned an annual return of 5% over the periods shown, the Fund's operating
expenses remained the same over the period shown and that you sold your shares
at the end of the period.

You may use this hypothetical example to compare the Fund's expense history
with other funds.1 Your actual costs may be higher or lower.

(1) Information on the annual operating expenses of both the Fund and Capital
Appreciation Portfolio, the master fund in which the Capital Appreciation
Fund invests. (A further discussion of the relationship between the Fund and
the Portfolio appears in the "Organizational Structure" Section of this
prospectus.)

(2)Bankers Trust has agreed, for the 16-month period from the Fund's fiscal year
end of September 30, 1998, to waive its fees and reimburse expenses so that
total expenses will not exceed 1.25%.

(3)Based on expenses, after fee waivers and reimbursements for the first 16
months only.

ANNUAL FEES AND EXPENSES

<TABLE>
<CAPTION>
Percentage of Average
Daily Net Assets(1)
-----------------------------
<S> <C>
Management Fees 0.65%
- --------------------------------------- -----
Distribution and Service (12b-1) Fees none
- --------------------------------------- -----
Other Fund Operating Expenses 0.99%
- --------------------------------------- -----
Total Fund Operating Expenses 1.64%(2)
- --------------------------------------- -------
Less: Fee Waivers or Expense
Reimbursement (0.39)%
- --------------------------------------- -------
NET EXPENSES 1.25 %
======================================= =======
</TABLE>

<TABLE>
<CAPTION>
EXPENSE EXAMPLE(3)
1 year 3 years 5 years 10 years
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
$127 $477 $867 $1,962
</TABLE>

------
6

<PAGE>

A DETAILED LOOK
AT THE CAPITAL APPRECIATION FUND

OBJECTIVE

The Capital Appreciation Fund seeks long-term capital growth. The Fund invests
the majority of its assets in the stock and other securities with equity
characteristics of medium-sized U.S. companies. We believe these companies
contain the greatest concentration of businesses with significant growth
prospects. Thus, the Fund invests primarily in companies whose market
capitalization falls in the market capitalization range of the S&P Mid-Cap 400
Index at the time it first purchases the shares. To a lesser extent, the Fund
may also invest in companies outside the United States that meet its investment
criteria.

The Fund invests for long-term capital growth, not income; any dividend and
interest income is secondary to the pursuit of its objective. While we give
priority to long-term capital growth, we cannot offer any assurance of
achieving our objective. The Fund's objective is not a fundamental policy. We
must notify shareholders before we change it, but we do not require their
approval to do so.

STRATEGY
We pursue a flexible investment program to achieve the Fund's objective. We are
not restricted to investments in specific market sectors. We may invest in any
market sector and in any size company if we have identified an opportunity with
attractive long-term prospects for capital growth. Nevertheless, we attempt to
match the dollar-weighted average capitalization of the Fund's holdings to the
midpoint capitalization of the S&P Mid-Cap 400 Index.

We consider many broad factors in assessing a potential candidate for
investment, including generally:
- - competitive position within its industry
- - business prospects
- - management team
- - record of earnings growth
- - underlying asset value relative to industry peers
- - stock price relative to industry peers

- - whether a reliable and liquid market for its shares exists.

- --------------------------------------------------------------------------------
"Market Capitalization," or "Market Cap," provides a ready gauge of a company's
size. It multiplies the total number of a company's outstanding shares by the
current price of its stock.

PRINCIPAL INVESTMENTS
The Fund normally owns stock in approximately 100 medium-sized companies at any
one time. It focuses primarily in stock and other securities with equity
characteristics such as trust or limited partnership interests, rights and
warrants. It may also invest in convertible securities when it is more
advantageous than investing in a company's common stock.

The Fund may also invest up to 25% of its assets in stocks and other securities
of companies based outside the United States. Under normal conditions, this
tactic would not comprise a major element of its strategy.

INVESTMENT PROCESS
The Fund's process begins with a methodical search for companies (in any
industry) that show attractive long-term prospects for growth. The research
team relies on information gleaned from a variety of sources and perspectives,
including broad trends such as lifestyle and technological changes, industry
cycles and regulatory changes, quantitative screening and individual company
analysis. Companies are screened to identify those with strong business
fundamentals (i.e., high growth, low debt, high return-on-equity) and technical
strength. Measures of this strength include the extent of management's
ownership of a company's shares, the extent of ownership by mutual funds and
other large professional investors, estimates of future earnings by investment
analysts who follow the stock and the extent that actual earnings have deviated
from analysts' estimates in the recent past. The list of candidates is narrowed
through meetings with company and industry contacts, attendance at conferences
focusing on emerging growth companies, reviews of research and industry
publications and investment analyst contacts.
- --------------------------------------------------------------------------------

A right is a privilege granted to existing shareholders of a company to
subscribe to shares of a new issue of common stock below the public offering
price before it is offered to the public.

A warrant entitles the holder to buy a certain amount of common stock at a
specified price, usually higher than the market price at the time the Warrant
was issued, within a set time period.

Convertible Securities are bonds that give purchasers the right of exchange for
a specified number of shares of a company's common stock at specified prices
within a certain period of time. Purchasers receive regular interest payments
until they exercise their exchange right.

7
------

<PAGE>

A DETAILED LOOK AT THE CAPITAL APPRECIATION FUND

RISKS

BELOW WE SET FORTH SOME OF THE PROMINENT RISKS ASSOCIATED WITH MID CAP
INVESTING, AS WELL AS INVESTING IN GENERAL, AND WE DETAIL OUR APPROACHES TO
CONTAINING THEM. ALTHOUGH WE ATTEMPT TO ASSESS THE LIKELIHOOD THAT THESE RISKS
MAY ACTUALLY OCCUR AND TO LIMIT THEM, WE MAKE NO GUARANTEE THAT WE WILL
SUCCEED.

PRIMARY RISK

MARKET RISK. Although individual stocks can outperform their local markets,
deteriorating market conditions might cause an overall weakness in the stock
prices of the entire market.

STOCK SELECTION RISK. A risk that pervades all investing is the risk that the
securities an investor has selected will not perform to expectations. The Fund
follows a disciplined selling process to try to lessen this market risk. First,
we may sell a security if one or more of the following conditions take place:

- - There is a material change in the company's fundamentals; - The stock

underperforms its industry peer group by 15% or more; or

- - The stock price reaches our expectation.

MEDIUM-SIZED COMPANY RISK. Medium-sized company stocks tend to experience
steeper fluctuations in price -- down as well as up -- than the stocks of
larger companies. A shortage of reliable information -- the same information
gap that creates opportunity -- can pose added risk. Industry-wide reversals
have had a greater impact on them, since they usually lack a large company's
financial resources. Medium-sized company stocks are typically less liquid than
large company stocks: when things are going poorly for a medium-sized company,
it is harder to find a buyer for its shares.

FOREIGN INVESTMENT RISK. To the extent that the Fund holds companies based
outside the United States, it faces the risks inherent in foreign investing.
Adverse political, economic or social developments could undermine the value of
the Fund's investments or prevent the Fund from realizing their full value.
Accounting and financial reporting standards differ from those in the U.S. and
could convey incomplete information when compared to information typically
provided by U.S. companies. Finally, the currency of the country in which the
Fund has invested could decline relative to the value of the U.S. dollar, which
would depreciate the value of an investment itself to U.S. investors.

SECONDARY RISK

PRICING RISK.When price quotations for securities are not readily available, we
determine their value by the method that most accurately reflects their current
worth in the judgement of the Board of Trustees. This procedure implies an
unavoidable risk, the risk that our prices are higher or lower than the prices
that the securities might actually command if we sold them. If we have valued
the securities too highly, you may end up paying too much for Fund shares when
you buy. If we underestimate their price, you may not receive the full market
value for your Fund shares when you sell.

YEAR 2000 RISK. As with most businesses, the Fund faces the risk that the
computer systems of its Investment Adviser and other companies on which it
relies for service or in which it invests will not accommodate the changeovers
necessary from dates in the year 1999 to dates in the year 2000. These risks
could adversely affect:
- - The companies in which the Fund invests, which could impact the value of the
Fund's investments;
- - Our ability to service your Fund account, including our ability to meet your
requests to buy and sell Fund shares; and
- - Our ability to trade securities held by the Fund or to accurately price
securities held by the Fund.

TEMPORARY DEFENSIVE POSITION. For temporary defensive purposes, we may invest
up to 100% of the Fund's assets in the common stock of larger companies, in
fixed-income securities, or short-term money market securities. To the extent
we find it necessary to invest in such securities, the Fund may not meet its
goal of long-term capital growth.

MANAGEMENT OF THE FUND

BOARD OF TRUSTEES. The Fund's shareholders, voting in proportion to the number
of shares each owns, elects a Board of Trustees, and the Trustees supervise all
of the Fund's activities on their behalf.

INVESTMENT ADVISER. Under the supervision of the Board of Trustees, Bankers
Trust Company, with headquarters at 130 Liberty Street, New York, NY 10006,
acts as the Fund's investment adviser. As investment adviser, Bankers Trust
makes the Fund's investment decisions and assumes responsibility for the
securities the Fund owns. It buys and sells securities for the Fund and
conducts the research that leads to the purchase and sale decisions. For its
services in the last fiscal year, Bankers Trust received a fee from the Capital
Appreciation Fund of 0.65% of its average daily net assets.

8
------

<PAGE>

A DETAILED LOOK AT THE CAPITAL APPRECIATION FUND

governments, financial institutions and private clients through a global
network of over 96 offices in more than 43 countries.

Bankers Trust's officers bring wide experience to managing both the Fund and
its Portfolio. The firm's own record dates back to its founding as a trust
company in 1903. It has invested retirement assets on behalf of the nation's
largest corporations and institutions for more than 50 years. Today, the assets
under its global management exceed $338 billion. The scope of the firm's
capability is broad: It is a leader in both the active and passive quantitative
investment disciplines and maintains a major presence in stock and bond markets
worldwide.

PORTFOLIO MANAGER. Anthony Takazawa is responsible for the day-to-day
management of the master portfolio's investments: - Vice President of Bankers
Trust.

- - Joined Bankers Trust and the Fund in 1996.
- - Served as Portfolio Manager and Equity Analyst at Phoenix Mutual Life
Insurance Co. from 1988 to 1996.
- - 10 years of investment experience.
- - Bachelors degree in Business Administration from University of Notre Dame,
MBA from University of Wisconsin, Chartered Financial Analyst.

OTHER SERVICES. Bankers Trust provides the administrative functions -- such as
portfolio accounting, legal services and others -- for the Fund. Bankers Trust
- -- or your broker or financial advisor -- performs the functions necessary to
establish and maintain your account. In addition to setting up the account and
processing your purchase and sale orders, these functions include:
- - keeping accurate, up-to-date records for your individual Fund account;
- - implementing any changes you wish to make in your account information;
- - processing your request for cash dividends and distributions from the Fund;
- - answering your questions on the Fund's investment performance or
administration;
- - sending proxy reports and updated prospectus information to you; and
- - collecting your executed proxies.

ORGANIZATIONAL STRUCTURE. The Funds are "feeder funds" that invest all of their
assets in a "master portfolio," the Capital Appreciation Portfolio. The Fund
and its Master Portfolio have the same investment objective. The Master
Portfolio is advised by Bankers Trust.

The formula calls for deducting all of the Fund's liabilities from the total
value of its assets -- the market value of the securities it holds, plus its
cash reserves -- and dividing the result by the number of shares outstanding.
(Note that prices for securities that trade on foreign exchanges can change
significantly on days when the New York Stock Exchange is closed and you cannot
buy or sell Fund shares. Such price changes in the securities the Fund owns may
ultimately affect the price of Fund shares the next time the NAV is
calculated.)

- --------------------------------------------------------------------------------
The Exchange is open every week, Monday through Friday, except when the
following holidays are celebrated: New Year's Day, Martin Luther King, Jr. Day
(the third Monday in January), Presidents' Day (the third Monday in February),
Good Friday, Memorial Day (the last Monday in May), July 4th, Labor Day (the
first Monday in September), Thanksgiving Day (the fourth Thursday in November)
and Christmas Day.

9
------

<PAGE>

A Detailed Look at the Capital Appreciation Fund

DIVIDENDS AND DISTRIBUTIONS

Dividends and capital gains distributions, if any, are paid annually. We
automatically reinvest all dividends and any capital gains, unless you tell us
otherwise.

TAX CONSIDERATIONS
The Fund does not ordinarily pay income taxes. You and other shareholders pay
taxes on the income or capital gains from the Fund's holdings. Your taxes will
vary from year to year, based on the amount of capital gains distributions and
dividends paid out by the Fund. You owe the taxes whether you receive cash or
choose to have distributions and dividends reinvested. Distributions and
dividends usually create the following tax liability:

<TABLE>
<CAPTION>
Transaction Tax Status
- ---------------------------------------- ----------------
<S> <C>
Income dividends Ordinary income
Short-term capital gains distributions Ordinary income
Long-term capital gains distributions Capital gains
</TABLE>

Every year your Fund will send you information on the distributions for the
previous year. In addition, if you sell your Fund shares you may have a capital
gain or loss.

<TABLE>
<CAPTION>
Transaction Tax Status
- ------------------------------------- ------------------
<S> <C>
Your sale of shares owned more than Capital gains or
one year losses
Your sale of shares owned for one Gains treated as
year or less ordinary income;
losses subject to
special rules.
</TABLE>

THE TAX CONSIDERATIONS FOR TAX DEFERRED ACCOUNTS OR NON-TAXABLE ENTITIES WILL
BE DIFFERENT.

BECAUSE EACH INVESTOR'S TAX CIRCUMSTANCES ARE UNIQUE AND BECAUSE THE TAX LAWS
ARE SUBJECT TO CHANGE, WE RECOMMEND THAT YOU CONSULT YOUR TAX ADVISOR ABOUT
YOUR INVESTMENT.

We may close your Fund account on 30 days' notice if it fails to meet minimum
balance requirements for any reason other than a change in market value. In
addition, if your sell order exceeds $250,000, we reserve the right to redeem
it "in kind" with a pro-rata distribution of stocks actually held by the Fund,
rather than in cash.

Your broker or financial advisor may charge transaction fees on the purchase
and sale of Fund shares.

EXCHANGE PRIVILEGES. You can exchange all or part of your shares for shares of
another BT Mutual Fund up to four times a year without paying a fee. Before
buying shares through an exchange you should be sure to get a copy of that
fund's prospectus and read it carefully. Please note also that you may have to
pay taxes on the shares you sell in the exchange.

ACCOUNT MINIMUMS. The Fund requires a minimum investment of $2,500 to open
accounts, $250 for subsequent investments, and a minimum balance of $1,000 to
maintain them. The Fund requires a $500 minimum investment to open a retirement
account and $100 for subsequent investments, but imposes no minimum balance.
Automatic investment accounts, which credit money from your checking account to
the purchase of fund shares bi-weekly, monthly, quarterly, or semi-annually,
call for a minimum $1,000 opening investment and at least $100 for each
subsequent purchase of shares.

THE FUND'S SHAREHOLDER GUIDE AND STATEMENT OF ADDITIONAL INFORMATION CONTAIN
COMPLETE INFORMATION ON BUYING AND SELLING FUND SHARES AND MAINTAINING A FUND
ACCOUNT. IF YOU HAVE NOT ALREADY RECEIVED YOUR FREE COPY OF THE SHAREHOLDER
GUIDE OR WISH TO OBTAIN A FREE COPY OF THE STATEMENT OF ADDITIONAL INFORMATION,
PLEASE CALL THE BT SERVICE CENTER AT 1-800-730-1313.

10
------

<PAGE>

A Detailed Look at the Capital Appreciation Fund

The table below provides a picture of the Fund's financial performance for the
past five years. The information selected reflects financial results for a
single Fund share. The total returns in the table represent the rate of return
that an investor would have earned on an investment in the Fund (assuming
reinvestment of all interest income and distributions). This information has
been audited by PricewaterhouseCoopers LLP, whose report, along with the Fund's
financial statements, is included in the Fund's annual report. The annual
report is available free of charge by calling the BT Service Center at
1-800-730-1313.

Financial Highlights

<TABLE>
<CAPTION>
For the
period
For the For the For the January 1, For the
year ended year ended year ended 1995 through year ended
September 30, September 30, September 30, September 30, December 31,
1998 1997 1996 1996(1) 1994
--------------- --------------- --------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD $ 15.72 $ 16.79 $ 16.83 $ 12.10 $ 11.72
- -------------------------------------- -------- ------- ------- ------- -------
INCOME (LOSS) FROM INVESTMENT
Operations
Expenses in Excess of Investment
Income (0.12) (0.13) (0.10) (0.07) (0.04)
- -------------------------------------- -------- ------- ------- -------- -------
Net Realized and Unrealized Gain
(Loss) from Investment Transactions (1.58) 2.13 1.89 4.80 0.42
- -------------------------------------- -------- ------- ------- -------- -------
TOTAL INCOME (LOSS) FROM INVESTMENT
OPERATIONS (1.70) 2.00 1.79 4.73 0.38
====================================== ========= ======= ======= ======== ========
DISTRIBUTIONS TO SHAREHOLDERS
Net realized Gain from Investment
Transactions (2.64) (3.07) (1.83) -- --
- -------------------------------------- -------- ------- ------- -------- -------
NET ASSET VALUE, END OF PERIOD $ 11.38 $ 15.72 $ 16.79 $ 16.83 $ 12.10
- -------------------------------------- -------- ------- ------- -------- -------
TOTAL INVESTMENT RETURN (11.42)% 14.64% 12.35% 39.09% 3.24%
====================================== ======== ======== ======== ======== ========
SUPPLEMENTAL DATA AND RATIOS:
Net Assets, End of Period (000s
omitted) $ 25,497 $49,002 $67,385 $ 57,380 $42,737
- -------------------------------------- -------- ------- ------- --------- -------
Ratios to Average Net Assets:
Expenses in Excess of Income (0.70)% (0.77)% (0.66)% (0.65)%(2) (0.57)%
- -------------------------------------- -------- ------- ------- ------------ -------
Expenses, Including Expenses on the
Capital Appreciation Portfolio 1.25% 1.25% 1.25% 1.25%(2) 1.25%
Decrease Reflected in Above Expense
Ratio Due to Absorption of Expenses
by Bankers Trust 0.39% 0.29% 0.26% 0.32%(2) 0.54%
- -------------------------------------- -------- ------- ------- ------------ -------
Portfolio Turnover Rate(3) 145% 167% 271% 125% 157%
- -------------------------------------- -------- ------- ------- ------------ -------
</TABLE>

(1) The Board of Trustees approved the change of the fiscal year end from
December 31 to September 30.
(2) Annualized
(3) The Portfolio turnover rate is the rate for the master fund in which the
Fund invests its assets.

11
------
<PAGE>

[BANKERS TRUST LOGO APPEARS HERE]

You can find more detailed information about the Fund in the current Statement
of Additional Information, dated January 31, 1999, which we have filed
electronically with the Securities and Exchange Commission (SEC) and which is
incorporated by reference into this Prospectus. To receive your free copy of the
Statement of Additional Information, the annual or semi-annual report, or if you
have questions about investing in a Fund, write to us at:

BT SERVICE CENTER
P.O. BOX 419210
KANSAS CITY, MO 64141-6210

Or call our toll-free number: 1-800-730-1313

You can find reports and other information about the Fund on the SEC Web site
(http://www.sec.gov), or you can get copies of this information, after payment
of a duplicating fee, by writing to the Public Reference Section of the SEC,
Washington, DC 20549-6009. Information about each Fund, including its Statement
of Additional Information, can be reviewed and copied at the SEC's Public
Reference Room in Washington, D.C. For information on the Public Reference Room,
call the SEC at 1-800-SEC-0330.

You can find information about buying and selling shares in the Fund in the
Shareholder Guide. If you have not already received a copy of the Guide, call
the BT Service Center to obtain one free of charge.

CUSIP #055922819
CAPITAL APPRECIATION FUND STA465300 (1/99)
BT INVESTMENT FUNDS 811-4760

DISTRIBUTED BY:
ICC Distributors, Inc.
Two Portland Square
Portland, ME 04101

<PAGE>

PROSPECTUS: JANUARY 31, 1999

[BT MUTUAL FUNDS LOGO APPEARS HERE]

BT Mutual Funds

Small Cap Fund

With the goal of achieving long-term capital growth through
investment in stocks and other equity securities of small
companies

TRUST: BT INVESTMENT FUNDS
INVESTMENT ADVISER: BANKERS TRUST COMPANY

<PAGE>

Overview
of the Small Cap Fund

Goal: The Fund invests for long-term capital growth. Core
Strategy: The Fund invests primarily in stocks and other
equity securities of companies with market capitalizations,
at the time we purchase the stock, within the market
capitalization range of the Russell 2000 Index.

Small Cap Fund
Overview of the Small Cap Fund

A Detailed Look at the Small Cap Fund

7 Objective
7 Strategy
7 Principal Investments
7 Investment Process
7 Risks
8 Management of the Fund
9 Calculating the Fund's Share Price
10 Performance Information
10 Dividends and Distributions
10 Tax Considerations
10 Buying and Selling Fund Shares
11 Financial Highlights

INVESTMENT POLICIES AND STRATEGIES
The Fund invests all of its assets in a master portfolio with the same
investment objective of the Fund. The Fund, through the master portfolio, seeks
to achieve that objective by investing in companies with small market
capitalizations. The Fund searches for small companies whose share price does
not reflect its prospects by looking at factors such as the company's financial
strength and technological opportunities.

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3
<PAGE>

Overview of the Small Cap Fund

PRINCIPAL RISKS OF INVESTING IN THE FUND
An investment in the Fund could lose money, or the Fund's performance could
trail that of other investments. For example:
- - Stocks that the Investment Adviser has selected could perform poorly;
- - Small company stock returns could trail stock market returns generally
because of the liquidity risks specific to small company investing: greater
share-price volatility and fewer buyers for small company shares in periods of
economic or stock market stress. Such lack of liquidity may accelerate a
prevailing downward price trend and limit the Fund's ability to exit from an
unsuccessful investment; or
- - The stock market could decline or could underperform other investments.

WHO SHOULD CONSIDER INVESTING IN THE FUND
You should consider investing in the Small Cap Fund if you are seeking
long-term capital growth. There is, of course, no guarantee that the Fund will
realize its goal. Moreover, you should be willing to accept greater short-term
fluctuation in the value of your investment than you would typically experience
investing in bond or money market funds.

You should not consider investing in the Small Cap Fund if you are pursuing a
short-term financial goal, if you seek regular income or if you cannot tolerate
fluctuations in the value of your investments.

The Fund by itself does not constitute a balanced investment program. It can,
however, afford you exposure to investment opportunities not available to
someone who invests in large company and medium-sized company stocks.

An investment in the Small Cap Fund is not a deposit of Bankers Trust Company
or any other bank and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.

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4
<PAGE>

Overview of the Small Cap Fund

Year-by-Year Returns
(each full calendar year since inception)

[BAR CHART APPEARS BELOW WITH THE FOLLOWING INFORMATION:]

1994 1995 1996 1997 1998
- ---- ---- ---- ---- ----
19.31% 58.57% 6.90% 13.16% 6.15%

Since inception, the Fund's highest return in any calendar quarter was 30.11%
and its lowest quarterly return was -24.39%. Past performance offers no
indication of how the Fund will perform in the future.

TOTAL RETURNS, AFTER FEES AND EXPENSES

The bar chart and table on this page can help you evaluate the potential risk
and rewards of investing in the Fund by showing changes in the Fund's
performance year to year. The bar chart shows the Fund's actual return for each
full calendar year since the Fund began selling shares on October 20, 1993 (its
inception date). The table compares the Fund's average annual return with the
Russell 2000 Index over the last one and five years, and since inception. The
Index is a passive measure of stock performance. It does not factor in the
costs of buying, selling and holding stocks -- costs which are reflected in the
Fund's results.

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

The Russell 2000 Index is a widely accepted benchmark of small company stock
performance. It is a model, not an actual portfolio and is a subset of the
Russell 3000 Index. The Russell 2000 tracks the 2000 smallest companies in the
Russell 3000. The weighted average market capitalization of the companies in
the Russell 2000 was approximately .88 billion as of December 31, 1998. That
compares to $72 billion for the companies in the Russell 3000.

Average Annual Returns
(as of December 31, 1998)

<TABLE>
<CAPTION>
Since Inception
1 Year 5 Year (October 21, 1993)*
---------- ----------- --------------------
<S> <C> <C> <C>
Small Cap Fund 6.15% 19.43% 19.67%
- -------------------- ----- ----- -----
Russell 2000 Index -2.55% 11.87% 11.47%
- -------------------- ------ ----- -----
</TABLE>

*The Russell 2000 Index is calculated from October 31, 1993.

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5
<PAGE>

Overview of the Small Cap Fund

ANNUAL FUND OPERATING EXPENSES
(expenses paid from Fund assets)

The Annual Fees and Expenses table to the right describes the fees and expenses
you may pay if you buy and hold shares of the Small Cap Fund.

Expense Example. This example illustrates the expenses you would have incurred
on a $10,000 investment in the Fund. It assumes that the Fund earned an annual
return of 5% over the periods shown, that the Fund's operating expenses
remained the same and you sold your shares at the end of the period.

You may use this hypothetical example to compare the Fund's expense history
with other funds.(1) Your actual costs may be higher or lower.

1 Information on the annual operating expenses reflects the expenses of both the
Fund and the Small Cap Portfolio, the master fund in which the Small Cap Fund
invests its assets. (A further discussion of the relationship between the Fund
and the Portfolio appears in the "Organizational Structure" section of this
prospectus).
2 Bankers Trust has agreed, for the 16 months from the Fund's fiscal year end of
September 30, 1998, to waive its fees or reimburse its expenses so that total
expenses will not exceed 1.25%.
3 Based on expenses, after fee waivers and reimbursements for the first 16
months only.

Annual Fees and Expenses

<TABLE>
<CAPTION>
Percent of Average
Daily Net Assets(1)
---------------------------
<S> <C>
Management Fees 0.65%
- --------------------------------------- -----
Distribution and Service (12b-1) Fees none
- --------------------------------------- -----
Other Expenses 0.79%
- --------------------------------------- -----
Total Fund Operating Expenses 1.44%
- --------------------------------------- -----
Less: Fee Waivers or Expense
Reimbursement (0.19)%(2)
- --------------------------------------- ----------
Net Expenses 1.25%
- --------------------------------------- ----------
</TABLE>

<TABLE>
<CAPTION>
Expense Example(3)
1 year 3 years 5 years 10 years
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
$127 $440 $784 $1,759
</TABLE>

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6
<PAGE>

A detailed look
at the Small Cap Fund

OBJECTIVE
The Small Cap Fund seeks long-term capital growth. Under normal circumstances,
the Fund invests at least 65% of its total assets in the stock and other
securities with equity characteristics, of companies with market
capitalizations, at the time we first purchase the shares, within the market
capitalization range of the Russell 2000 Index.

The Fund invests for long-term growth, not income; any dividend and interest
income is incidental to the pursuit of its objective. While we give priority to
long-term capital growth, we cannot offer any assurance of achieving this
objective. The Fund's objective is not a fundamental policy. We must notify
shareholders before we change it, but we do not require their approval to do
so.

STRATEGY

We invest for the long term. We are looking for small companies that have
reached a pivotal point -- companies that are ready to reap the benefits of
technological change, companies that have begun to increase their market share,
companies that have completed a turnaround or whose pace of growth is starting
to accelerate. Normally, their share prices do not reflect their strong
prospects -- most investors have not yet discovered them. Two financial
attributes set these companies apart:

- - evidence of above-average growth in revenues and earnings; and
- - a balance sheet that can support this growth potential with sufficient
working capital and manageable levels of debt.

PRINCIPAL INVESTMENTS
The Fund normally owns stock in approximately 90 to 110 small companies at any
one time. The Fund focuses principally on companies with market caps within the
market capitalization range of the Russell 2000 Index.

The Fund may also invest up to 25% of its assets in the stocks of non-U.S.
companies and up to 35% of its assets in large caps. Under normal conditions,
these two tactics would not comprise major elements of its strategy.
- --------------------------------------------------------------------------------

"Market Capitalization," or "Market Cap," provides a ready gauge of a company's
size. It multiplies the total number of a company's outstanding shares by the
current price of its stock to arrive at an estimate of its current value.

INVESTMENT PROCESS
The Fund's process begins with a methodical search for industries poised to
take off. Before identifying individual companies, we seek to identify the
industries that are undergoing positive change or that stand to benefit from
broad demographic and cultural trends.

Once we have identified a likely industry, the exhaustive search begins for the
most promising small companies within the industry. The Small Cap research team
meets frequently with the managements of investment candidates to gather a
first-hand impression of their prospects. The team's investigative work relies
on the analytical and forecasting tools that Bankers Trust has long applied and
is continuously enhancing. The work demands intensive research: visits to a
company's plants and frequent contact with its management, suppliers, customers
and competitors.

RISKS

Below we set forth some of the prominent risks associated with investing in
small company securities, as well as investing in general. Although we attempt
to assess the likelihood that these risks may actually occur and to limit them,
we make no guarantee that we will succeed.

Primary Risks

Market Risk. Although individual stocks can out perform their local markets,
deteriorating market conditions might cause an overall weakness in the stock
prices of the entire market.

Stock Selection. A risk that pervades all investing is the risk that the
securities an investor has selected will not perform to expectations. We manage
this risk in the Small Cap Fund by closely monitoring the Fund's investments
for the following signs of negative change:

- - decelerating revenue or earnings growth;
- - loss of market share;
- - increasing levels of debt or decreasing levels of cash flow and working
capital; and
- - a stock price that lags behind competitors'.
- --------------------------------------------------------------------------------

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7
<PAGE>

A Detailed Look at the Small Cap Fund

Small Company Risk. Small company stocks tend to experience steeper
fluctuations in price -- down as well as up -- than the stocks of larger
companies. A shortage of reliable information -- the same information gap that
creates opportunity in small company investing -- can also pose added risk.
Industry-wide reversals have had a greater impact on small companies, since
they lack a large company's financial resources. Small company managers
typically have less experience coping with adversity or capitalizing on
opportunity than their counterparts at larger companies. Finally, small company
stocks are typically less liquid than large company stocks: when things are
going poorly, it is harder to find a buyer for a small company's shares.

Foreign Investment Risk. To the extent that the Fund holds companies based
outside the United States, it faces the risks inherent in foreign investing.
Adverse political, economic or social developments could undermine the value of
the Fund's investments or prevent the Fund from realizing their full value.
Accounting and financial reporting standards differ from those in the U.S. and
could convey incomplete information when compared to information typically
provided by U.S. companies. Finally, the currency of the country in which the
Fund has invested could decline relative to the value of the U.S. dollar, which
would depreciate the value of an investment itself to U.S. investors.

Secondary Risk

Temporary Defensive Position. For temporary defensive purposes, we may invest
up to 100% of the Fund's assets in the common stock of larger companies, in
fixed-income securities, or short-term money market securities. To the extent
we find it necessary to invest in such securities, the Fund may not meet its
goal of long-term capital growth.

MANAGEMENT OF THE FUND

Board of Trustees. The Fund's shareholders, voting in proportion to the number
of shares each owns, elects a Board of Trustees, and the Trustees supervise all
of the Fund's activities on their behalf.

Investment Adviser. Under the supervision of the Board of Trustees, Bankers
Trust Company, with headquarters at 130 Liberty Street, New York, NY 10006,
acts as the Fund's investment adviser. As investment adviser, Bankers Trust
makes the Fund's investment decisions and assumes responsibility for the
securities the Fund owns. It buys and sells securities for the Fund and
conducts the research that leads to the purchase and sale decisions. For its
services in the last fiscal year, Bankers Trust received a fee from the Small
Cap Fund of 0.65% of its average daily net assets.

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8
<PAGE>

A Detailed Look at the Small Cap Fund

Deutsche Bank AG is a major global banking institution that is engaged in a
wide range of financial services, including retail and commercial banking,
investment banking and insurance. The transaction is contingent upon various
regulatory approvals, as well as the approval of the Fund's Board of Trustees
and the Fund's shareholders. If the transaction is approved and completed,
Deutsche Bank AG, as the Investment Adviser's new parent company, will control
the operations of the Investment Adviser. Bankers Trust believes that, under
this new arrangement, the services provided to the Fund will be maintained at
their current level.

Portfolio Managers. The following portfolio managers are responsible for the
day-to-day management of the master portfolio's investments:

Timothy Woods, Principal of Bankers Trust and Portfolio Manager of the Fund.
- - Joined Bankers Trust in 1992 and the Fund in 1994.
- - Manager of small and mid-cap equity investments.
- - 14 years of investment and financial experience.
- - Bachelors degree from Florida A&M University, MBA from The Wharton School,
University of Pennsylvania, Chartered Financial Analyst.

Mary P. Dugan, Vice President of Bankers Trust and Portfolio Manager of the
Fund.
- - Joined Bankers Trust and the Fund in 1994.
- - Securities Analyst specializing in health care, capital goods and the energy
industries at Fred Alger Management from 1992 to 1994.
- - 15 years of investment and financial research experience.
- - Bachelors degree from the University of Rochester, MBA from New York
University, Chartered Financial Analyst.

Other Services. Bankers Trust provides the administrative functions -- such as
portfolio accounting, legal services and others -- for the Fund. In addition,
Bankers Trust -- or your broker or financial advisor -- performs the functions
necessary to establish and maintain your account. In addition to setting up the
account and processing your purchase and sale orders, these functions include:
- - keeping accurate, up-to-date records for your individual Fund account;
- - implementing any changes you wish to make in your account information;
- - processing your request for cash dividends and distributions from the Fund;
- - answering your questions on the Fund's investment performance or
administration;
- - sending proxy reports and updated prospectus information to you; and
- - collecting your executed proxies.

Organizational Structure. The Small Cap Fund is a "feeder fund" that invests
all of its assets in a "master portfolio," the Small Cap Portfolio. The Fund
and its Master Portfolio have the same investment objective. The Master
Portfolio is advised by Bankers Trust.

CALCULATING THE FUND'S SHARE PRICE

We calculate the daily price of the Fund's shares (also known as the "Net Asset
Value" or "NAV") in accordance with the standard formula for valuing mutual
fund shares at the close of regular trading on the New York Stock Exchange
every day the Exchange is open for business.
The formula calls for deducting all of the Fund's liabilities from the total
value of its assets -- the market value of the securities it holds, plus its
cash reserves -- and dividing the result by the number of shares outstanding.
(Note that prices for securities that trade on foreign exchanges can change
significantly on days when the New York Stock Exchange is closed and you cannot
buy or sell Fund shares. Price changes in the securities the Fund owns may
ultimately affect the price of Fund shares the next time the NAV is
calculated.)

- --------------------------------------------------------------------------------
The Exchange is open every week, Monday through Friday, except when the
following holidays are celebrated: New Year's Day, Martin Luther King, Jr. Day
(the third Monday in January), Presidents' Day (the third Monday in February),
Good Friday, Memorial Day (the last Monday in May), July 4th, Labor Day (the
first Monday in September), Thanksgiving Day (the fourth Thursday in November)
and Christmas Day.

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9
<PAGE>

A Detailed Look at the Small Cap Fund

DIVIDENDS AND DISTRIBUTIONS
If the Fund earns investment income or recognizes taxable net capital gains, it
is the Fund's policy to distribute to shareholders substantially all of that
taxable income quarterly and to distribute any taxable net capital gains on an
annual basis. We automatically reinvest all dividends and any capital gains,
unless you tell us otherwise.

Every year your Fund will send you information on the distributions for the
previous year. In addition, if you sell your Fund shares you may have a capital
gain or loss.

<TABLE>
<CAPTION>
Transaction Tax Status
- ------------------------------ ---------------
<S> <C>
Your sale of shares owned Capital gains
more than one year or losses
Your sale of shares Gains treated
owned for one year or less as ordinary
income; losses
subject to
special rules.
</TABLE>

The tax considerations for tax deferred accounts or non-taxable entities will
be different.

Because each investor's tax circumstances are unique and because the tax laws
are subject to change, we recommend that you consult your tax advisor about
your investment.

We may close your Fund account on 30 days' notice if it fails to meet minimum
balance requirements for any reason other than a change in market value. In
addition, if your sell order exceeds $250,000, we reserve the right to redeem
it "in kind" with a pro-rata distribution of stocks actually held by the Fund,
rather than in cash.

Your broker or financial advisor may charge transaction fees on the purchase
and sale of Fund shares.

Exchange Privileges. You can exchange all or part of your shares for shares of
another BT Mutual Fund up to four times a year without paying a fee. Before
buying shares through an exchange you should be sure to get a copy of that
fund's prospectus and read it carefully. Please note also that you may have to
pay taxes on the shares you sell in the exchange.

Account Minimums. The Fund requires a minimum investment of $2,500 to open
accounts, $250 for subsequent investments, and a minimum balance of $1,000 to
maintain them. The Fund requires a $500 minimum investment to open a retirement
account and $100 for subsequent investments, but imposes no minimum balance.
Automatic investment accounts, which credit money from your checking account to
the purchase of fund shares bi-weekly, monthly, quarterly, or semi-annually,
call for a minimum $1,000 opening investment and at least $100 for each
subsequent purchase of shares.

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10
<PAGE>

A Detailed Look at the Small Cap Fund

The table below provides a picture of the Fund's financial performance for the
past five years. The information selected reflects financial results for a
single Fund share. The total returns in the table represent the rate of return
that an investor would have earned on an investment in the Fund, assuming
reinvestment of all dividends and distributions. This information has been
audited by PricewaterhouseCoopers LLP, whose report, along with the Fund's
financial statements, is included in the Fund's annual report. The annual
report is available free of charge by calling the BT Service Center at
1-800-730-1313.

Financial Highlights

<TABLE>
<CAPTION>
For the period
For the year For the year For the year For the year October 21, 19931
ended ended ended ended through
September 30, September 30, September 30, September 30, September 30,
1998 1997 1996 1995 1994
--------------- --------------- --------------- --------------- ------------------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net Asset Value, Beginning of
Period $ 23.68 $ 21.66 $ 18.50 $ 11.60 $ 10.00
- ---------------------------------- -------- ------- ------- ------- -------
Income from Investment
Operations
Expenses in Excess of Income ( 0.18) ( 0.14) ( 0.12) ( 0.04) ( 0.03)
- ---------------------------------- -------- ------- ------- ------- --------
Net Realized and Unrealized Gain
(Loss) on Investment ( 6.24) 3.58 4.65 6.94 1.63
- ---------------------------------- -------- ------- ------- ------- --------
Total Income (Loss) from
Investment Operations ( 6.42) 3.44 4.53 6.90 1.60
- ---------------------------------- -------- ------- ------- ------- --------
Distributions to Shareholders
Net Realized Gain from Investment
Transactions ( 1.04) ( 1.42) ( 1.37) -- --
- ---------------------------------- -------- ------- ------- ------- --------
In Excess of Net Realized Gains ( 1.26) -- -- -- --
- ---------------------------------- -------- ------- ------- ------- --------
Total Distributions ( 2.30) ( 1.42) ( 1.37) -- --
- ---------------------------------- -------- ------- ------- ------- --------
Net Asset Value, End of Period $ 14.96 $ 23.68 $ 21.66 $ 18.50 $ 11.60
- ---------------------------------- -------- ------- ------- ------- --------
Total Investment Return (28.38)% 17.90% 26.41% 59.48% 17.06%(2)
- ---------------------------------- -------- ------- ------- ------- ----------
Supplemental Data and Ratios:
Net Assets, End of Period (000s
Omitted) $172,310 $286,322 $242,236 $122,935 $ 21,332
- ---------------------------------- -------- -------- -------- -------- ----------
Ratios to Average Net Assets:
Expenses in Excess of Income ( 0.87)% ( 0.89)% ( 0.70)% ( 0.46)% ( 0.58)%(2)
- ---------------------------------- -------- -------- -------- -------- -----------
Expenses, Including Expenses of
the Small Cap Portfolio 1.25% 1.25% 1.25% 1.25% 1.25%(2)
Decrease Reflected in Above
Expense Ratio Due to Absorption
of Expenses by Bankers Trust 0.19% 0.03% 0.22% 0.34% 0.86%(2)
- ---------------------------------- -------- -------- -------- -------- -----------
Portfolio Turnover Rate3 182% 188% 159% 161% 154%
- ---------------------------------- -------- -------- -------- -------- -----------
</TABLE>

1 Inception date
2 Annualized
3 The portfolio turnover rate is the rate for the master portfolio into which
the Fund invests all of its assets.

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11
<PAGE>

[BANKERS TRUST LOGO APPEARS HERE]

You can find more detailed information about the Fund in the current Statement
of Additional Information, dated January 31, 1999, which we have filed
electronically with the Securities and Exchange Commission (SEC) and which is
incorporated by reference into this Prospectus. To receive your free copy of the
Statement of Additional Information, the annual or semi-annual report, or if you
have questions about investing in the Fund, write to us at:

BT Service Center
P.O. Box 419210
Kansas City, MO 64141-6210
or call our toll-free number: 1-800-730-1313

You can find reports and other information about the Fund on the SEC Web site
(http://www.sec.gov), or you can get copies of this information, after payment
of a duplicating fee, by writing to the Public Reference Section of the SEC,
Washington, DC 20549-6009. Information about the Fund, including its Statement
of Additional Information, can be reviewed and copied at the SEC's Public
Reference Room in Washington, D.C. For information on the Public Reference Room,
call the SEC at 1-800-SEC-0330. You can find information about buying and
selling shares in the Fund in the Shareholder Guide. If you have not already
received a copy of the Guide, call the BT Service Center to obtain one free of
charge.

Small Cap Fund CUSIP #055922769
BT Investment Funds STA498300 (1/99)
811-4760

Distributed by:
ICC Distributors, Inc.
Two Portland Square
Portland, ME 04101

<PAGE>

PROSPECTUS: JANUARY 31, 1999

[BT MUTUAL FUNDS LOGO APPEARS HERE]

BT Mutual Funds
International Equity Fund
International Small Company Equity Fund
Global Emerging Markets Equity Fund
Latin American Equity Fund
Pacific Basin Equity Fund

INVESTING IN STOCKS AND OTHER EQUITY SECURITIES OF
COMPANIES
OUTSIDE THE UNITED STATES

TRUST: BT INVESTMENT FUNDS
INVESTMENT ADVISER: BANKERS TRUST COMPANY

<TABLE>
<S> <C>
TABLE OF CONTENTS
----------------------------------------
3 INTERNATIONAL EQUITY FUND
12 INTERNATIONAL SMALL COMPANY EQUITY FUND
19 GLOBAL EMERGING MARKETS EQUITY FUND
26 LATIN AMERICAN EQUITY FUND
35 PACIFIC BASIN EQUITY FUND
44 INFORMATION CONCERNING ALL FUNDS
44 Management of the Funds
45 Calculating a Fund's Share Price
45 Performance Information
46 Dividends and Distributions
46 Tax Considerations
46 Buying and Selling Fund Shares
</TABLE>

2
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<PAGE>

INTERNATIONAL EQUITY FUND

Overview

<TABLE>
<S> <C>
[GOAL: The Fund invests for long-term capital appreciation.
CORE STRATEGY: The Fund invests primarily in the stocks and other
equity securities of companies in developed countries outside the
United States.]
</TABLE>

<TABLE>
<S> <C>
International Equity Fund
OVERVIEW OF THE INTERNATIONAL EQUITY FUND
3 Goal
3 Core Strategy
3 Investment Policies and Strategies
4 Principal Risks of Investing in the Fund
4 Who Should Consider Investing in the Fund
5 Total Returns, After Fees and Expenses
6 Annual Fund Operating Expenses
A DETAILED LOOK AT THE INTERNATIONAL EQUITY FUND
7 Objective
7 Strategy
7 Principal Investments
8 Investment Process
8 Risks
10 Portfolio Managers
11 Financial Highlights
</TABLE>

INVESTMENT POLICIES AND STRATEGIES
The Fund invests all of its assets in a master portfolio with the same
investment objective as the Fund. The Fund, through the master portfolio, seeks
to achieve that objective by investing primarily in companies in developed
foreign countries. The Fund may also invest a portion of its assets in
companies based in emerging markets. The companies are selected by an extensive
tracking system plus the input of experts from various financial disciplines.

3
------
<PAGE>

Overview of the International Equity Fund

PRINCIPAL RISKS OF INVESTING IN THE FUND
An investment in the Fund could lose money, or the Fund's performance could
trail that of other investments. For example:
- - Stocks that the Investment Adviser has selected could perform poorly; or
- - The stock market could perform poorly in one or more of the countries in
which the Fund has invested.

Beyond the risks common to all stock investing, an investment in the Fund could
also lose money or underperform alternative investments as a result of risks in
the foreign countries in which the Fund invests:
- - Adverse political, economic or social developments could undermine the value
of the Fund's investments or prevent the Fund from realizing their full value;
- - Accounting and financial reporting standards differ from those in the U.S.
and could convey incomplete information when compared to information typically
provided by U.S. companies; or
- - The currency of a country in which the Fund invests may decrease in value
relative to the U.S. dollar, which could affect the value of the investment to
U.S. investors.

WHO SHOULD CONSIDER INVESTING IN THE FUND
You should consider investing in the International Equity Fund if you are
seeking long-term capital appreciation. There is, of course, no guarantee that
the Fund will realize its goal. Moreover, you should be willing to accept
greater short-term fluctuation in the value of your investment than you would
typically experience investing in bond or money-market funds.

You should not consider investing in the International Equity Fund if you are
pursuing a short-term financial goal, if you seek regular income or if you
cannot tolerate fluctuations in the value of your investments.

The Fund by itself does not constitute a balanced investment program. It can,
however, afford you exposure to investment opportunities not available to
someone who invests in U.S. securities alone. Diversifying your investments may
improve your long-run investment return and lower the volatility of your
overall investment portfolio.

AN INVESTMENT IN THE INTERNATIONAL EQUITY FUND IS NOT A DEPOSIT OF BANKERS
TRUST COMPANY OR ANY OTHER BANK, AND IS NOT INSURED OR GUARANTEED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.

4
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<PAGE>

Overview of the International Equity Fund

YEAR-BY-YEAR RETURNS
(EACH FULL CALENDAR YEAR SINCE INCEPTION)
[BAR CHART APPEARS HERE BELOW WITH THE FOLLOWING INFORMATION.]

1993 1994 1995 1996 1997 1998
- ----- ---- ---- ----- ----- ------
37.38% 4.11% 16.10% 21.32% 17.37% 20.82%

Since inception, the Fund's highest return in any calendar quarter was 19.44%
and its lowest quarterly return was -16.58%. Past performance offers no
indication of how the Fund will perform in the future.

TOTAL RETURNS, AFTER FEES AND EXPENSES

The bar chart and table on this page can help you evaluate the potential risk
and rewards of investing in the Fund by showing changes in the Fund's
performance year to year. The bar chart shows the Fund's actual return for each
full calendar year since the Fund began selling shares on August 4, 1992 (its
inception date). The table compares the Fund's average annual return with the
MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EAFE INDEX over the last one and
five years and since its inception. Bear in mind that the Index is a passive
measure of combined national stock market returns. It does not factor in the
costs of buying, selling and holding stocks -- costs which are reflected in the
Fund's results.

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

THE MSCI EAFE INDEX of major markets in Europe, Australia and the Far East
(EAFE) is a widely accepted benchmark of international stock performance. It is
a model, not an actual portfolio. It tracks stocks in Australia, Austria,
Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Italy, Japan,
the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden,
Switzerland and the United Kingdom.

AVERAGE ANNUAL RETURNS
(AS OF DECEMBER 31, 1998)

<TABLE>
<CAPTION>
Since Inception
1 year 5 years (August 4, 1992)(1)
----------- ----------- ------------------
<S> <C> <C> <C>
INTERNATIONAL EQUITY FUND 20.82% 15.77% 17.34%
- --------------------------- ----- ----- -----
EAFE Index 20.00% 9.19% 11.93%
- --------------------------- ----- ----- -----
Lipper International Fund
Universe(2) 13.02% 7.69% 11.04%
- ---------- ----- ----- -----
</TABLE>

(1)The EAFE Index and Lipper International Fund Universe averages are calculated
from July 31, 1992.
(2)Unweighted average return, net of fees and expenses, of all mutual funds that
invested primarily in stocks and other equity securities of companies outside
the United States.

5
-------
<PAGE>

Overview of the International Equity Fund

ANNUAL FUND OPERATING EXPENSES
(EXPENSES PAID FROM FUND ASSETS)

The Annual Fees and Expenses table to the right describes the fees and expenses
that you may pay if you buy and hold shares of the International Equity Fund.

Expense Example. The example below illustrates the expenses you would have
incurred on a $10,000 investment in the Fund. The numbers assume that the Fund
earned an annual return of 5% over the periods shown, the Fund's operating
expenses remained the same and you sold your shares at the end of the period.

You may use this hypothetical example to compare the Fund's expense history
with other funds.(1) Your actual costs may be higher or lower.

(1)Information on the annual operating expenses reflects the expenses of both
the Fund and the International Equity Portfolio, the master fund in which the
International Equity Fund invests its assets. (A further discussion of the
relationship between the Fund and the Portfolio appears in the
"Organizational Structure" section of this prospectus.)
(2)Bankers Trust has agreed, for the 16-month period from the Fund's fiscal year
end of September 30, 1998, to waive its fees and reimburse expenses so that
total expenses will not exceed 1.50%.
(3)Based on expenses, after fee waivers and reimbursements for the first 16
months only.

ANNUAL FEES AND EXPENSES

<TABLE>
<CAPTION>
Percentage of Average
Daily Net Assets(1)
---------------------------
<S> <C>
Management Fees 0.65%
- --------------------------------------- -------
Distribution and Service (12b-1) Fees None
- --------------------------------------- -------
Other Fund Operating Expenses 1.05%
- --------------------------------------- -------
Total Fund Operating Expenses 1.70%
- --------------------------------------- -------
Less: Fee Waivers or Expense
Reimbursement (0.20)%(2)
- --------------------------------------- ------------
NET EXPENSES 1.50%
- --------------------------------------- ------------
</TABLE>

<TABLE>
<CAPTION>
[EXPENSE EXAMPLE(3)
1 year 3 years 5 years 10 years
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
$153 $520 $921 $2,047]
</TABLE>

6
------

<PAGE>

INTERNATIONAL EQUITY FUND

A detailed look

OBJECTIVE
The Fund seeks long-term capital appreciation. Under normal circumstances, the
Fund invests at least 65% of its total assets in the stocks and other
securities with equity characteristics of companies in developed countries
outside the United States.

The Fund invests for capital appreciation, not income; any dividend and
interest income is incidental to the pursuit of its objective. While we give
priority to capital appreciation, we cannot offer any assurance of achieving
this objective. The Fund's objective is not a fundamental policy. We must
notify shareholders before we change it, but we do not require their approval
to do so.

STRATEGY

The Fund invests for the long term. We employ a strategy of growth at a
reasonable price. We seek to identify companies outside the United States that
combine strong potential for earnings growth with reasonable investment value.
Such companies typically exhibit increasing rates of profitability and cash
flow, yet their share prices compare favorably to other stocks in a given
market and to their global peers. In evaluating stocks, we consider factors
such as sales, earnings, cash flow and enterprise value. Enterprise value is a
company's market capitalization plus the value of its net debt. We further
consider the relationship between these and other quantitative factors.
Together, these indicators of growth and value may identify companies with
improving prospects before the market in general has taken notice.

PRINCIPAL INVESTMENTS
Almost all the companies in which the Fund invests are based in the developed
foreign countries that make up the EAFE Index, plus Canada. The Fund may also
invest a portion of its assets in companies based in the emerging markets of
Latin America, the Middle East, Europe, Asia and Africa if we believe that
their return potential more than compensates for the extra risks associated
with these markets. While we have invested in emerging markets in the past,
under normal market conditions we do not consider this a central element of the
Fund's strategy. Typically, we would not hold more than 15% of net assets in
emerging markets.

BEST/WORST PERFORMING STOCK MARKETS

[BAR CHART APPEARS BELOW DEPICTING THE BEST/WORST PERFORMING STOCK MARKETS]

1988 1994
New Zealand -12% Hong Kong -5%
Belgium 55% Finland 52%

1989 1995
Finland -9% Austria -4%
Austria 104% Switzerland 45%

1990 1996
New Zealand -37% Japan -15%
United Kingdom 10% Spain 41%

1991 1997
Finland -17% Malaysia -68%
Hong Kong 50% Switzerland 45%

1992 1998
Denmark -28% Norway -30%
Hong Kong 32% Finland 123%

1993
US 10%
Hong Kong 116%

Returns in U.S. dollars
- --------------------------------------------------------------------------------
THIS CHART DOES NOT REPRESENT THE PERFORMANCE OF ANY OF THE BT MUTUAL FUNDS.
PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS.

From 1988 to 1998, the difference in annual returns between the strongest
performing markets and the weakest averaged 81%, according to Factset. And the
United States, notwithstanding some outstanding years during this period, never
posted the best annual return. Thus, by maintaining a presence across the
developed markets, investors can potentially improve their returns compared to
investing solely in U.S. stocks.

7
----
<PAGE>

A Detailed Look at the International Equity Fund

INVESTMENT PROCESS

Company research lies at the heart of our investment process, as it does with
many stock mutual funds. We track several thousand companies to arrive at the
approximately 100 stocks the Fund normally holds. But our process brings an
added dimension to this fundamental research. It draws on the insight of
experts from a range of financial disciplines -- regional stock market
specialists, global industry specialists, economists and quantitative analysts.
They challenge, refine and amplify each other's ideas. Their close
collaboration is a critical element of our investment process.

RISKS
BELOW WE SET FORTH SOME OF THE PROMINENT RISKS ASSOCIATED WITH INTERNATIONAL
INVESTING, AS WELL AS INVESTING IN GENERAL, AND WE DETAIL OUR APPROACHES TO
CONTAINING THEM. ALTHOUGH WE ATTEMPT TO ASSESS THE LIKELIHOOD THAT THESE RISKS
MAY ACTUALLY OCCUR AND TO LIMIT THEM, WE MAKE NO GUARANTEE THAT WE WILL
SUCCEED.

PRIMARY RISKS

Market Risk. Although individual stocks can outperform their local markets,
deteriorating market conditions might cause an overall weakness in the stock
prices of the entire market.

Stock Selection Risk. A risk that pervades all investing is the risk that the
securities an investor has selected will not perform to expectations. To
minimize this risk, we monitor each of the stocks in the Fund according to
three basic quantitative criteria.

We subject a stock to intensive review if:
- - its rate of price appreciation begins to trail that of its national stock
index;
- - the financial analysts who follow the stock, both within Bankers Trust and
outside, cut their estimates of the stock's future earnings; or
- - the stock's price approaches the downside target we set when we first bought
the stock (and may since have modified to reflect changes in market and
economic conditions).

In this review, we seek to learn if the deteriorating performance accurately
reflects deteriorating prospects or if, in our view, it merely reflects
investor overreaction to temporary circumstances.

Political Risk. Some foreign governments have limited the outflow of profits to
investors abroad, extended diplomatic disputes to include trade and financial
relations, and imposed high taxes on corporate profits. While these political
risks have not occurred recently in the major countries in which the Fund
invests, we analyze countries and regions to try to anticipate these risks.

- --------------------------------------------------------------------------------
PORTFOLIO TURNOVER. The portfolio turnover rate measures the frequency that the
Portfolio sells and replaces the securities it holds within a given period.
Historically, this Fund has had a low portfolio turnover rate.

Information Risk. Financial reporting standards for companies based in foreign
markets differ from those in the United States. Since the "numbers" themselves
sometimes mean different things, the Investment Adviser devotes much of its
research effort to understanding and assessing the impact of these differences
upon a company's financial conditions and prospects.

- - Liquidity Risk. Stocks that trade less can be more difficult or more costly
to buy, or to sell, than more liquid or active stocks. This liquidity risk is a
factor of the trading volume of a particular stock, as well as the size and
liquidity of the entire local market. On the whole, foreign exchanges are
smaller and less liquid than the U.S. market. This can make buying and selling
certain shares more difficult and costly. Relatively small transactions in some
instances can have a disproportionately large effect on the price and supply of
shares. In certain situations, it may become virtually impossible to sell a
stock in an orderly fashion at a price that approaches our estimate of its
value.

- - Regulatory Risk. Some foreign governments regulate their exchanges less
stringently, and the rights of shareholders may not be as firmly established.

The management of certain foreign companies may be less focused on short-term
earnings than some U.S. companies. For example, they may pay lower dividends.

In an effort to reduce these foreign stock market risks, the Fund diversifies
its investments, just as you may spread your investments among a range of
securities so that a setback in one need not overwhelm your entire strategy. In
this way, a reversal in one market or stock need not undermine the pursuit of
long-term capital appreciation.

Currency Risk. The Fund invests in foreign securities denominated in foreign
currencies. This creates the possibility that changes in foreign exchange rates
will affect the value of foreign securities or the U.S. dollar amount of income
or gain received on these securities. The Investment Adviser seeks to minimize
this risk by actively managing the currency exposure of the Fund.

Emerging Market Risk. To the extent that the Fund invests in emerging markets
to enhance overall returns, it may face higher political, information, and
stock market risks. In addition,

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

CURRENCY MANAGEMENT is used to offset investment risks ("hedging") and, where
possible, to add to investment returns. Currency management activities include
the use of forward contracts and may include the use of other instruments.
There is no guarantee that these currency management activities will work and
they could cause losses to the Fund.

8
----

<PAGE>

A Detailed Look at the International Equity Fund

profound social changes and business practices that depart from norms in
developed countries' economies have hindered the orderly growth of emerging
economies and their stock markets in the past. High levels of debt tend to make
emerging economies heavily reliant on foreign capital and vulnerable to capital
flight. For all these reasons, the Fund carefully limits and balances its
commitment to these markets.

SECONDARY RISKS

Small Company Risk. Although the Fund generally invests in the shares of large,
well-established companies, it may occasionally take advantage of exceptional
opportunities presented by smaller companies. Such opportunities pose unique
risks, which we take into account in considering an investment. Small company
stocks tend to experience steeper fluctuations in price -- down as well as up
- -- than the stocks of larger companies. A shortage of reliable information, the
same information gap that creates opportunity in small company investing, can
also pose added risk. Industrywide reversals have had a greater impact on small
companies, since they lack a large company's financial resources. Small company
managers typically have less experience coping with adversity or capitalizing
on opportunity than their counterparts at larger companies. Finally, small
company stocks are typically less liquid than large company stocks: when things
are going poorly, it is harder to find a buyer for a small company's shares.

Futures and Options. Although not one of its principal investment strategies,
the Fund may invest in futures contracts and options on futures contracts.
These investments, when made, are for hedging purposes. If the Fund invests in
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS for non-hedging purposes,
the margin and premiums required to make those investments will not exceed 5%
of the Fund's net asset value after taking into account unrealized profits and
losses on the contracts. Futures contracts and options on futures contracts
used for non-hedging purposes involve greater risks than stock investments.
- --------------------------------------------------------------------------------
FUTURES CONTRACTS and options on futures contracts are used as a low cost
method of gaining exposure to a particular securities market without investing
directly in those securities.

Euro Risk. On January 1, 1999, eleven countries of the European Economic and
Monetary Union (EMU) began implementing a plan to replace their national
currencies with a new currency, the euro. Full conversion to the euro is slated
to occur by July 1, 2002.

Although it is impossible to predict the impact of the conversion to the euro
on the Fund, the risks may include:
- - changes in the relative strength and value of the U.S. dollar or other major
currencies;
- - adverse effects on the business or financial condition of European issuers
that the Fund holds in its portfolio;
- - that the systems used to purchase and sell euro-denominated securities may
not work;
- - uncertainty about how existing financial contracts will be treated after euro
implementation; and
- - unpredictable effects on trade and commerce generally.

These and other factors could increase volatility in financial markets
worldwide and could adversely affect the value of securities held by the Fund.

Temporary Defensive Position. We may from time to time adopt a temporary
defensive position in response to extraordinary adverse political, economic or
stock market events. We could place up to 100% of the Fund's assets in U.S. or
foreign-government money-market investments, or other short-term bonds that
offer comparable safety, if the situation warranted. To the extent we might
adopt such a position and over the course of its duration, the Fund may not
meet its goal of long-term capital appreciation.

9
----

<PAGE>

A Detailed Look at the International Equity Fund

PORTFOLIO MANAGERS

The following portfolio managers are responsible for the day-to-day management
of the master portfolio's investments:

Michael Levy, Managing Director of Bankers Trust and Co-Lead Manager of the
Fund.
- - Joined Bankers Trust and the Fund in 1993.
- - Bankers Trust's international equity strategist, overseeing the design and
implementation of the firm's proprietary stock selection process.
- - 27 years of business experience, 17 of them as an investment professional.
- - Degrees in mathematics and geophysics from the University of Michigan.

Robert Reiner, Managing Director of Bankers Trust and Co-Lead Manager of the
Fund.
- - Joined Bankers Trust and the Fund in 1994.

- - Specializes in Japanese and European stock and market analysis. - Served as
a Senior Financial Analyst at Scudder, Stevens & Clark from 1993 to 1994.
- - 17 years of investment industry experience.
- - Degrees from the University of Southern California and Harvard University.

Julie Wang, Principal of Bankers Trust and Co-Manager of the Fund.
- - Joined Bankers Trust and the Fund in 1994.
- - Focuses on the Fund's Asia-Pacific investments and its emerging-markets
exposure.
- - Served as Investment Manager for American International Group's Southeast
Asia portfolio from 1991 to 1994.
- - 10 years of investment management experience.
- - Bachelors degree in economics from Yale University, MBA from The Wharton
School, University of Pennsylvania.

10
----

<PAGE>

A Detailed Look at the International Equity Fund

The table below provides a picture of the Fund's financial performance for the
past five years. The information selected reflects financial results for a
single Fund share. The total returns in the table represent the rate of return
that an investor would have earned on an investment in the Fund, assuming
reinvestment of all dividends and distributions. This information has been
audited by PricewaterhouseCoopers LLP, whose report, along with the Fund's
financial statements, is included in the Fund's annual report. The annual
report is available free of charge by calling the BT Service Center at
1-800-730-1313.

FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
FOR THE
PERIOD
JANUARY 1,
FOR THE FOR THE FOR THE 1995 FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED THROUGH YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
1998 1997 1996 1995(1) 1994
-------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD $ 22.13 $ 16.77 $ 15.47 $ 13.37 $ 13.18
- ------------------------------------------- --------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.02 0.09 0.18 0.14 0.10
- ------------------------------------------- --------- ------- ------- ------- -------
Net Realized and Unrealized Gain (Loss) on
Investment, Option, Foreign Currency,
Forward Foreign Currency and Foreign
Futures Contracts (0.87) 5.63 1.80 1.97 0.44
- ------------------------------------------- --------- ------- ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS (0.85) 5.72 1.98 2.11 0.54
- ------------------------------------------- --------- ------- ------- ------- -------
DISTRIBUTIONS TO SHAREHOLDERS
Net Investment Income (0.01) (0.16) (0.31) -- (0.09)
- ------------------------------------------- --------- -------- -------- ------- -------
Net Realized Gains (0.59) (0.20) (0.37) (0.01) (0.26)
- ------------------------------------------- --------- -------- -------- ------- -------
TOTAL DISTRIBUTIONS (0.60) (0.36) (0.68) (0.01) (0.35)
- ------------------------------------------- --------- -------- -------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 20.68 $ 22.13 $ 16.77 $ 15.47 $ 13.37
- ------------------------------------------- --------- -------- -------- ------- -------
TOTAL INVESTMENT RETURN (3.73)% 34.76% 13.42% 15.82% 4.12%
- ------------------------------------------- --------- -------- -------- ------- -------
SUPPLEMENTAL DATA AND RATIOS:
Net Assets, End of Period (000s omitted) $1,251,580 $525,520 $161,692 $ 82,807 $56,020
- ------------------------------------------- ---------- -------- -------- -------- -------
Ratios to Average Net Assets:
Net Investment Income 0.61% 0.53% 0.91% 1.55%(2) 0.84%
- ------------------------------------------- ---------- -------- -------- ---------- -------
Expenses, Including Expenses of the
International Equity Portfolio 1.50% 1.50% 1.50% 1.50%(2) 1.50%
Decrease Reflected in Above Expense Ratio
Due to Absorption of Expenses by
Bankers Trust 0.20% 0.18% 0.26% 0.33%(2) 0.37%
- ------------------------------------------- ---------- -------- -------- ---------- -------
Portfolio Turnover Rate(3) 65% 63% 68% 21% 15%
- ------------------------------------------- ---------- -------- -------- ---------- -------
</TABLE>

(1)On August 2, 1995, the Fund changed its fiscal year-end from December 31 to
September 30.
(2)Annualized
(3)The portfolio turnover rate is the rate for the master fund in which the Fund
invests its assets.

11
----

<PAGE>

INTERNATIONAL SMALL COMPANY EQUITY FUND

Overview

<TABLE>
<S> <C>
[GOAL: The Fund invests for long-term capital appreciation.
CORE STRATEGY: The Fund invests primarily in the stocks and other
equity securities of small companies in developed countries outside
the United States.]
</TABLE>

<TABLE>
<S> <C>
International Small Company Equity Fund
OVERVIEW OF THE INTERNATIONAL SMALL COMPANY
EQUITY FUND
12 Goal
12 Core Strategy
12 Investment Policies and Strategies
13 Principal Risks of Investing in the Fund
13 Who Should Consider Investing in the Fund
14 Total Returns, After Fees and Expenses
14 Annual Fund Operating Expenses
A DETAILED LOOK AT THE INTERNATIONAL SMALL
COMPANY EQUITY FUND
15 Objective
15 Strategy
15 Principal Investments
15 Investment Process
15 Risks
17 Portfolio Manager
18 Financial Highlights
</TABLE>

INVESTMENT POLICIES AND STRATEGIES
The Fund invests all of its assets in a master portfolio with the same
investment objective as the Fund. The Fund, through the master portfolio, seeks
to achieve that objective by investing principally in roughly 50 to 80 small
companies in developed countries outside the United States. The companies are
selected by combining an extensive tracking system, direct contact with the
company, its management, and its competitors, and a look at the market in which
the company is trading.

12
----

<PAGE>

Overview of the International Small Company Equity Fund

PRINCIPAL RISKS OF INVESTING IN THE FUND

An investment in the Fund could lose money, or the Fund's performance could
trail that of other investments. For example:
- - Stocks that our Investment Adviser has selected could perform poorly;
- - The stock market could perform poorly in one or more of the countries in
which the Fund has invested; or
- - Small company stock returns trail stock market returns generally because of
risks specific to small company investing: greater share-price volatility and
fewer buyers for shares in periods of economic or stock market stress.

WHO SHOULD CONSIDER INVESTING IN THE FUND
You should consider investing in the International Small Company Equity Fund if
you are seeking long-term capital appreciation. There is, of course, no
guarantee that the Fund will realize its goal. Moreover, you should be willing
to accept greater short-term fluctuation in the value of your investment than
you would typically experience investing in bond or money market funds.

You should not consider investing in the International Small Company Equity
Fund if you are pursuing a short-term financial goal, if you seek regular
income or if you cannot tolerate fluctuations in the value of your investments.

The Fund by itself does not constitute a balanced investment program. It can,
however, afford you exposure to investment opportunities not available to
someone who invests in U.S. securities alone or in established large company
stocks or medium-sized company stocks.

AN INVESTMENT IN THE INTERNATIONAL SMALL COMPANY EQUITY FUND IS NOT A DEPOSIT
OF BANKERS TRUST COMPANY OR ANY OTHER BANK AND IS NOT INSURED OR GUARANTEED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.

13
----

<PAGE>

Overview of the International Small Company Equity Fund

TOTAL RETURNS, AFTER FEES AND EXPENSES

The Fund first opened to investors on June 30, 1998. Therefore, it does not
have a full calendar year of annual operating performance to report.

ANNUAL FUND OPERATING EXPENSES
(EXPENSES PAID FROM FUND ASSETS)

The Annual Fees and Expenses table to the right describes the fees and
estimated expenses that you may pay if you buy and hold shares of the
International Small Company Equity Fund.

Expense Example. The example on this page illustrates the expenses you would
have incurred on a $10,000 investment in the Fund. The numbers assume that the
Fund earned an annual return of 5% over the periods shown, that the Fund's
operating expenses remained the same and you sold your shares at the end of the
period.

You may use this hypothetical example to compare the Fund's expense ratio with
other funds.(1) Your actual costs may be higher or lower.

(1)Information on the annual operating expenses reflects the expenses of both
the Fund and the International Small Company Equity Portfolio, the master fund
in which International Small Company Equity Fund invests. (A further discussion
of the relationship between the Fund and the Portfolio appears in the
"Organizational Structure" section of this prospectus.)
2)Generally, when a fund begins operations, its expenses are relatively high and
its assets are relatively small, which makes its total fund operating expenses
(expressed as a percentage of average daily net assets) relatively high compared
to funds with longer operating histories and greater assets.
(3)Bankers Trust has agreed, for the 16-month period from the Fund's fiscal year
end of September 30, 1998, to waive its fees and reimburse expenses, so that
total expenses will not exceed 1.90%.
(4)Based on expenses, after fee waivers and reimbursements for the first 16
months only.

ANNUAL FEES AND EXPENSES

<TABLE>
<CAPTION>
Percentage of Average
Daily Net Assets(1)
-----------------------------
<S> <C>
Management Fees 1.10%
- --------------------------------------- --------
Distribution and Service (12b-1) Fees none
- --------------------------------------- --------
Other Fund Operating Expenses 34.63%
- --------------------------------------- --------
Total Fund Operating Expenses 35.73%(2)
- --------------------------------------- ------------
Less: Fee Waivers or Expense
Reimbursement (33.83)%(3)
- --------------------------------------- -------------
NET EXPENSES 1.90%
- --------------------------------------- -------------
</TABLE>

<TABLE>
<CAPTION>
[EXPENSE EXAMPLE(4)
1 year 3 years
-------- --------
<S> <C> <C>
$193 $4,629]
</TABLE>

14
----
<PAGE>

INTERNATIONAL SMALL COMPANY EQUITY FUND

A detailed look
OBJECTIVE
The Fund seeks long-term capital appreciation. Under normal circumstances, it
invests at least 65% of its total assets in stock and other securities with
equity characteristics of SMALL COMPANIES in developed countries outside the
United States.

STRATEGY
The Fund seeks first to identify global industries with strong prospects. The
companies in the industry as a whole will be reporting improving cash flow or
revenues. Or their stock prices, measured by factors such as earnings, cash
flow or REPLACEMENT VALUE per share, may seem low compared to companies in
other industries.

Once we have identified the industry, the search begins for smaller enterprises
that combine significant potential for earnings growth with reasonable
investment value. Such companies have secured a solid competitive position.
Their earnings per share and cash flow are increasing at rates comparable to
the industry as a whole. But the local stock market may have overlooked these
solid fundamentals because of misperception or, as is often the case with small
companies, a simple lack of information. Investors in the local market may not
have fully understood the impact of legislative, demographic, or technological
change that should work in a company's favor, or they may have failed to take
into account the impact of a restructuring on the company's profitability.

PRINCIPAL INVESTMENTS
When the Fund is fully invested, it intends to hold the shares of roughly 50 to
80 small companies. It focuses principally on companies having publicly traded
shares with a market capitalization within the market capitalization range of
THE SALOMON SMITH BARNEY EXTENDED MARKET INDEX -- EXCLUDING U.S. (TOTAL).
- --------------------------------------------------------------------------------
We define a "SMALL COMPANY" as, at the time of purchase, having publicly traded
shares with a market capitalization within the market capitalization range of
The Salomon Smith Barney Extended Market Index -- excluding U.S. (Total).

REPLACEMENT VALUE measures the cost per share of replacing all the physical
assets of a business at current prices.

Small companies remain under-researched both in the United States and to an
even greater extent abroad, so they may offer fertile ground for finding
substantially undervalued stocks. Moreover, the Fund offers an opportunity to
invest in companies that often slip beneath the screens of the "large-cap"
mutual funds.

While the Fund may invest throughout the world, it intends to invest primarily
in Canada, Japan, the United Kingdom, Germany, France, Switzerland, the
Netherlands, Sweden, Hong Kong, Italy, Norway, Denmark, Spain, Ireland,
Singapore, Portugal, Sweden, Finland, and Austria.

INVESTMENT PROCESS
Company research lies at the heart of our investment process, as it does with
many stock mutual funds. We track several hundred companies to arrive at the 50
to 80 stocks the Fund intends to normally hold. This effort relies on the
analytical and forecasting tools that the Investment Adviser has applied and
refined in international investing over the last quarter-century. Applying
these tools to small company investing calls for face-to-face contact, visits
to the company's plants and frequent contact with its management, suppliers,
customers and competitors. It also requires the investment team to place their
global industry findings in the context of national stock markets: a strong
small company might well fail as an investment if its shares trade in a weak
stock market.

RISKS
BELOW WE SET FORTH SOME OF THE PROMINENT RISKS ASSOCIATED WITH SMALL COMPANY
INVESTING AND INVESTING OUTSIDE THE UNITED STATES, ALONG WITH THOSE OF
INVESTING IN GENERAL. WE ALSO DETAIL OUR METHODS FOR DEALING WITH THESE RISKS.
ALTHOUGH WE ATTEMPT TO ASSESS THE LIKELIHOOD THAT THESE RISKS MAY ACTUALLY
OCCUR AND TO LIMIT THEM, WE MAKE NO GUARANTEE THAT WE WILL SUCCEED.

- --------------------------------------------------------------------------------
THE SALOMON SMITH BARNEY EXTENDED MARKET INDEX -- EXCLUDING U.S. (TOTAL), one
of the principal global small company stock benchmarks, includes 4,500
companies representing an estimated 20% of the total value of the world's
stocks.

PORTFOLIO TURNOVER. The portfolio turnover rate measures the frequency that the
Portfolio sells and replaces the securities it holds within a given period. We
expect that this Fund will not have a high portfolio turnover rate.
15
-----
<PAGE>

A Detailed Look at the International Small Company Equity Fund

PRIMARY RISKS

Market Risk. Although individual stocks can outperform their local markets,
deteriorating market conditions might cause an overall weakness in the stock
process of the entire market.

Stock Selection Risk. A risk that pervades all investing is the risk that the
securities an investor has selected will not perform to expectations. The Fund
seeks to limit this risk with a strict evaluation process. Before it takes a
position in a stock, the Fund's investment team typically establishes a target
sell price, at which point they will reevaluate the company's situation to
determine whether the deterioration in price mirrors a fundamental
deterioration in the business, or whether the reversal is merely temporary.

Small Company Risk. Small company stocks tend to experience steeper
fluctuations in price -- down as well as up -- than the stocks of larger
companies. A shortage of reliable information -- the same information gap that
creates opportunity in small company investing -- can also pose added risk.
Industrywide reversals have had a greater impact on small companies, since they
lack a large company's financial resources. Small company managers typically
have less experience coping with adversity or capitalizing on opportunity than
their counterparts at larger companies. Finally, small company stocks are
typically less liquid than large company stocks: when things are going poorly,
it is harder to find a buyer for a small company's shares.

Political Risk. Some foreign governments have limited the outflow of profits to
investors abroad, and extended diplomatic disputes to include trade and
financial relations, and imposed high taxes on corporate profits. While these
political risks have not occurred recently in the major countries in which the
Fund invests, we analyze countries and regions to try to anticipate these
risks.

The management of certain foreign companies may be less focused on short-term
earnings than some U.S. companies. For example, they may pay lower dividends.

SECONDARY RISKS

Emerging Markets Risk. To the extent that the Fund invests in emerging markets
to enhance overall returns, it may face higher stock market, information and
political risks. Therefore, the Fund carefully limits and balances its
commitment to these markets.

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

16
-----
<PAGE>

A Detailed Look at the International Small Company Equity Fund

These and other factors could increase volatility in financial markets
worldwide and could adversely affect the value of securities held by the Fund.

Temporary Defensive Position. We may from time to time adopt a temporary
defensive position in response to extraordinary adverse political, economic or
stock market events. We could place up to 100% of the Fund's assets in U.S. or
foreign government money market investments, or other short-term bonds that
offer comparable safety, if the situation warranted. To the extent that we
might adopt such a position, and over the course of its duration, the Fund may
not meet its goal of long-term capital appreciation.

PORTFOLIO MANAGER

Monik Kotecha is responsible for the day-to-day management of the master
portfolio's investments.
- - Head Portfolio Manager and Senior Vice President, BT Funds Management
(International) Limited ("BTFMI") and Lead Portfolio Manager of the Fund since
its inception.
- - Joined Bankers Trust in 1994 as analyst for European small company
investments.
- - Head of BTFMI's Global Small Company Investments and head of Global Small Cap
Equities since 1996.
- - Eight years of investment management and research experience with Abu Dhabi
Investment Authority in London, U.K.
- - BSc. honors degree in law and accounting from University College, Cardiff;
MSc. from City University Business School, London, U.K.

17
-----
<PAGE>

A Detailed Look at the International Small Company Equity Fund

The table below provides a picture of the Fund's financial performance since
inception. The information selected reflects financial results for a single
Fund share. The total returns in the table represent the rate of return that an
investor would have earned on an investment in the Fund assuming reinvestment
of all dividends and distributions. This information has been audited by
PricewaterhouseCoopers LLP, whose report, along with the Fund's financial
statements, is included in the Fund's annual report. The annual report is
available free of charge by calling the BT Service Center at 1-800-730-1313.

FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
FOR THE PERIOD JUNE 30, 1998(1)
THROUGH SEPTEMBER 30, 1998
------------------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
- ------------------------------------------------------------------------------------------ ---------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.00(2)
- ------------------------------------------------------------------------------------------ ----------
Net Realized and Unrealized Gain (Loss) on Investment, Foreign Currency and
Forward Foreign Currency Contracts (1.97)
- ------------------------------------------------------------------------------------------ ----------
TOTAL LOSS FROM INVESTMENT OPERATIONS (1.97)
- ------------------------------------------------------------------------------------------ ----------
NET ASSET VALUE, END OF PERIOD $ 8.03
- ------------------------------------------------------------------------------------------ ----------
TOTAL INVESTMENT RETURN (19.70)%
- ------------------------------------------------------------------------------------------ ----------
SUPPLEMENTAL DATA AND RATIOS:
Net Assets, End of Period (000s omitted) $ 61
- ------------------------------------------------------------------------------------------ ----------
Ratios to Average Net Assets:
Net Investment Income(3) 0.22%
- ------------------------------------------------------------------------------------------ ----------
Expenses, Including Expenses of the International Small Company Equity Portfolio(3) 1.90%
Decrease Reflected in Above Expense Ratio Due to Absorption of Expenses by Bankers Trust(3) 210.17%
- ------------------------------------------------------------------------------------------ ----------
Portfolio Turnover Rate(4) 11%
- ------------------------------------------------------------------------------------------ ----------
</TABLE>

(1) Commencement of operations
(2) Less than $0.01 per share
(3) Annualized
(4) The portfolio turnover rate is the rate for the master fund in which the
Fund invests its assets.

18
----
<PAGE>
Global Emerging Markets Equity Fund

Overview

<TABLE>
<S> <C>
[GOAL: The Fund invests primarily for long-term capital growth.
CORE STRATEGY: The Fund invests in stocks and other equity
securities of companies in the world's emerging markets.]
</TABLE>

<TABLE>
<S> <C>
Global Emerging Markets Equity Fund
OVERVIEW OF THE GLOBAL EMERGING MARKETS EQUITY
FUND
19 Goal
19 Core Strategy
19 Investment Policies and Strategies
20 Principal Risks of Investing in the Fund
20 Who Should Consider Investing in the Fund
21 Total Returns, After Fees and Expenses
21 Annual Fund Operating Expenses
A DETAILED LOOK AT THE GLOBAL EMERGING MARKETS
EQUITY FUND
22 Objective
22 The Case for Emerging Markets
22 Strategy
22 Principal Investments
23 Investment Process
23 Risks
25 Portfolio Manager
25 Financial Highlights
</TABLE>

INVESTMENT POLICIES AND STRATEGIES
The Fund invests all of its assets in a master portfolio with the same
investment objective as the Fund. The Fund, through the master portfolio, seeks
to achieve that objective by investing primarily in companies based in emerging
markets meeting specific investment criteria. The Fund may also invest a
portion of its assets in emerging market bonds or other debt securities. The
companies are selected by an extensive tracking system plus the input of
experts from various financial disciplines.

19
------
<PAGE>

Overview of the Global Emerging Markets Equity Fund

PRINCIPAL RISKS OF INVESTING IN THE FUND

An investment in the Fund could lose money, or the Fund's performance could
trail that of other investments. For example:
- - Stocks that the Investment Adviser has selected could perform poorly; or
- - The stock market could perform poorly or could underperform other investments
in one or more of the countries in which the Fund has invested.

Beyond the risks common to all stock investing, an investment in the Fund could
also lose money or underperform alternative investments as a result of risks in
the foreign countries in which the Fund invests:
- - Economies in emerging markets are more volatile than developed countries' and
are subject to sudden reversals;
- - Adverse political, economic or social developments could undermine the value
of the Fund's investments or prevent the Fund from realizing their full value;
- - Accounting and financial reporting standards differ from those in the U.S.
and could convey incomplete information when compared to information typically
provided by U.S. companies; or
- - The currency of a country in which the Fund invests may decline in value
relative to the U.S. dollar, which could affect the value of the investment
itself to U.S. investors.

WHO SHOULD CONSIDER INVESTING IN THE FUND

You should consider investing in the Global Emerging Markets Equity Fund if you
are seeking long-term capital growth. There is, of course, no guarantee that
the Fund will realize its goal. The Fund is designed for investors who are
willing to accept the extreme fluctuation in short-term investment values that
have often accompanied this long-term capital growth.

You should not consider investing in the Global Emerging Markets Equity Fund if
you are pursuing a short-term financial goal, if you seek regular income or if
you cannot tolerate fluctuations in the value of your investments.

The Fund by itself does not constitute a balanced investment program. It can,
however, afford exposure to investment opportunities not otherwise available to
someone who invests in developed market securities alone.

AN INVESTMENT IN THE GLOBAL EMERGING MARKETS EQUITY FUND IS NOT A DEPOSIT OF
BANKERS TRUST COMPANY OR ANY OTHER BANK AND IS NOT INSURED OR GUARANTEED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.

20
------

<PAGE>

Overview of the Global Emerging Markets Equity Fund

TOTAL RETURNS, AFTER FEES AND EXPENSES
The Fund first opened to investors on June 30, 1998. Therefore, it does not
have a full calendar year of performance to report.

ANNUAL FUND OPERATING EXPENSES
(EXPENSES PAID FROM FUND ASSETS)

The Annual Fees and Expenses table to the right describes the fees and
estimated expenses you may pay if you buy and hold shares of the Global
Emerging Markets Equity Fund.

Expense Example. The example below illustrates the expenses you would have
incurred on a $10,000 investment in the Fund. The numbers assume that the Fund
earned an annual return of 5% over the periods shown, the Fund's operating
expenses remained the same and you sold your shares at the end of the period.

You may use this hypothetical example to compare the Fund's expense ratio with
other funds.(1) Your actual costs may be higher or lower.

(1)Information on the annual operating expenses reflects the expenses of both
the Fund and the Global Emerging Markets Equity Portfolio, the master fund in
which the Global Emerging Markets Equity Fund invests its assets. (A further
discussion of the relationship between the Fund and the Portfolio appears in the
"Organizational Structure" section of this prospectus.)
(2)Generally, when a fund begins operations, its expenses are relatively high
and its assets are relatively small, which makes its total fund operating
expenses (expressed as a percentage of average daily net assets) relatively high
compared to funds with longer operating histories and greater assets.
(3)Bankers Trust has agreed, for the 16-month period from the Fund's fiscal year
end of September 30, 1998, to waive its fees and reimburse expenses so that
total expenses will not exceed 1.90%.
(4)Based on expenses, after fee waivers and reimbursements for the first 16
months only.

ANNUAL FEES AND EXPENSES

<TABLE>
<CAPTION>
Percentage of Average
Daily Net Assets(1)
-----------------------------
<S> <C>
Management Fees 1.10%
- --------------------------------------- -------
Distribution and Service (12b-1) Fees None
- --------------------------------------- -------
Other Fund Operating Expenses 2.88%
- --------------------------------------- -------
Total Fund Operating Expenses 3.98%(2)
- --------------------------------------- -----------
Less: Fee Waivers or Expense
Reimbursements (2.08)%(3)
- --------------------------------------- ------------
Net Expenses 1.90%
- --------------------------------------- ------------
</TABLE>

<TABLE>
<CAPTION>
[EXPENSE EXAMPLE(4)
1 year 3 years
-------- --------
<S> <C> <C>
$193 $972]
</TABLE>

21
------
<PAGE>

GLOBAL EMERGING MARKETS EQUITY FUND

A detailed look

OBJECTIVE
The Fund seeks long-term capital growth. Under normal circumstances, the Fund
invests at least 65% of its total assets in the stock and other securities with
equity characteristics of companies in the world's EMERGING MARKETS.

The Fund invests for growth, not income; any dividend and interest income is
incidental to the pursuit of its objective. While we give priority to capital
growth, we cannot offer any assurance of achieving this objective. The Fund's
objective is not a fundamental policy. We must notify shareholders before we
change it, but we do not require their approval to do so.

THE CASE FOR EMERGING MARKETS

Emerging markets offer the potential for long-term growth. An emerging market
is commonly defined as one that has experienced comparatively little
industrialization. The world's two most populous nations -- China and India --
are emerging markets, and they alone account for almost 40% of the world's
population. As consumers in these markets rapidly improve their standards of
living and as their governments promote capitalism through deregulation and
privatization, companies serving these markets stand to gain substantially
through increased sales and profits. Thus, while emerging markets are
considerably more volatile than developed markets, they have substantial
long-term growth potential.

STRATEGY

The Fund invests for the long term. We employ a strategy of growth at a
reasonable price. We seek to identify companies in the emerging markets that
combine strong potential for earnings growth with reasonable investment value.
Such companies typically exhibit increasing rates of profitability and cash
flow, yet their share prices compare favorably to other stocks in a given
market and to their global peers. In evaluating stocks, we consider factors
such as sales, earnings, cash flow and enterprise value. Enterprise value is a
company's market capitalization plus the value of its net debt.

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

The EMERGING MARKETS include Argentina, Bolivia, Brazil, Bulgaria, Chile,
China, Colombia, Costa Rica, the Czech Republic, Ecuador, Egypt, Greece,
Hungary, India, Indonesia, Israel, the Ivory Coast, Jordan, Malaysia, Mexico,
Morocco, Nicaragua, Nigeria, Pakistan, Peru, the Philippines, Poland, Romania,
Russia, Slovakia, Slovenia, South Africa, South Korea, Sri Lanka, Taiwan,
Thailand, Turkey, Uruguay, Venezuela, Vietnam and Zimbabwe.

We further consider the relationship between these and other quantitative
factors. Together, these indicators of growth and value may identify companies
with improving prospects before the market in general has taken notice.

PRINCIPAL INVESTMENTS
The Fund invests in companies across the full geographic spectrum of emerging
markets: Asia, Latin America, Eastern Europe, the Mediterranean basin and
Africa. It looks for businesses that meet critical "investable" criteria:
- - solid management and finances that, according to our research, show signs of
being able to withstand any turmoil affecting the emerging markets; and
- - exporters able to take advantage of a favorable cost structure compared to
developed-world competition; and
- - domestic providers of goods and services positioned to benefit from the
emerging markets' opportunity for long-term growth.

The Fund may also invest up to 35% of its assets in emerging market BONDS and
other debt securities.

Bonds and other debt securities must have earned a rating of C or better from
Standard & Poor's Corporation or Moody's Investors Service. If they have no
rating, they must be at least comparable to a C-rated security in the opinion
of Bankers Trust. As an operating policy (which may be changed by the Fund's
Board of Trustees), the Fund will not invest more than 5% of its assets in
bonds or other debt securities rated BBB or lower by S&P or Baa or lower by
Moody's.

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

BONDS may generate capital appreciation through decreases in interest rates
resulting from economic and market conditions or improvements in the bond
issuer's finances. There is a corresponding risk in investing in bonds to seek
capital appreciation. If interest rates increase or if the bond issuer's
finances deteriorate, the price of the bond may go down.

PORTFOLIO TURNOVER. The portfolio turnover rate measures the frequency that the
Portfolio sells and replaces the value of its securities within a given period.
We expect that the Fund will not have a high portfolio turnover rate.

22
----
<PAGE>

A Detailed Look at the Global Emerging Markets Equity Fund

INVESTMENT PROCESS

Company research lies at the heart of our investment process, as it does with
many stock mutual funds. We track several hundred companies to arrive at the
approximately 50 stocks the Fund intends to normally hold when fully invested.
But our process brings an added dimension to this fundamental research. It
draws on the insight of experts from a range of financial disciplines --
regional stock market specialists, global industry specialists, economists and
quantitative analysts. They challenge, refine and amplify each other's ideas.
Their close collaboration is a critical element of our investment process.

RISKS
BELOW WE SET FORTH SOME OF THE PROMINENT RISKS ASSOCIATED WITH EMERGING MARKETS
INVESTING, AS WELL AS INVESTING IN GENERAL, AND WE DETAIL OUR APPROACHES TO
CONTAINING THEM. ALTHOUGH WE ATTEMPT TO ASSESS THE LIKELIHOOD THAT THESE RISKS
MAY ACTUALLY OCCUR AND TO LIMIT THEM, WE MAKE NO GUARANTEE THAT WE WILL
SUCCEED.

PRIMARY RISKS

Market Risk. Although individual stocks can outperform their local markets,
deteriorating market conditions might cause an overall weakness in the stock
prices of the entire market.

Stock Selection Risk. A risk that pervades all investing is the risk that the
securities an investor has selected will not perform to expectations. The Fund
seeks to limit this risk with a strict evaluation process. Before it takes a
position in a stock, the Fund's investment team typically establishes a target
sell price at which point they will reevaluate the company's situation to
determine whether the deterioration in performance mirrors a fundamental
deterioration in the business, or whether, in our view, the reversal is merely
temporary.

Emerging Market Risk. Emerging market investing entails heightened risks
compared to those posed in developed market investing. We outline those
heightened risks below. While the Fund relies on the specific strategies to
deal with each of the risks, it employs one general approach in an attempt to
reduce risk across the board: diversification. Just as individual investors
should spread their investments among a range of securities so that a setback
in one need not overwhelm their entire strategy, the Fund seeks to spread its
investments. In this way, a reversal in one market need not undermine the
pursuit of long-term capital growth.

Political Risk. Profound social changes and business practices that depart from
developed stock market norms have hindered the growth of emerging stock markets
in the past. High levels of debt tend to make them overly reliant on foreign
capital investment and vulnerable to capital flight. Governments have limited
foreign investors' access to capital markets and restricted the flow of profits
overseas. They have resorted to high taxes, expropriation and nationalization.
In many countries, particularly in Eastern Europe and Asia, stock exchanges
have operated largely without regulation and in the absence of laws or
precedents protecting the rights of private ownership and foreign investors.
All these threats remain a part of emerging-market investing today. The Fund
attempts to avoid them in large part through intensive, ongoing economic and
political research.

Information Risk. Emerging market accounting, auditing, and financial reporting
and disclosure standards tend to be far less stringent than those of developed
markets. And the risks of investors acting on incomplete, inaccurate or
deliberately misleading information are correspondingly greater. Compounding
the problem, local investment research often lacks the sophistication to spot
potential pitfalls. Thus, a linchpin in the Fund's investment process is
independently assessing the impact of these differences upon a company's
financial conditions and prospects.

The management of certain foreign companies may be less focused on short-term
earnings than some U.S. companies. For example, they may pay lower dividends.

23
------
<PAGE>

A Detailed Look at the Global Emerging Markets Equity Fund

SECONDARY RISKS

Small Company Risk. To the extent that the Global Emerging Market Equity Fund
invests in the stocks of smaller companies, it will encounter the risks
associated with such investing. Small company stocks tend to experience steeper
price fluctuations -- down as well as up -- than the stocks of larger
companies. Industrywide reversals have had a greater impact on small companies,
since they lack a large company's financial resources. Small company managers
typically have less experience coping with adversity and capitalizing on
opportunity than their counterpoints at larger companies. Finally, small
company stocks are typically less liquid than large company stocks: when things
are going poorly, it may be even harder to find a buyer for a small company's
shares.

Risks Associated with Debt Securities. To the extent that the Fund invests in
bonds and other debt securities, it faces the risk of rising interest rates,
which tend to reduce the value of these investments. The high levels of debt
carried by many emerging market countries and the concentration of their
economies on a few global industries also makes the investments particularly
vulnerable to local and worldwide economic slowdowns. Such slowdowns may affect
the ability of bond issuers to meet their repayment obligation and could even
result in a default that would render their bonds worthless.

Risks Associated with Lower Quality Debt Securities ("Junk Bonds"). The Fund
can invest up to 5% of its net assets in bonds or other debt securities rated
BBB or lower by S&P or Baa or lower by Moody's. These securities are riskier
than higher rated securities because their issuers are less creditworthy, and
there is an increased risk that the issuers will default on their repayments.
Junk bonds are also more sensitive to increases in interest rates, economic
downturns or adverse market conditions.

These and other factors could increase volatility in financial markets
worldwide and could adversely affect the value of securities held by the Fund.

24
-----
<PAGE>

A Detailed Look at the Global Emerging Markets Equity Fund

Temporary Defensive Position. We may from time to time adopt a temporary
defensive position in response to extraordinary adverse political, economic or
stock market events. We could place up to 100% of the Fund's assets in U.S. or
foreign government money market investments, or other short-term bonds that
offer comparable safety, if the situation warranted. To the extent we might
adopt such a position and over the course of its duration, the Fund may have to
forego its goal of long-term capital growth.

PORTFOLIO MANAGER

- - Head of BTFMI's global emerging markets investing since 1996.
- - Joined Bankers Trust in 1988 and served as a stock analyst in Australia and
the U.S.
- - 11 years of investment management experience.
- - First-class honors degree in accounting and finance from University of
Sydney, Australia.

The table below provides a picture of the Fund's financial performance since
inception. The information selected reflects financial results for a single
Fund share. The total returns in the table represent the rate of return that an
investor would have earned on an investment in the Fund (assuming reinvestment
of all interest income and distributions). This information has been audited by
PricewaterhouseCoopers LLP, whose report, along with the Fund's financial
statements, is included in the Fund's annual report. The annual report is
available free of charge by calling BT Service Center at 1-800-730-1313.

FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
FOR THE PERIOD JUNE 30, 1998(1)
THROUGH SEPTEMBER 30, 1998
------------------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
- ------------------------------------------------------------------------------------------ --------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.03
- ------------------------------------------------------------------------------------------ --------
Net Realized and Unrealized Loss on Investment, Foreign Currency and Forward Foreign
Currency Contracts (1.99)
- ------------------------------------------------------------------------------------------ --------
TOTAL LOSS FROM INVESTMENT OPERATIONS (1.96)
- ------------------------------------------------------------------------------------------ --------
NET ASSET VALUE, END OF PERIOD $ 8.04
- ------------------------------------------------------------------------------------------ --------
TOTAL INVESTMENT RETURN (19.60)%
- ------------------------------------------------------------------------------------------ --------
SUPPLEMENTAL DATA AND RATIOS:
Net Assets, End of Period (000s omitted) $ 1.937
- ------------------------------------------------------------------------------------------ --------
Ratios to Average Net Assets:
Net Investment Income(2) 1.67%
- ------------------------------------------------------------------------------------------ --------
Expenses, Including Expenses of the Global Emerging Markets Equity Portfolio(2) 1.90%
Decrease Reflected in Above Expense Ratio Due to Absorption of Expenses by Bankers Trust 10.64%
- ------------------------------------------------------------------------------------------ --------
Portfolio Turnover Rate(3) 38%
- ------------------------------------------------------------------------------------------ --------
</TABLE>

(1)Commencement of operations
(2)Annualized
(3)The portfolio turnover rate is the rate for the master fund in which the Fund
invests its assets.

25
----
<PAGE>

LATIN AMERICAN EQUITY FUND

Overview

<TABLE>
<S> <C>
[GOAL: The Fund invests for long-term capital appreciation.
CORE STRATEGY: The Fund invests primarily in the stocks and equity
securities of companies based in Latin America.]
</TABLE>

<TABLE>
<S> <C>
Latin American Equity Fund
OVERVIEW OF THE LATIN AMERICAN EQUITY FUND
26 Goal
26 Core Strategy
26 Investment Policies and Strategies
27 Principal Risks of Investing in the Fund
27 Who Should Consider Investing in the Fund
28 Total Returns, After Fees and Expenses
29 Annual Fund Operating Expenses
A DETAILED LOOK AT THE LATIN AMERICAN EQUITY FUND
30 Objective
30 The Case for Latin America
30 Strategy
30 Principal Investments
30 Investment Process
31 Risks
32 Portfolio Managers
34 Financial Highlights
</TABLE>

INVESTMENT POLICIES AND STRATEGIES
The Fund invests all of its assets in a master portfolio with the same
investment objective as the Fund. The Fund, through the master portfolio, seeks
to achieve that objective by investing primarily in the stock and other equity
securities of companies based in Latin America. The Fund may also invest a
portion of its assets in Latin American bonds and other debt securities. The
companies are selected by an extensive tracking system plus the input of
experts from various financial disciplines.

26
------
<PAGE>

Overview of the Latin American Equity Fund

PRINCIPAL RISKS OF INVESTING IN THE FUND
An investment in the Fund could lose money, or the Fund's performance could
trail that of other investments. For example:
- - Stocks that our Investment Adviser has selected could perform poorly; or
- - The stock market could perform poorly or could underperform other
investments in one or more of the countries in which the Fund has invested.

Beyond the risks common to all stock investing, an investment in the Fund could
also lose money or underperform alternative investments as a result of risks in
the emerging markets in which the Fund invests:
- - Adverse political, economic or social developments could undermine the value
of the Fund's investments or prevent the Fund from realizing their full value;
- - Accounting and financial reporting standards differ from those in the U.S.
and could convey incomplete information when compared to information typically
provided by U.S. companies; or
- - The currency of a country in which the Fund invests may decrease in value
relative to the U.S. dollar, which could affect the value of the investment to
U.S. investors.

WHO SHOULD CONSIDER INVESTING IN THE FUND
You should consider investing in the Latin American Equity Fund if you are
seeking long-term capital appreciation. There is, of course, no guarantee that
the Fund will realize its goal. You should be aware that extreme fluctuations
in short-term investment values have often accompanied this long-term capital
appreciation.

You should not consider investing in the Latin American Equity Fund if you are
pursuing a short-term financial goal, if you seek regular income or if you
cannot tolerate fluctuations in the value of your investments.

The Fund by itself does not constitute a balanced investment program. It can,
however, afford you exposure to investment opportunities not otherwise
available to someone who invests in developed market securities alone.

AN INVESTMENT IN THE LATIN AMERICAN EQUITY FUND IS NOT A DEPOSIT OF BANKERS
TRUST COMPANY OR ANY OTHER BANK AND IS NOT INSURED OR GUARANTEED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.

27
----
<PAGE>

Overview of the Latin American Equity Fund

YEAR-BY-YEAR RETURNS
(EACH FULL CALENDAR YEAR SINCE INCEPTION)

[BAR GRAPH APPEARS HERE WITH INFORMATION.]

1994 1995 1996 1997 1998
- ---- ----- ----- ----- -----
- -10.95% -24.27% 32.80% 30.80% -36.23%

Since inception, the Fund's highest return in any calendar quarter was 33.06%
and its lowest quarterly return was -33.61%. Past performance offers no
indication of how the Fund will perform in the future.

TOTAL RETURNS, AFTER FEES AND EXPENSES

The bar chart and table on this page can help you evaluate the potential risks
and rewards of investing in the Fund by showing changes in the Fund's
performance year to year. The bar chart shows the Fund's actual return for each
full calendar year since it began selling shares on October 25, 1993 (its
inception date). The table compares the Fund's average annual return with the
IFCI (INTERNATIONAL FINANCE CORPORATION INVESTABLE) LATIN AMERICAN INDEX over
the last one and five years, and since inception. The Index is a passive
measure of combined stock market returns. It does not factor in the costs of
buying, selling and holding securities -- costs which are reflected in the
Fund's results.

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

THE IFCI LATIN AMERICAN INDEX is a widely used benchmark of Latin American
stocks. It is a model, not an actual portfolio, developed by the IFC, a member
of the World Bank Group. It includes the returns of companies traded on stock
markets in Latin America.

AVERAGE ANNUAL RETURNS
(AS OF DECEMBER 31, 1998)

<TABLE>
<CAPTION>
Since Inception
1 year 5 years (October 25, 1993)(1)
------------ ----------- --------------------
<S> <C> <C> <C>
LATIN AMERICAN EQUITY FUND -36.23% -5.67% -1.36%
- -------------------------------- ------- ------ ------
IFCI Latin American Index -35.54% -5.94% -1.86%
- -------------------------------- ------- ------ ------
Lipper Latin American Average(2) -38.21% -6.81% -4.56%
- -------------------------------- ------- ------ ------
</TABLE>

(1)The IFCI Latin American Index and Lipper Latin American Average are
calculated from October 31, 1993 through end of period.
(2)The Lipper Latin American Average represents the average return of mutual
funds that invest in the stocks of Latin American companies.

28
----
<PAGE>

Overview of the Latin American Equity Fund

ANNUAL FUND OPERATING EXPENSES

(EXPENSES PAID FROM FUND ASSETS)

The Annual Fees and Expenses table to the right describes the fees and expenses
you may pay if you buy and hold shares of the Latin American Equity Fund.

Expense example. This example illustrates the expenses you would have incurred
on a $10,000 investment in the Fund. The numbers assume that the Fund earned an
annual return of 5% over the periods shown, the Fund's operating expenses
remained the same and you sold your shares at the end of the period.

You may use this hypothetical example to compare the fund's expense history
with other funds. (1) Your actual costs may be higher or lower.

(1)Information on the annual operating expenses reflects the expenses of both
the Fund and the Latin American Equity Portfolio, the master fund into which the
Latin American Equity Fund invests its assets. (A further discussion of the
relationship between the Fund and the Portfolio appears in the "Organizational
Structure" section of this prospectus).

(2)Bankers Trust has agreed, for the 16 month period from the Fund's fiscal year
end of September 30, 1998, to waive its fees or reimburse expenses so that
total expense will not exceed 2.00%.

(3)Based on expenses, after fee waivers and reimbursements for the first 16
months only.

ANNUAL FEES AND EXPENSES

<TABLE>
<CAPTION>
Percentage of Average
Daily Net Assets(1)
---------------------------
<S> <C>
Management Fees 1.00%
- --------------------------------------- -------
Distribution and Service (12b-1) Fees None
- --------------------------------------- -------
Other Fund Operating Expenses 1.66%
- --------------------------------------- -------
Total Fund Operating Expenses 2.66%
- --------------------------------------- -------
Less: Fee Waivers or Expense
Reimbursement (0.66)%(2)
- --------------------------------------- ------------
NET EXPENSES 2.00%
- --------------------------------------- ------------
</TABLE>

<TABLE>
<CAPTION>
[EXPENSE EXAMPLE(3)
1 Year 3 Years 5 Years 10 Years
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
$203 $755 $1,360 $3,001]
</TABLE>

29
------
<PAGE>

LATIN AMERICAN EQUITY FUND

A detailed look

OBJECTIVE
The Fund seeks long-term capital appreciation. Under normal circumstances, the
Fund invests at least 65% of its total assets in the stock and other securities
with equity characteristics of companies based in LATIN AMERICA.

The Fund invests for capital appreciation, not income; any dividend or interest
income is incidental to the pursuit of its objective. While we give priority to
capital appreciation, we cannot offer any assurance of achieving this
objective. The Fund's objective is not a fundamental policy. We must notify
shareholders before we change it, but we do not require their approval to do
so.

THE CASE FOR LATIN AMERICA

Perhaps more than any other developing region, Latin America has adopted the
U.S. economic model. Deregulation and reduced rates of inflation have promoted
an environment conducive to investing. A large portion of the populations of
Argentina, Brazil, Chile and Mexico have benefited from national economic
growth and entered the middle class. Their new affluence and aspirations have
generated a strong demand for consumer goods. Vast, formerly government-owned
enterprises in oil and gas, telecommunications, and electric power are
privatizing and selling shares to the public.

STRATEGY

The Fund invests for the long term. We employ a strategy of growth at a
reasonable price. We seek to identify companies in Latin America that combine
strong potential for earnings growth with reasonable investment value. Such
companies typically exhibit increasing rates of profitability and cash flow,
yet their share prices compare favorably to other stocks in a given market and
to their global peers. In evaluating stocks, we consider factors such as sales,
earnings, cash flow and enterprise value. Enterprise value is a company's
market capitalization plus the value of its net debt. We further consider the
relationship between these and other quantitative factors. Together, these
indicators of growth and value may identify companies with improving prospects
before the market in general has taken notice.

- --------------------------------------------------------------------------------
We define "LATIN AMERICA" as Mexico and all countries in Central America and
South America, including Argentina, Brazil, Chile, Columbia, Peru and
Venezuela.

PRINCIPAL INVESTMENTS
The Fund invests primarily in the stock and other equity securities of
companies based in Latin America. We consider a company to be based in Latin
America if it meets one of four criteria:
- - It has its headquarters in the region or is organized under the laws of a
Latin American country;
- - It derives more than half its revenue from goods or services produced or
sales made in the region;
- - Its stock trades on a Latin American exchange; or
- - It is issued or guaranteed by the government of a country (or its agencies)
in Latin America.

The Fund may also invest up to 35% of its assets in Latin American BONDS and
other debt securities.

Bonds and other debt securities must have earned a rating of C or better from
Standard & Poor's Corporation or Moody's Investors Service. If they have no
rating, they must be at least comparable to a C-rated security in the opinion
of Bankers Trust. As an operating policy (which may be changed by the Fund's
Board of Trustees), the Fund will not invest more than 10% of its assets in
bonds or other debt securities rated BBB or lower by S&P or Baa or lower by
Moody's.

INVESTMENT PROCESS
Company research lies at the heart of our investment process, as it does with
many stock mutual funds. We track several hundred companies to arrive at the
approximately 30 stocks the Fund normally holds. But our process brings an
added dimension to this fundamental research. It draws on the insight of
experts from a range of financial disciplines -- regional stock market
specialists, global industry specialists, economists and quantitative analysts.
They challenge, refine and amplify each other's ideas. Their close
collaboration is a critical element of our investment process.
- --------------------------------------------------------------------------------
BONDS may generate capital appreciation through decreases in interest rates
resulting from economic and market conditions or improvements in the bond
issuer's finances. There is corresponding risk in investing in bonds to seek
capital appreciation. If interest rates increase or if the bond issuer's
finances deteriorate, the price of the bond may go down.

PORTFOLIO TURNOVER. The portfolio turnover rate measures the frequency that the
Portfolio sells and replaces the securities it holds within a given period.
Historically, this Fund has had a high portfolio turnover rate. High turnover
can increase the Fund's transaction costs, thereby lowering its returns. It may
also increase your tax liability.

30
-----
<PAGE>

A Detailed Look at the Latin American Equity Fund

RISKS
BELOW WE SET FORTH SOME OF THE PROMINENT RISKS ASSOCIATED WITH INVESTING IN
LATIN AMERICA, AS WELL AS INVESTING IN GENERAL, AND WE DETAIL OUR APPROACHES TO
CONTAINING THEM. ALTHOUGH WE ATTEMPT TO ASSESS THE LIKELIHOOD THAT THESE RISKS
MAY ACTUALLY OCCUR AND TO LIMIT THEM, WE MAKE NO GUARANTEE THAT WE WILL
SUCCEED.

PRIMARY RISKS

Market Risk. Although individual stocks can outperform their local markets,
deteriorating market conditions might cause an overall weakness in the stock
prices of the entire market.

Stock Selection Risk. A risk that pervades all investing is the risk that the
securities an investor has selected will not perform to expectations. The Fund
seeks to limit this risk with a strict evaluation process. Before it invests in
a stock, the Fund's investment team typically establishes a target sell price,
at which point they will reevaluate the company's situation to determine
whether the deterioration in performance mirrors a fundamental deterioration in
the business, or whether, in our view, the reversal is merely temporary.

Risks Associated with Investing in Latin America. The stock markets of Latin
America have exhibited much greater volatility than those of the United States,
Western Europe and Japan. The Fund aims to reduce the risk in this volatility
while still capturing the region's inherent potential by diversifying its
investments. Just as individual investors should spread their investments so
that a setback in one need not overwhelm their entire strategy, the Fund seeks
to spread its investments among Latin America's stock markets and industries.
In this way, a reversal in one stock need not undermine the pursuit of
long-term capital appreciation.

Political Risk. Profound social change and business practices that depart from
developed market norms have hindered the growth of Latin American stock markets
in the past. High levels of debt tend to make them overly reliant on foreign
capital investment and vulnerable to capital flight. Governments have declared
moratoriums on the repayment of foreign debts, which has had a negative impact
on stocks as well as bonds. They have limited foreign investors' access to
capital markets and restricted the flow of profits overseas. And they have
resorted to high taxes, expropriation and nationalization. All these threats
remain a part of Latin American investing today. The Fund attempts to avoid
them, in large part, through intensive, ongoing economic and political
research.

Foreign Stock Market Risk. From time to time, foreign capital markets have
exhibited more volatility than those in the United States. Trading stocks on
some foreign exchanges is inherently more difficult than trading in the United
States for reasons including:
- - Liquidity Risk. Stocks that trade less can be more difficult or more costly
to buy, or to sell, than more liquid or active stocks. This liquidity risk is a
factor of the trading volume of a particular stock, as well as the size and
liquidity of the entire local market. On the whole, foreign exchanges are
smaller and less liquid than the U.S. market. This can make buying and selling
certain shares more difficult and costly. Relatively small transactions in some
instances can have a disproportionately large effect on the price and supply of
shares. In certain situations, it may become virtually impossible to sell a
stock in an orderly fashion at a price that approaches our estimate of its
value.
- - Regulatory Risk. Some foreign governments regulate their exchanges less
stringently, and the rights of shareholders may not be as firmly established.

The management of certain foreign companies may be less focused on short-term
earnings than some U.S. companies. For example, they may pay lower dividends.

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

31
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<PAGE>

A Detailed Look at the Latin American Equity Fund

SECONDARY RISKS

Small Company Risk. To the extent that the Latin American Equity Fund invests
in the stocks of smaller companies, it will encounter the risks associated with
such investing. Small company stocks tend to experience steeper price
fluctuations -- down as well as up -- than the stocks of larger companies.
Industrywide reversals have had a greater impact on small companies, since they
lack a large company's financial resources. Small company managers typically
have less experience coping with adversity or capitalizing on opportunity than
their counterparts at larger companies. Finally, small company stocks are
typically less liquid than large company stocks: when things are going poorly,
it is harder to find a buyer for a small company's shares.

Risks Associated with Debt Securities. To the extent that the Fund invests in
bonds and other debt securities, it faces the risk of rising interest rates,
which tend to reduce the value of these investments. The high levels of debt
carried by many Latin American countries and the concentration of their
economies on a few global industries also makes the investments particularly
vulnerable to local and worldwide economic slowdowns. Such slowdowns may affect
the ability of bond issuers to meet their repayment obligation and could even
result in a default that would render their bonds worthless.

Risks Associated with Lower Quality Debt Securities ("Junk Bonds"). The Fund
can invest up to 10% of its net assets in bonds or other debt securities rated
BBB or lower by S&P or Baa or lower by Moody's. These securities are riskier
than higher rated securities because their issuers are less creditworthy, and
there is an increased risk that the issuers will default on their repayments.
Junk bonds are also more sensitive to increases in interest rates, economic
downturns or adverse market conditions.

These and other factors could increase volatility in financial markets
worldwide and could adversely affect the value of securities held by the Fund.

Temporary Defensive Position. We may from time to time adopt a temporary
defensive position in response to extraordinary adverse political, economic or
stock market events. We could place up to 100% of the Fund's assets in U.S. or
foreign government money market investments, or other short-term bonds that
offer comparable safety, if the situation warranted. To the extent we might
adopt such a position and over the course of its duration, the Fund may have to
forego its goal of long-term capital growth.

PORTFOLIO MANAGERS

The following portfolio managers are responsible for the day-to-day management
of the master portfolio's investments:

Paul Durham, Managing Director of BT Funds Management (International) Limited
("BTFMI") and Co-Lead Portfolio Manager of the Fund since 1999.
- - Joined Bankers Trust in 1988 and served as a stock analyst in Australia and
the U.S.
- - Head of BTFMI's global emerging markets since 1996.

32
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<PAGE>

A Detailed Look at the Latin American Equity Fund

- - 11 years of investment management experience.
- - First-class honors degree in accounting and finance from University of
Sydney, Australia.

Warren Howe, Co-Lead Portfolio Manager of the Fund.
- - Joined Bankers Trust in 1992 and the Fund in 1998.
- - Lead Latin American equities portfolio manager.
- - Six years of investment management and analyst experience.
- - Bachelor's degree in Commerce from University of New South Wales; Master's
degree in Applied Finance from Macquarie University.

Julie Wang, Principal of Bankers Trust and Co-Manager of the Fund.
- - Joined Bankers Trust in 1994 and the Fund in 1998.
- - Specializes in emerging markets.
- - Ten years of investment management experience.
- - Served as Investment Manager at American International Group from 1991 to
1994.
- - Bachelor's degree in economics from Yale University; MBA from The Wharton
School, University of Pennsylvania.

33
------
<PAGE>

A Detailed Look at the Latin American Equity Fund

The table below provides a picture of the Fund's financial performance for the
past five years. The information selected reflects financial results for a
single Fund share. The total returns in the table represent the rate of return
that an investor would have earned on an investment in the Fund, assuming
reinvestment of all dividends and distributions. This information has been
audited by PricewaterhouseCoopers LLP, whose report, along with the Fund's
financial statements, is included in the Fund's annual report. The annual
report is available free of charge by calling the BT Service Center at
1-800-730-1313.

FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE FOR THE OCTOBER 25,
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED 1993(1) TO
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1996 1995 1994
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD $ 15.74 $ 10.71 $ 8.50 $ 14.59 $ 10.00
- ------------------------------------------- -------- ------- ------- -------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.44 0.002 0.02 0.03 --
- ------------------------------------------- -------- ------- ------- -------- -------
Net Realized and Unrealized Gain (Loss) on
Investment, Foreign Currency and
Forward Foreign Currency Contracts (7.40) 5.03 2.19 (5.92) 4.59
- ------------------------------------------- -------- ------- ------- -------- -------
TOTAL INCOME (LOSS) FROM INVESTMENT
OPERATIONS (6.96) 5.03 2.21 (5.89) 4.59
- ------------------------------------------- -------- ------- ------- -------- -------
DISTRIBUTIONS TO SHAREHOLDERS
Net Investment Income (0.03) 0.002 -- -- --
- ------------------------------------------- -------- ------- ------- -------- -------
Net Realized Gains -- -- -- (0.20) --
- ------------------------------------------- -------- ------- ------- -------- -------
NET ASSET VALUE, END OF PERIOD $ 8.75 $ 15.74 $ 10.71 $ 8.50 $ 14.59
- ------------------------------------------- -------- ------- ------- -------- -------
TOTAL INVESTMENT RETURN (44.28)% 47.00% 26.00% (40.68)% 50.01%(3)
- ------------------------------------------- -------- ------- ------- -------- ---------
SUPPLEMENTAL DATA AND RATIOS:
Net Assets, End of Period (000s omitted) $ 6,256 $37,413 $16,997 $ 13,624 $27,489
- ------------------------------------------- -------- ------- ------- -------- ---------
Ratios to Average Net Assets:
Net Investment Income 1.42% 0.16% 0.16% 0.29% 0.03%(3)
- ------------------------------------------- -------- ------- ------- -------- ---------
Expenses, Including Expenses of the Latin
American Equity Portfolio 2.00% 2.00% 2.00% 2.00% 2.00%(3)
Decrease Reflected in Above Expense Ratio
Due to Absorption of Expenses by
Bankers Trust 0.66% 0.44% 0.66% 1.17% 1.27%(3)
- ------------------------------------------- -------- ------- ------- -------- ---------
Portfolio Turnover Rate(4) 92% 122% 171% 161% 124%
- ------------------------------------------- -------- ------- ------- -------- ---------
</TABLE>

(1)Commencement of operations
(2)Less than $0.01
(3)Annualized
(4)The portfolio turnover rate is the rate for the master portfolio, into which
the Fund invests all its assets.

34
----
<PAGE>

PACIFIC BASIN EQUITY FUND

Overview

<TABLE>
<S> <C>
[GOAL: The Fund invests for long-term capital appreciation.
CORE STRATEGY: The Fund invests primarily in the stocks and other
equity securities of companies in the Pacific Basin region, excluding
Japan.]
</TABLE>

Pacific Basin Equity Fund
OVERVIEW OF THE PACIFIC BASIN EQUITY FUND
35 Goal
35 Core Strategy
35 Investment Policies and Strategies
36 Principal Risks of Investing in the Fund
36 Who Should Consider Investing in the Fund
37 Total Returns, After Fees and Expenses
38 Annual Fund Operating Expenses
A DETAILED LOOK AT THE PACIFIC BASIN EQUITY FUND
39 Objective
39 The Case for the Pacific Basin
39 Strategy
39 Principal Investments
39 Investment Process
40 Risks
42 Portfolio Manager
43 Financial Highlights

INVESTMENT POLICIES AND STRATEGIES
The Fund invests all of its assets in a master portfolio with the same
investment objective as the Fund. The Fund, through the master portfolio, seeks
to achieve that objective by investing primarily in the stock and other equity
securities of companies based in the Pacific Basin. The Fund may also invest a
portion of its assets in Pacific Basin bonds and other debt securities. The
companies are selected by an extensive tracking system plus the input of
experts from various financial disciplines.

35
------
<PAGE>

Overview of the Pacific Basin Equity Fund

PRINCIPAL RISKS OF INVESTING IN THE FUND

An investment in the Fund could lose money, or the Fund's performance could
trail that of other investments. For example:
- - Stocks that our Investment Adviser has selected could perform poorly; or
- - The stock market could perform poorly or could underperform other investments
in one or more of the countries in which the Fund has invested.

- - Economies in emerging markets are more volatile than developed countries' and
are subject to sudden reversals;
- - Adverse political, economic or social developments could undermine the value
of the Fund's investments or prevent the Fund from realizing their full value.
- - Accounting and financial reporting standards differ from those in the U.S.
and could convey incomplete information when compared to information typically
provided by U.S. companies; or
- - The currency of a country in which the Fund invests may decrease in value
relative to the U.S. dollar, which could affect the value of the investment
itself to U.S. investors.

WHO SHOULD CONSIDER INVESTING IN THE FUND

You should consider investing in the Pacific Basin Equity Fund if you are
seeking long-term capital appreciation. There is, of course, no guarantee that
the Fund will realize its goal. The Fund is designed for investors who are
willing to accept that extreme fluctuations in short-term investment values
have often accompanied this long-term capital appreciation.

You should not consider investing in the Pacific Basin Equity Fund if you are
pursuing a short-term financial goal, if you seek regular income or if you
cannot tolerate fluctuations in the value of your investments.

AN INVESTMENT IN THE PACIFIC BASIN EQUITY FUND IS NOT A DEPOSIT OF BANKERS
TRUST COMPANY OR ANY OTHER BANK AND IS NOT INSURED OR GUARANTEED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.

36
----
<PAGE>

Overview of the Pacific Basin Equity Fund

YEAR-BY-YEAR RETURNS
(EACH FULL CALENDAR YEAR SINCE INCEPTION)

[BAR GRAPH APPEARS HERE WITH INFORMATION.]

1994 1995 1996 1997 1998
- ----- ----- ----- ----- -----
- -16.86% 7.25% 12.9% -45.92% 0.14%

Since inception, the Fund's highest return in any calendar quarter was 31.84%
and its lowest quarterly return was -37.09%. Past performance offers no
indication of how the Fund will perform in the future.

TOTAL RETURNS, AFTER FEES AND EXPENSES

The bar chart and table on this page can help you evaluate the potential risks
and rewards of investing in the Pacific Basin Equity Fund by showing changes in
the Fund's performance year to year. The bar chart shows the Fund's actual
return for each full calendar year since it began selling shares on November 1,
1993 (its inception date). The table compares the Fund's average annual return
with the MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) COMBINED ASIA (EX-JAPAN)
INDEX over the last one and five years, and since inception. Bear in mind that
the Index is a passive measure of combined national stock market returns. It
does not factor in the costs of buying, selling and holding securities -- costs
which are reflected in the Fund's results.

- --------------------------------------
THE MSCI ALL COUNTRY ASIA (EX-JAPAN) FREE INDEX is a broad benchmark of
Asia/Pacific stock performance, excluding Japan. The Index is a model, not an
actual portfolio, that includes the returns of companies traded on the stock
markets in China, Hong Kong, India, Indonesia, Korea, Malaysia, New Zealand,
Pakistan, the Philippines, Singapore, Sri Lanka, Taiwan and Thailand.

AVERAGE ANNUAL RETURNS
(AS OF DECEMBER 31, 1998)

<TABLE>
<CAPTION>
Since Inception
1 year 5 years (November 1, 1993)(1)
---------- ------------ --------------------
<S> <C> <C> <C>
PACIFIC BASIN EQUITY FUND 0.14% -11.41% -6.83%
- --------------------------------------------- ----- ------- ------
MSCI All Country Asia (ex-Japan) Free Index -7.39% -13.77% -9.79%
- --------------------------------------------- ------ ------- ------
Lipper Pacific ex-Japan Average(2) -9.05% -11.89% -8.66%
- --------------------------------------------- ------ ------- ------
</TABLE>

(1)The MSCI All Country Asia (ex-Japan) Free Index and Lipper Pacific Basin
ex-Japan Average calculated from October 31, 1993 through end of period.
(2)The Lipper Pacific Basin ex-Japan Average represents the average return of
mutual funds with the objective of investing in the common stocks of Asia
and the Far East (excluding Japan).

37
----
<PAGE>

Overview of the Pacific Basin Equity Fund

ANNUAL FUND OPERATING EXPENSES
(EXPENSES PAID FROM FUND ASSETS)

The Annual Fees and Expenses table to the right describes the fees and expenses
you may pay if you buy and hold shares of the Pacific Basin Equity Fund.

Expense Example. The example below illustrates the expenses you would have
incurred on a $10,000 investment in the Fund. The numbers assume that the Fund
earned an annual return of 5% over the periods shown, the Fund's operating
expenses remained the same, and you sold your shares at the end of the period.

You may use this hypothetical example to compare the Fund's expense history
with other funds.1 Your actual costs may be higher or lower.

1Information on the annual operating expenses reflects the expenses of both the
Fund and the Pacific Basin Equity Portfolio, the master fund in which the
Pacific Basin Equity Fund invests its assets. (A further discussion of the
relationship between the Fund and the Portfolio appears in the "Organizational
Structure" section of this prospectus.)

2Bankers Trust has agreed, for the 16-month period from the Fund's fiscal year
end of September 30, 1998, to waive its fees or reimburse expenses so that
total expenses will not exceed 1.75%.

3Based on expenses, after fee waivers and reimbursements for the first 16
months only.

ANNUAL FEES AND EXPENSES

<TABLE>
<CAPTION>
Percentage of Average
Daily Net Assets(1)
-----------------------------
<S> <C>
Management Fees 0.75%
- --------------------------------------- -------
Distribution and Service (12b-1) Fees None
- --------------------------------------- -------
Other Fund Operating Expenses 1.70%
- --------------------------------------- -------
Total Fund Operating Expenses 2.45%
- --------------------------------------- -------
Less: Fee Waivers or Expense
Reimbursement (0.70)%(2)
- --------------------------------------- ------------
NET EXPENSES 1.75%
- --------------------------------------- ------------
</TABLE>

<TABLE>
<CAPTION>
[EXPENSE EXAMPLE(3)
1 year 3 years 5 years 10 years
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
$178 $687 $1,250 $2,789]
</TABLE>

38
----
<PAGE>

PACIFIC BASIN EQUITY FUND

A detailed look
OBJECTIVE

The Fund seeks long-term capital appreciation. Under normal circumstances, the
Fund invests at least 65% of its total assets in the stock and other securities
with equity characteristics of companies in the PACIFIC BASIN, excluding Japan.

THE CASE FOR THE PACIFIC BASIN
Until recently, the developing economies of the Pacific Basin ranked among the
world's fastest growing. And despite the turmoil that has swept the region,
enormous potential remains.
- - China and India alone account for 40% of the world's population.
- - Two decades of heavy infrastructure spending have provided the region with
the physical capital necessary to resume its development; and
- - The region's nations have made education a top priority. Universal primary
education is widespread. This trend has enabled the region's businesses to tap
vast pools of skilled labor at a fraction of their cost in developed markets.

STRATEGY

The Fund invests for the long-term. We employ a strategy of growth at a
reasonable price. We seek to identify companies in the Pacific Rim that combine
strong potential for earnings growth with reasonable investment value. Such
companies typically exhibit increasing rates of profitability and cash flow,
yet their share prices compare favorably to other stocks in a given market and
to their global peers. In evaluating stocks, we consider factors such as sales,
earnings, cash flow and enterprise value. Enterprise value is a company's
market capitalization plus the value of its net debt. We further consider the
relationship between these and other quantitative factors. Together, these
indicators of growth and value may identify companies with improving prospects
before the market in general has taken notice.

- --------------------------------------------------------------------------------
The PACIFIC BASIN markets in which the Fund may invest include India,
Indonesia, Malaysia, New Zealand, Pakistan, the Philippines, the People's
Republic of China and Hong Kong, Singapore, Sri Lanka, South Korea, Thailand,
Taiwan and Vietnam.

PRINCIPAL INVESTMENTS
The Fund invests primarily in the stock and other equity securities of
companies based in the Pacific Basin. We consider a company to be based in the
Pacific Basin if it meets one of four criteria:
- - It is organized under the laws of one of the countries in the region;
- - It derives at least half its revenues or profits from goods or services
produced or sold or investments made in the region;

- - It derives at least half its revenues or profits from assets in
the region; or

- - Its stock trades on a Pacific Basin exchange.

The Fund may also invest up to 35% of its assets in Pacific Basin BONDS and
other debt securities.

PORTFOLIO TURNOVER. The portfolio turnover rate measures the frequency that the
Portfolio sells and replaces the securities it holds within a given period.
Historically, the Fund has had a high portfolio turnover rate. High turnover
can increase the Fund's transaction costs, thereby lowering its returns. It may
also increase your tax liability.

39
-----
<PAGE>

A Detailed Look at the Pacific Basin Equity Fund

analysts. They challenge, refine and amplify each other's ideas. Their close
collaboration is a critical element of our investment process.

RISKS
BELOW WE SET FORTH SOME OF THE PROMINENT RISKS ASSOCIATED WITH INVESTING IN THE
PACIFIC BASIN, AS WELL AS INVESTING IN GENERAL, AND WE DETAIL OUR APPROACHES TO
CONTAINING THEM. ALTHOUGH WE ATTEMPT TO ASSESS THE LIKELIHOOD THAT THESE RISKS
MAY ACTUALLY OCCUR AND TO LIMIT THEM, WE MAKE NO GUARANTEE THAT WE WILL
SUCCEED.

PRIMARY RISKS

Market Risk. Although individual stocks can outperform their local markets,
deteriorating market conditions might cause an overall weakness in the stock
prices of the entire market.

Stock Selection Risk. A risk that pervades all investing is the risk that the
securities an investor has selected will not perform to expectations. The Fund
seeks to limit this risk with a strict evaluation process. Before it invests in
a stock, the Fund's investment team typically establishes a target sell price
at which point they will reevaluate the company's situation to determine
whether the deterioration in performance mirrors a fundamental deterioration in
the company's business, or if, in our view, the reversal is merely temporary.

Emerging Market Risk. Emerging market investing entails heightened risks
compared to those posed in developed market investing. We outline those risks
below. While the Fund relies on the specific strategies to deal with each of
the risks, it employs one general approach in an attempt to reduce risk across
the board: diversification. Just as individual investors should spread their
investments among a range of securities so that a setback in one need not
overwhelm their entire strategy, the Fund seeks to spread its investments. In
this way, a reversal in one market need not undermine the pursuit of long-term
capital growth.

Political Risk. Profound social changes and business practices that depart from
developed stock market norms have hindered the growth of Pacific Basin stock
markets in the past. Authoritarian rule and the participation of the military
in daily business life have exacerbated normal economic uncertainties. High
levels of debt tend to make Pacific Basin countries overly reliant on foreign
capital investment and vulnerable to capital flight.

Governments have limited foreign investors' access to capital markets and
restricted the flow of profits overseas. And they have resorted to high taxes,
expropriation and nationalization. All these threats remain a part of Pacific
Basin investing today.

The Fund attempts to avoid them in large part through intensive, ongoing
economic and political research.

Information Risk. Emerging market accounting, auditing, and financial reporting
and disclosure standards generally tend to be far less stringent than those of
developed markets. And the risks of investors acting on incomplete, inaccurate
or deliberately misleading information are correspondingly greater. Compounding
the problem, local investment research often lacks the sophistication to spot
potential pitfalls. Thus, a linchpin in the Fund's investment process is
independently assessing the impact of these differences upon a company's
financial conditions and prospects.

The management of certain foreign companies may be less focused on short-term
earnings than some U.S. companies. For example, they may pay lower dividends.

Risks Affecting Malaysian Securities. As part of its investment strategy of
holding securities of companies in a number of Pacific Basin countries, the
Pacific Basin Equity Fund has a significant holding of Malaysian securities.

On September 1, 1998, the Government of Malaysia imposed a series of
restrictions affecting investments in Malaysian securities. Because of these
restrictions, the Fund must wait 12 months

40
-----
<PAGE>

A Detailed Look at the Pacific Basin Equity Fund

before it can convert its Malaysian holdings into U.S. dollars. For this
reason, we consider these securities illiquid. The Fund continues to seek to
reduce its Malaysian holdings.

The percentage of Malaysian securities held by the Fund as of December 31, 1998
was approximately 6.5%. The Fund does not presently intend to purchase
additional Malaysian securities. There is no assurance, however, that the
percentage of Malaysian or other illiquid securities will not increase as the
value of Malaysian securities or the rest of the Fund changes. On at least one
day since imposition of exchange controls, the Fund's illiquid holdings have
been above 15 percent, due primarily to its holdings of Malaysian securities.

SECONDARY RISKS

Small Company Risk. To the extent that the Pacific Basin Equity Fund invests in
the stocks of smaller companies, it will encounter the risks associated with
such investing. Small company stocks tend to experience steeper price
fluctuations -- down as well as up -- than the stocks of larger companies.
Industrywide reversals have had a greater impact on small companies, since they
lack a large company's financial resources. Small company managers typically
have less experience coping with adversity or capitalizing on opportunity than
their counterparts at larger companies. Finally, small company stocks are
typically less liquid than large company stocks: when things are going poorly,
it is harder to find a buyer for a small company's shares.

Risks Associated with Debt Securities. To the extent that the Fund invests in
bonds and other debt securities, it faces the risk of rising interest rates,
which tend to reduce the value of these investments. The high levels of debt
carried by many Pacific Basin countries and the concentration of their
economies on a few global industries also makes the investments particularly
vulnerable to local and worldwide economic slowdowns. Such slowdowns may affect
the ability of bond issuers to meet their repayment obligation and could even
result in a default that would render their bonds worthless.
- --------------------------------------------------------------------------------

FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS are used as a low cost
method of gaining exposure to a particular securities market without investing
directly in those securities.

41
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<PAGE>

A Detailed Look at the Pacific Basin Equity Fund

These and other factors could increase volatility in financial markets
worldwide and could adversely affect the value of securities held by the Fund.

Temporary Defensive Position. We may from time to time adopt a temporary
defensive position in response to extraordinary adverse political, economic or
stock market events. We could place up to 100% of the Fund's assets in U.S. or
foreign government money market investments, or other short-term bonds that
offer comparable safety, if the situation warranted. To the extent that we
might adopt such a position, and over the course of its duration, the Fund may
not meet its goal of long-term capital appreciation.

PORTFOLIO MANAGER

Paul Durham is responsible for the day-to-day management of the master
portfolio's investments:
- - Managing Director of BT Funds Management (International) Limited ("BTFMI")
and Portfolio Manager of the Fund since its inception.
- - Joined Bankers Trust in 1988 and served as a stock analyst in Australia and
the U.S.
- - Head of BTFMI global emerging markets since 1996.

- - 11 years investment management experience.
- - First-class honors degree in accounting and finance from University of
Sydney, Australia.

42
-------
<PAGE>

A Detailed Look at the Pacific Basin Equity Fund

The table below provides a picture of the Fund's financial performance for the
past five years. The information selected reflects financial results for a
single Fund share. The total returns in the table represent the rate of return
that an investor would have earned on an investment in the Fund, assuming
reinvestment of all dividends and distributions. This information has been
audited by PricewaterhouseCoopers LLP, whose report, along with the Fund's
financial statements, is included in the Fund's annual report. The annual
report is available free of charge by calling the BT Service Center at
1-800-730-1313.

FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE FOR THE NOVEMBER 1,
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED 1993(1)
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, TO SEPTEMBER 30,
1998 1997 1996 1995 1994
-------------- -------------- -------------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.16 $ 11.80 $ 10.96 $ 11.82 $ 10.00
- ------------------------------------------ -------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income/(Expenses in
Excess of Income) 0.24 (0.05) (0.03) 0.01 (0.04)
- ------------------------------------------ -------- ------- ------- ------- --------
Net Realized and Unrealized Gain (Loss)
on Investment, Futures, Foreign
Currency and Forward Foreign
Currency Contracts (5.32) (1.07) 0.87 (0.49) 1.86
- ------------------------------------------ -------- ------- ------- ------- --------
TOTAL INCOME (LOSS) FROM INVESTMENT
OPERATIONS (5.08) (1.12) 0.84 (0.48) 1.82
- ------------------------------------------ -------- ------- ------- ------- --------
DISTRIBUTIONS TO SHAREHOLDERS
Net Investment Income (0.24) -- -- -- --
- ------------------------------------------ -------- ------- ------- ------- --------
Net Realized Gains (0.99) (0.52) -- (0.38) --
- ------------------------------------------ -------- ------- ------- ------- --------
TOTAL DISTRIBUTIONS (1.23) (0.52) -- (0.38) --
- ------------------------------------------ -------- ------- ------- ------- --------
NET ASSET VALUE, END OF PERIOD $ 3.85 $ 10.16 $ 11.80 $ 10.96 $ 11.82
- ------------------------------------------ -------- ------- ------- ------- --------
TOTAL INVESTMENT RETURN (52.21)% ( 9.97)% 7.66% ( 3.87)% 20.11%(2)
- ------------------------------------------ -------- ------- ------- ------- ----------
SUPPLEMENTAL DATA AND RATIOS:
Net Assets, End of Period (000s omitted) $ 4,268 $26,501 $29,389 $24,504 $ 25,36(2)
- ------------------------------------------ -------- ------- ------- ------- ----------
Ratios to Average Net Assets:
Net Investment Income/(Expenses in
Excess of Income) 0.43% (0.42)% (0.24)% 0.12% (0.59)%(2)
- ------------------------------------------ -------- ------- ------- ------- -----------
Expenses, Including Expenses of the
Pacific Basin Equity Portfolio 1.75% 1.75% 1.75% 1.75% 1.75%(2)
Decrease Reflected in Above Expense
Ratio Due to Absorption of Expenses
by Bankers Trust 0.70% 0.29% 0.31% 0.52% 0.60%(2)
- ------------------------------------------ -------- ------- ------- ------- -----------
Portfolio Turnover Rate(3) 125% 172% 118% 104% 40%
- ------------------------------------------ -------- ------- ------- ------- -----------
</TABLE>

(1)Commencement of operations
(2)Annualized
(3)The portfolio turnover rate is the rate for the master portfolio, into which
the Fund invests all its assets.

43
-----
<PAGE>

Information
CONCERNING ALL FUNDS

MANAGEMENT OF THE FUNDS

Board of Trustees. Each Fund's shareholders, voting in proportion to the number
of shares each owns, elect a Board of Trustees, and the Trustees supervise all
of the Fund's activities on their behalf.

Investment Adviser. Under the supervision of the Board of Trustees, Bankers
Trust Company, with headquarters at 130 Liberty Street, New York, NY 10006,
acts as each Fund's investment adviser. As investment adviser, Bankers Trust
makes the Fund's investment decisions and assumes responsibility for the
securities the Fund owns. It buys and sells securities for the Fund and
conducts the research that leads to the purchase and sale decisions.

For the International Small Company Equity Fund, Global Emerging Markets Equity
Fund, Latin American Equity Fund and the Pacific Basin Equity Fund, Bankers
Trust has vested day-to-day investment decision-making and implementation in a
sub-adviser, the wholly owned entity BT Funds Management (International)
Limited ("BTFMI"). Responsibilities and advisory fees can be reallocated
between the Investment Adviser and Sub-Adviser without obtaining shareholder
approval.

The Funds paid the following fees for investment advisory and sub-advisory
services in the last fiscal year:

<TABLE>
<CAPTION>
Average Daily
Companies to which Percentage of
Fund Fees Were Paid Net Assets
- --------------------------- ------------------- --------------
<S> <C> <C>
International Equity Fund Bankers Trust 0.65%
- --------------------------- ------------------- ----
Latin American Equity
Fund Bankers Trust 1.00%
- --------------------------- ------------------- ----
Pacific Basin Bankers Trust
Equity Fund and BTFMI 0.75%
- --------------------------- ------------------- ----
</TABLE>

International Small Company Equity Fund and Global Emerging Markets Fund have
not been in operation for a full fiscal year. Bankers Trust and BTFMI's fees
for investment advisory and sub-advisory services for each of these Funds is
1.10% of the Fund's average daily net assets. The sub-advisory arrangement for
the Latin American Equity Fund began on January 1, 1999. Under the new
sub-advisory arrangement for the Latin American Equity Fund, Bankers Trust and
BTFMI's fee for investment advisory and sub-advisory services will be 1.00% of
the Fund's average daily net assets.

Bankers Trust's officers bring wide experience to managing both the Funds and
their Portfolios. The firm's own record dates back to its founding as a trust
company in 1903. It has invested retirement assets on behalf of the nation's
largest corporations and institutions for more than 50 years. Today, the assets
under its global management exceed $338 billion. The scope of the firm's
capability is broad: It is a leader in both the active and passive quantitative
investment disciplines and maintains a major presence in stock and bond markets
worldwide. BTFMI, a subsidiary of Bankers Trust with headquarters at Level 15,
The Chifley Tower, 2 Chifley Square, Sydney, N.S.W. 2000 Australia, offers a
decade of research and investing experience in small companies worldwide to a
number of private clients. It has developed a team dedicated exclusively to the
small company and emerging market disciplines.

The Investment Adviser is a wholly owned subsidiary of Bankers Trust
Corporation. Bankers Trust Corporation has entered into an Agreement and Plan
of Merger with Deutsche Bank AG, dated as of November 30, 1998, under which
Bankers Trust Corporation would merge with and into a subsidiary of Deutsche
Bank AG. The transaction is contingent upon various regulatory approvals, as
well as the approval of the Fund's Board of Trustees and the Fund's
shareholders. If the transaction is approved and completed, Deutsche Bank AG,
as the Investment Adviser's new parent company, will control the operations of
the Investment Adviser. Bankers Trust believes that, under this new
arrangement, the services provided to the Fund will be maintained at their
current level.

Other Services. Bankers Trust provides administrative services -- such as
portfolio accounting, legal services and others -- for the Funds. In addition,
Bankers Trust -- or your broker or

44
----
<PAGE>

Information Common to All of the Funds

financial advisor -- performs the functions necessary to establish and maintain
your account. In addition to setting up the account and processing your
purchase and sale orders, these functions include:
- - keeping accurate, up-to-date records for your individual Fund account;
- - implementing any changes you wish to make in your account information;
- - processing your requests for cash dividends and distributions from the Fund;
- - answering your questions on the Fund's investment performance or
administration;
- - sending proxy reports and updated prospectus information to you; and
- - collecting your executed proxies.

Organizational Structure. The Funds are "feeder funds" that invest all of their
assets in a "master portfolio." The Funds and their corresponding Master
Portfolio are listed below:

<TABLE>
<CAPTION>
Fund Master Portfolio
- ---------------------------- -------------------------------
<S> <C>
International Equity Fund International Equity Portfolio
- ---------------------------- -------------------------------
International Small Company International Small Company
Equity Fund Equity Portfolio
- ---------------------------- -------------------------------
Global Emerging Markets Global Emerging Markets
Equity Fund Equity Portfolio
- ---------------------------- -------------------------------
Latin American Equity Fund Latin American Equity
- ----------------------------
Portfolio
-------------------------------
Pacific Basin Equity Fund Pacific Basin Equity Portfolio
- ---------------------------- -------------------------------
</TABLE>

Each Fund and its Master Portfolio have the same investment objective. Each
Master Portfolio is advised by Bankers Trust.

A Master Portfolio may accept investments from other feeder funds. A feeder
bears the Master Portfolio's expenses in proportion to their assets. Each
feeder can set its own transaction minimums, fund-specific expenses, and other
conditions. This arrangement allows a Fund's Trustees to withdraw the Fund's
assets from the Master Portfolio if they believe doing so is in the
shareholder's best interests. If the Trustees withdraw a Fund's assets, they
would then consider whether the Fund should hire its own investment adviser,
invest in a different master portfolio, or take other action.

CALCULATING A FUND'S SHARE PRICE

We calculate the daily price of each Fund's shares (also known as the "Net
Asset Value" or "NAV") in accordance with the standard formula for valuing
mutual fund shares at the close of regular trading on the New York Stock
Exchange every day THE EXCHANGE IS OPEN for business.

The formula calls for deducting all of a Fund's liabilities from the total
value of its assets -- the market value of the securities it holds, plus its
cash reserves -- and dividing the result by the number of shares outstanding.
(Note that prices for securities that trade on foreign exchanges can change
significantly on days when the New York Stock Exchange is closed and you cannot
buy or sell Fund shares. Price changes in the securities a Fund owns may
ultimately affect the price of Fund shares the next time the NAV is
calculated.)

We value the securities in a Fund at their stated market value if price
quotations are available. When price quotations for a particular security are
not readily available, we determine their value by the method that most
accurately reflects their current worth in the judgment of the Board of
Trustees. You can find a fund's daily share price in the mutual fund listings
of most major newspapers.

PERFORMANCE INFORMATION. The Fund's performance can be used in advertisements
that appear in various publications. It may be compared to the performance of
various indexes and investments for which reliable performance data is
available. The Fund's performance may also be compared to averages, performance
rankings, or other information prepared by recognized mutual fund statistical
services.

- --------------------------------------------------------------------------------
THE EXCHANGE IS OPEN every week, Monday through Friday, except when the
following holidays are celebrated: New Year's Day, Martin Luther King, Jr. Day
(the third Monday in January), Presidents' Day (the third Monday in February),
Good Friday, Memorial Day (the last Monday in May), July 4th, Labor Day (the
first Monday in September), Thanksgiving Day (the fourth Thursday in November)
and Christmas Day.

45
----
<PAGE>

Information Common to All of the Funds

DIVIDENDS AND DISTRIBUTIONS

Dividends and capital gains distributions, if any, are paid annually. We
automatically reinvest all dividends and any capital gains, unless you tell us
otherwise.

TAX CONSIDERATIONS
A Fund does not ordinarily pay income taxes. You and other shareholders pay
taxes on the income or capital gains from the Fund's holdings. Your taxes will
vary from year to year, based on the amount of capital gains distributions and
dividends paid out by the Fund. You owe the taxes whether you receive cash or
choose to have distributions and dividends reinvested. Distributions and
dividends usually create the following tax liability:

Every year your Fund will send you information on the distributions for the
previous year. In addition, if you sell your Fund shares you may have a capital
gain or loss.

<TABLE>
<CAPTION>
Transaction Tax Status
- ------------------------------------ ------------------
<S> <C>
Your sale of shares owned more than Capital gains or
one year losses
Your sale of shares owned for one Gains treated as
year or less ordinary income;
losses subject to
special rules.
</TABLE>

THE TAX CONSIDERATIONS FOR TAX DEFERRED ACCOUNTS OR NON-TAXABLE ENTITIES WILL
BE DIFFERENT.

BECAUSE EACH INVESTOR'S TAX CIRCUMSTANCES ARE UNIQUE AND BECAUSE THE TAX LAWS
ARE SUBJECT TO CHANGE, WE RECOMMEND THAT YOU CONSULT YOUR TAX ADVISOR ABOUT
YOUR INVESTMENT.

BUYING AND SELLING FUND SHARES
You can purchase or redeem shares in a Fund by mail, wire transfer or through
an authorized broker or financial advisor. Contact your broker or financial
advisor for details. You may also call the BT Service Center at 1-800-730-1313.

We may close your Fund account on 30 days' notice if it fails to meet minimum
balance requirements for any reason other than a change in market value. In
addition, if your sell order exceeds $250,000, we reserve the right to redeem
it "in kind" with a pro-rata distribution of stocks actually held by a Fund,
rather than in cash.

Your broker or financial advisor may charge transaction fees on the purchase
and sale of Fund shares.

Exchange Privileges. You can exchange all or part of your shares into another
BT Mutual Fund up to four times a year without paying a fee. Before buying
shares through an exchange you should be sure to get a copy of that fund's
prospectus and read it carefully. Please note also that you may have to pay
taxes on the shares you sell in the exchange.

Account minimums. A fund requires a minimum investment of $2,500 to open
accounts, $250 for subsequent investments, and a minimum balance of $1,000 to
maintain them. It requires a $500 minimum investment to open a retirement
account, $100 for subsequent investments, but imposes no minimum balance.
Automatic investment accounts, which credit money from your checking account to
the purchase of fund shares bimonthly, monthly, quarterly, or semi-annually,
call for a minimum $1,000 opening investment and at least $100 for each
subsequent purchase of shares.

EACH FUND'S SHAREHOLDER GUIDE AND STATEMENT OF ADDITIONAL INFORMATION CONTAIN
COMPLETE INFORMATION ON BUYING AND SELLING FUND SHARES AND MAINTAINING A FUND
ACCOUNT. IF YOU HAVE NOT ALREADY RECEIVED YOUR FREE COPY OF THE SHAREHOLDER
GUIDE OR WISH TO OBTAIN A FREE COPY OF THE STATEMENT OF ADDITIONAL INFORMATION,
PLEASE CALL THE BT SERVICE CENTER AT 1-800-730-1313.

46
------
<PAGE>

(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>

[LOGO BANKERS TRUST
Architects of Value]

<TABLE>
<S> <C>
[Additional information about each Fund's investments and performance is
available in the Fund's annual and semi-annual reports to shareholders. In the
Fund's annual report, you will find a discussion of the market conditions and
investment strategies that significantly affected the Fund's performance during
its last fiscal year.
You can find more detailed information about each Fund in the current Statement
of Additional Information, dated January 31, 1999, which we have filed
electronically with the Securities and Exchange Commission (SEC) and which is
incorporated by reference. To receive your free copy of the Statement of
Additional Information, the annual or semi-annual report, or if you have
questions about investing in a Fund, write to us at:

BT SERVICE CENTER
P.O. BOX 419210
KANSAS CITY, MO 64141-6210
or call our toll-free number: 1-800-730-1313

You can find reports and other information about each Fund on the SEC website
(http://www.sec.gov), or you can get copies of this information, after payment
of a duplicating fee, by writing to the Public Reference Section of the SEC,
Washington, D.C. 20549-6009. Information about each Fund, including its
Statement of Additional Information, can be reviewed and copied at the SEC's
Public Reference Room in Washington, D.C. For information on the Public
Reference Room, call the SEC at 1-800-SEC-0330. You can find information about
buying and selling shares in a Fund in the Shareholder Guide. If you have not
already received a copy of the Guide, call the BT Service Center to obtain one
free of charge.]

</TABLE>

Global Funds Combined
BT INVESTMENT FUNDS

DISTRIBUTED BY:
ICC Distributors, Inc.
Two Portland Square
Portland, ME 04101 CUSIP #055922868
#055922686
#055922678
#055922785
#055922769
COMBINTL 300 (1/99)
811-4760

<PAGE>

STATEMENT OF ADDITIONAL INFORMATION

January 31, 1999

BT INVESTMENT FUNDS

Intermediate Tax Free Fund

BT Investment Funds (the "Trust") is comprised of a number of separate
investment funds. The shares of the following fund - Intermediate Tax Free Fund
(the "Fund") - are described herein.

As described in the Prospectus, the Trust seeks to achieve the investment
objective of the Fund by investing all the investable assets ("Assets") of the
Fund in a diversified open-end management investment company, the Intermediate
Tax Free Portfolio (the "Portfolio"), having the same investment objective as
the Fund.

Shares of the Fund are sold by ICC Distributors, Inc. ("ICC Distributors"), the
Trust's Distributor, to clients and customers (including affiliates and
correspondents) of Bankers Trust Company ("Bankers Trust"), the Portfolio's
investment adviser ("Adviser"), and to clients and customers of other
organizations. As appropriate, references to the Adviser herein apply to any
sub-advisor which may have day-to-day investment management responsibility of a
Portfolio.

The Trust's Prospectus for the Fund is dated January 31, 1999. The Prospectus
provides the basic information investors should know before investing. This
Statement of Additional Information ("SAI"), which is not a Prospectus, is
intended to provide additional information regarding the activities and
operations of the Trust and should be read in conjunction with the Fund's
Prospectus. You may request a copy of a prospectus or a paper copy of this SAI,
if you have received it electronically, free of charge by calling the Trust at
the telephone number listed below or by contacting any Service Agent. This SAI
is not an offer of any Fund for which an investor has not received a Prospectus.
Capitalized terms not otherwise defined in this SAI have the meanings accorded
to them in the Trust's Prospectus. The financial statements for the Fund and the
Portfolio for the fiscal year ended September 30, 1998, are incorporated herein
by reference to the Annual Report to shareholders for the Fund and Portfolio
dated September 30, 1998. A copy of the Fund's and the Portfolio's Annual Report
may be obtained without charge by calling the Fund at the telephone number
listed below.

BANKERS TRUST COMPANY
Investment Adviser and Administrator of the Portfolio
ICC DISTRIBUTORS, INC.
Distributor

Two Portland Square
Portland, Maine 04101
1-800-730-1313

<PAGE>

TABLE OF CONTENTS

PAGE

<S> <C>
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS.................................................................. 3
Investment Objective................................................................................... 3
Investment Policies.................................................................................... 3
Additional Risk Factors................................................................................ 12
Investment Restrictions................................................................................ 16
Portfolio Transactions and Brokerage Commissions....................................................... 19

PERFORMANCE INFORMATION.......................................................................................... 21
Standard Performance Information....................................................................... 21
Expenses............................................................................................... 22
Comparison of Fund Performance......................................................................... 22
Economic and Market Information........................................................................ 24
Purchase of Shares..................................................................................... 24
Redemption of Shares................................................................................... 27
Redemptions and Purchases in Kind...................................................................... 29

MANAGEMENT OF THE TRUST AND THE PORTFOLIO........................................................................ 30
Trustees of the Trust.................................................................................. 30
Trustees of the Portfolio.............................................................................. 31
Officers of the Trust and Portfolio.................................................................... 31
Investment Adviser..................................................................................... 33
Administrator.......................................................................................... 34
Distributor............................................................................................ 35
Service Agent.......................................................................................... 35
Custodian and Transfer Agent........................................................................... 35
Use of Name............................................................................................ 36
Banking Regulatory Matters............................................................................. 36
Counsel and Independent Accountants.................................................................... 36

ORGANIZATION OF THE TRUST........................................................................................ 36

TAXATION......................................................................................................... 38
Taxation of the Fund................................................................................... 38
Distributions.......................................................................................... 39
Taxation of the Portfolio.............................................................................. 40
Other Taxation......................................................................................... 40

FINANCIAL STATEMENTS............................................................................................. 40

APPENDIX......................................................................................................... 41

</TABLE>
2
<PAGE>

INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS

Investment Objective

The investment objective of the Fund is a high level of current income exempt
from federal income tax consistent with moderate risk of capital. There can, of
course, be no assurance that the Fund will achieve its investment objective.

Investment Policies

The Fund seeks to achieve its investment objective by investing all of its
assets in the Portfolio. The Trust may withdraw the Fund's investment from the
Portfolio at any time if the Board of Trustees of the Trust determines that it
is in the best interests of the Fund to do so.

Since the investment characteristics of the Fund will correspond directly to
those of the Portfolio, the following is a discussion of the various investments
of and techniques employed by the Portfolio. The Portfolio's investment
objective is a high level of current income exempt from Federal income tax
consistent with moderate risk of capital. The Portfolio invests primarily in
high-quality tax-exempt municipal bonds. The Portfolio seeks to hold a portfolio
of securities with an intermediate-term duration. The Portfolio intends to
manage its holdings actively. Portfolio transactions are undertaken principally
to accomplish the Portfolio's investment objective in relation to expected
movements in the general level of interest rates, but the Portfolio may also
engage in short-term trading consistent with its objective.

The Portfolio seeks to maintain a current yield that is greater than that
generally obtainable from a portfolio of short-term tax-exempt obligations,
subject to applicable quality restrictions. The Portfolio seeks to increase
yields by adjusting the average maturity of its portfolio in light of prevailing
market conditions and credit considerations. The Portfolio will normally consist
of a portfolio of securities with a weighted average maturity of three to ten
years. The remaining maturity of securities generally will not exceed 20 years
at the time of investment. The Portfolio adjusts its holdings of long-term and
short-term debt securities to reflect its assessment of prospective changes in
interest rates, which may adversely affect current income.

The value of securities held by the Portfolio will generally fluctuate inversely
with changes in prevailing interest rates and will also be affected by changes
in the creditworthiness of issuers and other market factors. The quality
criteria applied in the selection of Portfolio securities are intended to
minimize adverse price changes due to credit considerations. The value of
municipal securities in the Portfolio can also be affected by market reaction to
legislative consideration of various tax reform proposals. Although the value of
the assets of the Portfolio and the net asset value of the Fund will fluctuate,
the Portfolio attempts to conserve the value of its assets to the extent
consistent with its objective.
3
<PAGE>
Quality Information. The Portfolio will not purchase any municipal obligation
unless it is rated at least A, MIG-1 or Prime-1 by Moody's Investors Service,
Inc. ("Moody's") or A, SP-1 or A-1 by Standard & Poor's Ratings Group ("S&P") or
if unrated, in the Adviser's opinion it is of comparable quality. These
standards must be satisfied at the time an investment is made. If the quality of
the investment later declines, the Portfolio may continue to hold the
investment.

Taxable Investments. The Portfolio attempts to invest 100% of its assets in
tax-exempt municipal securities; however the Portfolio is permitted to invest up
to 20% (or greater while maintaining a temporary defensive position) of the
value of its total assets in securities, the interest income on which is subject
to federal income or alternative minimum tax. The Portfolio may make taxable
investments pending investment of proceeds of tax-exempt securities, pending
settlement of purchases of portfolio securities, to maintain liquidity to meet
redemptions or when it is advisable in Bankers Trust's opinion because of
adverse market conditions. The taxable investments permitted for the Portfolio
include obligations of the U.S. and its agencies and instrumentalities, bank
obligations, commercial paper and repurchase agreements and other debt
securities which meet the Portfolio's quality requirements.

Municipal Securities. The Portfolio may invest in notes and bonds issued by or
on behalf of states, territories and possessions of the United States and the
District of Columbia and their political subdivisions, agencies, authorities and
instrumentalities. These obligations may be general obligation instruments
secured by the issuer's pledge of its full faith, credit and taxing power for
the payment of principal and interest, or they may be revenue instruments
payable from specific revenue sources, but not generally backed by the issuer's
taxing power. These include industrial development bonds where payment is the
responsibility of the private industrial user of the facility financed by the
instruments.

Short-Term Municipal Investments. For temporary defensive purposes or for
purposes of liquidity, the assets of the Portfolio may be invested in short-term
municipal obligations. These short-term obligations include municipal notes of
various types, including notes issued in anticipation of receipt of taxes, the
proceeds of the sale of bonds, other revenues or grant proceeds and project
notes, as well as municipal commercial paper and municipal demand obligations
such as variable rate demand notes and master demand obligations. The interest
rate on variable rate demand notes is adjustable at periodic intervals as
specified in the notes. Master demand obligations permit the investment of
fluctuating amounts at periodically adjusted interest rates. Although master
demand obligations are not marketable to third parties, the Portfolio considers
them to be liquid because they are payable on demand. There is no specific
percentage limitation on these investments. The credit quality of variable rate
demand notes and other municipal obligations is frequently enhanced by various
arrangements with domestic or foreign financial institutions, such as letters of
credit, guarantees and insurance, and these arrangements are considered when
investment quality is evaluated. These obligations will be of comparable quality
to municipal bonds and will be purchased in anticipation of a declining market
and rising interest rates, pending purchase of longer term investments or to
maintain liquidity to meet redemptions. The amortized cost method is used by the
Portfolio to value municipal securities with maturities of less than 60 days;
when these securities are subject to puts separate from the underlying
securities, no value is assigned to the puts. The cost of any such put is
carried as an unrealized loss from the time of purchase until it is exercised or
expires.

4
<PAGE>

Municipal Bonds. Municipal bonds generally fund longer-term capital needs than
municipal notes and have maturities exceeding one year when issued. The
Portfolio may invest in municipal bonds. Municipal bonds include:

General Obligation Bonds. Issuers of general obligation bonds include states,
counties, cities, towns and regional districts. The proceeds of these
obligations are used to fund a wide range of public projects, including
construction or improvement of schools, highways and roads, and water and sewer
systems. The basic security behind general obligation bonds is the issuer's
pledge of its full faith and credit and taxing power for the payment of
principal and interest. The taxes that can be levied for the payment of debt
service may be limited or unlimited as to the rate or amount of special
assessments.

Revenue Bonds. The principal security for a revenue bond is generally the net
revenues derived from a particular facility, group of facilities or, in some
cases, the proceeds of a special excise tax or other specific revenue source.
Revenue bonds are issued to finance a wide variety of capital projects,
including electric, gas, water and sewer systems; highways, bridges, and
tunnels; port and airport facilities; colleges and universities; and hospitals.
Although the principal security behind these bonds may vary, many provide
additional security in the form of a debt service reserve fund that may be used
to make principal and interest payments on the issuer's obligations. Housing
finance authorities have a wide range of security, including partially or fully
insured mortgages, rent subsidized and/or collateralized mortgages, certificates
of deposit and/or the net revenues from housing or other public projects. Some
authorities provide further security in the form of a state's ability (without
obligation) to make up deficiencies in the debt service reserve fund.

Private Activity Bonds. Private activity bonds, which are considered municipal
obligations if the interest paid thereon is excluded from gross income for
Federal income tax purposes but is a specific tax preference item for Federal
individual and corporate alternative minimum tax purposes, are issued by or on
behalf of public authorities to raise money to finance various
privately-operated facilities such as manufacturing facilities, certain hospital
and university facilities and housing projects. These bonds are also used to
finance public facilities such as airports, mass transit systems and ports. The
payment of the principal and interest on these bonds is dependent solely on the
ability of the facility's user to meet its financial obligations and generally
the pledge, if any, of real and personal property so financed as security for
payment.

5
<PAGE>

Municipal Notes. Municipal notes generally fund short-term capital needs. The
Portfolio may invest in municipal notes, which include:

Tax Anticipation Notes. Tax anticipation notes are issued to finance working
capital needs of municipalities. Generally, they are issued in anticipation of
various seasonal tax revenue, such as income, sales, use and business taxes, and
are payable from these specific future taxes.

Revenue Anticipation Notes. Revenue anticipation notes are issued in expectation
of receipt of other types of revenue, such as Federal revenues available under
Federal revenue sharing programs.

Bond Anticipation Notes. Bond anticipation notes are issued to provide interim
financing until long-term financing can be arranged. In most cases, the
long-term bonds provide funds for the repayment of these notes.

Miscellaneous, Temporary and Anticipatory Instruments. These instruments may
include notes issued to obtain interim financing pending entering into alternate
financial arrangements, such as receipt of anticipated Federal, state or other
grants or aid, passage of increased legislative authority to issue longer-term
instruments or obtaining other refinancing.

Construction Loan Notes. Construction loan notes are sold to provide
construction financing. Permanent financing, the proceeds of which are applied
to the payment of construction loan notes, is sometimes provided by a commitment
of the Government National Mortgage Association ("GNMA") to purchase the loan,
accompanied by a commitment by the Federal Housing Administration to insure
mortgage advances thereunder. In other instances, permanent financing is
provided by commitments of banks to purchase the loan. The Portfolio will only
purchase construction loan notes that are subject to permanent GNMA or bank
purchase commitments.

Tax-Exempt Commercial Paper. The Portfolio may invest in tax-exempt commercial
paper. Tax-exempt commercial paper is a short-term obligation with a stated
maturity of 365 days or less. It is issued by agencies of state and local
governments to finance seasonal working capital needs or as short-term financing
in anticipation of longer-term financing.

Standby Commitments. The Portfolio may acquire standby commitments or "puts"
solely to facilitate portfolio liquidity; the Portfolio intends to exercise its
rights thereunder for trading purposes. The maturity of a municipal obligation
is not to be considered shortened by any standby commitment to which the
obligation is subject. Thus, standby commitments do not affect the
dollar-weighted average maturity of the Portfolio.

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When municipal obligations are subject to puts separate from the underlying
securities, no value is assigned to the put. Because of the difficulty of
evaluating the likelihood of exercise or the potential benefit of a put, the
Board of Trustees has determined that puts shall have a fair market value of
zero, regardless of whether any direct or indirect consideration was paid.

Since the value of the put is partly dependent on the ability of the put writer
to meet its obligation to repurchase, the Portfolio's policy is to enter into
put transactions only with put writers who are approved by Bankers Trust. It is
the Portfolio's general policy to enter into put transactions only with those
put writers which are determined to present minimal credit risks. In connection
with this determination, the Board of Trustees will review regularly Bankers
Trust's list of approved put writers, taking into consideration, among other
things, the ratings, if available, of their equity and debt securities, their
reputation in the municipal securities markets, their net worth, their
efficiency in consummating transactions and any collateral arrangements, such as
letters of credit securing the puts written by them. Commercial banks normally
will be members of the Federal Reserve System, and other dealers will be members
of the National Association of Securities Dealers, Inc. or members of a national
securities exchange. Other put writers will have outstanding debt rated Aa or
better by Moody's or AA or better by S&P, or will be of comparable quality in
Bankers Trust's opinion, or such put writers' obligations will be collateralized
and of comparable quality in Bankers Trust's opinion. The Board of Trustees has
directed Bankers Trust not to enter into put transactions with any put writer
that, in the judgment of Bankers Trust using the above-described criteria, is or
becomes a recognizable credit risk. The Trust is unable to predict whether all
or any portion of any loss sustained could subsequently be recovered from a put
writer in the event that a put writer should default on its obligation to
repurchase an underlying security.

Other Investments and Investment Techniques. The Portfolio may also utilize the
following investments and investment techniques and practices: puts, zero coupon
municipal securities, repurchase agreements, Rule 144A securities, when-issued
and delayed delivery securities, and options and futures contracts.

Debt Securities. Bonds and other debt instruments are used by issuers to borrow
money from investors. The issuer pays the investor a fixed or variable rate of
interest, and must repay the amount borrowed at maturity. Some debt securities,
such as zero coupon bonds, do not pay current interest, but are purchased at a
discount from their face values. Debt securities, loans, and other direct debt
have varying degrees of quality and varying levels of sensitivity to changes in
interest rates. Longer-term bonds are generally more sensitive to interest rate
changes than short-term bonds.

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Puts. The Portfolio may purchase municipal bonds or notes together with the
right to resell them at an agreed price or yield within a specified period prior
to maturity. This right to resell is known as a put. The aggregate price paid
for securities with puts may be higher than the price which otherwise would be
paid. Consistent with the investment objectives of the Portfolio and subject to
the supervision of the Trustees of the Portfolio, the purpose of this practice
is to permit the portfolio to be fully invested in tax-exempt securities while
maintaining the necessary liquidity to purchase securities on a when-issued
basis, to meet unusually large redemptions, to purchase at a later date
securities other than those subject to the put and to facilitate Bankers Trust's
ability to manage the Portfolio actively. The principal risk of puts is that the
put writer may default on its obligation to repurchase. Bankers Trust will
monitor each writer's ability to meet its obligations under puts.

The amortized cost method is used by the Portfolio to value municipal securities
with maturities of less than 60 days; when these securities are subject to puts
separate from the underlying securities, no value is assigned to the puts. The
cost of any such put is carried as an unrealized loss from the time of purchase
until it is exercised or expires.

Zero Coupon Bonds. Zero coupon bonds are the separate income or principal
components of a debt instrument. These involve risks that are similar to those
of other debt securities, although they may be more volatile, and certain zero
coupon bonds move in the same direction as interest rates.

Zero Coupon Municipal Securities. The Intermediate Tax Free Portfolio may invest
in zero coupon municipal securities which are debt securities issued or sold at
a discount from their face value which do not entitle the holder to any periodic
payment of interest prior to maturity or a specified redemption date (or cash
payment date). The amount of the discount varies depending on the time remaining
until maturity or cash payment date, prevailing interest rates, liquidity of the
security and perceived credit quality of the issuer. Zero coupon securities also
may take the form of debt securities that have been stripped of their unmatured
interest coupons, the coupons themselves and receipts or certificates
representing interests in such stripped debt obligations and coupons. The market
prices of zero coupon securities generally are more volatile than the market
prices of interest-bearing securities and are likely to respond to a greater
degree to changes in interest rates than interest-bearing securities having
similar maturities and credit qualities.

Floating Rate Bonds. Floating rate bonds may have interest rates that move in
tandem with a benchmark, helping to stabilize their prices.

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U.S. Government Securities. U.S. government securities are high-quality debt
securities issued or guaranteed by the U.S. Treasury or by an agency or
instrumentality of the U.S. government. Not all U.S. government securities are
backed by the full faith and credit of the United States. For example,
securities issued by the Farm Credit Banks or by the Federal National Mortgage
Association are supported by the instrumentality's right to borrow money from
the U.S. Treasury under certain circumstances. However, securities issued by
other agencies or instrumentalities are supported only by the credit of the
entity that issued them.

Illiquid Securities. Historically, illiquid securities have included securities
subject to contractual or legal restrictions on resale because they have not
been registered under the Securities Act of 1933, as amended (the "1933 Act"),
securities which are otherwise not readily marketable and repurchase agreements
having a remaining maturity of longer than seven days. Securities which have not
been registered under the 1933 Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a mutual fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemptions within seven days. A mutual fund might also have to register such
restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.

A large institutional market has developed for certain securities that are not
registered under the 1933 Act, including repurchase agreements, commercial
paper, foreign securities, municipal securities and corporate bonds and notes.
Institutional investors depend on an efficient institutional market in which the
unregistered security can be readily resold or on an issuer's ability to honor a
demand for repayment. The fact that there are contractual or legal restrictions
on resale of such investments to the general public or to certain institutions
may not be indicative of their liquidity.

The Securities and Exchange Commission (the "SEC") has adopted Rule 144A, which
allows a broader institutional trading market for securities otherwise subject
to restriction on their resale to the general public. Rule 144A establishes a
"safe harbor" from the registration requirements of the 1933 Act of resales of
certain securities to qualified institutional buyers. The Adviser anticipates
that the market for certain restricted securities such as institutional
commercial paper will expand further as a result of this regulation and the
development of automated systems for the trading, clearance and settlement of
unregistered securities of domestic and foreign issuers, such as the PORTAL
System sponsored by the National Association of Securities Dealers, Inc.

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Rule 144A Securities are securities in the United States that are not registered
for sale under federal securities laws but which can be resold to institutions
under SEC Rule 144A. Provided that a dealer or institutional trading market in
such securities exists, these restricted securities are treated as exempt from
the 15% limit on illiquid securities. Under the supervision of the Board of
Trustees of the Portfolio, the Adviser determines the liquidity of restricted
securities and, through reports from the Adviser, the Board will monitor trading
activity in restricted securities. If institutional trading in restricted
securities were to decline, the liquidity of the Portfolio could be adversely
affected.

In reaching liquidity decisions, the Adviser will consider, among other things,
the following factors: (1) the frequency of trades and quotes for the security;
(2) the number of dealers and other potential purchasers or sellers of the
security; (3) dealer undertakings to make a market in the security; and (4) the
nature of the security and of the marketplace trades (E.G., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
the transfer).

When-Issued and Delayed Delivery Securities. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. Delivery of and payment
for these securities may take place as long as a month or more after the date of
the purchase commitment. The value of these securities is subject to market
fluctuations during this period and no income accrues to the Portfolio until
settlement takes place. The Portfolio identifies, as part of a segregated
account, cash or liquid securities in an amount at least equal to these
commitments.

Lending of Portfolio Securities. The Portfolio is permitted to lend up to 30% of
the total value of its securities. The Portfolio will not lend securities to
Bankers Trust, ICC Distributors or their affiliates. These loans must be secured
continuously by cash or equivalent collateral or by a letter of credit at least
equal to the market value of the securities loaned plus accrued income. By
lending its securities, the Portfolio may increase its income by continuing to
receive income on the loaned securities as well as by the opportunity to receive
interest on the collateral. During the term of the loan, the Portfolio continues
to bear the risk of fluctuations in the price of the loaned securities. In
lending securities to brokers, dealers and other financial organizations, the
Portfolio is subject to risks, which like those associated with other extensions
of credit, include delays in recovery and possible loss of rights in the
collateral should the borrower fail financially. Cash collateral may be invested
in a money market fund managed by Bankers Trust (or its affiliates) and Bankers
Trust may serve as a Portfolio's lending agent and may share in revenue received
from securities lending transactions as compensation for this service.

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Repurchase Agreements. In a repurchase agreement, the Portfolio buys a security
at one price and simultaneously agrees to sell it back at a higher price at a
future date. Delays or losses could result if the other party to the agreement
defaults or becomes insolvent.

Reverse Repurchase Agreements. In a reverse repurchase agreement, the Portfolio
temporarily transfers possession of a portfolio instrument to another party in
return for cash. This could increase the risk of fluctuation in the Fund's yield
or in the market value of its assets. A reverse repurchase agreement is a form
of borrowing and will be counted toward the Portfolio's borrowing restrictions.

Short-Term Instruments. The Portfolio intends to stay invested in the securities
described herein to the extent practical in light of its objective and long-term
investment perspective. However, the Portfolio may invest up to 35% of its total
assets in high quality short-term investments with remaining maturities of 397
days or less, or in money market mutual funds, to meet anticipated redemptions
and expenses for day-to-day operating purposes and up to 100% of its total
assets when, in the Adviser's opinion, it is advisable to adopt a temporary
defensive position because of unusual and adverse conditions affecting the
respective markets. When the Portfolio experiences large cash inflows through
the sale of securities and desirable equity securities, that are consistent with
the Portfolio's investment objective, which are unavailable in sufficient
quantities or at attractive prices, the Portfolio may invest in short-term
instruments for a limited time pending availability of such portfolio
securities. Short-term instruments consist of U.S. and non-U.S.: (i) short-term
obligations of sovereign governments, their agencies, instrumentalities,
authorities or political subdivisions; (ii) other short-term debt securities
rated AA or higher by S&P or Aa or higher by Moody's or, if unrated, of
comparable quality in the opinion of the Adviser; (iii) commercial paper; (iv)
bank obligations, including negotiable certificates of deposit, time deposits
and bankers' acceptances; and (v) repurchase agreements. At the time the
Portfolio invests in commercial paper, bank obligations or repurchase
agreements, the issuer or the issuer's parent must have outstanding debt rated
AA or higher by S&P or Aa or higher by Moody's or outstanding commercial paper
or bank obligations rated A-1 by S&P or Prime-1 by Moody's; or, if no such
ratings are available, the instrument must be of comparable quality in the
opinion of the Adviser. These instruments may be denominated in U.S. dollars or
in foreign currencies.

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Derivatives. The Portfolio may invest in various instruments that are commonly
known as "derivatives." Generally, a derivative is a financial arrangement, the
value of which is based on, or "derived" from, a traditional security, asset, or
market index. Some derivatives such as mortgage-related and other asset-backed
securities are in many respects like any other investment, although they may be
more volatile or less liquid than more traditional debt securities. There are,
in fact, many different types of derivatives and many different ways to use
them. There are a range of risks associated with those uses. Futures and options
are commonly used for traditional hedging purposes to attempt to protect a fund
from exposure to changing interest rates, securities prices, or currency
exchange rates and as a low cost method of gaining exposure to a particular
securities market without investing directly in those securities. However, some
derivatives are used for leverage, which tends to magnify the effects of an
instrument's price changes as market conditions change. Leverage involves the
use of a small amount of money to control a large amount of financial assets,
and can in some circumstances lead to significant losses. The Adviser will use
derivatives only in circumstances where they offer the most efficient means of
improving the risk/reward profile of the Portfolio and when consistent with the
Portfolio's investment objective and policies. The use of derivatives for
non-hedging purposes may be considered speculative.

Certificates of Deposit and Bankers' Acceptances. Certificates of deposit are
receipts issued by a depository institution in exchange for the deposit of
funds. The issuer agrees to pay the amount deposited plus interest to the bearer
of the receipt on the date specified on the certificate. The certificate usually
can be traded in the secondary market prior to maturity. Bankers' acceptances
typically arise from short-term credit arrangements designed to enable
businesses to obtain funds to finance commercial transactions. Generally, an
acceptance is a time draft drawn on a bank by an exporter or an importer to
obtain a stated amount of funds to pay for specific merchandise. The draft is
then "accepted" by a bank that, in effect, unconditionally guarantees to pay the
face value of the instrument on its maturity date. The acceptance may then be
held by the accepting bank as an earning asset or it may be sold in the
secondary market at the going rate of discount for a specific maturity. Although
maturities for acceptances can be as long as 270 days, most acceptances have
maturities of six months or less.

For a description of commercial paper ratings, see Appendix.

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Futures Contracts and Options on Futures Contracts.

General. The successful use of futures contracts and options thereon draws upon
the Adviser's skill and experience with respect to such instruments and usually
depends on the Adviser's ability to forecast interest rate and currency exchange
rate movements correctly. Should interest or exchange rates move in an
unexpected manner, the Portfolio may not achieve the anticipated benefits of
futures contracts or options on futures contracts or may realize losses and thus
will be in a worse position than if such strategies had not been used. In
addition, the correlation between movements in the price of futures contracts or
options on futures contracts and movements in the price of the securities and
currencies hedged or used for cover will not be perfect and could produce
unanticipated losses.

Futures Contracts. Futures contracts are contracts to purchase or sell a fixed
amount of an underlying instrument, commodity or index at a fixed time and place
in the future. U.S. futures contracts have been designed by exchanges which have
been designated "contracts markets" by the Commodity Futures Trading Commission
("CFTC"), and must be executed through a futures commission merchant, or
brokerage firm, which is a member of the relevant contract market. Futures
contracts trade on a number of exchange markets and clear through their clearing
corporations. The Portfolio may enter into contracts for the purchase or sale
for future delivery of fixed-income securities, foreign currencies, or financial
indices including any index of U.S. government securities. The Portfolio may
enter into futures contracts which are based on debt securities that are backed
by the full faith and credit of the U.S. government, such as long-term U.S.
Treasury Bonds, Treasury Notes, Government National Mortgage Association
("GNMA") modified pass-through mortgage-backed securities and three-month U.S.
Treasury Bills. The Portfolio may also enter into futures contracts which are
based on bonds issued by governments other than the U.S. government. Futures
contracts on foreign currencies may be used to hedge against securities that are
denominated in foreign currencies.

At the same time a futures contract is entered into, the Portfolio must allocate
cash or securities as a deposit payment ("initial margin"). The initial margin
deposits are set by exchanges and may range between 1% and 10% of a contract's
face value. Daily thereafter, the futures contract is valued and the payment of
"variation margin" may be required, since each day the Portfolio would provide
or receive cash that reflects any decline or increase in the contract's value.

Although futures contracts (other than those that settle in cash, such as index
futures) by their terms call for the actual delivery or acquisition of the
instrument underlying the contract, in most cases the contractual obligation is
fulfilled by offset before the date of the contract without having to make or
take delivery of the instrument underlying the contract. The offsetting of a
contractual obligation is accomplished by entering into an opposite position in
the identical futures contract on the commodities exchange on which the futures
contract was entered into (or a linked exchange). Such a transaction, which is
effected through a member of an exchange, cancels the obligation to make or take
delivery of the instrument underlying the contract. Since all transactions in
the futures market are made, offset or fulfilled through a clearinghouse
associated with the exchange on which the contracts are traded, the Portfolio
will incur brokerage fees when it enters into futures contracts.

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<PAGE>

The purpose of entering into a futures contract, in the case of a Portfolio
which holds or intends to acquire fixed-income securities, is to attempt to
protect the Portfolio from fluctuations in interest rates without actually
buying or selling fixed-income securities. For example, if interest rates were
expected to increase, a Portfolio might enter into futures contracts for the
sale of debt securities. Such a sale would have much the same effect as selling
an equivalent value of the debt securities owned by the Portfolio. If interest
rates did increase, the value of the debt security in the Portfolio would
decline, but the value of the futures contracts to the Portfolio would increase
at approximately the same rate, thereby keeping the net asset value of the
Portfolio from declining as much as it otherwise would have. A portfolio could
accomplish similar results by selling debt securities and investing in bonds
with short maturities when interest rates are expected to increase. However,
since the futures market is more liquid than the cash market, the use of futures
contracts as an investment technique allows a Portfolio to maintain a defensive
position without having to sell its portfolio securities.

Similarly, when it is expected that interest rates may decline, futures
contracts may be purchased to attempt to hedge against anticipated purchases of
debt securities at higher prices. Since the fluctuations in the value of futures
contracts should be similar to those of debt securities, a Portfolio could take
advantage of the anticipated rise in the value of debt securities without
actually buying them until the market had stabilized. The assets in the
segregated asset account maintained to cover the Portfolio's obligations with
respect to such futures contracts will consist of cash or securities acceptable
to the broker from its portfolio in an amount equal to the difference between
the fluctuating market value of such futures contracts and the aggregate value
of the initial and variation margin payments made by the Portfolio with respect
to such futures contracts.

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

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<PAGE>

In addition, futures contracts entail risks. Although the Adviser believes that
use of such contracts will benefit the Portfolio, if the Adviser's investment
judgment about the general direction of interest rates is incorrect, the
Portfolio's overall performance would be poorer than if it had not entered into
any such contract. For example, if the Portfolio has hedged against the
possibility of an increase in interest rates which would adversely affect the
price of debt securities held in its portfolio and interest rates decrease
instead, the Portfolio will lose part or all of the benefit of the increased
value of its debt securities which it has hedged because it will have offsetting
losses in its futures positions. In addition, in such situations, if the
Portfolio has insufficient cash, it may have to sell debt securities from its
portfolio to meet daily variation margin requirements. Such sales of bonds may
be, but will not necessarily be, at increased prices which reflect the rising
market. The Portfolio may have to sell securities at a time when it may be
disadvantageous to do so.

Options on Futures Contracts. Each Portfolio may purchase and write options on
futures contracts for hedging purposes. The purchase of a call option on a
futures contract is similar in some respects to the purchase of a call option on
an individual security. Depending on the pricing of the option compared to
either the price of the futures contract upon which it is based or the price of
the underlying debt securities, it may or may not be less risky than ownership
of the futures contract or underlying debt securities. For example, when a
Portfolio is not fully invested it may purchase a call option on an interest
rate sensitive futures contract to hedge against a potential price increase on
debt securities due to declining interest rates. The purchase of a put option on
a futures contract is similar in some respects to the purchase of protective put
options on portfolio securities. For example, a Portfolio may purchase an
interest rate sensitive put option on a futures contract to hedge its portfolio
against the risk of a decline in the price of debt securities and to rising
interest rates.

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

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

Futures Contracts on Stock and Bond Indices. Each Portfolio may enter into
futures contracts providing for the making and acceptance of a cash settlement
based upon changes in the value of an index of domestic or foreign securities.
This investment technique may be used as a low-cost method of gaining exposure
to a particular securities market without investing directly in those securities
or to hedge against anticipated future changes in general market prices which
otherwise might either adversely affect the value of securities held by the
Portfolio or adversely affect the prices of securities which are intended to be
purchased at a later date for the portfolio.

When used for hedging purposes, each transaction in futures contracts on a
securities index involves the establishment of a position which the Adviser
believes will move in a direction opposite to that of the investment being
hedged. If these hedging transactions are successful, the futures position taken
for the Portfolio will rise in value by an amount which approximately offsets
the decline in value of the portion of the Portfolio's investments that is being
hedged. Should general market prices move in an unexpected manner, the full
anticipated benefits of Futures Contracts may not be achieved or a loss may be
realized.

Although futures contracts on securities indices would be entered into for
hedging purposes only, such transactions do involve certain risks. The risks
include a lack of correlation between the futures contract and the foreign
equity market being hedged and incorrect assessments of market trends which may
result in poorer overall performance than if a futures contract had not been
entered into.

Asset Coverage. To assure that the Portfolio's use of futures and related
options, as well as when-issued and delayed-delivery securities are not used to
achieve investment leverage, the Portfolio will cover such transactions, as
required under applicable interpretations of the SEC, either by owning the
underlying securities or by segregating with the Portfolio's Custodian or
futures commission merchant liquid securities in an amount at all times equal to
or exceeding the Portfolio's commitment with respect to these instruments or
contracts.

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Investment Restriction on Futures Transactions. The Portfolio will not enter
into any futures contracts or options on futures contracts if immediately
thereafter the amount of margin deposits on all the futures contracts of the
Portfolio and premiums paid on outstanding options on futures contracts owned by
the Portfolio (other than those entered into for bona fide hedging purposes)
would exceed 5% of the Portfolio's net asset value, after taking into account
unrealized profits and unrealized losses on any such contracts.

Additional Risk Factors

In addition to the risks discussed above, the Portfolio's investments may be
subject to the following risk factors:

Options on Futures Contracts. Futures contracts 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.

Options on Securities. A Portfolio may write (sell) covered call and put options
to a limited extent on its portfolio securities ("covered options") in an
attempt to increase income. However, the Portfolio may forgo the benefits of
appreciation on securities sold or may pay more than the market price on
securities acquired pursuant to call and put options written by the Portfolio.

When a Portfolio writes a covered call option, it gives the purchaser of the
option the right to buy the underlying security at the price specified in the
option (the "exercise price") by exercising the option at any time during the
option period. If the option expires unexercised, the Portfolio will realize
income in an amount equal to the premium received for writing the option. If the
option is exercised, a decision over which the Portfolio has no control, the
Portfolio must sell the underlying security to the option holder at the exercise
price. By writing a covered call option, the Portfolio forgoes, in exchange for
the premium less the commission ("net premium"), the opportunity to profit
during the option period from an increase in the market value of the underlying
security above the exercise price.

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When a Portfolio writes a covered put option, it gives the purchaser of the
option the right to sell the underlying security to the Portfolio at the
specified exercise price at any time during the option period. If the option
expires unexercised, the Portfolio will realize income in the amount of the
premium received for writing the option. If the put option is exercised, a
decision over which the Portfolio has no control, the Portfolio must purchase
the underlying security from the option holder at the exercise price. By writing
a covered put option, the Portfolio, in exchange for the net premium received,
accepts the risk of a decline in the market value of the underlying security
below the exercise price. The Portfolio will only write put options involving
securities for which a determination is made at the time the option is written
that the Portfolio wishes to acquire the securities at the exercise price.

A Portfolio may terminate its obligation as the writer of a call or put option
by purchasing an option with the same exercise price and expiration date as the
option previously written. This transaction is called a "closing purchase
transaction." The Portfolio will realize a profit or loss for a closing purchase
transaction if the amount paid to purchase an option is less or more, as the
case may be, than the amount received from the sale thereof. To close out a
position as a purchaser of an option, the Portfolio may make a "closing sale
transaction" which involves liquidating the Portfolio's position by selling the
option previously purchased. Where the Portfolio cannot effect a closing
purchase transaction, it may be forced to incur brokerage commissions or dealer
spreads in selling securities it receives or it may be forced to hold underlying
securities until an option is exercised or expires.

When a Portfolio writes an option, an amount equal to the net premium received
by the Portfolio is included in the liability section of the Portfolio's
Statement of Assets and Liabilities as a deferred credit. The amount of the
deferred credit will be subsequently marked to market to reflect the current
market value of the option written. The current market value of a traded option
is the last sale price or, in the absence of a sale, the mean between the
closing bid and asked price. If an option expires on its stipulated expiration
date or if the Portfolio enters into a closing purchase transaction, the
Portfolio will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the premium received when the option was sold), and the
deferred credit related to such option will be eliminated. If a call option is
exercised, the Portfolio will realize a gain or loss from the sale of the
underlying security and the proceeds of the sale will be increased by the
premium originally received. The writing of covered call options may be deemed
to involve the pledge of the securities against which the option is being
written. Securities against which call options are written will be segregated on
the books of the custodian for the Portfolio.

18
<PAGE>

A Portfolio may purchase call and put options on any securities in which it may
invest. The Portfolio would normally purchase a call option in anticipation of
an increase in the market value of such securities. The purchase of a call
option would entitle the Portfolio, in exchange for the premium paid, to
purchase a security at a specified price during the option period. The Portfolio
would ordinarily have a gain if the value of the securities increased above the
exercise price sufficiently to cover the premium and would have a loss if the
value of the securities remained at or below the exercise price during the
option period.

A Portfolio would normally purchase put options in anticipation of a decline in
the market value of securities in its portfolio ("protective puts") or
securities of the type in which it is permitted to invest. The purchase of a put
option would entitle the Portfolio, in exchange for the premium paid, to sell a
security, which may or may not be held in the Portfolio's holdings, at a
specified price during the option period. The purchase of protective puts is
designed merely to offset or hedge against a decline in the market value of the
Portfolio's holdings. Put options also may be purchased by the Portfolio for the
purpose of affirmatively benefiting from a decline in the price of securities
which the Portfolio does not own. The Portfolio would ordinarily recognize a
gain if the value of the securities decreased below the exercise price
sufficiently to cover the premium and would recognize a loss if the value of the
securities remained at or above the exercise price. Gains and losses on the
purchase of protective put options would tend to be offset by countervailing
changes in the value of underlying portfolio securities.

Each Portfolio has adopted certain other nonfundamental policies concerning
option transactions which are discussed below. The Portfolio's activities in
options may also be restricted by the requirements of the Internal Revenue Code
of 1986, as amended (the "Code"), for qualification as a regulated investment
company.

The hours of trading for options on securities may not conform to the hours
during which the underlying securities are traded. To the extent that the option
markets close before the markets for the underlying securities, significant
price and rate movements can take place in the underlying securities markets
that cannot be reflected in the option markets. It is impossible to predict the
volume of trading that may exist in such options, and there can be no assurance
that viable exchange markets will develop or continue.

A Portfolio may engage in over-the-counter options transactions with
broker-dealers who make markets in these options. The ability to terminate
over-the-counter option positions is more limited than with exchange-traded
option positions because the predominant market is the issuing broker rather
than an exchange, and may involve the risk that broker-dealers participating in
such transactions will not fulfill their obligations. To reduce this risk, the
Portfolio will purchase such options only from broker-dealers who are primary
government securities dealers recognized by the Federal Reserve Bank of New York
and who agree to (and are expected to be capable of) entering into closing
transactions, although there can be no guarantee that any such option will be
liquidated at a favorable price prior to expiration. The Adviser will monitor
the creditworthiness of dealers with whom the Portfolio enters into such options
transactions under the general supervision of the Portfolios' Trustees.

19
<PAGE>

Unless the Trustees conclude otherwise, each Portfolio intends to treat OTC
options as not readily marketable and therefore subject to each Portfolio's 15%
limitation on investment in illiquid securities.

Special Information Concerning Master-Feeder Fund Structure. Unlike other
open-end management investment companies (mutual funds) which directly acquire
and manage their own portfolio securities, the Fund seeks to achieve its
investment objective by investing all of its Assets in the Portfolio, a separate
registered investment company with the same investment objective as the Fund.
Therefore, an investor's interest in the Portfolio's securities is indirect. In
addition to selling a beneficial interest to the Fund, the Portfolio may sell
beneficial interests to other mutual funds, investment vehicles or institutional
investors. Such investors will invest in the Portfolio on the same terms and
conditions and will pay a proportionate share of the Portfolio's expenses.
However, the other investors investing in the Portfolio are not required to sell
their shares at the same public offering price as the Fund due to variations in
sales commissions and other operating expenses. Therefore, investors in the Fund
should be aware that these differences may result in differences in returns
experienced by investors in the different funds that invest in the Portfolio.
Such differences in returns are also present in other mutual fund structures.
Information concerning other holders of interests in the Portfolio is available
from Bankers Trust at 1-800-730-1313.

Smaller funds investing in the Portfolio may be materially affected by the
actions of larger funds investing in the Portfolio. For example, if a large fund
withdraws from the Portfolio, the remaining funds may experience higher pro rata
operating expenses, thereby producing lower returns (however, this possibility
exists as well for traditionally structured funds which have large institutional
investors). Additionally, the Portfolio may become less diverse, resulting in
increased portfolio risk. Also, funds with a greater pro rata ownership in the
Portfolio could have effective voting control of the operations of the
Portfolio. Except as permitted by the SEC, whenever the Trust is requested to
vote on matters pertaining to the Portfolio, the Trust will hold a meeting of
shareholders of the Fund and will cast all of its votes in the same proportion
as the votes of the Fund's shareholders. Fund shareholders who do not vote will
not affect the Trust's votes at the Portfolio meeting. The percentage of the
Trust's votes representing the Fund's shareholders not voting will be voted by
the Trustees or officers of the Trust in the same proportion as the Fund
shareholders who do, in fact, vote.

20
<PAGE>

Certain changes in the Portfolio's investment objectives, policies or
restrictions may require the Fund to withdraw its interest in the Portfolio. Any
such withdrawal could result in a distribution "in kind" of portfolio securities
(as opposed to a cash distribution from the Portfolio). If securities are
distributed, the Fund could incur brokerage, tax or other charges in converting
the securities to cash. In addition, the distribution in kind may result in a
less diversified portfolio of investments or adversely affect the liquidity of
the Fund. Notwithstanding the above, there are other means for meeting
redemption requests, such as borrowing.

The Fund may withdraw its investment from the Portfolio at any time, if the
Board of Trustees of the Trust determines that it is in the best interests of
the shareholders of the Fund to do so. Upon any such withdrawal, the Board of
Trustees of the Trust would consider what action might be taken, including the
investment of all the Assets of the Fund in another pooled investment entity
having the same investment objective as the Fund or the retaining of an
investment adviser to manage the Fund's assets in accordance with the investment
policies described herein with respect to the Portfolio.

The Fund's investment objective is not a fundamental policy and may be changed
upon notice to, but without the approval of, the Fund's shareholders. If there
is a change in the Fund's investment objective, the Fund's shareholders should
consider whether the Fund remains an appropriate investment in light of their
then-current needs. The investment objective of the Portfolio is also not a
fundamental policy. Shareholders of the Fund will receive 30 days prior written
notice with respect to any change in the investment objective of the Fund or the
Portfolio.

Rating Services. The ratings of rating services represent their opinions as to
the quality of the securities that they undertake to rate. It should be
emphasized, however, that ratings are relative and subjective and are not
absolute standards of quality. Although these ratings are an initial criterion
for selection of portfolio investments, the Adviser also makes its own
evaluation of these securities, subject to review by the Board of Trustees.
After purchase by the Portfolio, an obligation may cease to be rated or its
rating may be reduced below the minimum required for purchase by the Portfolio.
Neither event would require the Portfolio to eliminate the obligation from its
portfolio, but the Adviser will consider such an event in its determination of
whether the Portfolio should continue to hold the obligation.

21
<PAGE>

Investment Restrictions

The following investment restrictions are "fundamental policies" of the Fund and
the Portfolio and may not be changed with respect to the Fund or the Portfolio
without the approval of a "majority of the outstanding voting securities" of the
Fund or the Portfolio, as the case may be. "Majority of the outstanding voting
securities" under the Investment Company Act of 1940, as amended (the "1940
Act"), and as used in this SAI, means, with respect to the Fund (or the
Portfolio), the lesser of (i) 67% or more of the outstanding voting securities
of the Fund (or of the total beneficial interests of the Portfolio) present at a
meeting, if the holders of more than 50% of the outstanding voting securities of
the Fund (or of the total beneficial interests of the Portfolio) are present or
represented by proxy or (ii) more than 50% of the outstanding voting securities
of the Fund (or of the total beneficial interests of the Portfolio). Whenever
the Trust is requested to vote on a fundamental policy of a Portfolio, the Trust
will hold a meeting of the Fund's shareholders and will cast its vote as
instructed by that Fund's shareholders. Fund shareholders who do not vote will
not affect the Trust's votes at the Portfolio meeting. The percentage of the
Trust's votes representing Fund shareholders not voting will be voted by the
Trustees of the Trust in the same proportion as the Fund shareholders who do, in
fact, vote.

Fundamental Policies. As a matter of fundamental policy, the Portfolio (or the
Fund) may not (except that no investment restriction of the Fund shall prevent
the Fund from investing all of its Assets in an open-end investment company with
substantially the same investment objectives):

(1) borrow money or mortgage or hypothecate assets of the Portfolio
(Fund), except that in an amount not to exceed 1/3 of the current
value of the Portfolio's (Fund's) net assets, it may borrow money,
but only as a temporary measure for extraordinary or emergency
purposes and enter into reverse repurchase agreements or dollar roll
transactions, and except that it may pledge, mortgage or hypothecate
not more than 1/3 of such assets to secure such borrowings (it is
intended that money would be borrowed only from banks and only
either to accommodate requests for the withdrawal of beneficial
interests (redemption of shares) while effecting an orderly
liquidation of portfolio securities or to maintain liquidity in the
event of an unanticipated failure to complete a portfolio security
transaction or other similar situations) or reverse repurchase
agreements, provided that collateral arrangements with respect to
options and futures, including deposits of initial deposit and
variation margin, are not considered a pledge of assets for purposes
of this restriction and except that assets may be pledged to secure
letters of credit solely for the purpose of participating in a
captive insurance company sponsored by the Investment Company
Institute; for additional related restrictions, see clause (i) under
the caption "Additional Restrictions" below (as an operating policy,
the Portfolio may not engage in dollar-roll transactions);

22
<PAGE>

(2) underwrite securities issued by other persons except insofar as the
Portfolio (Trust or the Fund) may technically be deemed an
underwriter under the 1933 Act in selling a portfolio security;

(3) make loans to other persons except: (a) through the lending of the
Portfolio's (Fund's) portfolio securities and provided that any such
loans not exceed 30% of the Portfolio's (Fund's) total assets (taken
at market value); (b) through the use of repurchase agreements or
the purchase of short-term obligations; or (c) by purchasing a
portion of an issue of debt securities of types distributed publicly
or privately;

(4) purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or
interests therein), interests in oil, gas or mineral leases,
commodities or commodity contracts (except futures and option
contracts) in the ordinary course of business (except that the
Portfolio (Trust) may hold and sell, for the Portfolio's (Fund)
portfolio, real estate acquired as a result of the Portfolio's
(Fund's) ownership of securities);

(5) concentrate its investments in any particular industry (excluding
U.S. government securities), but if it is deemed appropriate for the
achievement of the Portfolio's (Fund's) investment objective(s), up
to 25% of its total assets may be invested in any one industry; and

(6) issue any senior security (as that term is defined in the 1940 Act)
if such issuance is specifically prohibited by the 1940 Act or the
rules and regulations promulgated thereunder, provided that
collateral arrangements with respect to options and futures,
including deposits of initial deposit and variation margin, are not
considered to be the issuance of a senior security for purposes of
this restriction.

(7) withrespect to 75% of the (Portfolio's) Fund's total assets, invest
more than 5% of its total assets in the securities of any one issuer
(excluding cash and cash equivalents, U.S. government securities and
the securities of other investments companies) or own more than 10%
of the voting securities of any issuer.

Additional Restrictions. The following are nonfundamental policies
of the Fund and the Portfolio. In order to comply with certain
statutes and policies, the Portfolio (or the Trust, on behalf of the
Fund) will not as a matter of operating policy (except that no
operating policy shall prevent a Fund from investing all of its
Assets in an open-end investment company with substantially the same
investment objectives):

23
<PAGE>

(i) borrow money (including through reverse repurchase or forward roll
transactions) for any purpose in excess of 10% of the Portfolio's (Fund's) total
assets (taken at cost), except that the Portfolio (Fund) may borrow for
temporary or emergency purposes up to 1/3 of its total assets; pledge, mortgage
or hypothecate for any purpose in excess of 10% of the Portfolio's (Fund's)
total assets (taken at market value),

(ii) provided that collateral arrangements with respect to options and futures,
including deposits of initial deposit and variation margin, and reverse
repurchase agreements are not considered a pledge of assets for purposes of this
restriction;

(iii) purchase any security or evidence of interest therein on margin, except
that such short-term credit as may be necessary for the clearance of purchases
and sales of securities may be obtained and except that deposits of initial
deposit and variation margin may be made in connection with the purchase,
ownership, holding or sale of futures;

(iv) (a) sell any security which it does not own unless by virtue of its
ownership of other securities it has at the time of sale a right to obtain
securities, without payment of further consideration, equivalent in kind and
amount to the securities sold and provided that if such right is conditional the
sale is made upon the same conditions; and (b) make short sales of securities or
maintain a short position, unless at all times when a short position is open it
owns an equal amount of such securities or securities convertible into or
exchangeable, without payment of any further consideration, for securities of
the same issue and equal in amount to, the securities sold short, and unless not
more than 10% of the Portfolio's (Fund's) net assets (taken at market value) is
represented by such securities, or securities convertible into or exchangeable
for such securities, at any one time (the Portfolio (Fund) has no current
intention to engage in short selling);

(v) invest for the purpose of exercising control or management of
another company;

24
<PAGE>

commission, or except when such purchase, though not made in the open
market, is part of a plan of merger or consolidation; provided,
however, that securities of any investment company will not be
purchased for the Portfolio (Fund) if such purchase at the time thereof
would cause: (a) more than 10% of the Portfolio's (Fund's) total assets
(taken at the greater of cost or market value) to be invested in the
securities of such issuers; (b) more than 5% of the Portfolio's
(Fund's) total assets (taken at the greater of cost or market value) to
be invested in any one investment company; or (c) more than 3% of the
outstanding voting securities of any such issuer to be held for the
Portfolio (Fund), unless permitted to exceed these limitations by an
exemptive order of the SEC; provided further that, except in the case
of a merger or consolidation, the Portfolio (Fund) shall not purchase
any securities of any open-end investment company unless (1) the
Portfolio's investment adviser waives the investment advisory fee with
respect to assets invested in other open-end investment companies and
(2) the Portfolio incurs no sales charge in connection with the
investment;

(vii) write puts and calls on securities unless each of the following
conditions are met: (a) the security underlying the put or call is
within the investment policies of the Portfolio (Fund) and the option
is issued by the OCC, except for put and call options issued by
non-U.S. entities or listed on non-U.S. securities or commodities
exchanges; (b) the aggregate value of the obligations underlying the
puts determined as of the date the options are sold shall not exceed
50% of the Portfolio's (Fund's) net assets; (c) the securities subject
to the exercise of the call written by the Portfolio (Fund) must be
owned by the Portfolio (Fund) at the time the call is sold and must
continue to be owned by the Portfolio (Fund) until the call has been
exercised, has lapsed, or the Portfolio (Fund) has purchased a closing
call, and such purchase has been confirmed, thereby extinguishing the
Portfolio's (Fund's) obligation to deliver securities pursuant to the
call it has sold; and (d) at the time a put is written, the Portfolio
(Fund) establishes a segregated account with its custodian consisting
of cash or liquid securities equal in value to the amount the Portfolio
(Fund) will be obligated to pay upon exercise of the put (this account
must be maintained until the put is exercised, has expired, or the
Portfolio (Fund) has purchased a closing put, which is a put of the
same series as the one previously written);

25
<PAGE>

(viii) buy and sell puts and calls on securities, stock index futures
or options on stock index futures, or financial futures or options on
financial futures unless such options are written by other persons and:
(a) the options or futures are offered through the facilities of a
national securities association or are listed on a national securities
or commodities exchange, except for put and call options issued by
non-U.S. entities or listed on non-U.S. securities or commodities
exchanges; (b) the aggregate premiums paid on all such options which
are held at any time do not exceed 20% of the Portfolio's (Fund's)
total net assets; and (c) the aggregate margin deposits required on all
such futures or options thereon held at any time do not exceed 5% of
the Portfolio's (Fund's) total assets; and

(ix) invest more than 15% of the Portfolio's (Fund's) net assets (taken
at the greater of cost or market value) in securities that are illiquid
or not readily marketable (excluding Rule 144A securities deemed by the
Board of Trustees of the Portfolio (Trust) to be liquid).

(x) sell securities it does not own (short sales) such that the dollar
amount of such short sales at any one time exceeds 25% of the net
equity of the Portfolio (Fund), and the value of securities of any one
issuer in which the Portfolio (Fund) is short exceeds the lesser of
2.0% of the value of the Portfolio's (Fund's) net assets or 2.0% of the
securities of any class of any U.S. issuer and, provided that short
sales may be made only in those securities which are fully listed on a
national securities exchange or a foreign exchange (This provision does
not include the sale of securities that the Portfolio (Fund)
contemporaneously owns or where the Portfolio has the right to obtain
securities equivalent in kind and amount to those sold, i.e., short
sales against the box.) (The Portfolio (Fund) currently does not engage
in short selling);

There will be no violation of any investment restriction (except with
respect to fundamental investment restriction (1) above) if that
restriction is complied with at the time the relevant action is taken,
notwithstanding a later change in the market value of an investment, in
net or total assets or in the change of securities rating of the
investment, or any other later change.

26
<PAGE>

Portfolio Transactions and Brokerage Commissions

The Adviser is responsible for decisions to buy and sell securities, futures
contracts and options on such securities and futures for each Portfolio, the
selection of brokers, dealers and futures commission merchants to effect
transactions and the negotiation of brokerage commissions, if any.
Broker-dealers may receive brokerage commissions on portfolio transactions,
including options, futures and options on futures transactions and the purchase
and sale of underlying securities upon the exercise of options. Orders may be
directed to any broker-dealer or futures commission merchant, including to the
extent and in the manner permitted by applicable law, Bankers Trust or its
subsidiaries or affiliates. Purchases and sales of certain portfolio securities
on behalf of a Portfolio are frequently placed by the Adviser with the issuer or
a primary or secondary market-maker for these securities on a net basis, without
any brokerage commission being paid by the Portfolio. Trading does, however,
involve transaction costs. Transactions with dealers serving as market-makers
reflect the spread between the bid and asked prices. Transaction costs may also
include fees paid to third parties for information as to potential purchasers or
sellers of securities. Purchases of underwritten issues may be made which will
include an underwriting fee paid to the underwriter.

The Adviser seeks to evaluate the overall reasonableness of the brokerage
commissions paid (to the extent applicable) in placing orders for the purchase
and sale of securities for a Portfolio taking into account such factors as
price, commission (negotiable in the case of national securities exchange
transactions), if any, size of order, difficulty of execution and skill required
of the executing broker-dealer through familiarity with commissions charged on
comparable transactions, as well as by comparing commissions paid by the
Portfolio to reported commissions paid by others. The Adviser reviews on a
routine basis commission rates, execution and settlement services performed,
making internal and external comparisons.

The Adviser is authorized, consistent with Section 28(e) of the Securities
Exchange Act of 1934, when placing portfolio transactions for a Portfolio with a
broker to pay a brokerage commission (to the extent applicable) in excess of
that which another broker might have charged for effecting the same transaction
on account of the receipt of research, market or statistical information. The
term "research, market or statistical information" includes advice as to the
value of securities; the advisability of investing in, purchasing or selling
securities; the availability of securities or purchasers or sellers of
securities; and furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy and the performance
of accounts.

27
<PAGE>

Consistent with the policy stated above, the Conduct Rules of the National
Association of Securities Dealers, Inc. and such other policies as the Trustees
of the Portfolio may determine, the Adviser may consider sales of shares of the
Trust and of other investment company clients of the Adviser as a factor in the
selection of broker-dealers to execute portfolio transactions. The Adviser will
make such allocations if commissions are comparable to those charged by
nonaffiliated, qualified broker-dealers for similar services.

Higher commissions may be paid to firms that provide research services to the
extent permitted by law. The Adviser may use this research information in
managing the Portfolio's assets, as well as the assets of other clients.

Except for implementing the policies stated above, there is no intention to
place portfolio transactions with particular brokers or dealers or groups
thereof. In effecting transactions in over-the-counter securities, orders are
placed with the principal market-makers for the security being traded unless,
after exercising care, it appears that more favorable results are available
otherwise.

Although certain research, market and statistical information from brokers and
dealers can be useful to a Portfolio and to the Adviser, it is the opinion of
the management of the Portfolios that such information is only supplementary to
the Adviser's own research effort, since the information must still be analyzed,
weighed and reviewed by the Adviser's staff. Such information may be useful to
the Adviser in providing services to clients other than the Portfolios, and not
all such information is used by the Adviser in connection with the Portfolios.
Conversely, such information provided to the Adviser by brokers and dealers
through whom other clients of the Adviser effect securities transactions may be
useful to the Adviser in providing services to the Portfolios.

In certain instances there may be securities which are suitable for a Portfolio
as well as for one or more of the Adviser's other clients. Investment decisions
for a Portfolio and for the Adviser's other clients are made with a view to
achieving their respective investment objectives. It may develop that a
particular security is bought or sold for only one client even though it might
be held by, or bought or sold for, other clients. Likewise, a particular
security may be bought for one or more clients when one or more clients are
selling that same security. Some simultaneous transactions are inevitable when
several clients receive investment advice from the same investment adviser,
particularly when the same security is suitable for the investment objectives of
more than one client. When two or more clients are simultaneously engaged in the
purchase or sale of the same security, the securities are allocated among
clients in a manner believed to be equitable to each. It is recognized that in
some cases this system could have a detrimental effect on the price or volume of
the security as far as a Portfolio is concerned. However, it is believed that
the ability of a Portfolio to participate in volume transactions will produce
better executions for the Portfolio.

28
<PAGE>

For the fiscal years ended September 30, 1998 and 1997 and the period from
January 1, 1996 to September 30, 1996, and the fiscal year ended December 31,
1995, the Portfolio paid no brokerage commissions.

PERFORMANCE INFORMATION

Standard Performance Information

From time to time, quotations of a Fund's performance may be included in
advertisements, sales literature or shareholder reports. Mutual fund performance
is commonly measured as total return and/or yield. The Fund's performance is
affected by its expenses. These performance figures are calculated in the
following manner:

Yield: Yield refers to the income generated by an investment in the Fund
over a given period of time, expressed as an annual percentage rate.
Yields for a Fund used in advertising are computed by dividing the
Fund's interest and dividend income for a given 30-day or one-month
period, net of expenses, by the average number of shares entitled to
receive distributions during the period, dividing this figure by the
Fund's net asset value per share at the end of the period, and
annualizing the result (assuming compounding of income) in order to
arrive at an annual percentage rate. Income is calculated for purpose of
yield quotations in accordance with standardized methods applicable to
all stock and bond mutual funds. Dividends from equity investments are
treated as if they were accrued on a daily basis, solely for the purpose
of yield calculations. In general, interest income is reduced with
respect to bonds trading at a premium over their par value by
subtracting a portion of the premium from income on a daily basis, and
is increased with respect to bonds trading at a discount by adding a
portion of the discount to daily income. Capital gains and losses
generally are excluded from the calculation.

Income calculated for the purposes of calculating the Fund's yield
differs from income as determined for other accounting purposes. Because
of the different accounting methods used, and because of the compounding
assumed in yield calculations, the yield quoted for the Fund may differ
from the rate of distributions of the Fund paid over the same period or
the rate of income reported in the Fund's financial statements.

Unlike some bank deposits or other investments which pay a fixed yield
for a stated period of time, the total return (see "Total Return" below)
of the Fund will vary depending upon interest rates, the current market
value of the securities held by the Portfolio and changes in the
expenses of the Fund or Portfolio.

29
<PAGE>

Tax-Equivalent Yield: The Fund's tax-equivalent yield is equal to the
Fund's yield divided by (1-Tax Rate).

As of September 30, 1998, the Fund's tax equivalent 30-day SEC yield was
5.65% assuming a maximum Federal tax rate of 39.6%. The Fund's 30-day
SEC yield for the period ended September 30, 1998 was 3.90%.

Total return: Total return is the change in value of an investment in
the Fund over a given period, assuming reinvestment of any dividends and
capital gains. A cumulative total return reflects actual performance
over a stated period of time. An average annual total return is a
hypothetical rate of return that, if achieved annually, would have
produced the same cumulative total return if performance had been
constant over the entire period. Average annual total return
calculations smooth out variations in performance; they are not the same
as actual year-by-year results. Average annual total returns covering
periods of less than one year assume that performance will remain
constant for the rest of the year. The Fund's average annual total
return is calculated for certain periods by determining the average
annual compounded rates of return over those periods that would cause an
investment of $1,000 (made at the maximum public offering price with all
distributions reinvested) to reach the value of that investment at the
end of the periods. The Fund may also calculate total return figures
which represent aggregate performance over a period or year-by-year
performance.

Cumulative Total Return Annualized Total Return
For the Period From From the Period From
July 20, 1992 July 20, 1992
Total Return for the Total Return for the (Commencement of (Commencement of
One Year Ended Five Years Ended Operations) Operations)
September 30, 1998 September 30, 1998 Through September 30, 1998 Through September 30, 1998

<S> <C> <C> <C> <C>
Intermediate Tax- 7.71% 5.29% 42.78% 5.92%
Free Fund
</TABLE>

30
<PAGE>

Performance Results: Total returns and yields are based on past results
and are not an indication of future performance. Any total return
quotation provided for a Fund should not be considered as representative
of the performance of the Fund in the future since the net asset value
and public offering price of shares of the Fund will vary based not only
on the type, quality and maturities of the securities held in the
corresponding Portfolio, but also on changes in the current value of
such securities and on changes in the expenses of the Fund and the
corresponding Portfolio. These factors and possible differences in the
methods used to calculate total return should be considered when
comparing the total return of a Fund to total returns published for
other investment companies or other investment vehicles. Total return
reflects the performance of both principal and income.

Expenses

The Fund bears its own expenses. Operating expenses for the Fund
generally consist of all costs not specifically borne by the Adviser or
ICC Distributors, including administration fees, fees for necessary
professional services, amortization of organizational expenses and costs
associated with regulatory compliance and maintaining legal existence
and shareholder relations. The Portfolio bears its own expenses.
Operating expenses for the Portfolio generally consist of all costs not
specifically borne by the Adviser or ICC Distributors, including
investment advisory and administration and service fees, fees for
necessary professional services, amortization of organizational
expenses, the costs associated with regulatory compliance and
maintaining legal existence and investor relations.

Comparison of Fund Performance

Comparison of the quoted nonstandardized performance of various investments is
valid only if performance is calculated in the same manner. Since there are
different methods of calculating performance, investors should consider the
effect of the methods used to calculate performance when comparing performance
of a Fund with performance quoted with respect to other investment companies or
types of investments.

In connection with communicating its performance to current or prospective
shareholders, a Fund also may compare these figures to the performance of other
mutual funds tracked by mutual fund rating services or to unmanaged indices
which may assume reinvestment of dividends but generally do not reflect
deductions for administrative and management costs. A Fund's performance may be
compared to the performance of various indices and investments for which
reliable data is available. The Fund's performance may also be compared to
averages, performance rankings, or other information prepared by recognized
mutual fund statistical services. Evaluations of a Fund's performance made by
independent sources may also be used in advertisements concerning the Fund.
Sources for a Fund's performance information could include the following:

31
<PAGE>

Asian Wall Street Journal, a weekly Asian newspaper that often reviews U.S.
mutual funds investing internationally.

Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.

Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds investing abroad.

Changing Times, The Kiplinger Magazine, a monthly investment advisory
publication that periodically features the performance of a variety of
securities.

Consumer Digest, a monthly business/financial magazine that includes a "Money
Watch" section featuring financial news.

Financial Times, Europe's business newspaper, which features from time to time
articles on international or country-specific funds.

Financial World, a general business/financial magazine that includes a "Market
Watch" department reporting on activities in the mutual fund industry.

Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.

Fortune, a national business publication that periodically rates the performance
of a variety of mutual funds.

Global Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.

Investor's Daily, a daily newspaper that features financial, economic and
business news.

Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a weekly
publication of industry-wide mutual fund averages by type of fund.

Money, a monthly magazine that from time to time features both specific funds
and the mutual fund industry as a whole.

Morningstar Inc., a publisher of financial information and mutual fund research.

New York Times, a nationally distributed newspaper which regularly covers
financial news.

Personal Investing News, a monthly news publication that often reports on
investment opportunities and market conditions.

Personal Investor, a monthly investment advisory publication that includes a
"Mutual Funds Outlook" section reporting on mutual fund performance measures,
yields, indices and portfolio holdings.

Success, a monthly magazine targeted to the world of entrepreneurs and growing
business, often featuring mutual fund performance data.

U.S. News and World Report, a national business weekly that periodically reports
mutual fund performance data.

32
<PAGE>

ValueLine, a biweekly publication that reports on the largest 15,000 mutual
funds.

Wall Street Journal, a Dow Jones and Company, Inc. newspaper which regularly
covers financial news.

Weisenberger Investment Companies Services, an annual compendium of information
about mutual funds and other investment companies, including comparative data on
funds' backgrounds, management policies, salient features, management results,
income and dividend records, and price ranges.

Working Women, a monthly publication that features a "Financial Workshop"
section reporting on the mutual fund/financial industry.

Economic and Market Information

Advertising and sales literature of the Fund may include discussions of
economic, financial and political developments and their effect on the
securities market. Such discussions may take the form of commentary on these
developments by Fund portfolio managers and their views and analysis on how such
developments could affect the Fund. In addition, advertising and sales
literature may quote statistics and give general information about the mutual
fund industry, including the growth of the industry, from sources such as the
Investment Company Institute ("ICI").

Purchase of Shares

The Trust accepts purchase orders for Shares of the Fund at the NAV per Share
next determined after the order is received on each Valuation Day. Shares may be
available through Investment Professionals, such as broker/dealers and
investment advisers (including Service Agents).

Shares must be purchased in accordance with procedures established by the
Transfer Agent and each Service Agent. It is the responsibility of each Service
Agent to transmit to the Transfer Agent purchase and redemption orders and to
transmit to Bankers Trust as the Trust's custodian (the "Custodian") purchase
payments by the following business day (trade date + 1) after an order for
shares is placed. A shareholder must settle with the Service Agent for his or
her entitlement to an effective purchase or redemption order as of a particular
time. Because Bankers Trust is the Custodian and Transfer Agent of the Trust,
funds may be transferred directly from or to a customer's account held with
Bankers Trust to settle transactions with the Fund without incurring the
additional costs or delays associated with the wiring of federal funds.

33
<PAGE>

The Trust and the Adviser have authorized one or more brokers to accept on the
Trust's behalf purchase and redemption orders. Such brokers are authorized to
designate other intermediaries to accept purchase and redemption orders on the
Trust's behalf. The Transfer Agent will be deemed to have received a purchase or
redemption order when an authorized broker or, if applicable, a broker's
authorized designee, accepts the order. Customer orders will be priced at the
Fund's NAV next computed after they are accepted by an authorized broker or the
broker's authorized designee.

Certificates for Shares will not be issued. Each shareholder's account will be
maintained by a Service Agent or Transfer Agent.

If orders are placed through an Investment Professional, it is the
responsibility of the Investment Professional to transmit the order to buy
Shares to the Transfer Agent before 4:00 p.m. Eastern time.

The Transfer Agent must receive payment within one business day after an order
for Shares is placed; otherwise, the purchase order may be canceled and the
investor could be held liable for resulting fees and/or losses.

<TABLE>
<CAPTION>
Minimum Investments

<S> <C>
To Open an Account $2,500
For retirement accounts 500
Through automatic investment plans 1,000

To Add to an Account $250
For retirement accounts 100
Through automatic investment plans 100

Minimum Balance $1,000

For retirement accounts None

</TABLE>

[The Fund and its service providers reserve the right to, from time to time in
their discretion, waive or reduce the investment minimums.]

34
<PAGE>

If you are new to BT Investment Funds, complete and sign an account application
and mail it along with your check to the address listed below. For an account
application, call the BT Service Center at 1-800-730-1313.

BT Service Center
P.O. Box 419210
Kansas City, MO 64141-6210

Overnight mailings:

BT Service Center
210 West 10th Street, 8th Floor
Kansas City, MO 64105-1716

If you have money invested in a fund in the BT Family of Funds, you can:

o Mail an account application with a check,

o Wire money into your account,

o Open an account by exchanging from another fund in the BT Family of
Funds, or

o Contact your Service Agent or Investment Professional.

If you are investing through a tax-sheltered retirement plan, such as an IRA,
for the first time, you will need a special application. Contact your Investment
Professional or BT Retirement Services Center at 1-800-677-7596 for more
information and a retirement account application.

35
<PAGE>

Additional Information About Buying Shares
<TABLE>
<CAPTION>
<S> <C>

To Open an Account To Add to an Account

By Wire Call the BT Service Center at Call your Investment
1-800-730-1313 to receive wire Professional or wire
instructions for account additional investment to:
establishment.
Routing No.: 021001033
Attn: Bankers Trust/IFTC
Deposit
DDA No.: 00-226-296
FBO: (Account name)

(Account Number)
Credit: (Fund name and number)

Investment Intermediate

Tax-Free Fund--467

PLEASE NOTE THAT YOU MUST CALL THE BT
SERVICE CENTER TO PLACE YOUR TRADE THE
DAY YOU WISH TO BUY SHARES TO NOTIFY US
OF THE WIRE TRANSFER AND TO INDICATE THE
FUND IN WHICH YOU INTEND TO INVEST TO
RECEIVE THAT DAY'S PRICE.

By Phone Contact your Service Agent, Contact your Service Agent,
Investment Professional, or call Investment Professional, or call
BT's Service Center at BT's Service Center at
1-800-730-1313. If you are an 1-800-730-1313. If you are an
existing shareholder, you may existing Shareholder, you may
exchange from another BT account exchange from another BT account
with the same registration, with the same registration,
including name, address, and including name, address, and
taxpayer ID number. You may taxpayer ID number.
only order exchanges over the
phone if your account is authorized
to do so.

By Mail Complete and sign the account Make your check payable to the
application. Make your check complete name of the Fund of your
payable to the complete name of choice. Indicate your Fund account
the Fund of your choice. Mail to number on your check and mail to
the appropriate address indicated the address printed on your account
on the application. statement.
</TABLE>

36
<PAGE>

Redemption of Shares

You can arrange to take money out of your fund account at any time by selling
(redeeming) some or all of your Shares. Your Shares shall be sold at the next
NAV calculated after an order is received by the Transfer Agent. Redemption
requests should be transmitted by customers in accordance with procedures
established by the Transfer Agent and the shareholder's Service Agent.
Redemption requests for Shares received by the Service Agent and transmitted to
the Transfer Agent prior to the Valuation Time on each Valuation Day will be
effective at that day's Valuation Time and the redemption proceeds normally will
be delivered to the shareholder's account the next day, but in any event within
seven calendar days following receipt of the request.

Service Agents may allow redemptions or exchanges by telephone and may disclaim
liability for following instructions communicated by telephone that the Service
Agent reasonably believes to be genuine. The Service Agent must provide the
investor with an opportunity to choose whether or not to utilize the telephone
redemption or exchange privilege. The Transfer Agent and the Service Agent must
employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. If the Service Agent does not do so, it may be liable for
any losses due to unauthorized or fraudulent instructions. Such procedures may
include, among others, requiring some form of personal identification prior to
acting upon instructions received by telephone, providing written confirmation
of such transactions and/or tape recording of telephone instructions.

Redemption orders are processed without charge by the Trust. A Service Agent or
the Trust may on at least 30 days' notice involuntarily redeem a shareholder's
account with the fund having a balance below the minimum, but not if an account
is below the minimum due to change in market value. See "Minimum Investments"
above for minimum balance amounts.

To sell Shares in a retirement account, your request must be made in writing,
except for exchanges to other eligible funds in the BT Family of Funds, which
can be requested by phone or in writing. For information on retirement
distributions, contact your Service Agent or call the BT Service Center at
1-800-730-1313.

If you are selling some but not all of your non-retirement account Shares, leave
at least $1,000 worth of shares in the account to keep it open.

To sell Shares by bank wire you will need to sign up for these services in
advance when completing your account application.

37
<PAGE>

Certain requests must include a signature guarantee to protect you and Bankers
Trust from fraud. Redemption requests in writing must include a signature
guarantee if any of the following situations apply:

Your account registration has changed within the last 30 days,

The check is being mailed to a different address than the one on your
account (record address),

The check is being made payable to someone other than the account owner,

The redemption proceeds are being transferred to a BT account with a
different registration, or

You wish to have redemption proceeds wired to a non-predesignated
bank account.

A signature guarantee is also required if you change the pre-designated bank
information for receiving redemption proceeds on your account.

You should be able to obtain a signature guarantee from a bank, broker, dealer,
credit union (if authorized under state law), securities exchange or
association, clearing agency, or savings association. A notary public cannot
provide a signature guarantee.

Additional Information About Selling Shares

By Wire - You must sign up for the wire feature before using it. To verify that
it is in place, call 1-800-730-1313. Minimum wire: $1,000. Your wire redemption
request must be received by the Transfer Agent before 4:00 p.m. Eastern time for
money to be wired on the next business day.

In Writing - Write a signed "letter of instruction" with your name, the Fund's
name and Fund's number, your Fund account number, the dollar amount or number of
Shares to be redeemed, and mail to one of the following addresses:

BT Service Center
P.O. Box 419210
Kansas City, MO 64141-6210

Overnight mailings:

BT Service Center
210 West 10th Street, 8th Floor
Kansas City, MO 64105-1716

38
<PAGE>

For Trust accounts, the trustee must sign the letter indicating capacity
as trustee. If the trustee's name is not on the account registration,
provide a copy of the trust document certified within the last 60 days.

For a Business or Organization account, at least one person authorized
by corporate resolution to act on the account must sign the letter.

Unless otherwise instructed, the Transfer Agent will send a check to the
account address of record.

Exchange Privilege

Shareholders may exchange their Shares for shares of certain other funds in the
BT Family of Funds registered in their state. To make an exchange, follow the
procedures indicated in "Purchase of Shares" and "Redemption of Shares" herein.
Before making an exchange, please note the following:

Call your Service Agent for information and a prospectus. Read the
Prospectus before exchanging into a Fund.

Complete and sign an application, taking care to register your new
Amount in the same name, address and taxpayer identification
number as your existing account(s).

Each exchange represents the sale of shares of one fund and the
purchase of shares of another, which may produce a gain or loss for
tax purposes. Your Service Agent will receive a written confirmation of
each exchange transaction.

Exchanges out of the Fund may be limited to four per calendar year and
any exchange may have tax consequences for you.

The Fund reserves the right to terminate or modify the exchange
privilege in the future.

39
<PAGE>

Redemptions and Purchases in Kind

The Trust, on behalf of the Fund, and the Portfolio reserves the right, if
conditions exist which make cash payments undesirable, to honor any request for
redemption or withdrawal by making payment in whole or in part in readily
marketable securities chosen by the Trust, or the Portfolio, as the case may be,
and valued as they are for purposes of computing the Fund's or the Portfolio's
net asset value, as the case may be (a redemption in kind). If payment is made
to a Fund shareholder in securities, an investor, including the Fund, the
shareholder may incur transaction expenses in converting these securities into
cash. The Trust, on behalf of the Fund, and the Portfolio have elected, however,
to be governed by Rule 18f-1 under the 1940 Act as a result of which the Fund
and the Portfolio are obligated to redeem shares or beneficial interests, as the
case may be, with respect to any one investor during any 90-day period, solely
in cash up to the lesser of $250,000 or 1% of the net asset value of the Fund or
the Portfolio, as the case may be, at the beginning of the period.

The Portfolio has agreed to make a redemption in kind to the Fund whenever the
Fund wishes to make a redemption in kind and therefore shareholders of the Fund
that receive redemptions in kind will receive portfolio securities of the
Portfolio and in no case will they receive a security issued by the Portfolio.
The Portfolio has advised the Trust that the Portfolio will not redeem in kind
except in circumstances in which the Fund is permitted to redeem in kind or
unless requested by the Fund.

Each investor in a Portfolio, including the corresponding Fund, may add to or
reduce its investment in the Portfolio on each day the Portfolio determines its
net asset value. At the close of each such business day, the value of each
investor's beneficial interest in the Portfolio will be determined by
multiplying the net asset value of the Portfolio by the percentage effective for
that day, which represents that investor's share of the aggregate beneficial
interests in the Portfolio. Any additions or withdrawals which are to be
effected as of the close of business on that day will then be effected. The
investor's percentage of the aggregate beneficial interests in the Portfolio
will then be recomputed as the percentage equal to the fraction (i) the
numerator of which is the value of such investor's investment in the Portfolio
as of the close of business on such day plus or minus, as the case may be, the
amount of net additions to or withdrawals from the investor's investment in the
Portfolio effected as of the close of business on such day, and (ii) the
denominator of which is the aggregate net asset value of the Portfolio as of the
close of business on such day plus or minus, as the case may be, the amount of
net additions to or withdrawals from the aggregate investments in the Portfolio
by all investors in the Portfolio. The percentage so determined will then be
applied to determine the value of the investor's interest in the Portfolio as
the close of business on the following business day.

40
<PAGE>

MANAGEMENT OF THE TRUST AND THE PORTFOLIO

The Trust and the Portfolio are each governed by a Board of Trustees which is
responsible for protecting the interests of investors. A majority of the
Trustees who are not "interested persons" (as defined in the 1940 Act) of the
Trust or the Portfolio, as the case may be, have adopted written procedures
reasonably appropriate to deal with potential conflicts of interest arising from
the fact that some of the same individuals are Trustees of the Trust and the
Portfolios, up to and including creating separate boards of trustees.

The Board of Trustees is composed of persons experienced in financial matters
who meet throughout the year to oversee the activities of the Fund or Portfolio.
In addition, the Trustees review contractual arrangements with companies that
provide services to the Fund/Portfolio and review the Fund's performance.

The Trustees and officers of the Trust and Portfolio, their birthdate and their
principal occupations during the past five years are set forth below. Their
titles may have varied during that period. Unless otherwise indicated, the
address of each officer is Clearing Operations, P.O. Box 897, Pittsburgh,
Pennsylvania 05230-0897.

Trustees of the Trust

S. LELAND DILL (birthdate: March 28, 1930) -- Trustee; Retired; Director, Coutts
(U.S.A.) International; Coutts Trust Holdings Ltd; Director, Zweig Series Trust;
formerly Partner of KPMG Peat Marwick; Director, Vinters International Company
Inc.; General Partner of Pemco (an investment company registered under the 1940
Act). His address is 5070 North Ocean Drive, Singer Island, Florida 33404.

KELVIN J. LANCASTER (birthdate: December 10, 1924) -- Trustee; John Bates Clark
Professor of Economics, Columbia University Distinguished Fellow, American
Economics Association; Fellow, American Acadamy of Arts and Sciences; Fellow,
Econometric Society; Former Chairman, Columbia University Department of
Economics; Former Director, National Bureau of Economic Research. His address is
35 Claremont Avenue, New York, New York 10027 and 8 Island View Drive, Sherman,
CT 06784.

PHILIP SAUNDERS, JR. (birthdate: October 11, 1935) -- Trustee; Principal, Philip
Saunders Associates (Economic and Finance Consulting); former Director of
Financial Industry Consulting, Wolf & Company; President, John Hancock Home
Mortgage Corporation; and Senior Vice President of Treasury and Financial
Services, John Hancock Mutual Life Insurance Company, Inc. His address is 445
Glen Road, Weston, Massachusetts 02193.

41
<PAGE>

Trustees of the Portfolios

CHARLES P. BIGGAR (birthdate: October 13, 1930) -- Trustee; Retired; formerly
Vice President of International Business Machines ("IBM") and President of the
National Services and the Field Engineering Divisions of IBM. His
address is 12 Hitching Post Lane, Chappaqua, New York 10514.

S. LELAND DILL

PHILIP SAUNDERS, JR.

Officers of the Trust and Portfolios

Unless otherwise specified, each officer listed below holds the same position
with the Trust and each Portfolio.

JOHN Y. KEFFER (birthdate: July 15, 1942) -- President and Chief Executive
Officer; President, Forum Financial Group.

JOSEPH A. FINELLI (birthdate: January 24, 1957) -- Treasurer; Vice President, BT
Alex. Brown Incorporated and Vice President, Investment Company Capital Corp.
(registered investment advisor), September 1995-Present; Formerly, Vice
President and Treasurer, The Delaware Group of Funds (registered investment
companies) and Vice President, Delaware Management Company Inc. (investments),
1980-August 1995.

DANIEL O. HIRSCH (birthdate: March 27, 1954) -- Secretary; Principal, BT Alex.
Brown since July 1998; Assistant General Counsel in the Office of the General
Councel at the United States Securities and Exchange Commission from 1993 to
1998. His address is 2901 Dorset Avenue, Chevy Chase, Maryland 20815.

No person who is an officer or director of Bankers Trust is an officer or
Trustee of the Trust or the Portfolios. No director, officer or employee of ICC
Distributors or any of its affiliates will receive any compensation from the
Trust or the Portfolios for serving as an officer or Trustee of the Trust or a
Portfolio.

42
<PAGE>

Trustee Compensation Table
<TABLE>
<CAPTION>

Aggregate Total Compensation
Name of Person, Compensation Compensation from Fund Complex***
Position from Trust* from Portfolio** Paid to Trustees
<S> <C> <C> <C>
S. Leland Dill,
Trustee of the Trust
and Portfolio $14,471.17 $934.83 $35,000

Kelvin J. Lancaster,
Trustee of the Trust $24,338.66 N/A $35,000

Philip Saunders, Jr.,
Trustee of the Trust
and Portfolio $14,325.38 $941.77 $35,000

Charles P. Biggar,
Trustee of Portfolio N/A $1,105.83 $35,000
</TABLE>

43
<PAGE>

*The provided is for the BT Investment Funds, which is comprised of 17 funds,
for the year ended September 30, 1998.

**The provided is for Intermediate Tax Free Portfolio for the Portfolio's most
recent fiscal year ended September 30, 1998.

***Aggregated information is furnished for the BT Family of Funds which consists
of the following: BT Investment Funds, BT Institutional Funds, BT Pyramid Mutual
Funds, BT Advisor Funds, BT Investment Portfolios, Cash Management Portfolio,
Treasury Money Portfolio, Tax Free Money Portfolio, NY Tax Free Money Portfolio,
International Equity Portfolio, Intermediate Tax Free Portfolio, Asset
Management Portfolio, Equity 500 Index Portfolio and Capital Appreciation
Portfolio for the year ended September 30, 1998.

Bankers Trust reimbursed the Fund and Portfolio for a portion of their Trustees
fees for the period above. See "Investment Adviser" and "Administrator" below.

As of December 31, 1998, the Trustees and Officers of the Trust and the
Portfolio owned in the aggregate less than 1% of the shares of any Fund or the
Trust (all series taken together).

As of December 31, 1998, the following shareholders of record owned 5% or more
of the outstanding voting shares of the Fund: Bankers Trust Company FBO
2300414040, New York, New York, owned approximately 278,552 shares (14%);
Bankers Trust FBO 2500004040, New York, New York, owned approximately 151,723
shares (8%); Bankers Trust Company FBO 2562162424, New York, New York, owned
approximately 113,940 shares (6%).

Investment Adviser

The Trust has not retained the services of an investment adviser since the Trust
seeks to achieve the investment objective of each of its Funds by investing all
the Assets of the Fund in the Portfolio. The Portfolio has retained the services
of Bankers Trust as Adviser.

Bankers Trust Company, a New York banking corporation with principal offices at
130 Liberty Street, (One Bankers Trust Plaza), New York, New York 10006, is a
wholly owned subsidiary of Bankers Trust Corporation. Bankers Trust conducts a
variety of general banking and trust activities and is a major wholesale
supplier of financial services to the international and domestic institutional
market. As of December 31, 1998, Bankers Trust Corporation was the seventh
largest bank holding company in the United States with total assets of over $156
billion. The scope of Bankers Trust's investment management capability is broad
due to its leadership positions in both active and passive quantitative
management and its presence in major equity and fixed income markets around the
world. Bankers Trust is one of the nation's largest and most experienced
investment managers with over $338 billion in assets under management globally.

44
<PAGE>

Under the terms of the Portfolio's investment advisory agreement with Bankers
Trust (the "Advisory Agreement"), Bankers Trust manages the Portfolio subject to
the supervision and direction of the Board of Trustees of the Portfolio. Bankers
Trust will: (i) act in strict conformity with the Portfolio's Declaration of
Trust, the 1940 Act and the Investment Advisers Act of 1940, as the same may
from time to time be amended; (ii) manage the Portfolio in accordance with the
Portfolio's investment objectives, restrictions and policies; (iii) make
investment decisions for the Portfolio; (iv) place purchase and sale orders for
securities and other financial instruments on behalf of the Portfolio; and (v)
employ professional investment managers and securities analysts who provide
research services to the Portfolio. Bankers Trust may utilize the expertise of
any of its worldwide subsidiaries and affiliates to assist it in its role as
investment adviser. All orders for investment transactions on behalf of the
Portfolio are placed by Bankers Trust with broker-dealers and other financial
intermediaries that it selects, including those affiliated with Bankers Trust. A
Bankers Trust affiliate will be used in connection with a purchase or sale of an
investment for the Portfolio only if Bankers Trust believes that the affiliate's
charge for the transaction does not exceed usual and customary levels. The
Portfolio will not invest in obligations for which Bankers Trust or any of its
affiliates is the ultimate obligor or accepting bank. The Portfolio may,
however, invest in the obligations of correspondents and customers of Bankers
Trust.

Bankers Trust has been advised by its counsel that, in counsel's opinion,
Bankers Trust currently may perform the services for the Trust and the
Portfolios described in the Prospectus and this SAI without violation of the
Glass-Steagall Act or other applicable banking laws or regulations.

Bankers Trust bears all expenses in connection with the performance of services
under the Advisory Agreement. The Trust and the Portfolio bears certain other
expenses incurred in its operation, including: taxes, interest, brokerage fees
and commissions, if any; fees of Trustees of the Trust or the Portfolio who are
not officers, directors or employees of Bankers Trust, ICC Distributors or any
of their affiliates; SEC fees and state Blue Sky qualification fees; charges of
custodians and transfer and dividend disbursing agents; certain insurance
premiums; outside auditing and legal expenses; costs of maintenance of corporate
existence; costs attributable to investor services, including, without
limitation, telephone and personnel expenses; costs of preparing and printing
prospectuses and statements of additional information for regulatory purposes
and for distribution to existing shareholders; costs of shareholders' reports
and meetings of shareholders, officers and Trustees of the Trust or the
Portfolio; and any extraordinary expenses.

45
<PAGE>

Bankers Trust, subject to the supervision and direction of the Board of Trustees
of each Portfolio, manages each Portfolio in accordance with the Portfolio's
investment objective and stated investment policies, makes investment decisions
for the Portfolio, places orders to purchase and sell securities and other
financial instruments on behalf of the Portfolio and employs professional
investment managers and securities analysts who provide research services to the
Portfolio. Bankers Trust may utilize the expertise of any of its world wide
subsidiaries and affiliates to assist it in its role as investment adviser. All
orders for investment transactions on behalf of a Portfolio are placed by the
Adviser with broker-dealers and other financial intermediaries that it selects,
including those affiliated with Bankers Trust. A Bankers Trust affiliate will be
used in connection with a purchase or sale of an investment for the Portfolio
only if Bankers Trust believes that the affiliate's charge for the transaction
does not exceed usual and customary levels. A Portfolio will not invest in
obligations for which Bankers Trust or any of its affiliates is the ultimate
obligor or accepting bank. Each Portfolio may, however, invest in the
obligations of correspondents and customers of Bankers Trust. Bankers Trust may
perform the above duties or it may delegate such responsibilities to the
Sub-Investment Adviser as defined herein.

For the fiscal years ended September 30, 1998 and 1997, the period from January
1, 1996 to September 30, 1996, and the year ended December 31, 1995, Bankers
Trust earned $87,127, $85,925 and $67,313, respectively, in compensation for
investment advisory services provided to the Portfolio. During the same periods,
Bankers Trust reimbursed $34,062, $22,599 and $23,842, respectively, to the
Portfolio to cover expenses.

Bankers Trust may have deposit, loan and other commercial banking relationships
with the issuers of securities which may be purchased on behalf of the
Portfolio, including outstanding loans to such issuers which could be repaid in
whole or in part with the proceeds of securities so purchased. Such persons
issue, deal, trade and invest in securities for their own accounts and are among
the leading market participants with respect to various types of such
securities. Bankers Trust has informed the Portfolio that, in making its
investment decisions, it does not obtain or use material inside information in
its possession or in the possession of any of its affiliates. In making
investment recommendations for the Portfolio, Bankers Trust will not inquire or
take into consideration whether an issuer of securities proposed for purchase or
sale by the Portfolio is a customer of Bankers Trust, its parent or its
subsidiaries or affiliates and, in dealing with its customers, Bankers Trust,
its parent, subsidiaries and affiliates will not inquire or take into
consideration whether securities of such customers are held by any fund managed
by Bankers Trust or any such affiliate.

46
<PAGE>

The Fund's prospectus contains disclosure as to the amount of Bankers Trust's
investment advisory and administration and services fees, including waivers
thereof. Bankers Trust may not recoup any of its waived investment advisory or
administration and services fees.

Administrator

Under the administration and services agreements, Bankers Trust is obligated on
a continuous basis to provide such administrative services as the Board of
Trustees of the Trust and the Portfolio reasonably deem necessary for the proper
administration of the Trust or a Portfolio. Bankers Trust will generally assist
in all aspects of the Fund's and Portfolio's operations; supply and maintain
office facilities (which may be in Bankers Trust's own offices), statistical and
research data, data processing services, clerical, accounting, bookkeeping and
recordkeeping services (including without limitation the maintenance of such
books and records as are required under the 1940 Act and the rules thereunder,
except as maintained by other agents), executive and administrative services,
and stationery and office supplies; prepare reports to shareholders or
investors; prepare and file tax returns; supply financial information and
supporting data for reports to and filings with the SEC and various state Blue
Sky authorities; supply supporting documentation for meetings of the Board of
Trustees; provide monitoring reports and assistance regarding compliance with
the Declaration of Trust, by-laws, investment objectives and policies and with
Federal and state securities laws; arrange for appropriate insurance coverage;
calculate net asset values, net income and realized capital gains or losses; and
negotiate arrangements with, and supervise and coordinate the activities of,
agents and others to supply services.

Pursuant to a sub-administration agreement (the "Sub-Administration Agreement"),
Forum Financial ("Forum") performs such sub-administration duties for the Trust
and the Portfolio as from time to time may be agreed upon by the Adviser and
Forum. The Sub-Administration Agreement provides that Forum will receive such
compensation as from time to time may be agreed upon by Forum and Bankers Trust.
All such compensation will be paid by Bankers Trust.

For the fiscal years ended September 30, 1998 and 1997, the period from January
1, 1996 to September 30, 1996, and the year ended December 31, 1995, Bankers
Trust earned $86,961, $85,690 and $67,185, respectively, in compensation for
administrative and other services provided to the Fund. During the same periods,
Bankers Trust reimbursed $46,946, $41,571 and $40,323, respectively, to cover
expenses. For the same periods, Bankers Trust earned $10,895, $10,741 and
$8,414, respectively, in compensation for administrative and other services
provided to the Portfolio.

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Distributor

ICC Distributors is the principal distributor for shares of the Fund. ICC
Distributors is a registered broker/dealer and is unaffiliated with Bankers
Trust. The principal business address of ICC Distributors is P.O.
Box 7558, Portland, Maine 04101.

Service Agent

All shareholders must be represented by a Service Agent. The Adviser acts as a
Service Agent pursuant to its Administration and Services Agreement with the
Trust and receives no additional compensation from the Fund for such shareholder
services. The service fees of any other Service Agents, including
broker-dealers, will be paid by the Adviser from its fees. The services provided
by a Service Agent may include establishing and maintaining shareholder
accounts, processing purchase and redemption transactions, arranging for bank
wires, performing shareholder sub-accounting, answering client inquiries
regarding the Trust, assisting clients in changing dividend options, account
designations and addresses, providing periodic statements showing the client's
account balance, transmitting proxy statements, periodic reports, updated
prospectuses and other communications to shareholders and, with respect to
meetings of shareholders, collecting, tabulating and forwarding to the Trust
executed proxies and obtaining such other information and performing such other
services as the Administrator or the Service Agent's clients may reasonably
request and agree upon with the Service Agent. Service Agents may separately
charge their clients additional fees only to cover provision of additional or
more comprehensive services not already provided under the Administration and
Services Agreement with the Adviser, or of the type or scope not generally
offered by a mutual fund, such as cash management services or enhanced
retirement or trust reporting. In addition, investors may be charged a
transaction fee if they effect transactions in Fund shares through a broker or
agent. Each Service Agent has agreed to transmit to shareholders, who are its
customers, appropriate disclosures of any fees that it may charge them directly.

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Custodian and Transfer Agent

Bankers Trust, 130 Liberty Street (One Bankers Trust Plaza), New York, New York
10006, serves as Custodian for the Trust and for the Portfolio pursuant to the
administration and services agreements. As Custodian, it holds the Fund's and
the Portfolio's assets. Bankers Trust also serves as transfer agent of the Trust
and of the Portfolio pursuant to the respective administration and services
agreement. Under its transfer agency agreement with the Trust, Bankers Trust
maintains the shareholder account records for the Fund, handles certain
communications between shareholders and the Trust and causes to be distributed
any dividends and distributions payable by the Trust. Bankers Trust may be
reimbursed by the Fund or the Portfolio for its out-of-pocket expenses. Bankers
Trust will comply with the self-custodian provisions of Rule 17f-2 under the
1940 Act.

Use of Name

The Trust and Bankers Trust have agreed that the Trust may use "BT" as part of
its name for so long as Bankers Trust serves as investment adviser to the
Portfolios. The Trust has acknowledged that the term "BT" is used by and is a
property right of certain subsidiaries of Bankers Trust and that those
subsidiaries and/or Bankers Trust may at any time permit others to use that
term.

The Trust may be required, on 60 days' notice from Bankers Trust at any time, to
abandon use of the acronym "BT" as part of its name. If this were to occur, the
Trustees would select an appropriate new name for the Trust, but there would be
no other material effect on the Trust, its shareholders or activities.

Banking Regulatory Matters

Bankers Trust has been advised by its counsel that in its opinion Bankers Trust
may perform the services for the Portfolios contemplated by the Advisory
Agreements and other activities for the Fund and the Portfolio described in the
Prospectus and this SAI without violation of the Glass-Steagall Act or other
applicable banking laws or regulations. However, counsel has pointed out that
future changes in either Federal or state statutes and regulations concerning
the permissible activities of banks or trust companies, as well as future
judicial or administrative decisions or interpretations of present and future
statutes and regulations, might prevent Bankers Trust from continuing to perform
those services for the Trust and the Portfolio. State laws on this issue may
differ from the interpretations of relevant Federal law and banks and financial
institutions may be required to register as dealers pursuant to state securities
law. If the circumstances described above should change, the Board of Trustees
would review the relationships with Bankers Trust and consider taking all
actions necessary in the circumstances.

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Counsel and Independent Accountants

Willkie Farr & Gallagher, 787 Seventh Avenue, New York, New York 10019-6099,
serves as Counsel to the Trust and the Portfolio. PricewaterhouseCoopers LLP,
250 West Pratt Street, Baltimore, Maryland 21201 acts as Independent Accountants
of the Trust and the Portfolio.

ORGANIZATION OF THE TRUST

Shares of the Trust do not have cumulative voting rights, which means that
holders of more than 50% of the shares voting for the election of Trustees can
elect all Trustees. Shares are transferable but have no preemptive, conversion
or subscription rights. Shareholders generally vote by Fund, except with respect
to the election of Trustees and the ratification of the selection of independent
accountants.

The Trust is an entity commonly known as a "Massachusetts business trust." Under
Massachusetts law, shareholders of such a business trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which both inadequate
insurance existed and the Trust itself was unable to meet its obligations. The
Trust's Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of this disclaimer be given in
each agreement, obligation or instrument entered into or executed by the Trust
or a Trustee. The Declaration of Trust provides for indemnification from the
Trust's property for all losses and expenses of any shareholder held personally
liable for the obligations of the Trust. Thus, the risk of a shareholder's
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Trust itself would be unable to meet its obligations,
a possibility that the Trust believes is remote. Upon payment of any liability
incurred by the Trust, the shareholder paying the liability will be entitled to
reimbursement from the general assets of the Trust. The Trustees intend to
conduct the operations of the Trust in a manner so as to avoid, as far as
possible, ultimate liability of the shareholders for liabilities of the Trust.

The Trust was organized under the name BT Tax-Free Investment Trust and assumed
its current name of BT Investment Funds on May 16, 1988.

Except as described below, whenever the Trust is requested to vote on a
fundamental policy of the Portfolio, the Trust will hold a meeting of the Fund's
shareholders and will cast its vote as instructed by the Fund's shareholders.
Fund shareholders who do not vote will not affect the Trust's votes at the
Portfolio meeting. The percentage of the Trust's votes representing Fund
shareholders not voting will be voted by the Trustees of the Trust in the same
proportion as the Fund shareholders who do, in fact, vote.

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Except as described below, whenever the Fund is requested to vote on matters
pertaining to the Portfolio, the Fund will hold a meeting of its shareholders
and will cast its votes proportionately as instructed by Fund shareholders.
However, subject to applicable statutory and regulatory requirements, the Fund
would not request a vote of its shareholders with respect to (a) any proposal
relating to the Portfolio, which proposal, if made with respect to the Fund,
would not require the vote of the shareholders of the Fund, or (b) any proposal
with respect to the Portfolio that is identical in all material respects to a
proposal that has previously been approved by shareholders of the Fund. Any
proposal submitted to holders in the Portfolio, and that is not required to be
voted on by shareholders of the Fund, would nonetheless be voted on by the
Trustees of the Trust.

The Portfolio is a subtrust (or "series") of the BT Investment Portfolios, an
open-end management investment company. Declarations of Trust of BT Investment
Portfolio provide that the Fund and other entities investing in the Portfolio
(e.g., other investment companies, insurance company separate accounts and
common and commingled trust funds) will each be liable for all obligations of
the Portfolio. However, the risk of the Fund incurring financial loss on account
of such liability is limited to circumstances in which both inadequate insurance
existed and the Portfolio itself was unable to meet its obligations.
Accordingly, the Trustees of the Trust believe that neither the Fund nor its
shareholders will be adversely affected by reason of the Fund's investing in the
corresponding Portfolio. The interests in BT Investment Portfolios are divided
into separate series, such as the Portfolio. No series of BT Investment
Portfolios has any preference over any other series.

Each series in the Trust will not be involved in any vote involving a Portfolio
in which it does not invest its Assets. Shareholders of all the series of the
Trust will, however, vote together to elect trustees of the Trust and for
certain other matters. Under certain circumstances, the shareholders of one or
more series could control the outcome of these votes.

The series of the BT Investment Portfolios will vote separately or together in
the same manner as the series of the Trust. Under certain circumstances, the
investors in one or more series of BT Investment Portfolios could control the
outcome of these votes.

The Trust and BT Investment Portfolios reserve the right to add additional
series in the future. The Trust also reserves the right to issue more than one
class of Shares in the Fund.

TAXATION

Taxation of the Fund

The Trust intends to qualify annually and to elect for the Fund to be treated as
a regulated investment company under the Code. Provided the Fund meets the
requirements imposed by the Code and distributes all of its income and gains,
the Fund will not pay any federal income or excise taxes.

As a regulated investment company, the Fund will not be subject to U.S. federal
income tax on its investment company taxable income and net capital gains (the
excess of net long-term capital gains over net short-term capital losses), if
any, that it distributes to shareholders. The Fund intends to distribute to its
shareholders, at least annually, substantially all of its investment company
taxable income and net capital gains, and therefore does not anticipate
incurring federal income tax liability.

If for any taxable year the Fund does not qualify for the special federal income
tax treatment afforded regulated investment companies, all of its taxable income
will be subject to federal income tax at regular corporate rates (without any
deduction for distributions to its shareholders). In such event, dividend
distributions, including amounts derived from interest on tax-exempt
obligations, would be taxable to shareholders to the extent of current
accumulated earnings and profits, and would be eligible for the dividends
received deduction for corporations in the case of corporate shareholders.

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A Fund's investment in Section 1256 contracts, such as regulated futures
contracts, most forward currency forward contracts traded in the interbank
market and options on most stock indices, are subject to special tax rules. All
section 1256 contracts held by a Fund at the end of its taxable year are
required to be marked to their market value, and any unrealized gain or loss on
those positions will be included in the Fund's income as if each position had
been sold for its fair market value at the end of the taxable year. The
resulting gain or loss will be combined with any gain or loss realized by the
Fund from positions in section 1256 contracts closed during the taxable year.
Provided such positions were held as capital assets and were not part of a
"hedging transaction" nor part of a "straddle," 60% of the resulting net gain or
loss will be treated as long-term capital gain or loss, and 40% of such net gain
or loss will be treated as short-term capital gain or loss, regardless of the
period of time the positions were actually held by the Fund.

Each Fund shareholder will receive, if appropriate, various written notices
after the close of the Fund's prior taxable year as to the federal income status
of his dividends and distributions which were received from the Fund during the
Fund's prior taxable year. Shareholders should consult their tax advisers as to
any state and local taxes that may apply to these dividends and distributions.
The dollar amount of dividends excluded from federal income taxation and the
dollar amount subject to such income taxation, if any, will vary for each
shareholder depending upon the size and duration of each shareholder's
investment in the Fund. To the extent that the Fund earns taxable net investment
income, the Fund intends to designate as taxable dividends the same percentage
of each dividend as its taxable net investment income bears to its total net
investment income earned. Therefore, the percentage of each dividend designated
as taxable, if any, may vary. These statements will also designate the amount of
exempt-interest dividends that is a specific preference item for purposes of the
Federal individual and corporate alternative minimum taxes.

Investment in the Fund would not be suitable for tax-exempt institutions,
qualified retirement plans, H.R. 10 plans and individual retirement accounts
since such investors would not gain any additional tax benefit from the receipt
of tax-exempt income.

Because the Fund will distribute exempt-interest dividends, all or a portion of
any interest on indebtedness incurred by a shareholder to purchase or carry
shares of the Fund will not be deductible for Federal personal income tax
purposes. In addition, the Code may require a shareholder of the Fund, if he
receives exempt-interest dividends, to treat as taxable income a portion of
certain otherwise nontaxable social security and railroad retirement benefit
payments. Furthermore, that portion of any exempt-interest dividend paid by the
Fund which represents income from private activity bonds held by the Fund may
not retain its tax-exempt status in the hands of a shareholder who is a
"substantial user" of a facility financed by such bonds, or a "related person"
thereof. Moreover, as noted in the Prospectus of the Fund, some or all of the
Fund's dividends and distributions may be specific preference items, or a
component of an adjustment item, for purposes of the Federal individual and
corporate alternative minimum taxes. In addition, the receipt of Fund dividends
and distributions may affect a foreign corporate shareholder's Federal "branch
profits" tax liability and a Subchapter S corporate shareholder's Federal
"excess net passive income" tax liability. Shareholders should consult their own
tax advisers as to whether they are (i) "substantial users" with respect to a
facility or "related" to such users within the meaning of the Code and (ii)
subject to a Federal alternative minimum tax the Federal "branch profits" tax or
the Federal "excess net passive income" tax.

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Distributions

The Fund distributes substantially all of its net investment income and capital
gains to shareholders each year. The Fund distributes capital gains annually.
Income dividends for the Fund are declared daily and paid monthly. Unless a
shareholder instructs the Trust to pay such dividends and distributions in cash,
they will be automatically reinvested in additional shares of the Fund.

The Fund intends to qualify to pay exempt-interest dividends to its shareholders
by having, at the close of each quarter of its taxable year, at least 50% of the
value of its total assets invested in tax-exempt securities. An exempt-interest
dividend is that part of dividend distributions made by the Fund which consists
of interest received by the Fund derived from tax-exempt securities held by the
Portfolio. Exempt-interest dividends received from the Fund will be treated for
federal income tax purposes as tax-exempt interest income. In view of the
Portfolio's investment policies, it is expected that substantially all the
Fund's dividends will be exempt-interest dividends, although the Fund may from
time to time distribute net short-term capital gains or other minor amounts of
taxable income.

Interest on certain tax-exempt municipal obligations issued after August 7, 1986
is a preference item for purposes of the federal alternative minimum tax
applicable to individuals and corporations. Under tax regulations to be used,
the portion of an exempt-interest dividend of a regulated investment company
that is allocable to these obligations will be treated as a preference item for
purposes of the alternative minimum tax. The Portfolio has limited its
investment to those securities the interest on which will not be treated as
preference items for purposes of the alternative minimum tax in the opinion of
bond counsel for the issuer. The Portfolio currently has no intention of
investing in obligations subject to the alternative minimum tax under normal
market conditions.

Corporations should, however, be aware that interest on all municipal securities
will be included in calculating: (i) adjusted current earning for purposes of
the alternative minimum tax applicable to them; (ii) the additional tax imposed
on certain corporations by the Superfund Revenue Act of 1986; and (iii) the
foreign branch profits tax imposed on effectively connected earnings and profits
of United States branches of foreign corporations. Furthermore, special tax
provisions may apply to certain financial institutions and property and casualty
insurance companies, and they should consult their tax advisors before
purchasing Shares of the Fund.

Certain provisions in the Tax Reform Act of 1986, as amended, relating to
issuance of municipal obligations, have reduced the volume of municipal
obligations, qualifying for federal tax exemption and may continue to do so.

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On the ex-date for a distribution from capital gains, the Fund's Share value is
reduced by the amount of the distribution. If you buy Shares just before the
ex-date ("buying a dividend"), you will pay the full price for the Shares and
then receive a portion of the price back as a taxable distribution.

Taxation of the Portfolio

The Portfolio is not subject to Federal income taxation. Instead, the Fund and
other investors investing in the Portfolio must take into account, in computing
their Federal income tax liability, their share of the Portfolio's income,
gains, losses, deductions, credits and tax preference items, without regard to
whether they have received any cash distributions from the Portfolio.

Other Taxation

The Trust is organized as a Massachusetts business trust and, under current law,
neither the Trust nor the Fund is liable for any income or franchise tax in the
Commonwealth of Massachusetts, provided that the Fund continues to qualify as a
regulated investment company under Subchapter M of the Code. The investment by
the Fund in the Portfolio does not cause the Fund to be liable for any income or
franchise tax in the State of New York.

The Portfolio is a subtrust of BT Investment Portfolios, which is organized as a
New York mast trust fund. No Portfolio is subject to any income or franchise tax
in the State of New York or the Commonwealth of Massachusetts.

Fund shareholders may be subject to state and local taxes on their Fund
distributions. Shareholders are advised to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the Fund.

FINANCIAL STATEMENTS

The financial statements for the Fund or Portfolio for the year ended September
30, 1998, are incorporated herein by reference to the Annual Report to
shareholders for the Fund dated September 30, 1998. A copy of the Fund's and
Portfolio's Annual Report may be obtained without charge by contacting the Fund.

APPENDIX

Description of Moody's Corporate Bond Ratings:

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

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

Ba - Bonds 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 rated B generally lack characteristics of a 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 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 rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked short-comings.

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

Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating
classification from Aa through B in its corporate bond system. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic rating category.

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Description of S&P Corporate Bond Ratings:

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

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

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

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

BB - Debt rate BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments.

B - Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB- rating.

CCC - Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal.

CC - Debt rated CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating.

C - The rating C is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed but debt service
payments are continued.

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

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D - Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating will also be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.

Description of S&P commercial paper ratings:

Commercial paper rated 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 A-1+.

Description of Moody's commercial paper ratings:

The rating Prime-1 is the highest commercial paper rating assigned by Moody's.
Issuers rated Prime-1 (or related supporting institutions) are considered to
have a superior capacity for repayment of short-term promissory obligations.

Description of S&P Municipal Bond Ratings:

AAA - Prime - These are obligations of the highest quality. They have the
strongest capacity for timely payment of debt service.

General Obligations Bonds - In a period of economic stress, the issuers will
suffer the smallest declines in income and will be least susceptible to
autonomous decline. Debt burden is moderate. A strong revenue structure appears
more than adequate to meet future expenditure requirements. Quality of
management appears superior.

Revenue Bonds - Debt service coverage has been, and is expected to remain,
substantial, stability of the pledged revenues is also exceptionally strong due
to the competitive position of the municipal enterprise or to the nature of the
revenues. Basic security provisions (including rate covenant, earnings test for
issuance of additional bonds and debt service reserve requirements) are
rigorous. There is evidence of superior management.

AA - High Grade - The investment characteristics of bonds in this group are only
slightly less marked than those of the prime quality issues. Bonds rated AA have
the second strongest capacity for payment of debt service.

A - Good Grade - Principal and interest payments on bonds in this category are
regarded as safe although the bonds are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds in higher
rated categories. This rating describes the third strongest capacity for payment
of debt service. Regarding municipal bonds, the rating differs from the two
higher ratings because:

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General Obligation Bonds - There is some weakness, either in the local economic
base, in debt burden, in the balance between revenues and expenditures, or in
quality of management. Under certain adverse circumstances, any one such
weakness might impair the ability of the issuer to meet debt obligations at some
future date.

Revenue Bonds - Debt service coverage is good, but not exceptional. Stability of
the pledged revenues could show some variations because of increased competition
or economic influences on revenues. Basic security provisions, while
satisfactory, are less stringent. Management performance appearance appears
adequate.

S&P's letter ratings may be modified by the addition of a plus or a minus sign,
which is used to show relative standing within the major rating categories,
except in the AAA rating category.

Description of Moody's Municipal Bond Ratings:

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

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

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.

Moody's may apply the numerical modifier in each generic rating classification
from Aa through B. The modifier 1 indicates that the security within its generic
rating classification possesses the strongest investment attributes.

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Description of S&P Municipal Note Ratings:

Municipal notes with maturities of three years or less are usually given note
ratings (designated SP-1, or -2) to distinguish more clearly the credit quality
of notes as compared to bonds. Notes rated SP-1 have a very strong or strong
capacity to pay principal and interest. Those issues determined to possess
overwhelming safety characteristics are given the designation of SP-1. Notes
rates SP-2 have a satisfactory capacity to pay principal and interest.

Description of Moody's Municipal Note Ratings:

Moody's ratings for state and municipal notes and other short-term loans are
designated Moody's Investment Grade (MIG) and for variable rate demand
obligations are designated Variable Moody's Investment Grade (VMIG). This
distinction recognizes the differences between short-term credit risk and
long-term risk. Loans bearing the designation MIG 1/VMIG 1 are of the best
quality, enjoying strong protection from established cash flows of funds for
their servicing or from established cash flows of funds for their servicing or
from established and broad-based access to the market for refinancing, or both.
Loans bearing the designation MIG2/VMIG2 are of high quality, with ample margins
of protection, although not as large as the preceding group.

S&P's Commercial Paper Ratings:

A is the highest commercial paper rating category utilized by S&P, which uses
the numbers 1, 1, 2 and 3 to denote relative strength within its A
classification. Commercial paper issues rated A by S&P have the following
characteristics: Liquidity ratios are better than industry average. Long-term
debt ratings is A or better. The issuer has access to at least two additional
channels of borrowing. Basic earnings and cash flow are in an upward tread.
Typically, the issuer is a strong company in a well-established industry and has
superior management.

Moody's Commercial Paper Ratings:

Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics: leasing
market positions in well-established industries; high rates of return on funds
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; well-established access to
a range of financial markets and assured sources of alternate liquidity.

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Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
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.
Issuers rates Prime-3 (or related supporting institutions) have an acceptable
capacity for repayment of short-term promissory obligations. The effect of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.

STATEMENT OF
ADDITIONAL INFORMATION

Investment Adviser and Administrator of each Portfolio
BANKERS TRUST COMPANY

Distributor
ICC DISTRIBUTORS, INC.

Custodian and Transfer Agent
BANKERS TRUST COMPANY

Independent Accountants
PRICEWATERHOUSECOOPERS L.L.P.

Counsel
WILLKIE FARR & GALLAGHER

No person has been authorized to give any information or to make any
representations other than those contained in the Trust's Prospectus, its
Statement of Additional Information or the Trust's official sales literature in
connection with the offering of the Trust's shares and, if given or made, such
other information or representations must not be relied on as having been
authorized by the Trust. Neither the Prospectus nor this Statement of Additional
Information constitutes an offer in any state in which, or to any person to
whom, such offer may not lawfully be made.

CUSIP #055922801
CUSIP #055922777
CUSIP #055922819
CUSIP #055922769
CUSIP #055922868
CUSIP #055922736
CUSIP #055922786

COMBINV400 (1/98)

<PAGE>

STATEMENT OF ADDITIONAL INFORMATION

January 31, 1999

BT INVESTMENT FUNDS

o Capital Appreciation Fund
o Small Cap Fund

BT Investment Funds (the "Trust") is an open-end, management investment company
(mutual fund) which consists of a number of separate investment funds. The
shares of the following funds - Capital Appreciation Fund and Small Cap Fund
(each, a "Fund" and together the "Funds") - are described herein. Each of the
Funds is a separate series of the Trust.

Unlike other mutual funds, the Trust seeks to achieve the investment objectives
of each Fund by investing all the investable assets ("Assets") of the Fund in a
diversified open-end management investment company having the same investment
objectives as the Fund. These investment companies (or a series thereof) are,
respectively, Capital Appreciation Portfolio and Small Cap Portfolio (each a
"Portfolio" and collectively the "Portfolios"). The Small Cap Portfolio is a
subtrust of BT Investment Portfolios.

Shares of the Funds are sold by ICC Distributors, Inc. ("ICC"), the Trust's
Distributor, to clients and customers (including affiliates and correspondents)
of Bankers Trust Company ("Bankers Trust"), the Portfolios' investment adviser
(the "Adviser"), and to clients and customers of other organizations. As
appropriate, references to the adviser herein apply to any sub-adviser which may
have day-to-day investment management responsibility of a Portfolio.

The Trust's Prospectuses for each Fund are each dated January 31, 1999. The
Prospectuses provide the basic information investors should know before
investing. This Statement of Additional Information ("SAI"), which is not a
Prospectus, is intended to provide additional information regarding the
activities and operations of the Trust and should be read in conjunction with
that Fund's Prospectus. You may request a copy of a prospectus or a paper copy
of this SAI, if you have received it electronically, free of charge by calling
the Trust at the telephone number listed below or by contacting any Service
Agent. This SAI is not an offer of any Fund for which an investor has not
received a Prospectus. Capitalized terms not otherwise defined in this SAI have
the meanings accorded to them in the Trust's Prospectuses. The financial
statements for each Fund and the corresponding Portfolio for the fiscal year
ended September 30, 1998, are incorporated herein by reference to the Annual
Report to shareholders for the Fund and Portfolio dated September 30, 1998. A
copy of the Fund's and the Portfolio's Annual Report may be obtained without
charge by calling the Fund at the telephone number listed below.

BANKERS TRUST COMPANY
Investment Adviser of each Portfolio and Administrator
ICC DISTRIBUTORS, INC.
Distributor

Two Portland Square
Portland, Maine 04101
1-800-730-1313

TABLE OF CONTENTS

INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS 3

Investment Objectives.................................................................................................3
Investment Policies...................................................................................................3
Additional Risk Factors...............................................................................................17
Portfolio Turnover....................................................................................................20
Investment Restrictions...............................................................................................20
Portfolio Transactions and Brokerage Commissions......................................................................23

PERFORMANCE INFORMATION...............................................................................................24

Standard Performance Information......................................................................................24
Comparison of Fund Performance........................................................................................26
Economic and Market Information.......................................................................................28

VALUATION OF SECURITIES; REDEMPTIONS AND PURCHASES IN KIND............................................................28

Purchase of Shares....................................................................................................29

Redemption of Shares..................................................................................................31
Redemptions and Purchases in Kind.....................................................................................35
Trading in Foreign Securities.........................................................................................36

MANAGEMENT OF THE TRUST AND THE PORTFOLIOS............................................................................36

Trustees of the Trust.................................................................................................36
Trustees of the Portfolios............................................................................................37
Officers of the Trust and Portfolios..................................................................................37
Trustee Compensation Table............................................................................................38
Investment Adviser....................................................................................................39
Administrator.........................................................................................................41
Distributor...........................................................................................................42
Service Agent.........................................................................................................42
Custodian and Transfer Agent..........................................................................................42
Use of Name...........................................................................................................43
Banking Regulatory Matters............................................................................................43
Counsel and Independent Accountants...................................................................................43
</TABLE>

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<TABLE>
<CAPTION>
<S> <C>
ORGANIZATION OF THE TRUST.............................................................................................43

TAXATION..............................................................................................................45

Dividends and Distributions...........................................................................................45
Taxation of the Funds.................................................................................................45
Foreign Securities....................................................................................................46
Taxation of the Portfolios............................................................................................46
Sale of Shares........................................................................................................47
Foreign Withholding Taxes.............................................................................................47
Backup Withholding....................................................................................................47
Foreign Shareholders..................................................................................................47
Other Taxation........................................................................................................47

FINANCIAL STATEMENTS..................................................................................................48

APPENDIX..............................................................................................................48

</TABLE>

3
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INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS

Investment Objectives

The following is a description of each Fund's investment objective.

Capital Appreciation Fund's investment objective is long-term capital growth.

Small Cap Fund's investment objective is long-term capital growth.

The production of any current income is secondary to each Fund's investment
objective and there can, of course, be no assurance that either Fund will
achieve its investment objective.

Investment Policies

Each Fund seeks to achieve its investment objective by investing all of its
assets in the corresponding Portfolio, which has the same investment objective
as the Fund. The Trust may withdraw a Fund's investment from the corresponding
Portfolio at any time if the Board of Trustees of the Trust determines that it
is in the best interests of the Fund to do so.

Since the investment characteristics of each Fund will correspond directly to
those of the corresponding Portfolio, the following is a discussion of the
various investments of and techniques employed by each Portfolio.

Equity Securities. As used herein, "equity securities" are defined as common
stock, preferred stock, trust or limited partnership interests, rights and
warrants to subscribe to or purchase such securities, sponsored or unsponsored
ADRs, EDRs, GDRs, and convertible securities, consisting of debt securities or
preferred stock that may be converted into common stock or that carry the right
to purchase common stock. Common stocks, the most familiar type, represent an
equity (ownership) interest in a corporation. Although equity securities have a
history of long-term growth in value, their prices fluctuate based on changes in
a company's financial condition and on overall market and economic conditions.
Smaller companies are especially sensitive to these factors.

Debt Securities. Although not a principal investment, each Portfolio may invest
in debt securities. Bonds and other debt instruments are used by issuers to
borrow money from investors. The issuer pays the investor a fixed or variable
rate of interest, and must repay the amount borrowed at maturity. Some debt
securities, such as zero coupon bonds, do not pay current interest, but are
purchased at a discount from their face values. Debt securities, loans, and
other direct debt have varying degrees of quality and varying levels of
sensitivity to changes in interest rates. Longer-term bonds are generally more
sensitive to interest rate changes than short-term bonds.

4
<PAGE>
Convertible Securities. A convertible security is a bond or preferred stock
which may be converted at a stated price within a specific period of time into a
specified number of shares of common stock of the same or different issuer.
Convertible securities are senior to common stock in a corporation's capital
structure, but usually are subordinated to non-convertible debt securities.
While providing a fixed income stream--generally higher in yield than in the
income derived from a common stock but lower than that afforded by a
non-convertible debt security--a convertible security also affords an investor
the opportunity, through its conversion feature, to participate in the capital
appreciation of common stock into which it is convertible.

In general, the market value of a convertible security is the higher of its
investment value (its value as a fixed income security) or its conversion value
(the value of the underlying shares of common stock if the security is
converted). As a fixed income security, the market value of a convertible
security generally increases when interest rates decline and generally decreases
when interest rates rise; however, the price of a convertible security generally
increases as the market value of the underlying stock increases, and generally
decreases as the market value of the underlying stock declines. Investments in
convertible securities generally entail less risk than investments in the common
stock of the same issuer.

Preferred Stock. Preferred stock has a preference in liquidation (and, generally
dividends) over common stock but is subordinated in liquidation to debt. As a
general rule the market value of preferred stocks with fixed dividend rates and
no conversion rights varies inversely with interest rates and perceived credit
risk, with the price determined by the dividend rate. Some preferred stocks are
convertible into other securities, for example common stock, at a fixed price
and ratio or upon the occurrence of certain events. The market price of
convertible preferred stocks generally reflects an element of conversion value.
Because many preferred stocks lack a fixed maturity date, these securities
generally fluctuate substantially in value when interest rates change; such
fluctuations often exceed those of long-term bonds of the same issuer. Some
preferred stocks pay an adjustable dividend that may be based on an index,
formula, auction procedure or other dividend rate reset mechanism. In the
absence of credit deterioration, adjustable rate preferred stocks tend to have
more stable market values than fixed rate preferred stocks.

All preferred stocks are also subject to the same types of credit risks of the
issuer as corporate bonds. In addition, because preferred stock is junior to
debt securities and other obligations of an issuer, deterioration in the credit
rating of the issuer will cause greater changes in the value of a preferred
stock than in a more senior debt security with similar yield characteristics.
Preferred stocks may be rated by Standard & Poor's Ratings Group ("S&P") and
Moody's Investors Services, Inc. ("Moody's") although there is no minimum rating
which a preferred stock must have (and a preferred stock may not be rated) to be
an eligible investment for the Portfolio. The Adviser expects, however, that
generally the preferred stocks in which the Portfolio invests will be rated at
least CCC by S&P or Caa by Moody's or, if unrated, of comparable quality in the
opinion of the Adviser. Preferred stocks rated CCC by S&P are regarded as
predominantly speculative with respect to the issuer's capacity to pay preferred
stock obligations and represent the highest degree of speculation among
securities rated between BB and CCC; preferred stocks rated Caa by Moody's are
likely to be in arrears on dividend payments. Moody's rating with respect to
preferred stocks does not purport to indicate the future status of payments of
dividends.

5
<PAGE>
Warrants. Warrants are instruments which entitle the holder to buy underlying
equity securities at a specific price for a specific period of time. A warrant
tends to be more volatile than its underlying securities and ceases to have
value if it is not exercised prior to its expiration date. In addition, changes
in the value of a warrant do not necessarily correspond to changes in the value
of its underlying securities.

ADRs, GDRs and EDRs. American Depository Receipts ("ADRs"), Global Depository
Receipts ("GDRs"), and European Depository Receipts ("EDRs") are certificates
evidencing ownership of shares of a foreign-based issuer held in trust by a bank
or similar financial institution. Designed for use in U.S., international and
European securities markets, respectively, ADRs, GDRs and EDRs are alternatives
to the purchase of the underlying securities in their national markets and
currencies. ADRs, GDRs and EDRs are subject to the same risks as the foreign
securities to which they relate.

6
<PAGE>

The Securities and Exchange Commission the (the "SEC") has adopted Rule 144A,
which allows a broader institutional trading market for securities otherwise
subject to restriction on their resale to the general public. Rule 144A
establishes a "safe harbor" from the registration requirements of the 1933 Act
of resales of certain securities to qualified institutional buyers. The Adviser
anticipates that the market for certain restricted securities such as
institutional commercial paper will expand further as a result of this
regulation and the development of automated systems for the trading, clearance
and settlement of unregistered securities of domestic and foreign issuers, such
as the PORTAL System sponsored by the National Association of Securities
Dealers, Inc.

In reaching liquidity decisions, the Adviser will consider, among other things,
the following factors: (1) the frequency of trades and quotes for the security;
(2) the number of dealers and other potential purchasers or sellers of the
security; (3) dealer undertakings to make a market in the security and (4) the
nature of the security and of the marketplace trades (E.G., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
the transfer).

7
<PAGE>

When-Issued and Delayed Delivery Securities. Each Portfolio may purchase
securities on a when-issued or delayed delivery basis. Delivery of and payment
for these securities may take place as long as a month or more after the date of
the purchase commitment. The value of these securities is subject to market
fluctuations during this period and no income accrues to the Portfolio until
settlement takes place. Each Portfolio identifies, as part of a segregated
account, cash or liquid securities in an amount at least equal to these
commitments.

Lending of Portfolio Securities. The Portfolio is permitted to lend up to 30% of
the total value of its securities. The Portfolio will not lend securities to
bankers Trust, ICC Distributors or their affiliates. These loans must be secured
continuously by cash or equivalent collateral or by a letter of credit at least
equal to the market value of the securities loaned plus income. By lending its
securities, the Portfolio may increase its income by continuing to receive
income on the loaned securities as well as by the opportunity to receive
interest on the collateral. During the term of the loan, the Portfolio continues
to bear the risk of fluctuations in the price of the loaned securities. In
lending securities to brokers, dealers and other financial organizations, the
Portfolio is subject to risks, which like those associated with other extensions
of credit, include delays in recovery and possible loss of rights in the
collateral should the borrower fail financially. Cash collateral may be invested
in a money market fund managed by Bankers Trust (or its affiliates) and Bankers
Trust may serve as a Portfolio's lending agent and may share in revenue received
from securities lending transactions as compensation for this service.

Repurchase Agreements. In a repurchase agreement, a Portfolio buys a security at
one price and simultaneously agrees to sell it back at a higher price at a
future date. Delays or losses could result if the other party to the agreement
defaults or becomes insolvent.

Reverse Repurchase Agreements. In a reverse repurchase agreement, a Portfolio
temporarily transfers possession of a portfolio instrument to another party in
return for cash. This could increase the risk of fluctuation in the Fund's yield
or in the market value of its assets. A reverse repurchase agreement is a form
of borrowing and will be counted toward the Portfolio's borrowing restrictions.

Investment Companies. With respect to certain countries in which capital markets
are either less developed or not easily accessed, investments by the Portfolio
may be made through investment in other registered investment companies that in
turn are authorized to invest in the securities of such countries. Investments
in other investment companies may also be made for other purposes, such as noted
below under "Short-Term Instruments," are limited in amount by the Investment
Company Act of 1940, as amended (the "1940 Act") (except the Portfolio may
exceed the applicable percentage limits to the extent permitted by an exemptive
order of the SEC), and will involve the indirect payment of a portion of the
expenses, including advisory fees, of such other investment companies and may
result in a duplication of fees and expenses.

8
<PAGE>

Short-Term Instruments. Each Portfolio intends to stay invested in the
securities described herein to the extent practical in light of its objective
and long-term investment perspective. However, each Portfolio may invest up to
35% of its total assets in high quality short-term investments with remaining
maturities of 397 days or less, or in money market mutual funds, to meet
anticipated redemptions and expenses for day-to-day operating purposes and up to
100% of its total assets when, in the Adviser's opinion, it is advisable to
adopt a temporary defensive position because of unusual and adverse conditions
affecting the respective markets. When either Portfolio experiences large cash
inflows through the sale of securities and desirable equity securities, that are
consistent with the Portfolio's investment objective, which are unavailable in
sufficient quantities or at attractive prices, the Portfolio may invest in
short-term instruments for a limited time pending availability of such portfolio
securities. Short-term instruments consist of U.S. and non-U.S.: (i) short-term
obligations of sovereign governments, their agencies, instrumentalities,
authorities or political subdivisions; (ii) other short-term debt securities
rated AA or higher by S&P or Aa or higher by Moody's or, if unrated, of
comparable quality in the opinion of the Adviser; (iii) commercial paper; (iv)
bank obligations, including negotiable certificates of deposit, time deposits
and bankers' acceptances; and (v) repurchase agreements. At the time the
Portfolio invests in commercial paper, bank obligations or repurchase
agreements, the issuer or the issuer's parent must have outstanding debt rated
AA or higher by S&P or Aa or higher by Moody's or outstanding commercial paper
or bank obligations rated A-1 by S&P or Prime-1 by Moody's; or, if no such
ratings are available, the instrument must be

Lending of Portfolio Securities. Each Portfolio has the authority to lend up to
30% of the total value of its securities to brokers, dealers and other financial
organizations. These loans must be secured continuously by cash or securities
issued or guaranteed by the United States government, its agencies or
instrumentalities or by a letter of credit at least equal to the market value of
the securities loaned plus accrued income. Neither Portfolio will lend
securities to the Adviser, ICC Distributors or their affiliates. By lending its
securities, each Portfolio may increase its income by continuing to receive
payments in respect of dividends and interest on the loaned securities as well
as by either investing the cash collateral in short-term securities or obtaining
yield in the form of a fee interest paid by the borrower when irrevocable
letters of credit and U.S. government obligations are used as collateral. During
the term of the loan, each Portfolio continues to bear the risk of fluctuations
in the price of the loaned securities. There may be risks of delay in receiving
additional collateral or risks of delay in recovery of the securities or even
loss of rights in the collateral should the borrower of the securities fail
financially. Each Portfolio will adhere to the following conditions whenever its
securities are loaned: (i) the Portfolio must receive at least 100% cash
collateral or equivalent securities from the borrower; (ii) the borrower must
increase this collateral whenever the market value of the securities including
accrued interest rises above the level of the collateral; (iii) the Portfolio
must be able to terminate the loan at any time; (iv) the Portfolio must receive
substitute payments in respect of all dividends, interest or other distributions
on the loaned securities, and (v) voting rights on the loaned securities may
pass to the borrower; provided, however, that if a material event adversely
affecting the investment occurs, the Board of Trustees must retain the right to
terminate the loan and recall and vote the securities. In accordance with
approval received from the SEC, cash collateral may be invested in a money
market fund managed by Bankers Trust (or its affiliates) and Bankers Trust may
serve as each Portfolio's lending agent and may share in revenue received from
the securities lending transactions as compensation for this service.

9
<PAGE>

Derivatives. Each Portfolio may invest in various instruments that are commonly
known as "derivatives." Generally, a derivative is a financial arrangement, the
value of which is based on, or "derived" from, a traditional security, asset, or
market index. Some derivatives such as mortgage-related and other asset-backed
securities are in many respects like any other investment, although they may be
more volatile or less liquid than more traditional debt securities. There are,
in fact, many different types of derivatives and many different ways to use
them. There are a range of risks associated with those uses. Futures and options
are commonly used for traditional hedging purposes to attempt to protect a fund
from exposure to changing interest rates, securities prices, or currency
exchange rates and as a low cost method of gaining exposure to a particular
securities market without investing directly in those securities. However, some
derivatives are used for leverage, which tends to magnify the effects of an
instrument's price changes as market conditions change. Leverage involves the
use of a small amount of money to control a large amount of financial assets,
and can in some circumstances, lead to significant losses. The Adviser will use
derivatives only in circumstances where they offer the most efficient means of
improving the risk/reward profile of a Portfolio and when consistent with a
Portfolio's investment objective and policies. The use of derivatives for
non-hedging purposes may be considered speculative.

Currency Exchange Contracts. Because each Portfolio may buy and sell securities
denominated in currencies other than the U.S. dollar and receives interest,
dividends and sale proceeds in currencies other than the U.S. dollar, a
Portfolio from time to time may enter into currency exchange transactions to
convert to and from different foreign currencies and to convert foreign
currencies to and from the U.S. dollar. A Portfolio either enters into these
transactions on a spot (i.e., cash) basis at the spot rate prevailing in the
foreign currency exchange market or uses forward contracts to purchase or sell
foreign currencies.

Forward Currency Exchange Contracts. A forward foreign currency exchange
contract is an obligation by a Portfolio to purchase or sell a specific currency
at a future date, which may be any fixed number of days from the date of the
contract. Forward foreign currency exchange contracts establish an exchange rate
at a future date. These contracts are transferable in the interbank market
conducted directly between currency traders (usually large commercial banks and
brokerages) and their customers. A forward foreign currency exchange contract
may not have a deposit requirement and may be traded at a net price without
commission. Each Portfolio maintains with its custodian a segregated account of
cash or liquid securities in an amount at least equal to its obligations under
each forward foreign currency exchange contract. Neither spot transactions nor
forward foreign currency exchange contracts eliminate fluctuations in the prices
of the Portfolio's securities or in foreign exchange rates, or prevent loss if
the prices of these securities should decline.

10
<PAGE>
Each Portfolio may enter into foreign currency hedging transactions in an
attempt to protect against changes in foreign currency exchange rates between
the trade and settlement dates of specific securities transactions or changes in
foreign currency exchange rates that would adversely affect a portfolio position
or an anticipated investment position. Since consideration of the prospect for
currency parities will be incorporated into the Adviser's long-term investment
decisions, a Portfolio will not routinely enter into foreign currency hedging
transactions with respect to security transactions; however, the Adviser
believes that it is important to have the flexibility to enter into foreign
currency hedging transactions when it determines that the transactions would be
in the Portfolio's best interest. Although these transactions tend to minimize
the risk of loss due to a decline in the value of the hedged currency, at the
same time they tend to limit any potential gain that might be realized should
the value of the hedged currency increase. The precise matching of the forward
contract amounts and the value of the securities involved will not generally be
possible because the future value of such securities in foreign currencies will
change as a consequence of market movements in the value of such securities
between the date the forward contract is entered into and the date it matures.
The projection of currency market movements is extremely difficult, and the
successful execution of a hedging strategy is highly uncertain.

While these contracts are not presently regulated by the Commodity Futures
Trading Commission ("CFTC"), the CFTC may in the future assert authority to
regulate forward contracts. In such event the Portfolio's ability to utilize
forward contracts may be restricted. Forward contracts may reduce the potential
gain from a positive change in the relationship between the U.S. dollar and
foreign currencies. Unanticipated changes in currency prices may result in
poorer overall performance for the Portfolio than if it had not entered into
such contracts. The use of foreign currency forward contracts may not eliminate
fluctuations in the underlying U.S. dollar equivalent value of the prices of or
rates of return on a Portfolio's foreign currency denominated portfolio
securities and the use of such techniques will subject a Portfolio to certain
risks.

The matching of the increase in value of a forward contract and the decline in
the U.S. dollar equivalent value of the foreign currency denominated asset that
is the subject of the hedge generally will not be precise. In addition, a
Portfolio may not always be able to enter into foreign currency forward
contracts at attractive prices and this will limit the Portfolio's ability to
use such contract to hedge or cross-hedge its assets. Also, with regard to a
Portfolio's use of cross-hedges, there can be no assurance that historical
correlations between the movement of certain foreign currencies relative to the
U.S. dollar will continue. Thus, at any time poor correlation may exist between
movements in the exchange rates of the foreign currencies underlying a
Portfolio's cross-hedges and the movements in the exchange rates of the foreign
currencies in which the Portfolio's assets that are the subject of such
cross-hedges are denominated.

11
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Options on Foreign Currencies. Each Portfolio may purchase and write options on
foreign currencies for hedging purposes in a manner similar to that in which
futures contracts on foreign currencies, or forward contracts, will be utilized.
For example, a decline in the dollar value of a foreign currency in which
portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of portfolio securities,
the Portfolio may purchase put options on the foreign currency. If the value of
the currency does decline, a Portfolio will have the right to sell such currency
for a fixed amount in dollars and will thereby offset, in whole or in part, the
adverse effect on its portfolio which otherwise would have resulted.

Conversely, where a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of such
securities, the Portfolio may purchase call options thereon. The purchase of
such options could offset, at least partially, the effects of the adverse
movements in exchange rates. As in the case of other types of options, however,
the benefit to the Portfolio deriving from purchases of foreign currency options
will be reduced by the amount of the premium and related transaction costs. In
addition, where currency exchange rates do not move in the direction or to the
extent anticipated, the Portfolio could sustain losses on transactions in
foreign currency options which would require it to forego a portion or all of
the benefits of advantageous changes in such rates.

The purchase of an option on foreign currency may be used to hedge against
fluctuations in exchange rates although, in the event of exchange rate movements
adverse to the Portfolio's position, it may forfeit the entire amount of the
premium plus related transaction costs. In addition, the Portfolio may purchase
call options on a foreign currency when the Adviser anticipates that the
currency will appreciate in value.

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

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

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

12
<PAGE>

Each Portfolio also may write call options on foreign currencies that are not
covered for cross-hedging purposes. A call option on a foreign currency is for
cross-hedging purposes if it is not covered, but is designed to provide a hedge
against a decline in the U.S. dollar value of a security which the Portfolio
owns or has the right to acquire and which is denominated in the currency
underlying the option due to an adverse change in the exchange rate. In such
circumstances, the Portfolio collateralizes the option by maintaining in a
segregated account with its custodian, cash or liquid securities in an amount
not less than the value of the underlying foreign currency in U.S. dollars
marked to market daily.

There is no assurance that a liquid secondary market will exist for any
particular option, or at any particular time. If a Portfolio is unable to effect
a closing purchase transaction with respect to covered options it has written,
the Portfolio will not be able to sell the underlying currency or dispose of
assets held in a segregated account until the options expire or are exercised.
Similarly, if the Portfolio is unable to effect a closing sale transaction with
respect to options it has purchased, it would have to exercise the options in
order to realize any profit and will incur transaction costs upon the purchase
or sale of underlying currency. Each Portfolio pays brokerage commissions or
spreads in connection with its options transactions.

Options on Securities. A Portfolio may write and purchase put and call options
on stocks. A call option gives the purchaser of the option the right to buy, and
obligates the writer to sell, the underlying stock at the exercise price at any
time during the option period. Similarly, a put option gives the purchaser of
the option the right to sell, and obligates the writer to buy, the underlying
stock at the exercise price at any time during the option period. Each Portfolio
may also write (sell) covered call and put options to a limited extent on its
portfolio securities ("covered options") in an attempt to increase income.
However, a Portfolio may forgo the benefits of appreciation on securities sold
or may pay more than the market price on securities acquired pursuant to call
and put options written by the Portfolio.

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A put option sold by either portfolio is covered when, among other things, cash
or securities acceptable to the broker are place in a segregated account to
fulfill the obligations undertaken.

A Portfolio may terminate its obligation as the writer of a call or put option
by purchasing an option with the same exercise price and expiration date as the
option previously written. This transaction is called a "closing purchase
transaction." The Portfolio will realize a profit or loss for a closing purchase
transaction if the amount paid to purchase an option is less or more, as the
case may be, than the amount received from the sale thereof. To close out a
position as a purchaser of an option, the Portfolio, may make a "closing sale
transaction" which involves liquidating the Portfolio's position by selling the
option previously purchased. Where the Portfolio cannot effect a closing
purchase transaction, it may be forced to incur brokerage commissions or dealer
spreads in selling securities it receives or it may be forced to hold underlying
securities until an option is exercised or expires.

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A Portfolio would normally purchase put options in anticipation of a decline in
the market value of securities in its portfolio ("protective puts") or
securities of the type in which it is permitted to invest. The purchase of a put
option would entitle the Portfolio, in exchange for the premium paid, to sell a
security, which may or may not be held in the Portfolio's holdings, at a
specified price during the option period. The purchase of protective puts is
designed merely to offset or hedge against a decline in the market value of the
Portfolio's holdings. Put options also may be purchased by the Portfolio for the
purpose of affirmatively benefiting from a decline in the price of securities
which the Portfolio does not own. The Portfolio would ordinarily recognize a
gain if the value of the securities decreased below the exercise price
sufficiently to cover the premium and would recognize a loss if the value of the
securities remained at or above the exercise price. Gains and losses on the
purchase of protective put options would tend to be offset by countervailing
changes in the value of underlying portfolio securities.

Options on Securities Indices. In addition to options on securities, each
Portfolio may also purchase and write (sell) call and put options on domestic
and foreign stock exchanges, in lieu of direct investment in the underlying
securities for hedging purposes. Such options give the holder the right to
receive a cash settlement during the term of the option based upon the
difference between the exercise price and the value of the index. Such options
will be used for the purposes described above under "Options on Securities."

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Options on stock indices are generally similar to options on stock except that
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 a cash "exercise settlement amount" equal to (a)
the amount, if any, by which the fixed exercise price of the option exceeds (in
the case of a put) or is less than (in the case of a call) the closing value of
the underlying index on the date of exercise, multiplied by (b) a fixed "index
multiplier." 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 equal to such difference between the closing
price of the index and the exercise price of the option expressed in dollars or
a foreign currency, as the case may be, times a specified multiple. The writer
of the option is obligated, in return for the premium received, to make delivery
of this amount. The writer may offset its position in stock index options prior
to expiration by entering into a closing transaction on an exchange or the
option may expire unexercised.

Because the value of an index option depends upon movements in the level of the
index rather than the price of a particular stock, whether the Portfolio will
realize a gain or loss from the purchase or writing of options on an index
depends upon movements in the level of stock prices in the stock market
generally or, in the case of certain indices, in an industry or market segment,
rather than movements in the price of a particular stock. Accordingly,
successful use by the Portfolio of options on stock indices will be subject to
the Adviser's ability to predict correctly movements in the direction of the
stock market generally or of a particular industry. This requires different
skills and techniques than predicting changes in the price of individual stocks.

Options on securities indices entail risks in addition to the risks of options
on securities. The absence of a liquid secondary market to close out options
positions on securities indices is more likely to occur, although the Portfolio
generally will only purchase or write such an option if the Adviser believes the
option can be closed out.

Use of options on securities indices also entails the risk that trading in such
options may be interrupted if trading in certain securities included in the
index is interrupted. The Portfolio will not purchase such options unless the
Adviser believes the market is sufficiently developed such that the risk of
trading in such options is no greater than the risk of trading in options on
securities.

Price movements in a Portfolio's holdings may not correlate precisely with
movements in the level of an index and, therefore, the use of options on indices
cannot serve as a complete hedge. Because options on securities indices require
settlement in cash, the Adviser may be forced to liquidate portfolio securities
to meet settlement obligations.

Commercial Paper. 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. A variable amount master demand note (which is a type
of commercial paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under a letter agreement between a
commercial paper issuer and an institutional lender pursuant to which the lender
may determine to invest varying amounts.

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Futures Contracts and Options on Futures Contracts.

General. The successful use of futures contracts and options thereon draws upon
the Adviser's skill and experience with respect to such instruments and usually
depends on the Adviser's ability to forecast interest rate and currency exchange
rate movements correctly. Should interest or exchange rates move in an
unexpected manner, a Portfolio may not achieve the anticipated benefits of
futures contracts or options on futures contracts or may realize losses and thus
will be in a worse position than if such strategies had not been used. In
addition, the correlation between movements in the price of futures contracts or
options on futures contracts and movements in the price of the securities and
currencies hedged or used for cover will not be perfect and could produce
unanticipated losses.

Futures Contracts. Futures contracts are contracts to purchase or sell a fixed
amount of an underlying instrument, commodity or index at a fixed time and place
in the future. U.S. futures contracts have been designed by exchanges which have
been designated "contracts markets" by the CFTC, and must be executed through a
futures commission merchant, or brokerage firm, which is a member of the
relevant contract market. Futures contracts trade on a number of exchange
markets and clear through their clearing corporations. A Portfolio may enter
into contracts for the purchase or sale for future delivery of fixed-income
securities, foreign currencies, or financial indices including any index of U.S.
government securities, foreign government securities or corporate debt
securities. A Portfolio may enter into futures contracts which are based on debt
securities that are backed by the full faith and credit of the U.S. Government,
such as long-term U.S. Treasury Bonds, Treasury Notes, Government National
Mortgage Association ("GNMA") modified pass-through mortgage-backed securities
and three-month U.S. Treasury Bills. A Portfolio may also enter into futures
contracts which are based on bonds issued by governments other than the U.S.
government.

Futures contracts on foreign currencies may be used to hedge against securities
that are denominated in foreign currencies.

At the time of delivery of securities pursuant to such a contract, adjustments
are made to recognize differences in value arising from the delivery of
securities with a different interest rate from that specified in the contract.
In some (but not many) cases, securities called for by a futures contract may
not have been issued when the contract was written.

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Although futures contracts (other than those that settle in cash such as index
futures) by their terms call for the actual delivery or acquisition of the
instrument underlying the contract, in most cases the contractual obligation is
fulfilled by offset before the date of the contract without having to make or
take delivery of the instrument underlying the contract. The offsetting of a
contractual obligation is accomplished by entering into an opposite position in
the identical futures contract on the commodities exchange on which the futures
contract was entered into (or a linked exchange). Such a transaction, which is
effected through a member of an exchange, cancels the obligation to make or take
delivery of the instrument underlying the contract. Since all transactions in
the futures market are made, offset or fulfilled through a clearinghouse
associated with the exchange on which the contracts are traded, the Portfolio
will incur brokerage fees when it enters into futures contracts.

The assets in the segregated asset account maintained to cover the Portfolio's
obligations with respect to such futures contracts will consist of cash or
securities acceptable to the broker from its portfolio in an amount equal to the
difference between the fluctuating market value of such futures contracts and
the aggregate value of the initial and variation margin payments made by the
Portfolio with respect to such futures contracts.

In addition, futures contracts entail risks. Although the Adviser believes that
use of such contracts will benefit the Portfolios, if the Adviser's investment
judgment about the general direction of interest rates is incorrect, a
Portfolio's overall performance would be poorer than if it had not entered into
any such contract. For example, if a Portfolio has hedged against the
possibility of an increase in interest rates which would adversely affect the
price of debt securities held in its portfolio and interest rates decrease
instead, the Portfolio will lose part or all of the benefit of the increased
value of its debt securities which it has hedged because it will have offsetting
losses in its futures positions. In addition, in such situations, if a Portfolio
has insufficient cash, it may have to sell debt securities from its portfolio to
meet daily variation margin requirements. Such sales of bonds may be, but will
not necessarily be, at increased prices which reflect the rising market. A
Portfolio may have to sell securities at a time when it may be disadvantageous
to do so.

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Options on Futures Contracts. Each Portfolio may purchase and write options on
futures contracts for hedging purposes. The purchase of a call option on a
futures contract is similar in some respects to the purchase of a call option on
an individual security. Depending on the pricing of the option compared to
either the price of the futures contract upon which it is based or the price of
the underlying debt securities, it may or may not be less risky than ownership
of the futures contract or underlying debt securities. For example, when a
Portfolio is not fully invested it may purchase a call option on an interest
rate sensitive futures contract to hedge against a potential price increase on
debt securities due to declining interest rates. The purchase of a put option on
a futures contract is similar in some respects to the purchase of protective put
options on portfolio securities. For example, a Portfolio may purchase a put
option on an interest rate sensitive futures contract to hedge its portfolio
against the risk of a decline in the price of debt securities and to rising
interest rates.

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

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Futures Contracts on Securities Indices. Each Portfolio may enter into futures
contracts providing for cash settlement based upon changes in the value of an
index of domestic or foreign securities. This investment technique is designed
as a low-cost method of gaining exposure to a particular securities market
without investing directly in those securities or to hedge against anticipated
future change in general market prices which otherwise might either adversely
affect the value of securities held by the Portfolio or adversely affect the
prices of securities which are intended to be purchased at a later date for the
Portfolio.

In general, each transaction in futures contracts on a securities index involves
the establishment of a position which the Adviser believes will move in a
direction opposite to that of the investment being hedged. If these hedging
transactions are successful, the futures positions taken for the Portfolio will
rise in value by an amount which approximately offsets the decline in value of
the portion of the Portfolio's investments that are being hedged. Should general
market prices move in an unexpected manner, the full anticipated benefits of
Futures Contracts may not be achieved or a loss may be realized.

Although futures contracts on securities indices would be entered into for
hedging purposes only, such transactions do involve certain risks. These risks
include a lack of correlation between the futures contract and the foreign
equity market being hedged, and incorrect assessments of the market trends which
may result in poorer overall performance than if a futures contract had not been
entered into. Futures may fail as hedging techniques in cases where the price
movements of the securities underlying the futures do not follow the price
movements of the portfolio securities subject to the hedge. The loss from
investing in futures transactions is potentially unlimited. Gains and losses on
investments in futures depend on the portfolio manager's ability to predict
correctly the direction of stock prices, interest rates, and other economic
factors. The Portfolio will likely be unable to control losses by closing its
position where a liquid secondary market does not exist.

Asset Coverage. To assure that the Portfolio's use of futures and related
options, as well as when-issued and delayed-delivery securities and foreign
currency exchange transactions, are not used to achieve investment leverage, the
Portfolio will cover such transactions, as required under applicable
interpretations of the SEC, either by owning the underlying securities or by
segregating with the Portfolio's Custodian or futures commission merchant liquid
securities in an amount at all times equal to or exceeding the Portfolio's
commitment with respect to these instruments or contracts.

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Investment Restriction on Futures Transactions. A Portfolio will not enter into
any futures contracts or options on futures contracts if immediately thereafter
the amount of margin deposits on all the futures contracts of the Portfolio and
premiums paid on outstanding options on futures contracts owned by the Portfolio
(other than those entered into for bona fide hedging purposes) would exceed 5%
of the market value of the net assets of the Portfolio.

Additional Risk Factors

In addition to the risks discussed above, the Portfolio's investments may be
subject to the following risk factors:

Investing in Foreign Securities. Each Portfolio will, under normal market
conditions, invest a significant portion of its assets in foreign securities.
Investors should realize that investing in securities of foreign issuers
involves considerations not typically associated with investing in securities of
companies organized and operated in the United States. Investors should realize
that the value of the Portfolio's foreign investments may be adversely affected
by changes in political or social conditions, diplomatic relations, confiscatory
taxation, expropriation, nationalization, limitation on the removal of funds or
assets, or imposition or (or change in) exchange control or tax regulations in
foreign countries. In addition, changes in government administrations or
economic or monetary policies in the United States or abroad could result in
appreciation or depreciation of portfolio securities and could favorably or
unfavorably affect the Portfolio's operations, Furthermore, the economies of
individual foreign nations may differ from the U.S. economy, whether favorably
or unfavorably, in areas such as growth or gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency or balance of
payments position; it may also be more difficult to obtain and enforce a
judgment against a foreign issuer. In general, less information is publicly
available with respect to foreign issuers than is available with respect to U.S.
companies. Most foreign companies are also not subject to the uniform accounting
and financial reporting requirements applicable to issuers in the Untied States.
Any foreign investments made by the Portfolio must be made in compliance with
U.S. and foreign currency restrictions and tax laws restricting the amounts and
types of foreign investments.

Because foreign securities generally are denominated and pay dividends or
interest in foreign currencies, the value of the net assets of the Portfolio as
measured in U.S. dollars will be affected favorably or unfavorably by changes in
exchange rates. In order to protect against uncertainty in the level of future
foreign currency exchange rates, the Portfolio is also authorized to enter into
certain foreign currency exchange transactions. Furthermore, the Portfolio's
foreign investments may be less liquid and their prices may be more volatile
than comparable investments in securities of U.S. companies. The settlement
periods for foreign securities, which are often longer than those for securities
of U.S. issuers, may affect portfolio liquidity. Finally, there may be less
government supervision and regulation of securities exchanges, brokers and
issuers in foreign countries than in the United States.

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Medium- and Small-Capitalization Stocks. Historically, medium- and
small-capitalization stocks have been more volatile in price than the
larger-capitalization stocks included in the S&P 500. Among the reasons for the
greater price volatility of these securities are the less certain growth
prospects of smaller firms, the lower degree of liquidity in the markets for
such stocks, and the greater sensitivity of medium- and small-size companies to
changing economic conditions. In addition to exhibiting greater volatility,
medium- and small-size company stocks may fluctuate independently of larger
company stocks. Medium- and small-size company stocks may decline in price as
large company stocks rise, or rise in prices as large company stocks decline.

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 SEC. To the contrary, such instruments are traded
through financial institutions acting as principals, 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. 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 writer and a trader of forward contracts could lose amounts
substantially in excess of their initial investments.

Forward Contracts and options on foreign currencies traded over-the-counter
involve liquidity and credit risks which may not be present in the case of
exchange-traded currency options. A Portfolio's ability to terminate
over-the-counter options will be more limited than with exchange-traded options.
It is also possible that broker-dealers participating in over-the-counter
options transactions will not fulfill their obligations. Until such time as the
staff of the SEC changes its position, each Portfolio will treat purchased
over-the-counter options and assets used to cover written over-the-counter
options as illiquid securities.

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 a Portfolio to
liquidate open positions at a profit prior to exercise or expiration, or to
limit losses in the event of adverse market movements.

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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 currency option exercises, or would result in undue burdens on the OCC
or its clearing member, impose special procedures on exercise and settlement,
such as technical changes in the mechanics of delivery of currency, the fixing
of dollar settlement prices or prohibitions on exercise.

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

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The Fund's investment objective is not a fundamental policy and may be changed
upon notice to, but without the approval of, the Fund's shareholders. If there
is a change in the Fund's investment objective, the Fund's shareholders should
consider whether the Fund remains an appropriate investment in light of their
then-current needs. The investment objective of the Portfolio is also not a
fundamental policy. Shareholders of the Fund will receive 30 days prior written
notice with respect to any change in the investment objective of the Fund or the
Portfolio.

Rating Services. The ratings of rating services represent their opinions as to
the quality of the securities that they undertake to rate. It should be
emphasized, however, that ratings are relative and subjective and are not
absolute standards of quality. Although these ratings are an initial criterion
for selection of portfolio investments, the Adviser also makes its own
evaluation of these securities, subject to review by the Board of Trustees.
After purchase by a Portfolio, an obligation may cease to be rated or its rating
may be reduced below the minimum required for purchase by the Portfolio. Neither
event would require a Portfolio to eliminate the obligation from its portfolio,
but the Adviser will consider such an event in its determination of whether a
Portfolio should continue to hold the obligation. A description of the ratings
is included in the Appendix herein.

Portfolio Turnover

The portfolio turnover rates for Portfolios for the fiscal years ended September
30, 1998 and 1997 , respectively, were as follows: Capital Appreciation
Portfolio--145% and 167%; Small Cap Portfolio--182% and 188%.

These rates will vary from year to year. High turnover rates increase
transaction costs and may increase investable capital gains. The Adviser
considers these effects when evaluating the anticipated benefits of short-term
investing.

Investment Restrictions

Fundamental Policies. The following investment restrictions are "fundamental
policies" of each Fund and each Portfolio and may not be changed with respect to
the Fund or the Portfolio without the approval of a "majority of the outstanding
voting securities" of the Fund or the Portfolio, as the case may be. "Majority
of the outstanding voting securities" under the 1940 Act, and as used in this
SAI, means, with respect to the Fund (or the Portfolio), the lesser of (i) 67%
or more of the outstanding voting securities of the Fund (or of the total
beneficial interests of the Portfolio) present at a meeting, if the holders of
more than 50% of the outstanding voting securities of the Fund (or of the total
beneficial interests of the Portfolio) are present or represented by proxy or
(ii) more than 50% of the outstanding voting securities of the Fund (or of the
total beneficial interests of the Portfolio). Whenever the Trust is requested to
vote on a fundamental policy of a Portfolio, the Trust will hold a meeting of
the corresponding Fund's shareholders and will cast its vote as instructed by
that Fund's shareholders. Fund shareholders who do not vote will not affect the
Trust's votes at the Portfolio meeting. The percentage of the Trust's votes
representing Fund shareholders not voting will be voted by the Trustees of the
Trust in the same proportion as the Fund shareholders who do, in fact, vote.

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No Portfolio (or Fund) may (except that no investment restriction of a Fund
shall prevent a Fund from investing all of its Assets in an open-end investment
company with substantially the same investment objectives):

(1) borrow money or mortgage or hypothecate assets of the Portfolio
(Fund), except that in an amount not to exceed 1/3 of the current value
of the Portfolio's (Fund's) net assets, it may borrow money (but only as
a temporary measure for extraordinary or emergency purposes in the case
of the Small Cap Portfolio (Fund) and Capital Appreciation Portfolio
(Fund) and enter into reverse repurchase agreements or dollar roll
transactions, and except that it may pledge, mortgage or hypothecate not
more than 1/3 of such assets to secure such borrowings (it is intended
that money would be borrowed only from banks and only either to
accommodate requests for the withdrawal of beneficial interests
(redemption of shares) while effecting an orderly liquidation of
portfolio securities or to maintain liquidity in the event of an
unanticipated failure to complete a portfolio security transaction or
other similar situations) or reverse repurchase agreements, provided that
collateral arrangements with respect to options and futures, including
deposits of initial deposit and variation margin, are not considered a
pledge of assets for purposes of this restriction and except that assets
may be pledged to secure letters of credit solely for the purpose of
participating in a captive insurance company sponsored by the Investment
Company Institute; for additional related restrictions, see clause (i)
under the caption "Additional Restrictions" below (as an operating
policy, the Portfolios may not engage in dollar-roll transactions);

(2) underwrite securities issued by other persons except insofar as the
Portfolios (Trust or the Funds) may technically be deemed an underwriter
under the 1933 Act in selling a portfolio security;

(3) make loans to other persons except: (a) through the lending of the
Portfolio's (Fund's) portfolio securities and provided that any such
loans not exceed 30% of the Portfolio's (Fund's) total assets (taken at
market value); (b) through the use of repurchase agreements or the
purchase of short-term obligations; or (c) by purchasing a portion of an
issue of debt securities of types distributed publicly or privately;

(4) purchase or sell real estate (including limited partnership interests
but excluding securities secured by real estate or interests therein),
interests in oil, gas or mineral leases, commodities or commodity
contracts (except futures and option contracts) in the ordinary course of
business (except that the Portfolio (Fund) may hold and sell, for the
Portfolio's (Fund's) portfolio, real estate acquired as a result of the
Portfolio's (Fund's) ownership of securities);

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(5) concentrate its investments in any particular industry (excluding
U.S. government securities), but if it is deemed appropriate for the
achievement of a Portfolio's (Fund's) investment objective(s), up to 25%
of its total assets may be invested in any one industry; and

(6) issue any senior security (as that term is defined in the 1940 Act)
if such issuance is specifically prohibited by the 1940 Act or the rules
and regulations promulgated thereunder, provided that collateral
arrangements with respect to options and futures, including deposits of
initial deposit and variation margin, are not considered to be the
issuance of a senior security for purposes of this restriction.

(7) with respect to 75% of each (Portfolio's) Fund's total assets, invest
more than 5% of its total assets in the securities of any one issuer
(excluding cash and cash equivalents, U.S. government securities and the
securities of other investments companies) or own more than 10% of the
voting securities of any issuer.

Additional Restrictions. The following are nonfundamental policies of the
Funds and the Portfolios. In order to comply with certain statutes and
policies, each Portfolio (or the Trust, on behalf of each Fund) will not
as a matter of operating policy (except that no operating policy shall
prevent a Fund from investing all of its Assets in an open-end investment
company with substantially the same investment objectives):

(i) borrow money (including through reverse repurchase or forward roll
transactions) for any purpose in excess of 5% of the Portfolio's
(Fund's) total assets (taken at cost), except that the Portfolio (Fund)
may borrow for temporary or emergency purposes up to 1/3 of its total
assets;

(ii) pledge, mortgage or hypothecate for any purpose in excess of 10% of
the Portfolio's (Fund's) total assets (taken at market value), provided
that collateral arrangements with respect to options and futures,
including deposits of initial deposit and variation margin, and reverse
repurchase agreements are not considered a pledge of assets for purposes
of this restriction;

(iii) purchase any security or evidence of interest therein on margin,
except that such short-term credit as may be necessary for the clearance
of purchases and sales of securities may be obtained and except that
deposits of initial deposit and variation margin may be made in
connection with the purchase, ownership, holding or sale of futures;

(iv) sell securities it does not own (short sales) such that the dollar
amount of such short sales at any one time exceeds 25% of the net equity
of the Portfolio (Fund), and the value of securities of any one issuer
in which the Portfolio (Fund) is short exceeds the lesser of 2.0% of the
value of the Portfolio's (Fund's) net assets or 2.0% of the securities
of any class of any U.S. issuer and, provided that short sales may be
made only in those securities which are fully listed on a national
securities exchange or a foreign exchange (This provision does not
include the sale of securities that the Portfolio (Fund)
contemporaneously owns or where the Portfolio has the right to obtain
securities equivalent in kind and amount to those sold, i.e., short
sales against the box.) (the Portfolios (Funds) currently do not engage
in short selling);

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(v) invest for the purpose of exercising control or management of
another company;

(vi) purchase securities issued by any investment company except by
purchase in the open market where no commission or profit to a sponsor
or dealer results from such purchase other than the customary broker's
commission, or except when such purchase, though not made in the open
market, is part of a plan of merger or consolidation; provided, however,
that securities of any investment company will not be purchased for the
Portfolio (Fund) if such purchase at the time thereof would cause: (a)
more than 10% of the Portfolio's (Fund's) total assets (taken at the
greater of cost or market value) to be invested in the securities of
such issuers; (b) more than 5% of the Portfolio's (Fund's) total assets
(taken at the greater of cost or market value) to be invested in any one
investment company; or (c) more than 3% of the outstanding voting
securities of any such issuer to be held for the Portfolio (Fund),
unless permitted to exceed these limitations by an exemptive order of
the SEC; provided further that, except in the case of a merger or
consolidation, the Portfolio (Fund) shall not purchase any securities of
any open-end investment company unless (1) the Portfolio's investment
adviser waives the investment advisory fee with respect to assets
invested in other open-end investment companies and (2) the Portfolio
incurs no sales charge in connection with the investment;

(vii) invest more than 15% of the Portfolio's (Fund's) net assets (taken
at the greater of cost or market value) in securities that are illiquid
or not readily marketable (excluding Rule 144A securities deeemed by the
Board of Trustees of the Portfolio (Trust) to be liquid).

(viii) write puts and calls on securities unless each of the following
conditions are met: (a) the security underlying the put or call is
within the investment policies of the Portfolio (Fund) and the option is
issued by the OCC, except for put and call options issued by non-U.S.
entities or listed on non-U.S. securities or commodities exchanges; (b)
the aggregate value of the obligations underlying the puts determined as
of the date the options are sold shall not exceed 5% of the Portfolio's
(Fund's) net assets; (c) the securities subject to the exercise of the
call written by the Portfolio (Fund) must be owned by the Portfolio
(Fund) at the time the call is sold and must continue to be owned by the
Portfolio (Fund) until the call has been exercised, has lapsed, or the
Portfolio (Fund) has purchased a closing call, and such purchase has
been confirmed, thereby extinguishing the Portfolio's (Fund's)
obligation to deliver securities pursuant to the call it has sold; and
(d) at the time a put is written, the Portfolio (Fund) establishes a
segregated account with its custodian consisting of cash or liquid
securities equal in value to the amount the Portfolio (Fund) will be
obligated to pay upon exercise of the put (this account must be
maintained until the put is exercised, has expired, or the Portfolio
(Fund) has purchased a closing put, which is a put of the same series as
the one previously written);

27
<PAGE>

(ix) buy and sell puts and calls on securities, stock index futures or
options on stock index futures, or financial futures or options on
financial futures unless such options are written by other persons and:
(a) the options or futures are offered through the facilities of a
national securities association or are listed on a national securities
or commodities exchange, except for put and call options issued by
non-U.S. entities or listed on non-U.S. securities or commodities
exchanges; (b) the aggregate premiums paid on all such options which are
held at any time do not exceed 20% of the Portfolio's (Fund's) total net
assets; and (c) the aggregate margin deposits required on all such
futures or options thereon held at any time do not exceed 5% of the
Portfolio's (Fund's) total assets.

Portfolio Transactions and Brokerage Commissions

28
<PAGE>

29
<PAGE>

For the fiscal years ended September 30, 1998, 1997, and 1996, Capital
Appreciation Portfolio paid brokerage commissions in the amount of $114,917,
$774,242, and $648,897, respectively.

For the fiscal years ended September 30, 1998, 1997, and 1996, the Small Cap
Portfolio paid brokerage commissions in the amount of $657,321, $344,478, and
$238,160, respectively.

30
<PAGE>

PERFORMANCE INFORMATION

Standard Performance Information

From time to time, quotations of a Fund's performance may be included in
advertisements, sales literature or shareholder reports. For mutual funds
performance is commonly measured as total return. Each Fund's performance is
affected by its expenses. These performance figures are calculated in the
following manner:

Total return: Total return is the change in value of an investment in
the Fund over a given period, assuming reinvestment of any dividends and
capital gains. A cumulative total return reflects actual performance
over a stated period of time. An average annual total return is a
hypothetical rate of return that, if achieved annually, would have
produced the same cumulative total return if performance had been
constant over the entire period. Average annual total return
calculations smooth out variations in performance; they are not the same
as actual year-by-year results. Average annual total returns covering
periods of less than one year assume that performance will remain
constant for the rest of the year. A Fund's average annual total return
is calculated for certain periods by determining the average annual
compounded rates of return over those periods that would cause an
investment of $1,000 (made at the maximum public offering price with all
distributions reinvested) to reach the value of that investment at the
end of the periods. A Fund may also calculate total return figures which
represent aggregate performance over a period or year-by-year
performance.

CUMULATIVE ANNUALIZED
TOTAL RETURN TOTAL RETURN
FOR FOR
THE PERIOD THE PERIOD
TOTAL RETURN TOTAL RETURN FROM FROM
FOR FOR COMMENCEMENT COMMENCEMENT
THE ONE YEAR THE FIVE YEARS OF OPERATIONS OF OPERATIONS
ENDED ENDED THROUGH THROUGH
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1998 1998 1998
------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>

Capital (11.42)% 10.13% 92.01% 12.45%
Appreciation
Fund(1)
Small Cap (28.38)% N/A 97.45% 14.76%
Fund(2)
</TABLE>

(1) Fund commenced operations on March 9, 1993. (2) Fund commenced
operations on October 21, 1993.

Performance Results: Total returns are based on past results and are not
an indication of future performance. Any total return quotation provided
for a Fund should not be considered as representative of the performance
of the Fund in the future since the net asset value and public offering
price of shares of the Fund will vary based not only on the type,
quality and maturities of the securities held in the corresponding
Portfolio, but also on changes in the current value of such securities
and on changes in the expenses of the Fund and the corresponding
Portfolio. These factors and possible differences in the methods used to
calculate total return should be considered when comparing the total
return of a Fund to total returns published for other investment
companies or other investment vehicles. Total return reflects the
performance of both principal and income.

31
<PAGE>

Comparison of Fund Performance

Comparison of the quoted nonstandardized performance of various
investments is valid only if performance is calculated in the same
manner. Since there are different methods of calculating performance,
investors should consider the effect of the methods used to calculate
performance when comparing performance of a Fund with performance quoted
with respect to other investment companies or types of investments.

In connection with communicating its performance to current or
prospective shareholders, a Fund also may compare these figures to the
performance of other mutual funds tracked by mutual fund rating services
or to unmanaged indices which may assume reinvestment of dividends but
generally do not reflect deductions for administrative and management
costs. A Fund's performance may be compared to the performance of
various indices and investments for which reliable data is available.
The Fund's performance may also be compared to averages, performance
rankings, or other information prepared by recognized mutual fund
statistical services. Evaluations of a Fund's performance made by
independent sources may also be used in advertisements concerning the
Fund. Sources for a Fund's performance information could include the
following:

Asian Wall Street Journal, a weekly Asian newspaper that often reviews
U.S. mutual funds investing internationally.

Barron's, a Dow Jones and Company, Inc. business and financial weekly
that periodically reviews mutual fund performance data.

Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds investing
abroad.

Changing Times, The Kiplinger Magazine, a monthly investment advisory
publication that periodically features the performance of a variety of
securities.

Consumer Digest, a monthly business/financial magazine that includes a
"Money Watch" section featuring financial news.

Financial Times, Europe's business newspaper, which features from time
to time articles on international or country-specific funds.

32
<PAGE>

Financial World, a general business/financial magazine that includes a
"Market Watch" department reporting on activities in the mutual fund
industry.

Forbes, a national business publication that from time to time reports
the performance of specific investment companies in the mutual fund
industry.

Fortune, a national business publication that periodically rates the
performance of a variety of mutual funds.

Global Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.

Investor's Daily, a daily newspaper that features financial, economic
and business news.

Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a
weekly publication of industry-wide mutual fund averages by type of
fund.

Money, a monthly magazine that from time to time features both specific
funds and the mutual fund industry as a whole.

Morningstar Inc., a publisher of financial information and mutual fund
research.

New York Times, a nationally distributed newspaper which regularly
covers financial news.

Personal Investing News, a monthly news publication that often reports
on investment opportunities and market conditions.

Personal Investor, a monthly investment advisory publication that
includes a "Mutual Funds Outlook" section reporting on mutual fund
performance measures, yields, indices and portfolio holdings.

Success, a monthly magazine targeted to the world of entrepreneurs and
growing business, often featuring mutual fund performance data.

U.S. News and World Report, a national business weekly that periodically
reports mutual fund performance data.

ValueLine, a biweekly publication that reports on the largest 15,000
mutual funds.

33
<PAGE>

Wall Street Journal, a Dow Jones and Company, Inc. newspaper which
regularly covers financial news.

Weisenberger Investment Companies Services, an annual compendium of
information about mutual funds and other investment companies, including
comparative data on funds' backgrounds, management policies, salient
features, management results, income and dividend records, and price
ranges.

Working Women, a monthly publication that features a "Financial
Workshop" section reporting on the mutual fund/financial industry.

Economic and Market Information

Advertising and sales literature of a Fund may include discussions of economic,
financial and political developments and their effect on the securities market.
Such discussions may take the form of commentary on these developments by Fund
portfolio managers and their views and analysis on how such developments could
affect the Funds. In addition, advertising and sales literature may quote
statistics and give general information about the mutual fund industry,
including the growth of the industry, from sources such as the Investment
Company Institute ("ICI").

VALUATION OF SECURITIES; REDEMPTIONS AND PURCHASES IN KIND

The net asset value ("NAV") per Share is calculated once on each Valuation Day
as of the close of regular trading on the NYSE (the "Valuation Time"), which is
currently 4:00 p.m., Eastern time or in the event that the NYSE closes early, at
the time of such early closing. The NAV per Share is computed by dividing the
value of the Fund's assets (i.e., the value of its investment in the Portfolio
and other assets), less all liabilities attributable to the Shares, by the total
number of Shares outstanding as of the Valuation Time. The Portfolio's
securities and other assets are valued primarily on the basis of market
quotations or, if quotations are not readily available, by a method which the
Portfolio's Board of Trustees believes accurately reflects fair value.

Under procedures adopted by the Board, a NAV for a Fund later determined to have
been inaccurate for any reason will be recalculated. Purchases and redemptions
made at a NAV determined to have been inaccurate will be adjusted, although in
certain circumstances, such as where the difference between the original NAV and
the recalculated NAV divided by the recalculated is 0.005 (1/2 of 1%) or less or
shareholder transactions are otherwise insubstantially affected, further action
is not required.

34
<PAGE>
Equity and debt securities (other than short-term debt obligations maturing in
60 days or less), including listed securities and securities for which price
quotations are available, will normally be valued on the basis of market
valuations furnished by a pricing service. Such market valuations may represent
the last quoted price on the securities major trading exchange or may be
determined through use of matrix pricing. In matrix pricing, pricing services
may use various pricing models, involving comparable securities, historic
relative price movements, economic factors and dealer quotations.
Over-the-counter securities will normally be valued at the bid price. Short-term
debt obligations and money market securities maturing in 60 days or less are
valued at amortized cost, which approximates market.

Securities for which market quotations are not readily available are valued by
Bankers Trust pursuant to procedures adopted by each Portfolio's Board of
Trustees. It is generally agreed that securities for which market quotations are
not readily available should not be valued at the same value as that carried by
an equivalent security which is readily marketable.

35
<PAGE>
The problems inherent in making a good faith determination of value are
recognized in the codification effected by SEC Financial Reporting Release No. 1
("FRR 1" (formerly Accounting Series Release No. 113)) which concludes that
there is "no automatic formula" for calculating the value of restricted
securities. It recommends that the best method simply is to consider all
relevant factors before making any calculation. According to FRR 1 such factors
would include consideration of the:

type of security involved, financial statements, cost at date of
purchase, size of holding, discount from market value of
unrestricted securities of the same class at the time of
purchase, special reports prepared by analysts, information as to
any transactions or offers with respect to the security,
existence of merger proposals or tender offers affecting the
security, price and extent of public trading in similar
securities of the issuer or comparable companies, and other
relevant matters.

To the extent that a Portfolio purchases securities which are
restricted as to resale or for which current market quotations
are not readily available, the Adviser of the Portfolio will
value such securities based upon all relevant factors as outlined
in FRR 1.

36
<PAGE>

Purchase of Shares

Purchase orders for Shares (including those purchased through a Service Agent)
that are transmitted to the Trust's Transfer Agent (the "Transfer Agent"), prior
to the Valuation Time on any Valuation Day will be effective at that day's
Valuation Time. The Trust and Transfer Agent reserve the right to reject any
purchase order. Shares must be purchased in accordance with procedures
established by the Transfer Agent and each Service Agent. It is the
responsibility of each Service Agent to transmit to the Transfer Agent purchase
and redemption orders and to transmit to Bankers Trust as the Trust's custodian
(the "Custodian") purchase payments by the following business day (trade date +
1) after an order for shares is placed. A shareholder must settle with the
Service Agent for his or her entitlement to an effective purchase or redemption
order as of a particular time. Because Bankers Trust is the Custodian and
Transfer Agent of the Trust, funds may be transferred directly from or to a
customer's account held with Bankers Trust to settle transactions with the Fund
without incurring the additional costs or delays associated with the wiring of
federal funds.

Certificates for Shares will not be issued. Each shareholder's account will be
maintained by a Service Agent or Transfer Agent.

Minimum Investments

To Open an Account $2,500
For retirement accounts 500
Through automatic investment plans 1,000

To Add to an Account $250
For retirement accounts 100
Through automatic investment plan 100

Minimum Balance $1,000

For retirement accounts None

37
<PAGE>

BT Service Center
P.O. Box 419210
Kansas City, MO 64141-6210

Overnight mailings:

BT Service Center
210 West 10th Street, 8th Floor
Kansas City, MO 64105-1716

If you have money invested in a fund in the BT Family of Funds, you can:

o Mail an account application with a check,

o Wire money into your account,

o Open an account by exchanging from another fund in the BT Family of
Funds, or

o Contact your Service Agent or Investment Professional.

38
<PAGE>

Additional Information About Buying Shares
<TABLE>

<CAPTION>
<S> <C> <C>
TO OPEN AN ACCOUNT TO ADD TO AN ACCOUNT
By Wire Call the BT Service Center at Call your Investment
1-800-730-1313 to receive wire Professional or wire
instructions for account additional investment to:
establishment.

Routing No.: 021001033
Attn: Bankers Trust/IFTC
Deposit
DDA No.: 00-226-296
FBO: (Account name)
(Account Number)
Credit: (Fund name and number)

Investment Capital
Appreciation Fund - 465
Investment Small Cap
Fund - 498

PLEASE NOTE THAT YOU MUST CALL THE BT SERVICE CENTER TO
PLACE YOUR TRADE THE DAY YOU WISH TO BUY SHARES TO NOTIFY US
OF THE WIRE TRANSFER AND TO INDICATE THE FUND IN WHICH YOU
INTEND TO INVEST TO RECEIVE THAT DAY'S PRICE.

</TABLE>

39
<PAGE>
<TABLE>

<S> <C> <C>
By Phone Contact your Service Agent, Contact your Service Agent,
Investment Professional, or call Investment Professional, or call
BT's Service Center at BT's Service Center at

1-800-730-1313. If you are an 1-800-730-1313. If you are an
existing Shareholder, you may existing Shareholder, you may
exchange from another BT account exchange from another BT account
with the same registration, with the same registration,
including name, address, and including name, address, and
taxpayer ID number. You may only taxpayer ID number.
order exchange over the phone if
your account is authorized to do so.

By Mail Complete and sign the account Make your check payable to the
application. Make your check complete name of the Fund of your
payable to the complete name of the choice. Indicate your Fund account
Fund of your choice. Mail to the number on your check and mail to
appropriate address indicated on the the address printed on your account
application. statement.

</TABLE>

Redemption of Shares

40
<PAGE>

Redemption orders are processed without charge by the Trust. A Service Agent or
the Trust may on at least 30 days' notice involuntarily redeem a shareholder's
account with a Fund having a balance below the minimum, but not if an account is
below the minimum due to change in market value. See "Minimum Investments" above
for minimum balance amounts.

If you are selling some but not all of your non-retirement account Shares, leave
at least $1,000 worth of shares in the account to keep it open.

To sell Shares by bank wire you will need to sign up for these services in
advance when completing your account application.

41
<PAGE>

o Your account registration has changed within the last 30 days,

o The check is being mailed to a different address than the one on your
account (record address),

o The check is being made payable to someone other than the account
owner,

o The redemption proceeds are being transferred to a BT account with a
different registration, or

o You wish to have redemption proceeds wired to a non-predesignated
bank account.

A signature guarantee is also required if you change the pre-designated bank
information for receiving redemption proceeds on your account.

Additional Information About Selling Shares

42
<PAGE>

BT Service Center
P.O. Box 419210
Kansas City, MO 64141-6210

Overnight mailings:

BT Service Center
210 West 10th Street, 8th Floor
Kansas City, MO 64105-1716

For a Business or Organization account, at least one person authorized
by corporate resolution to act on the account must sign the letter.

Unless otherwise instructed, the Transfer Agent will send a check to the
account address of record.

43
<PAGE>

Investor Services

BT Investment Funds provide a variety of services to help you manage your
account.

Information Services

Statements and reports that your Investment Professional or the Transfer Agent
may send to you include the following:

o Confirmation statements (after every transaction that affects your
account balance, including distributions or your account registration)

o Account statements (monthly)

o Financial reports (every six months)

To reduce expenses, only one copy of most financial reports will be mailed, even
if you have more than one account in the Fund. Call your Investment Professional
or the BT Service Center at 1-800-730-1313 if you need additional copies of
financial reports.

Exchange Privilege

o Call your Service Agent for information and a prospectus. Read the
prospectus before exchanging into a Fund.

o Complete and sign an application, taking care to register your new
account in the same name, address and taxpayer identification number
as your existing account(s).

o Each exchange represents the sale of shares of one fund and the
purchase of shares of another, which may produce a gain or loss for
tax purposes. Your Service Agent will receive a written confirmation
of each exchange transaction.

o Exchanges out of the Fund may be limited to four per calendar year
and any exchange may have tax consequences for you.

O The Fund reserves the right to terminate or modify the exchange
privilege in the future.

44
<PAGE>

Systematic Programs

To move money from your bank account to BT Investment Funds
<TABLE>
<CAPTION>
<S> <C> <C>

MINIMUM MINIMUM
INITIAL SUBSEQUENT FREQUENCY SETTING UP OR CHANGING
$1,000 $100 Monthly, bimonthly, For a new account, complete the
quarterly or semi- appropriate section on the
annually application.

For existing accounts, call your
Investment Professional for an
application. To change the amount or
frequency of your investment,
contact your Investment Professional
directly or call 1-800-730-1313.
Call at least 10 business days prior
to your next scheduled investment date.

Systematic Withdrawal Program lets you set up periodic redemptions from your
account.

MINIMUM FREQUENCY SETTING UP OR CHANGING
$100 Monthly, quarterly, To establish, call your Investment Professional
semi-annually or or call 1-800-730-1313 after your account is open.
annually The accounts from which the withdrawals will be
processed must have a minimum
balance of $10,000, other than
retirement accounts subject to
required minimum
distributions.

</TABLE>

Tax-Saving Retirement Plans

Retirement plans offer significant tax savings and are available to individuals,
partnerships, small businesses, corporations, nonprofit organizations and other
institutions. Contact Bankers Trust for further information. Bankers Trust can
set up your new account in the Fund under a number of tax-savings or
tax-deferred plans. Minimums may differ from those listed elsewhere in this
Prospectus.

o Individual Retirement Accounts (IRAs): personal savings plans that
offer tax advantages for individuals to set aside money for
retirement and allow new contributions of $2,000 per tax year.

o Rollover IRAs: tax-deferred retirement accounts that retain the
special tax advantages of lump sum distributions from qualified
retirement plans and transferred IRA accounts.

45
<PAGE>

Redemptions and Purchases in Kind

The Trust, on behalf of each Fund, and each Portfolio reserve the right, if
conditions exist which make cash payments undesirable, to honor any request for
redemption or withdrawal by making payment in whole or in part in readily
marketable securities chosen by the Trust, or the Portfolio, as the case may be,
and valued as they are for purposes of computing the Fund's or the Portfolio's
net asset value, as the case may be (a redemption in kind). If payment is made
to a Fund shareholder in securities, an investor, including the Fund, may incur
transaction expenses in converting these securities into cash. The Trust, on
behalf of each Fund, and each Portfolio have elected, however, to be governed by
Rule 18f-1 under the 1940 Act as a result of which each Fund and each Portfolio
are obligated to redeem shares or beneficial interests, as the case may be, with
respect to any one investor during any 90-day period, solely in cash up to the
lesser of $250,000 or 1% of the net asset value of the Fund or the Portfolio, as
the case may be, at the beginning of the period.

Each Portfolio has agreed to make a redemption in kind to the corresponding Fund
whenever the Fund wishes to make a redemption in kind and therefore shareholders
of the Fund that receive redemptions in kind will receive portfolio securities
of the corresponding Portfolio and in no case will they receive a security
issued by the Portfolio. Each Portfolio has advised the Trust that the Portfolio
will not redeem in kind except in circumstances in which the Fund is permitted
to redeem in kind or unless requested by the Fund.

46
<PAGE>

Each Fund may, at its own option, accept securities in payment for shares. The
securities delivered in payment for shares are valued by the method described
under "Valuation of Securities" as of the day the Fund receives the securities.
This may be a taxable transaction to the shareholder. (Consult your tax adviser
for future tax guidance.) Securities may be accepted in payment for shares only
if they are, in the judgment of the Adviser, appropriate investments for the
Fund's corresponding Portfolio. In addition, securities accepted in payment for
shares must: (i) meet the investment objective and policies of the acquiring
Fund's corresponding Portfolio; (ii) be acquired by the applicable Fund for
investment and not for resale (other than for resale to the Fund's corresponding
Portfolio); (iii) be liquid securities which are not restricted as to transfer
either by law or liquidity of the market; and (iv) if stock, have a value which
is readily ascertainable as evidenced by a listing on a stock exchange,
over-the-counter market or by readily available market quotations from a dealer
in such securities. Each Fund reserves the right to accept or reject at its own
option any and all securities offered in payment for its shares.

Trading in Foreign Securities

Trading in foreign cities may be completed at times which vary from the closing
of the New York Stock Exchange ("NYSE"). In computing the net asset values, the
Funds value foreign securities at the latest closing price on the exchange on
which they are traded immediately prior to the closing of the NYSE. Similarly,
foreign securities quoted in foreign currencies are translated into U.S. dollars
at the foreign exchange rates.

Occasionally, events that affect values and exchange rates may occur between the
times at which they are determined and the closing of the NYSE. If such events
materially affect the value of portfolio securities, these securities may be
valued at their fair value as determined in good faith by the Trustees, although
the actual calculation may be done by others.

MANAGEMENT OF THE TRUST AND THE PORTFOLIOS

The Trust and each Portfolio are governed by a Board of Trustees which is
responsible for protecting the interests of investors. A majority of the
Trustees who are not "interested persons" (as defined in the 1940 Act) of the
Trust or the Portfolio, as the case may be, have adopted written procedures
reasonably appropriate to deal with potential conflicts of interest arising from
the fact that some of the same individuals are Trustees of the Trust and the
Portfolios, up to and including creating separate boards of trustees.

Each Board of Trustees is composed of persons experienced in financial matters
who meet throughout the year to oversee the activities of the Funds or
Portfolios they represent. In addition, the Trustees review contractual
arrangements with companies that provide services to the Funds/Portfolios and
review the Funds' performance.

The Trustees and officers of the Trust and Portfolios, their birthdate and their
principal occupations during the past five years are set forth below. Their
titles may have varied during that period. Unless otherwise indicated, the
address of each officer is Clearing Operations, P.O. Box 897, Pittsburgh,
Pennsylvania 05230-0897.

47
<PAGE>

Trustees of the Trust

S. LELAND DILL (birthdate: March 28, 1930 ) -- Trustee; Retired; Director,
Coutts (U.S.A.) International; Coutts Trust Holdings Ltd; Director, Zweig Series
Trust; formerly Partner of KPMG Peat Marwick; Director, Vinters International
Company Inc.; General Partner of Pemco (an investment company registered under
the 1940 Act). His address is 5070 North Ocean Drive, Singer Island, Florida
33404.

Trustees of the Portfolios

S. LELAND DILL

PHILIP SAUNDERS, JR.

Officers of the Trust and Portfolios

Unless otherwise specified, each officer listed below holds the same position
with the Trust and each Portfolio. JOHN Y. KEFFER (birthdate: July 15, 1942) --
President and Chief Executive Officer; President, Forum Financial Group.

48
<PAGE>
No person who is an officer or director of Bankers Trust is an officer or
Trustee of the Trust or the Portfolios. No director, officer or employee of ICC
Distributors or any of its affiliates will receive any compensation from the
Trust or the Portfolios for serving as an officer or Trustee of the Trust or a
Portfolio.

Trustee Compensation Table
<TABLE>
<CAPTION>

TOTAL
COMPENSATION
AGGREGATE AGGREGATE FROM FUND
NAME OF PERSON, COMPENSATION COMPENSATION COMPLEX***
POSITION FROM TRUST* FROM PORTFOLIOS** PAID TO
TRUSTEES(+) ----------- ----------------- -------------
- ---------------
<S> <C> <C> <C>
S. Leland Dill,
Trustee of Trust and Portfolios $14,471.17 $1,869.67 $35,000
Kelvin J. Lancaster,
Trustee of Trust $24,338.66 N/A $35,000
Philip Saunders, Jr.,
Trustee of Trust and Portfolios $14,325.38 $1,183.54 $35,000
Charles P. Biggar,
Trustee of Portfolios N/A $2,211.69 $35,000
</TABLE>

* The provided is for the BT Investment Funds, which is comprised of 17 funds,
for the year ended September 30, 1998.

** Information provided is for the Capital Appreciation Portfolio and BT
Investment Portfolios, which is comprised of 14 funds, for the year ended
September 30, 1998.

*** Aggregated information is furnished for the BT Family of Funds which
consists of the following: BT Investment Funds, BT Institutional
Funds, BT Pyramid Mutual Funds, BT Advisor Funds, BT Investment
Portfolios, Cash Management Portfolio, Treasury Money Portfolio, Tax
Free Money Portfolio, NY Tax Free Money Portfolio, International
Equity Portfolio, Intermediate Tax Free Portfolio, Asset Management
Portfolio, Equity 500 Index Portfolio and Capital Appreciation
Portfolio for the year ended September 30, 1998.

49
<PAGE>

Bankers Trust reimbursed the Funds and Portfolios for a portion of their
Trustees fees for the period above. See "Investment Adviser" and "Administrator"
below.

As of December 31, 1998, the Trustees and Officers of the Trust and the
Portfolios owned in the aggregate less than 1% of the shares of any Fund or the
Trust (all series taken together).

As of December 31, 1998, the following shareholders of record owned 5% or more
of the outstanding voting shares of Small Cap Fund: Bankers Trust Company as
Trustee for Westinghouse Savannah River/Bechtel Savannah River Inc. Savings and
Investment Plan, Jersey City, New Jersey, owned approximately 3,425,177 shares
(29%); Charles Schwab & Co., San Francisco, California, owned approximately
697,072 shares (6%); Bankers Trust as Trustee for Sealed Air Thrift Plan &
Profit Sharing Plan, Jersey City, New Jersey, owned approximately 614,826 shares
(5%).

Investment Adviser

The Trust has not retained the services of an investment adviser since the Trust
seeks to achieve the investment objective of each of its Funds by investing all
the Assets of the Fund in the corresponding Portfolio. Each Portfolio has
retained the services of Bankers Trust as Adviser.

Under the terms of each Portfolio's investment advisory agreement with Bankers
Trust (the "Advisory Agreement"), Bankers Trust manages the Portfolio subject to
the supervision and direction of the Board of Trustees of the Portfolio. Bankers
Trust will: (i) act in strict conformity with each Portfolio's Declaration of
Trust, the 1940 Act and the Investment Advisers Act of 1940, as the same may
from time to time be amended; (ii) manage each Portfolio in accordance with the
Portfolio's investment objectives, restrictions and policies; (iii) make
investment decisions for each Portfolio; and (iv) place purchase and sale orders
for securities and other financial instruments on behalf of each Portfolio.

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Bankers Trust bears all expenses in connection with the performance of services
under each Advisory Agreement. The Trust and each Portfolio bears certain other
expenses incurred in its operation, including: taxes, interest, brokerage fees
and commissions, if any; fees of Trustees of the Trust or the Portfolio who are
not officers, directors or employees of Bankers Trust, ICC Distributors or any
of their affiliates; SEC fees and state Blue Sky qualification fees; charges of
custodians and transfer and dividend disbursing agents; certain insurance
premiums; outside auditing and legal expenses; costs of maintenance of corporate
existence; costs attributable to investor services, including, without
limitation, telephone and personnel expenses; costs of preparing and printing
prospectuses and statements of additional information for regulatory purposes
and for distribution to existing shareholders; costs of shareholders' reports
and meetings of shareholders, officers and Trustees of the Trust or the
Portfolio; and any extraordinary expenses.

Bankers Trust has more than 50 years of experience managing retirement assets
for the nation's largest corporations and institutions. In the past, these
clients have been serviced through separate account and commingled fund
structures. Now, the BT Family of Funds brings Bankers Trust's extensive
investment management expertise--once available to only the largest institutions
in the U.S.--to individual investors. Bankers Trust's officers have had
extensive experience in managing investment portfolios having objectives similar
to those of each Portfolio.

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The Investment Advisory Agreement provides for each Portfolio to pay Bankers
Trust a fee, accrued daily and paid monthly, equal on an annual basis to the
following percentages of the average daily net assets of the Portfolio for its
then-current fiscal year: Capital Appreciation Portfolio, 0.65% and Small Cap
Portfolio, 0.65%. Under certain circumstances Bankers Trust has agreed to pay
fees to certain securities brokers, dealers and other entities that facilitate
the sale of Fund shares, and in connection therewith provide administrative,
shareholder, or distribution related services to the Fund or its shareholders.
Fees paid to entities that administer mutual fund "supermarkets" may be higher
than fees paid for other types of services.

For the fiscal years ended September 30, 1998, 1997, and 1996, Bankers Trust
accrued $252,946, $340,261, and $1,225,764, respectively, in compensation for
investment advisory services provided to Capital Appreciation Portfolio. During
the same periods, Bankers Trust reimbursed $101,826, $109,433, and $319,524,
respectively, to the Portfolio to cover expenses.

For the fiscal years ended September 30, 1998, 1997 and 1996, Bankers Trust
accrued $1,520,784, $1,278,294, and $1,293,449, respectively, in compensation
for investment advisory services provided to Small Cap Portfolio. During the
same periods, Bankers Trust reimbursed $387,616, $325,723, and $331,176,
respectively, to the Portfolio to cover expenses.

Bankers Trust may have deposit, loan and other commercial banking relationships
with the issuers of securities which may be purchased on behalf of the
Portfolios, including outstanding loans to such issuers which could be repaid in
whole or in part with the proceeds of securities so purchased. Such persons
issue, deal, trade and invest in securities for their own accounts and are among
the leading market participants with respect to various types of such
securities. Bankers Trust has informed the Portfolios that, in making its
investment decisions, it does not obtain or use material inside information in
its possession or in the possession of any of its affiliates. In making
investment recommendations for the Portfolios, Bankers Trust will not inquire or
take into consideration whether an issuer of securities proposed for purchase or
sale by a Portfolio is a customer of Bankers Trust, its parent or its
subsidiaries or affiliates and, in dealing with its customers, Bankers Trust,
its parent, subsidiaries and affiliates will not inquire or take into
consideration whether securities of such customers are held by any fund managed
by Bankers Trust or any such affiliate.

Administrator

Under its Administration and Services Agreement with the Trust, the Adviser
calculates the net asset value of the Funds and generally assists the Board of
Trustees of the Trust in all aspects of the administration and operation of the
Trust. The Administration and Services Agreement provides for the Trust to pay
the Adviser a fee, accrued daily and paid monthly, equal on an annual basis to
0.65% of the average daily net assets of each Fund for its then-current fiscal
year.

Under an Administration and Services Agreement with the Portfolio, the Adviser
calculates the value of the assets of the Portfolio and generally assists the
Board of Trustees of the Portfolio in all aspects of the administration and
operation of the Portfolio. The Administration and Services Agreement provides
for the Portfolio to pay the Adviser a fee, computed daily and paid monthly,
equal on an annual basis to 0.10% of each Portfolio's average daily net assets
for its then-current fiscal year. Under the Administration and Services
Agreement, the Adviser may delegate one or more of its responsibilities to
others, including affiliates of ICC Distributors, at the Adviser's expense.

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Under the administration and services agreements, the Adviser is obligated on a
continuous basis to provide such administrative services as the Board of
Trustees of the Trust and each Portfolio reasonably deem necessary for the
proper administration of the Trust or a Portfolio. The Adviser will generally
assist in all aspects of the Funds' and Portfolios' operations; supply and
maintain office facilities (which may be in Bankers Trust's own offices),
statistical and research data, data processing services, clerical, accounting,
bookkeeping and recordkeeping services (including without limitation the
maintenance of such books and records as are required under the 1940 Act and the
rules thereunder, except as maintained by other agents), executive and
administrative services, and stationery and office supplies; prepare reports to
shareholders or investors; prepare and file tax returns; supply financial
information and supporting data for reports to and filings with the SEC and
various state Blue Sky authorities; supply supporting documentation for meetings
of the Board of Trustees; provide monitoring reports and assistance regarding
compliance with Declarations of Trust, by-laws, investment objectives and
policies and with Federal and state securities laws; arrange for appropriate
insurance coverage; calculate net asset values, net income and realized capital
gains or losses; and negotiate arrangements with, and supervise and coordinate
the activities of, agents and others to supply services.

Pursuant to a sub-administration agreement (the "Sub-Administration Agreement"),
Forum Financial ("Forum") performs such sub-administration duties for the Trust
and the Portfolios as from time to time may be agreed upon by the Adviser and
Forum. The Sub-Administration Agreement provides that Forum will receive such
compensation as from time to time may be agreed upon by Forum and the Adviser.
All such compensation will be paid by the Adviser.

For the fiscal years ended September 30, 1998, 1997, and 1996, Bankers Trust
accrued $252,297, $338,831, and $405,364, respectively, in compensation for
administrative and other services provided to the Capital Appreciation Fund.
During the same periods, Bankers Trust reimbursed $48,662, $41,894, and $57,379,
respectively, to cover expenses. For the same periods, Bankers Trust received
$38,915, $52,348, and $188,579, respectively, in compensation for administrative
and other services provided to Capital Appreciation Portfolio.

For the fiscal years ended September 30, 1998, 1997, and 1996 , Bankers Trust
accrued $1,518,290, $1,273,452, and $1,285,892, respectively, in compensation
for administrative and other services provided to Small Cap Fund. During the
same periods, Bankers Trust reimbursed $61,829, $50,637, and $109,960,
respectively, to cover expenses. For the same periods, Bankers Trust received
$233,967, $196,661, and $198,992, respectively, in compensation for
administrative and other services provided to Small Cap Portfolio.

Bankers Trust has agreed that if in any fiscal year the aggregate expenses of
any Fund and its respective Portfolio (including fees pursuant to the Advisory
Agreement, but excluding interest, taxes, brokerage and, if permitted by the
relevant state securities commissions, extraordinary expenses) exceed the
expense limitation of any state having jurisdiction over a Fund, Bankers Trust
will reimburse the Fund for the excess expense to the extent required by state
law. As of the date of this SAI, the most restrictive annual expense limitation
applicable to any Fund is 2.50% of the Fund's first $30 million of average
annual net assets, 2.00% of the next $70 million of average annual net assets
and 1.50% of the remaining average annual net assets.

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Distributor

Service Agent

Distributor

ICC Distributors is the principal distributor for shares of the Funds. ICC
Distributors is a registered broker/dealer and is unaffiliated with Bankers
Trust. The principal business address of ICC Distributors is Two Portland
Square, Portland, Maine 04101.

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Service Agent

All shareholders must be represented by a Service Agent. Bankers Trust acts as a
Service Agent pursuant to its Administration and Services Agreement with the
Trust and receives no additional compensation from the Funds for such
shareholder services. The service fees of any other Service Agents, including
broker-dealers, will be paid by Bankers Trust from its fees. The services
provided by a Service Agent may include establishing and maintaining shareholder
accounts, processing purchase and redemption transactions, arranging for bank
wires, performing shareholder sub-accounting, answering client inquiries
regarding the Trust, assisting clients in changing dividend options, account
designations and addresses, providing periodic statements showing the client's
account balance, transmitting proxy statements, periodic reports, updated
prospectuses and other communications to shareholders and, with respect to
meetings of shareholders, collecting, tabulating and forwarding to the Trust
executed proxies and obtaining such other information and performing such other
services as the Administrator or the Service Agent's clients may reasonably
request and agree upon with the Service Agent. Service Agents may separately
charge their clients additional fees only to cover provision of additional or
more comprehensive services not already provided under the Administration and
Services Agreement with Bankers Trust, or of the type or scope not generally
offered by a mutual fund, such as cash management services or enhanced
retirement or trust reporting. In addition, investors may be charged a
transaction fee if they effect transactions in Fund shares through a broker or
agent. Each Service Agent has agreed to transmit to shareholders, who are its
customers, appropriate disclosures of any fees that it may charge them directly.

Custodian and Transfer Agent

Bankers Trust, 130 Liberty Street (One Bankers Trust Plaza) , New York, New
York, 10006, serves as Custodian for the Trust and for each Portfolio pursuant
to the administration and services agreements. As Custodian, it holds the Funds'
and each Portfolio's assets. Bankers Trust also serves as transfer agent of the
Trust and of each Portfolio pursuant to the respective administration and
services agreement. Under its transfer agency agreement with the Trust, Bankers
Trust maintains the shareholder account records for each Fund, handles certain
communications between shareholders and the Trust and causes to be distributed
any dividends and distributions payable by the Trust. Bankers Trust may be
reimbursed by the Funds or the Portfolios for its out-of-pocket expenses.
Bankers Trust will comply with the self-custodian provisions of Rule 17f-2 under
the 1940 Act.

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Use of Name

Banking Regulatory Matters

Bankers Trust has been advised by its counsel that in its opinion Bankers Trust
may perform the services for the Portfolios contemplated by the Advisory
Agreements and other activities for the Funds and the Portfolios described in
the Prospectuses and this SAI without violation of the Glass-Steagall Act or
other applicable banking laws or regulations. However, counsel has pointed out
that future changes in either Federal or state statutes and regulations
concerning the permissible activities of banks or trust companies, as well as
future judicial or administrative decisions or interpretations of present and
future statutes and regulations, might prevent Bankers Trust from continuing to
perform those services for the Trust and the Portfolios. State laws on this
issue may differ from the interpretations of relevant Federal law and banks and
financial institutions may be required to register as dealers pursuant to state
securities law. If the circumstances described above should change, the Boards
of Trustees would review the relationships with Bankers Trust and consider
taking all actions necessary in the circumstances.

Counsel and Independent Accountants

Willkie Farr & Gallagher, 787 Seventh Avenue, New York, New York 10019, serves
as Counsel to the Trust and each Portfolio. PricewaterhouseCoopers LLP, 250 West
Pratt Street, Baltimore, MD 21201 acts as Independent Accountants of the Trust
and each Portfolio.

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ORGANIZATION OF THE TRUST

The Trust was organized on July 21, 1986 under the laws of the Commonwealth of
Massachusetts. Each Fund is a mutual fund: an investment that pools
shareholders' money and invests it toward a specified goal. BT Investment
Portfolios is a New York master trust fund. The Capital Appreciation Portfolio
is a New York trust. The Trust offers shares of beneficial interest of separate
series, par value $0.001 per share. The Trust currently consists of 20 separate
series, including the Funds, and BT Investment Portfolios currently consist of
16 separate subtrusts, including the Portfolios. The shares of the other series
of the Trust are offered through separate prospectuses and SAIs. No series of
shares has any preference over any other series. The Trust and BT Investment
Portfolios reserve the right to add additional series in the future. The Trust
also reserves the right to issue more than one class of Shares of each Fund.

When matters are submitted for shareholder vote, shareholders of each Fund will
have one vote for each full share held and proportionate, fractional votes for
fractional shares held. A separate vote of each Fund is required on any matter
affecting the Fund on which shareholders are entitled to vote. Shareholders of
each Fund are not entitled to vote on trust matters that do not affect the Fund.
All series of the Trust will vote together on certain matters, such as electing
trustees or approving independent public accountants. There normally will be no
meetings of shareholders for the purpose of electing Trustees unless and until
such time as less than a majority of Trustees holding office have been elected
by shareholders, at which time the Trustees then in office, will call a
shareholders' meeting for the election of Trustees. Any Trustee may be removed
from office upon the vote of shareholders holding at least two-thirds of the
Trust's outstanding shares at a meeting called for that purpose. The Trustees
are required to call such a meeting upon the written request of shareholders
holding at least 10% of the Trust's outstanding shares. The Trust will also
assist shareholders in communicating with one another as provided for in the
1940 Act.

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The Declaration of Trust of BT Investment Portfolios provide that each Fund and
other entities investing in the Portfolio (e.g., other investment companies,
insurance company separate accounts and common and commingled trust funds) will
each be liable for all obligations of the Portfolio. However, the risk of the
Fund incurring financial loss on account of such liability is limited to
circumstances in which both inadequate insurance existed and the Portfolio
itself was unable to meet its obligations. Accordingly, the Trustees of the
Trust believe that neither the Fund nor its shareholders will be adversely
affected by reason of the Fund's investing in the corresponding Portfolio.

Each series in the Trust will not be involved in any vote involving a Portfolio
in which it does not invest its Assets. Shareholders of all of the series of the
Trust will, however, vote together to elect Trustees of the Trust and for
certain other matters. Under certain circumstances, the shareholders of one or
more series could control the outcome of these votes.

Shareholders generally vote by Fund, except with respect to the election of
Trustees and the ratification of the selection of independent accountants.

Massachusetts law provides that shareholders could under certain circumstances
be held personally liable for the obligations of the Trust. However, the Trust's
Declaration of Trust disclaims shareholder liability for acts or obligations of
the Trust and requires that notice of this disclaimer be given in each
agreement, obligation or instrument entered into or executed by the Trust or a
Trustee. The Declaration of Trust provides for indemnification from the Trust's
property for all losses and expenses of any shareholder held personally liable
for the obligations of the Trust. Thus, the risk of a shareholder's incurring
financial loss on account of shareholder liability is limited to circumstances
in which the Trust itself would be unable to meet its obligations, a possibility
that the Trust believes is remote. Upon payment of any liability incurred by the
Trust, the shareholder paying the liability will be entitled to reimbursement
from the general assets of the Trust. The Trustees intend to conduct the
operations of the Trust in a manner so as to avoid, as far as possible, ultimate
liability of the shareholders for liabilities of the Trust.

The Trust was organized under the name BT Tax-Free Investment Trust and assumed
its current name of BT Investment Funds on May 16, 1988.

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TAXATION

Dividends and Distributions

Each Fund distributes substantially all of its net income and capital gains to
shareholders each year. Each Fund distributes capital gains annually. Unless a
shareholder instructs the Trust to pay such dividends and distributions in cash,
they will be automatically reinvested in additional shares of the Fund.

The Trust intends to qualify annually and to elect each Fund to be treated as a
regulated investment company under Subchapter M of the Code. Provided each Fund
meets the requirements imposed by the Code and distributes all of its income and
gains, a Fund will not pay any federal income or excise taxes.

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Distributions from each Fund's income and short-term capital gains are taxed as
dividends, and long-term capital gain distributions are taxed as long-term
capital gains. Each Fund's capital gain distributions are taxable when they are
paid, whether you take them in cash or reinvest them in additional Shares.
Distributions declared to shareholders of record in October, November or
December and paid in January are taxable on December 31. Each Fund will send
each shareholder a tax statement by January 31 showing the tax status of the
distributions received during the past year.

On the ex-date for a distribution from capital gains, each Fund's Share value is
reduced by the amount of the distribution. If you buy Shares just before the
ex-date ("buying a dividend"), you will pay the full price for the Shares and
then receive a portion of the price back as a taxable distribution.

Taxation of the Funds

As a regulated investment company, each Fund will not be subject to U.S. Federal
income tax on its investment company taxable income and net capital gains (the
excess of net long-term capital gains over net short-term capital losses), if
any, that it distributes to shareholders. The Funds intend to distribute to
their shareholders, at least annually, substantially all of their investment
company taxable income and net capital gains, and therefore do not anticipate
incurring Federal income tax liability.

If for any taxable year a Fund does not qualify for the special federal income
tax treatment afforded regulated investment companies, all of its taxable income
will be subject to federal income tax at regular corporate rates (without any
deduction for distributions to its shareholders). In such event, dividend
distributions would be taxable to shareholders to the extent of current
accumulated earnings and profits, and would be eligible for the dividends
received deduction for corporations in the case of corporate shareholders.

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Each Fund shareholder will receive, if appropriate, various written notices
after the close of the Fund's prior taxable year as to the Federal income status
of his dividends and distributions which were received from the Fund during the
Fund's prior taxable year. Shareholders should consult their tax advisers as to
any state and local taxes that may apply to these dividends and distributions.

Foreign Securities

Income from investments in foreign stocks or securities may be subject to
foreign taxes. Tax conventions between certain countries and the United States
may reduce or eliminate such taxes. It is impossible to determine the effective
rate of foreign tax in advance since the amount of the Portfolio's assets to be
invested in various countries will vary.

If the Portfolio is liable for foreign taxes, and if more than 50% of the value
of the Portfolio's total assets at the close of its taxable year consists of
stocks or securities of foreign corporations (including foreign governments),
the corresponding Fund may make an election pursuant to which certain foreign
taxes paid by the Portfolio would be treated as having been paid directly by
shareholders of the corresponding Fund. Pursuant to such election, the amount of
foreign taxes paid will be included in the income of the corresponding Fund's
shareholders, and such Fund shareholders (except tax-exempt shareholders) may,
subject to certain limitations, claim either a credit or deduction for the
taxes. Each such Fund shareholder will be notified after the close of the
Portfolio's taxable year whether the foreign taxes paid will "pass through" for
that year and, if so, such notification will designate (a) the shareholder's
portion of the foreign taxes paid to each such country and (b) the amount which
represents income derived from sources within each such country.

The amount of foreign taxes for which a shareholder may claim a credit in any
year will generally be subject to a separate limitation for "passive income,"
which includes, among other items of income, dividends, interest and certain
foreign currency gains. Because capital gains realized by the Portfolio on the
sale of foreign securities will be treated as U.S. source income, the available
credit of foreign taxes paid with respect to such gains may be restricted by
this limitation.

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Taxation of the Portfolios

The Portfolios are not subject to Federal income taxation. Instead, the Fund and
other investors investing in a Portfolio must take into account, in computing
their Federal income tax liability, their share of the Portfolio's income,
gains, losses, deductions, credits and tax preference items, without regard to
whether they have received any cash distributions from the Portfolio.

Distributions received by a Fund from the corresponding Portfolio generally will
not result in the Fund recognizing any gain or loss for Federal income tax
purposes, except that: (1) gain will be recognized to the extent that any cash
distributed exceeds the Fund's basis in its interest in the Portfolio prior to
the distribution; (2) income or gain may be realized if the distribution is made
in liquidation of the Fund's entire interest in the Portfolio and includes a
disproportionate share of any unrealized receivables held by the Portfolio; and
(3) loss may be recognized if the distribution is made in liquidation of the
Fund's entire interest in the Portfolio and consists solely of cash and/or
unrealized receivables. A Fund's basis in its interest in the corresponding
Portfolio generally will equal the amount of cash and the basis of any property
which the Fund invests in the Portfolio, increased by the Fund's share of income
from the Portfolio, and decreased by the amount of any cash distributions and
the basis of any property distributed from the Portfolio.

Sale of Shares

Any gain or loss realized by a shareholder upon the sale or other disposition of
Shares of the Fund, or upon receipt of a distribution in complete liquidation of
the Fund, generally will be a capital gain or loss which will be long-term or
short-term, generally depending upon the shareholder's holding period for the
Shares. Any loss realized on a sale or exchange will be disallowed to the extent
the Shares disposed of are replaced (including Shares acquired pursuant to a
dividend reinvestment plan) within a period of 61 days beginning 30 days before
and ending 30 days after disposition of the Shares. In such a case, the basis of
the Shares acquired will be adjusted to reflect the disallowed loss. Any loss
realized by a shareholder on a disposition of Fund Shares held by the
shareholder for six months or less will be treated as a long-term capital loss
to the extent of any distributions of net capital gains received by the
shareholder with respect to such Shares.

Because the tax treatment also depends on your purchase price and your personal
tax position, you should keep your regular account statements to use in
determining your tax.

Foreign Withholding Taxes

Income received by a Portfolio from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries.

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Backup Withholding

The Fund may be required to withhold U.S. Federal income tax at the rate of 31%
of all taxable distributions payable to shareholders who fail to provide the
Fund with their correct taxpayer identification number or to make required
certifications, or who have been notified by the Internal Revenue Service that
they are subject to backup withholding. Corporate shareholders and certain other
shareholders specified in the Code generally are exempt from such backup
withholding. Backup withholding is not an additional tax. Any amounts withheld
may be credited against the shareholder's U.S. Federal income tax liability.

Foreign Shareholders

The tax consequences to a foreign shareholder of an investment in the Fund may
be different from those described herein. Foreign shareholders are advised to
consult their own tax advisers with respect to the particular tax consequences
to them of an investment in the Fund.

Other Taxation

The Trust is organized as a Massachusetts business trust and, under current law,
neither the Trust nor any Fund is liable for any income or franchise tax in the
Commonwealth of Massachusetts, provided that the Fund continues to qualify as a
regulated investment company under Subchapter M of the Code. The investment by
each Fund in the corresponding Portfolio does not cause the Fund to be liable
for any income or franchise tax in the State of New York.

Each Portfolio is a subtrust of BT Investment Portfolios, which is organized as
a New York master trust fund. No Portfolio is subject to any income or franchise
tax in the State of New York or the Commonwealth of Massachusetts.

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FINANCIAL STATEMENTS

The financial statements for each Fund and Portfolio for the period ended
September 30, 1998, are incorporated herein by reference to the Annual Report to
shareholders for each Fund and Portfolio dated September 30, 1998. A copy of a
Fund's and corresponding Portfolio's Annual Report may be obtained without
charge by contacting the respective Fund.

APPENDIX

Description of Moody's Corporate Bond Ratings:

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

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

Description of S&P Corporate Bond Ratings:

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

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

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

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CC - Debt rated CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating.

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

Description of S&P commercial paper ratings:

Description of Moody's commercial paper ratings:

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Description of S&P Municipal Bond Ratings:

AAA - Prime - These are obligations of the highest quality. They have the
strongest capacity for timely payment of debt service.

S&P's letter ratings may be modified by the addition of a plus or a minus sign,
which is used to show relative standing within the major rating categories,
except in the AAA rating category.

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Description of Moody's Municipal Bond Ratings:

Description of S&P Municipal Note Ratings:

Description of Moody's Municipal Note Ratings:

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S&P's Commercial Paper Ratings:

Moody's Commercial Paper Ratings:

<PAGE>

STATEMENT OF
ADDITIONAL INFORMATION

JANUARY 31, 1999

Investment Adviser and Administrator of each Portfolio

BANKERS TRUST COMPANY

Distributor
ICC DISTRIBUTORS, INC.

Custodian and Transfer Agent
BANKERS TRUST COMPANY

Independent Accountants
PRICEWATERHOUSECOOPERS LLP

Counsel
WILLKIE FARR & GALLAGHER

No person has been authorized to give any information or to make any
representations other than those contained in the Trust's Prospectuses, its
Statements of Additional Information or the Trust's official sales literature in
connection with the offering of the Trust's shares and, if given or made, such
other information or representations must not be relied on as having been
authorized by the Trust. Neither the Prospectuses nor this Statement of
Additional Information constitutes an offer in any state in which, or to any
person to whom, such offer may not lawfully be made.

<PAGE>

STATEMENT OF ADDITIONAL INFORMATION

January 31, 1999

BT INVESTMENT FUNDS

o International Equity Fund
o International Small Company Equity Fund
o Global Emerging Markets Equity Fund
o Pacific Basin Equity Fund
o Latin American Equity Fund

BT Investment Funds (the "Trust") is an open-end management investment company
(mutual fund) which consists of a number of separate investment funds. The
shares of the following funds - International Equity Fund, International Small
Company Equity Fund, Global Emerging Markets Equity Fund, Pacific Basin Equity
Fund and Latin American Equity Fund (each, a "Fund" and together the "Funds") -
are described herein. Each of the Funds is a separate series of the Trust.

Unlike other mutual funds, the Trust seeks to achieve the investment objective
of each Fund by investing all the investable assets ("Assets") of the Fund in a
diversified open-end management investment company having the same investment
objectives as the Fund. These investment companies (or a series thereof) are,
respectively, International Equity Portfolio, International Small Company Equity
Portfolio, Global Emerging Markets Equity Portfolio, Pacific Basin Equity
Portfolio, and Latin American Equity Portfolio (collectively, the "Portfolios").
The International Small Company Equity Portfolio, Global Emerging Markets
Portfolio, Pacific Basin Equity Portfolio and Latin American Equity Portfolio
are each a subtrust of BT Investment Portfolios.

Shares of each Fund are sold by ICC Distributors, Inc. ("ICC Distributors"), the
Trust's Distributor, to clients and customers (including affiliates and
correspondents) of Bankers Trust Company ("Bankers Trust"), the Portfolios'
investment adviser ("Adviser"), and to clients and customers of other
organizations. As appropriate, references to the Adviser herein apply to any
sub-adviser which may have day-to-day investment management responsibility for
the Portfolio.

The Trust's Prospectuses for each Fund are each dated January 31, 1999. The
Prospectuses provide the basic information investors should know before
investing. This Statement of Additional Information ("SAI"), which is not a
Prospectus, is intended to provide additional information regarding the
activities and operations of the Trust and should be read in conjunction with
that Fund's Prospectus. You may request a copy of a prospectus or a paper copy
of this SAI, if you have received it electronically, free of charge by calling
the Trust at the telephone number listed below or by contacting any Bankers
Trust service agent ("Service Agent"). This SAI is not an offer of any Fund for
which an investor has not received a Prospectus. Capitalized terms not otherwise
defined in this SAI have the meanings accorded to them in the Trust's
Prospectuses. The financial statements for each Fund and the corresponding
Portfolio for the fiscal year ended September 30, 1998, are incorporated herein
by reference to the Annual Report to shareholders for each Fund and each
Portfolio dated September 30, 1998. A copy of each Fund's and the corresponding
Portfolio's Annual Report may be obtained without charge by calling each Fund at
the telephone number listed below.

BANKERS TRUST COMPANY

Investment Adviser of the Portfolios and Administrator

ICC DISTRIBUTORS, INC.

Distributor

Two Portland Square
Portland, Maine 04101
(800) 730-1313

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Table of Contents

Page

INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS...............................3

Investment Objectives.....................................................3
Investment Policies.......................................................3
Additional Risk Factors..................................................17
Investment Restrictions..................................................26
Portfolio Transactions and Brokerage Commissions.........................29

PERFORMANCE INFORMATION.......................................................31

Standard Performance Information.........................................31
Comparison of Fund Performance...........................................33

Prior Performance of BT Fund Managers (International) Limited and
BT Funds

Management Limited (Global Emerging Markets Equity Fund).................34
Economic and Market Information..........................................36

VALUATION OF SECURITIES; REDEMPTIONS AND PURCHASES IN KIND....................36

Valuation of Securities..................................................36
Purchases of Shares......................................................37
Minimum Investments..................................................38
Additional Information About Buying Shares...........................39
Redemption of Shares.....................................................40
Additional Information About Selling Shares..........................41
Investor Services....................................................41
Information Services.................................................41
Exchange Privilege...................................................42
Systematic Programs..................................................42
Tax-Saving Retirement Plans..........................................43
Redemptions and Purchases in Kind........................................43
Trading in Foreign Securities............................................44

MANAGEMENT OF THE TRUST AND THE PORTFOLIOS....................................45

Trustees of the Trust....................................................45
Trustees of the Portfolios...............................................45
Officers of the Trust and Portfolios.....................................46
Investment Adviser.......................................................47
Sub-Investment Adviser...................................................49
Administrator............................................................50
Custodian and Transfer Agent.............................................51
Use of Name..............................................................51
Banking Regulatory Matters...............................................51
Counsel and Independent Accountants......................................51

ORGANIZATION OF THE TRUST.....................................................52

TAXATION......................................................................53

Dividends and Distributions..............................................53
Taxation of the Funds....................................................54
Taxation of the Portfolios...............................................55
Other Taxation...........................................................56

FINANCIAL STATEMENTS..........................................................56

APPENDIX......................................................................57

2
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INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS

Investment Objectives

The following is a description of each Fund's investment objective. There can,
of course, be no assurance that any Fund will achieve its investment objective.

International Equity Fund's investment objective is long-term capital
appreciation. Under normal circumstances, the Fund invests at least 65% of its
total assets in the stocks and other securities with equity characteristics of
companies based primarily in developed countries outside the United States.

International Small Company Equity Fund's investment objective is long-term
capital appreciation. The Fund will pursue this objective by investing primarily
in stocks and other securities with equity characteristics of small companies in
developed countries outside the United States. The Fund focuses on countries
domiciled in, or doing business in Canada, Japan, the United Kingdom, Germany,
France, Switzerland, the Netherlands, Sweden, Hong Kong, Italy, Norway, Denmark
and Spain. Bankers Trust will seek to identify and invest in low capitalization
equities that will grow substantially over 3 to 5 years and to provide returns
in excess of the Salomon Brothers Extended Market Index of the World ex-U.S.
(Total). It is expected under normal conditions that at least 65% of the
International Small Company Equity Portfolio's assets will be invested in the
equity securities of smaller companies in at least three countries other than
the United States.

Global Emerging Markets Equity Fund's investment objective is long-term capital
growth. The Fund will pursue this objective through investment in stocks and
other equity securities of companies in the world's emerging markets. The Fund
will attempt to outperform the return of the Morgan Stanley Capital
International Emerging Markets Free Total Return Index before expenses, although
there is no assurance it will be able to do so.

Pacific Basin Equity Fund's investment objective is long-term capital
appreciation. The Fund will pursue this objective through investment primarily
in stocks and other equity securities of companies based in the Pacific Basin
region, other than Japan. It is expected under normal conditions that at least
65% of the Pacific Basin Equity Portfolio's assets will be invested in the
equity securities of issuers based in at least three countries in the Pacific
Basin.

Latin American Equity Fund's investment objective is long-term capital
appreciation. The Fund will pursue this objective through investment primarily
in stocks and other equity securities of companies based in Latin America.

3
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Investment Policies

Debt Securities. Although not a principal investment, Global Emerging Markets
Equity Portfolio, Pacific Basin Equity Portfolio, and Latin American Equity
Portfolio may invest in debt securities. Bonds and other debt instruments are
used by issuers to borrow money from investors. The issuer pays the investor a
fixed or variable rate of interest, and must repay the amount borrowed at
maturity. Some debt securities, such as zero coupon bonds, do not pay current
interest, but are purchased at a discount from their face values. Debt
securities, loans, and other direct debt have varying degrees of quality and
varying levels of sensitivity to changes in interest rates. Longer-term bonds
are generally more sensitive to interest rate changes than short-term bonds.

Lower-quality foreign government debt securities are often considered to be
speculative and involve greater risk of default or price changes, or they may
already be in default. These risks are in addition to the general risks
associated with foreign securities. The Portfolios (except Latin American Equity
Portfolio) expect to invest in debt securities in one of the top four rating
categories by Standard & Poor's Ratings Service ("S&P") or Moody's Investors
Service, Inc. ("Moody's"), or comparably rated by another nationally recognized
statistical rating organization ("NRSRO"), or, if not rated by a NRSRO, of
comparable quality as determined by the Adviser at its sole discretion.

4
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Fixed Income Investments (Except for International Equity Portfolio). For
purposes of seeking capital appreciation, the Portfolios may invest up to 35% of
its total assets in debt securities of Latin American issuers which are rated at
least C by S&P or Moody's or, if unrated, of comparable quality in the opinion
of Bankers Trust. As an operating policy, which may be changed by the Board of
Trustees of BT Investment Portfolios, the Portfolio will not invest more than
10% of its total assets in debt securities rated BBB or lower by S&P or Baa or
lower by Moody's. Securities which are rated BBB by S&P or Baa by Moody's
possess speculative characteristics. Bonds rated C by S&P are of the lowest
quality and may be used when the issuer has filed a bankruptcy petition, but
debt payments are still being paid. Moody's lowest rating is C, which is applied
to bonds which have extremely poor prospects of ever attaining any real
investment standing. Certain debt securities can provide the potential for
capital appreciation based on various factors such as changes in interest rates,
economic and market conditions, improvement in an issuer's ability to repay
principal and pay interest and ratings upgrades. Additionally, convertible bonds
offer the potential for capital appreciation through the conversion feature,
which enables the holder of the bond to benefit from increases in the market
price of the securities into which they are convertible.

Lower-Rated Debt Securities ("Junk Bonds") (Latin American Equity Portfolio).
The Latin American Equity Portfolio may invest in lower-rated debt securities.
While the market for high yield corporate debt securities has been in existence
for many years and has weathered previous economic downturns, the 1980's brought
a dramatic increase in the use of such securities to fund highly leveraged
corporate acquisitions and restructuring. Past experience may not provide an
accurate indication of future performance of the high yield bond market,
especially during periods of economic recession. In fact, from 1989 to 1991, the
percentage of lower-rated debt securities that defaulted rose significantly
above prior levels.

The market for lower-rated debt securities may be thinner and less active than
that for higher rated debt securities, which can adversely affect the prices at
which the former are sold. If market quotations are not available, lower- rated
debt securities will be valued in accordance with procedures established by the
Board of Trustees, including the use of outside pricing services. Judgment plays
a greater role in valuing high yield corporate debt securities than is the case
for securities for which more external sources for quotations and last sale
information is available. Adverse publicity and changing investor perception may
affect the ability of outside pricing services to value lower-rated debt
securities and the Portfolios' ability to dispose of these securities.

Since the risk of default is higher for lower-rated debt securities, Bankers
Trust's research and credit analysis are an especially important part of
managing securities of this type held by the Portfolio. In considering
investments for the Portfolio, Bankers Trust will attempt to identify those
issuers of high yielding debt securities whose financial conditions are adequate
to meet future obligations, have improved or are expected to improve in the
future. Bankers Trust's analysis focuses on relative values based on such
factors as interest on dividend coverage, asset coverage, earnings prospects and
the experience and managerial strength of the issuer.

5
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Convertible Securities. A convertible security is a bond or preferred stock
which may be converted at a stated price within a specific period of time into a
specified number of shares of common stock of the same or different issuer.
Convertible securities are senior to common stock in a corporation's capital
structure, but usually are subordinated to non-convertible debt securities.
While providing a fixed income stream--generally higher in yield than in the
income derived from a common stock but lower than that afforded by a
non-convertible debt security--a convertible security also affords an investor
the opportunity, through its conversion feature, to participate in the capital
appreciation of common stock into which it is convertible.

All preferred stocks are also subject to the same types of credit risks of the
issuer as corporate bonds. In addition, because preferred stock is junior to
debt securities and other obligations of an issuer, deterioration in the credit
rating of the issuer will cause greater changes in the value of a preferred
stock than in a more senior debt security with similar yield characteristics.
Preferred stocks may be rated by S&P and Moody's although there is no minimum
rating which a preferred stock must have (and a preferred stock may not be
rated) to be an eligible investment for a Portfolio. The Adviser expects,
however, that generally the preferred stocks in which a Portfolio invests will
be rated at least CCC by S&P or Caa by Moody's or, if unrated, of comparable
quality in the opinion of the Adviser. Preferred stocks rated CCC by S&P are
regarded as predominantly speculative with respect to the issuer's capacity to
pay preferred stock obligations and represent the highest degree of speculation
among securities rated between BB and CCC; preferred stocks rated Caa by Moody's
are likely to be in arrears on dividend payments. Moody's rating with respect to
preferred stocks does not purport to indicate the future status of payments of
dividends.

6
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ADRs, GDRs and EDRs. ADRs, GDRs and EDRs are certificates evidencing ownership
of shares of a foreign-based issuer held in trust by a bank or similar financial
institution. Designed for use in U.S., international and European securities
markets, respectively, ADRs, GDRs and EDRs are alternatives to the purchase of
the underlying securities in their national markets and currencies. ADRs, GDRs
and EDRs are subject to the same risks as the foreign securities to which they
relate.

Short-Term Instruments. Each Portfolio intends to stay invested in the
securities described herein to the extent practical in light of its objective
and long-term investment perspective. However, each Portfolio may invest up to
35% of its total assets in high quality short-term investments with remaining
maturities of 397 days or less, or in money market mutual funds, to meet
anticipated redemptions and expenses for day-to-day operating purposes and up to
100% of its total assets when, in the Adviser's opinion, it is advisable to
adopt a temporary defensive position because of unusual and adverse conditions
affecting the respective markets. When a Portfolio experiences large cash
inflows through the sale of securities and desirable equity securities, that are
consistent with the Portfolio's investment objective, which are unavailable in
sufficient quantities or at attractive prices, each Portfolio may invest in
short-term instruments for a limited time pending availability of such portfolio
securities. Short-term instruments consist of U.S. and non-U.S.: (i) short-term
obligations of sovereign governments, their agencies, instrumentalities,
authorities or political subdivisions; (ii) other short-term debt securities
rated AA or higher by S&P or Aa or higher by Moody's or, if unrated, of
comparable quality in the opinion of Bankers Trust; (iii) commercial paper; (iv)
bank obligations, including negotiable certificates of deposit, time deposits
and banker's acceptances; and (v) repurchase agreements. At the time a Portfolio
invests in commercial paper, bank obligations or repurchase agreements, the
issuer or the issuer's parent must have outstanding debt rated AA or higher by
S&P or Aa or higher by Moody's or outstanding commercial paper or bank
obligations rated A-1 by S&P or Prime-1 by Moody's; or, if no such ratings are
available, the instrument must be of comparable quality in the opinion of
Bankers Trust. These instruments may be denominated in U.S. dollars or in
foreign currencies.

7
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Sovereign and Supranational Debt Obligations. Debt instruments issued or
guaranteed by foreign governments, agencies, and supranational organizations
("sovereign debt obligations"), especially sovereign debt obligations of
developing countries, may involve a high degree of risk, and may be in default
or present the risk of default. The issuer of the obligation or the governmental
authorities that control the repayment of the debt may be unable or unwilling to
repay principal and interest when due, and may require renegotiation or
rescheduling of debt payments. In addition, prospects for repayment of principal
and interest may depend on political as well as economic factors.

Brady Bonds. The Global Emerging Markets Equity Portfolio and The Latin American
Equity Portfolio may invest in "Brady bonds," which have been issued by the
governments of Argentina, Brazil, Costa Rica, Mexico, Nigeria, Philippines,
Uruguay and Venezuela. Most Brady bonds are currently rated below BBB by S&P or
Baa by Moody's.

The Brady Plan was conceived by the U.S. Treasury in the 1980's in an attempt to
produce a debt restructuring program which would enable a debt country to (i)
reduce the absolute level of debt of its creditor banks, and (ii) reschedule its
external debt repayments, based upon its ability to service such debts by
persuading its creditor banks to accept a debt write-off by offering them a
selection of options, each of which represented an attractive substitute for the
nonperforming debt. Although it was envisaged that each debtor country would
agree to a unique package of options with its creditor banks, the plan was that
these options would be based upon the following: (i) a discount bond carrying a
market rate of interest (whether fixed or floating), with principal
collateralized by the debtor country with cash or securities in an amount equal
to at least one year of rolling interest; (ii) a par bond carrying a low rate of
interest (whether fixed or floating), collateralized in the same way as in (i)
above; and (iii) retention of existing debt (thereby avoiding a debt write-off)
coupled with an advance of new money or subscription of new bonds.

8
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The Global Emerging Markets Equity Portfolio and The Latin American Equity
Portfolio may invest in either collateralized or uncollateralized Brady bonds.
U.S. dollar-denominated, collateralized Brady bonds, which may be fixed rate par
bonds or floating rate discount bonds, are collateralized in full as to
principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds. Interest payments on such bonds generally are collateralized by cash or
securities in an amount that in the case of fixed rate bonds, is equal to at
least one year of rolling interest payments or, in the case of floating rate
bonds, initially is equal to at least one year's rolling interest payments based
on the applicable interest rate at the time and is adjusted at regular intervals
thereafter.

Derivatives. Each Portfolio may invest in various instruments that are commonly
known as "derivatives." Generally, a derivative is a financial arrangement, the
value of which is based on, or "derived" from, a traditional security, asset, or
market index. Some derivatives such as mortgage-related and other asset-backed
securities are in many respects like any other investment, although they may be
more volatile or less liquid than more traditional debt securities. There are,
in fact, many different types of derivatives and many different ways to use
them. There are a range of risks associated with those uses. Futures and options
are commonly used for traditional hedging purposes to attempt to protect a fund
from exposure to changing interest rates, securities prices, or currency
exchange rates and as a low cost method of gaining exposure to a particular
securities market without investing directly in those securities. However, some
derivatives are used for leverage, which tends to magnify the effects of an
instrument's price changes as market conditions change. Leverage involves the
use of a small amount of money to control a large amount of financial assets,
and can in some circumstances, lead to significant losses. The Adviser will use
derivatives only in circumstances where they offer the most efficient means of
improving the risk/reward profile of the Portfolio and when consistent with the
Portfolio's investment objective and policies. The use of derivatives for
non-hedging purposes may be considered speculative.

9
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Rule 144A Securities are securities in the United States that are not registered
for sale under federal securities laws but which can be resold to institutions
under SEC Rule 144A. Provided that a dealer or institutional trading market in
such securities exists, these restricted securities are treated as exempt from
the 15% limit on illiquid securities. Under the supervision of the Board of
Trustees of the Portfolios, the Adviser determines the liquidity of restricted
securities and, through reports from the Adviser, the Board will monitor trading
activity in restricted securities. If institutional trading in restricted
securities were to decline, the liquidity of the Portfolios could be adversely
affected.

In reaching liquidity decisions, the Adviser will consider, among other things,
the following factors: (1) the frequency of trades and quotes for the security;
(2) the number of dealers and other potential purchasers or sellers of the
security; (3) dealer undertakings to make a market in the security and (4) the
nature of the security and of the marketplace trades (E.G., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
the transfer).

10
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Lending of Portfolio Securities. Each Portfolio has the authority to lend up to
30% of the total value of its portfolio securities to brokers, dealers and other
financial organizations. The Portfolios will not lend securities to Bankers
Trust, ICC Distributors or their affiliates. By lending its securities, a
Portfolio can increase its income by continuing to receive interest on the
loaned securities as well as by either investing the cash collateral in
short-term securities or obtaining yield in the form of interest paid by the
borrower when U.S. government obligations are used as collateral. There may be
risks of delay in receiving additional collateral or risks of delay in recovery
of the securities or even loss of rights in the collateral should the borrower
of the securities fail financially. Each Portfolio will adhere to the following
conditions whenever its securities are loaned: (i) the Portfolio must receive at
least 100 percent cash collateral or equivalent securities from the borrower;
(ii) the borrower must increase this collateral whenever the market value of the
securities including accrued interest rises above the level of the collateral;
(iii) the Portfolio must be able to terminate the loan at any time; (iv) the
Portfolio must receive reasonable interest on the loan, as well as any
dividends, interest or other distributions on the loaned securities, and any
increase in market value; (v) the Portfolio may pay only reasonable custodian
fees in connection with the loan; and (vi) voting rights on the loaned
securities may pass to the borrower; provided, however, that if a material event
adversely affecting the investment occurs, the Board of Trustees must terminate
the loan and regain the right to vote the securities. Cash collateral may be
invested in a money market fund managed by Bankers Trust (or its affiliates) and
Bankers Trust may serve as a Portfolio's lending agent and may share in revenue
received from securities lending transactions as compensation for this service.

Investment Companies. With respect to certain countries in which capital markets
are either less developed or not easily accessed, investments by a Portfolio may
be made through investment in other registered investment companies that in turn
are authorized to invest in the securities of such countries. Investments in
other investment companies may also be made for other purposes, such as noted
above under "Short-Term Instruments," are limited in amount by the Investment
Company Act of 1940, as amended ("1940 Act") (except each Portfolio may exceed
the applicable percentage limits to the extent permitted by an exemptive order
of the SEC), and will involve the indirect payment of a portion of the expenses,
including advisory fees, of such other investment companies and may result in a
duplication of fees and expenses.

11
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Leverage. The Latin American Equity Portfolio may borrow up to one-third of the
value of its total assets, from banks or through the use of reverse repurchase
agreements, to increase its holdings of portfolio securities. Under the 1940
Act, a Portfolio is required to maintain continuous asset coverage of 300% with
respect to such borrowings and to sell (within three days) sufficient portfolio
holdings to restore such coverage if it should decline to less than 300% due to
market fluctuations or otherwise, even if such liquidations of a Portfolio's
holdings may be disadvantageous from an investment standpoint.

Leveraging by means of borrowing may exaggerate the effect of any increase of
decrease in the value of a Portfolio's securities and the Fund's net asset value
and money borrowed by the Portfolio will be subject to interest and other costs
(which may include commitment fees and/or the cost of maintaining minimum
average balances) which may or may not exceed the income received from the
securities purchased with borrowed funds.

Warrants. Warrants are instruments which entitle the holder to buy underlying
equity securities at a specific price for a specific period of time. A warrant
tends to be more volatile than its underlying securities and ceases to have
value if it is not exercised prior to its expiration date. In addition, changes
in the value of a warrant do not necessarily correspond to changes in the value
of its underlying securities.

12
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A Portfolio may terminate its obligation as the writer of a call or put option
by purchasing an option with the same exercise price and expiration date as the
option previously written. This transaction is called a "closing purchase
transaction." The Portfolio will realize a profit or loss for a closing purchase
transaction if the amount paid to purchase an option is less or more, as the
case may be, than the amount received from the sale thereof. To close out a
position as a purchaser of an option, the Portfolio, may make a "closing sale
transaction" which involves liquidating the Portfolio's position by selling the
option previously purchased. Where the Portfolio cannot effect a closing
purchase transaction, it may be forced to incur brokerage commissions or dealer
spreads in selling securities it receives or it may be forced to hold underlying
securities until an option is exercised or expires.

13
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A Portfolio may engage in over-the-counter options transactions with
broker-dealers who make markets in these options. The ability to terminate
over-the-counter option positions is more limited than with exchange-traded
option positions because the predominant market is the issuing broker rather
than an exchange, and may involve the risk that broker-dealers participating in
such transactions will not fulfill their obligations. To reduce this risk, the
Portfolio will purchase such options only from broker-dealers who are primary
government securities dealers recognized by the Federal Reserve Bank of New York
and who agree to (and are expected to be capable of) entering into closing
transactions, although there can be no guarantee that any such option will be
liquidated at a favorable price prior to expiration. The Adviser will monitor
the creditworthiness of dealers with which the Portfolio enters into such
options transactions under the general supervision of the Portfolios' Trustees.
Unless the Trustees conclude otherwise, each Portfolio intends to treat OTC
options as not readily marketable and therefore subject to each Portfolio's 15%
limitation on investment in illiquid securities.

Options on Securities Indices. In addition to options on securities, each
Portfolio may also purchase and write (sell) call and put options on securities
indices. Such options give the holder the right to receive a cash settlement
during the term of the option based upon the difference between the exercise
price and the value of the index. Such options will be used for the purposes
described above under "Options on Securities."

The International Equity Portfolio and the Pacific Basin Equity Portfolio may,
to the extent allowed by Federal and state securities laws, invest in securities
indices instead of investing directly in individual foreign securities.

Use of options on securities indices also entails the risk that trading in such
options may be interrupted if trading in certain securities included in the
index is interrupted. A Portfolio will not purchase such options unless the
Adviser believes the market is sufficiently developed such that the risk of
trading in such options is no greater than the risk of trading in options on
securities.

14
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Options on Foreign Securities Indices. The Portfolio may purchase and write put
and call options on foreign stock indices listed on domestic and foreign stock
exchanges. The Portfolio may also purchase and write OTC Options on foreign
stock indices. These OTC Options would be subject to the same liquidity and
credit risks noted above with respect to OTC Options on foreign currencies. A
stock index fluctuates with changes in the market values of the stocks included
in the index.

OTC Options are purchased from or sold to securities dealers, financial
institutions or other parties (collectively referred to as "Counterparties" and
individually referred to as a "Counterparty") through direct bilateral agreement
with the Counterparty. In contrast to exchange listed options, which generally
have standardized terms and performance mechanics, all of the terms of an OTC
Option, including such terms as method of settlement, term, exercise price,
premium, guaranties and security, are set by negotiation of the parties.

Unless the parties provide for it, no central clearing or guaranty function is
involved in an OTC Option. As a result, if a Counterparty fails to make or take
delivery of the security, currency or other instrument underlying an OTC Option
it has entered into with the Portfolio or fails to make a cash settlement
payment due in accordance with the terms of that option, the Portfolio will lose
any premium it paid for the option as well as any anticipated benefit of the
transaction. Thus, the Adviser must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC Option will be met.

15
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To the extent permitted by U.S. federal or state securities laws, the Portfolio
may invest in options on foreign stock indices in lieu of direct investment in
foreign securities. The Portfolio may also use foreign stock index options for
hedging purposes.

Currency Exchange Transactions. Because each Portfolio may buy and sell
securities denominated in currencies other than the U.S. dollar and receives
interest, dividends and sale proceeds in currencies other than the U.S. dollar,
a Portfolio from time to time may enter into currency exchange transactions to
convert to and from different foreign currencies and to convert foreign
currencies to and from the U.S. dollar. A Portfolio either enters into these
transactions on a spot (i.e., cash) basis at the spot rate prevailing in the
foreign currency exchange market or uses forward contracts to purchase or sell
foreign currencies.

Forward Currency Exchange Contracts. A forward currency exchange contract is an
obligation by a Portfolio to purchase or sell a specific currency at a future
date, which may be any fixed number of days from the date of the contract.
Forward currency exchange contracts establish an exchange rate at a future date.
These contracts are transferable in the interbank market conducted directly
between currency traders (usually large commercial banks and brokerages) and
their customers. A forward currency exchange contract may not have a deposit
requirement and may be traded at a net price without commission. Each Portfolio
maintains with its custodian a segregated account of cash or liquid securities
in an amount at least equal to its obligations under each forward currency
exchange contract. Neither spot transactions nor forward currency exchange
contracts eliminate fluctuations in the prices of a Portfolio's securities or in
foreign exchange rates, or prevent loss if the prices of these securities should
decline.

Each Portfolio may enter into currency hedging transactions in an attempt to
protect against changes in currency exchange rates between the trade and
settlement dates of specific securities transactions or changes in currency
exchange rates that would adversely affect a portfolio position or an
anticipated investment position. Since consideration of the prospect for
currency parities will be incorporated into Bankers Trust's long-term investment
decisions, a Portfolio will not routinely enter into currency hedging
transactions with respect to security transactions; however the Adviser believes
that it is important to have the flexibility to enter into currency hedging
transactions when it determines that the transactions would be in a Portfolio's
best interest. Although these transactions tend to minimize the risk of loss due
to a decline in the value of the hedged currency, at the same time they tend to
limit any potential gain that might be realized should the value of the hedged
currency increase. The precise matching of the forward contract amounts and the
value of the securities involved will not generally be possible because the
future value of such securities in foreign currencies will change as a
consequence of market movements in the value of such securities between the date
the forward contract is entered into and the date it matures. The projection of
currency market movements is extremely difficult, and the successful execution
of a hedging strategy is highly uncertain.

16
<PAGE>

While these contracts are not presently regulated by the Commodity Futures
Trading Commission ("CFTC"), the CFTC may in the future assert authority to
regulate forward contracts. In such event a Portfolio's ability to utilize
forward contracts may be restricted. Forward contracts may reduce the potential
gain from a positive change in the relationship between the U.S. dollar and
foreign currencies. Unanticipated changes in currency prices may result in
poorer overall performance for a Portfolio than if it had not entered into such
contracts. The use of currency forward contracts may not eliminate fluctuations
in the underlying U.S. dollar equivalent value of the prices of or rates of
return on a Portfolio's foreign currency denominated portfolio securities and
the use of such techniques will subject a Portfolio to certain risks.

The matching of the increase in value of a forward contract and the decline in
the U.S. dollar equivalent value of the foreign currency denominated asset that
is the subject of the hedge generally will not be precise. In addition, a
Portfolio may not always be able to enter into currency forward contracts at
attractive prices and this will limit the Portfolio's ability to use such
contract to hedge or cross-hedge its assets. Also, with regard to a Portfolio's
use of cross-hedges, there can be no assurance that historical correlations
between the movement of certain foreign currencies relative to the U.S. dollar
will continue. Thus, at any time poor correlation may exist between movements in
the exchange rates of the foreign currencies underlying a Portfolio's
cross-hedges and the movements in the exchange rates of the foreign currencies
in which the Portfolio's assets that are the subject of such cross-hedges are
denominated.

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

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

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Futures Contracts and Options on Futures Contracts.

General. The successful use of futures contracts and options thereon draws upon
the Adviser's skill and experience with respect to such instruments and usually
depends on the Adviser's ability to forecast interest rate and currency exchange
rate movements correctly. Should interest or exchange rates move in an
unexpected manner, a Portfolio may not achieve the anticipated benefits of
futures contracts or options on futures contracts or may realize losses and thus
will be in a worse position than if such strategies had not been used. In
addition, the correlation between movements in the price of futures contracts or
options on futures contracts and movements in the price of the securities and
currencies hedged or used for cover will not be perfect and could produce
unanticipated losses.

Futures Contracts. Futures contracts are contracts to purchase or sell a fixed
amount of an underlying instrument, commodity or index at a fixed time and place
in the future. U.S. futures contracts have been designed by exchanges which have
been designated "contracts markets" by the CFTC, and must be executed through a
futures commission merchant, or brokerage firm, which is a member of the
relevant contract market. Futures contracts trade on a number of exchanges and
clear through their clearing corporations. A Portfolio may enter into contracts
for the purchase or sale for future delivery of fixed-income securities, foreign
currencies, or financial indices including any index of U.S. government
securities, foreign government securities or corporate debt securities. A
Portfolio may enter into futures contracts which are based on debt securities
that are backed by the full faith and credit of the U.S. Government, such as
long-term U.S. Treasury Bonds, Treasury Notes, Government National Mortgage
Association ("GNMA") modified pass-through mortgage-backed securities and
three-month U.S. Treasury Bills. A Portfolio may also enter into futures
contracts which are based on bonds issued by governments other than the U.S.
government. Futures contracts on foreign currencies may be used to hedge against
securities that are denominated in foreign currencies.

At the same time a futures contract is entered into, a Portfolio must allocate
cash or securities as a deposit payment ("initial margin"). The initial margin
deposits are set by exchanges and may range between 1% and 10% of a contract's
face value. Daily thereafter, the futures contract is valued and the payment of
"variation margin" may be required, since each day the Portfolio would provide
or receive cash that reflects any decline or increase in the contract's value.

19
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20
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Options on Futures Contracts. Each Portfolio may purchase and write options on
futures contracts for hedging purposes. The purchase of a call option on a
futures contract is similar in some respects to the purchase of a call option on
an individual security. For example, when a Portfolio is not fully invested it
may purchase a call option on an interest rate sensitive futures contract to
hedge against a potential price increase on debt securities due to declining
interest rates. The purchase of a put option on a futures contract is similar in
some respects to the purchase of protective put options on portfolio securities.
For example, a Portfolio may purchase a put option on an interest rate sensitive
futures contract to hedge its portfolio against the risk of a decline in the
prices of debt securities due to rising interest rates.

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

Futures Contracts on Domestic and Foreign Securities Indices. Each Portfolio may
enter into futures contracts providing for cash settlement based upon changes in
the value of an index of domestic or foreign securities. This investment
technique may be used as a low-cost method of gaining exposure to a particular
securities market without investing directly in those securities or to hedge
against anticipated future change in general market prices which otherwise might
either adversely affect the value of securities held by the Portfolio or
adversely affect the prices of securities which are intended to be purchased at
a later date for the Portfolio.

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When used for hedging purposes, each transaction in futures contracts on a
securities index involves the establishment of a position which the Adviser
believes will move in a direction opposite to that of the investment being
hedged. If these hedging transactions are successful, the futures positions
taken for the Portfolio will rise in value by an amount which approximately
offsets the decline in value of the portion of the Portfolio's investments that
are being hedged. Should general market prices move in an unexpected manner, the
full anticipated benefits of futures contracts may not be achieved or a loss may
be realized.

Asset Coverage. To assure that a Portfolio's use of futures and related options,
as well as when-issued and delayed-delivery securities and foreign currency
exchange transactions, are not used to achieve investment leverage, a Portfolio
will cover such transactions, as required under applicable interpretations of
the SEC, either by owning the underlying securities or by segregating with the
Portfolio's Custodian or futures commission merchant liquid securities in an
amount at all times equal to or exceeding the Portfolio's commitment with
respect to these instruments or contracts.

Investment Restrictions on Futures Transactions. A Portfolio will not enter into
any futures contracts or options on futures contracts if immediately thereafter
the amount of margin deposits on all the futures contracts of the Portfolio and
premiums paid on outstanding options on futures contracts owned by the Portfolio
(other than those entered into for bona fide hedging purposes) would exceed 5%
of the Portfolio's net asset value, after taking into account unrealized profits
and unrealized losses on any such contracts.

Additional Risk Factors

In addition to the risks discussed above, each Portfolio's investments may be
subject to the following risk factors:

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Foreign Securities. Each portfolio will, under normal market conditions, invest
a significant portion of its assets in foreign securities. Investors should
realize that investing in securities of foreign issuers involves considerations
not typically associated with investing in securities of companies organized and
operated in the United States. Investors should realize that the value of a
Portfolio's foreign investments may be adversely affected by changes in
political or social conditions, diplomatic relations, confiscatory taxation,
expropriation, nationalization, limitation on the removal of funds or assets, or
imposition or (or change in) exchange control or tax regulations in foreign
countries. In addition, changes in government administrations or economic or
monetary policies in the United States or abroad could result in appreciation or
depreciation of portfolio securities and could favorably or unfavorably affect a
Portfolio's operations, Furthermore, the economies of individual foreign nations
may differ from the U.S. economy, whether favorably or unfavorably, in areas
such as growth or gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency or balance of payments position; it may
also be more difficult to obtain and enforce a judgment against a foreign
issuer. In general, less information is publicly available with respect to
foreign issuers than is available with respect to U.S. companies. Most foreign
companies are also not subject to the uniform accounting and financial reporting
requirements applicable to issuers in the Untied States. Any foreign investments
made by a Portfolio must be made in compliance with U.S. and foreign currency
restrictions and tax laws restricting the amounts and types of foreign
investments.

Because foreign securities generally are denominated and pay dividends or
interest in foreign currencies, the value of the net assets of a Portfolio as
measured in U.S. dollars will be affected favorably or unfavorably by changes in
exchange rates. In order to protect against uncertainty in the level of future
foreign currency exchange rates, a Portfolio is also authorized to enter into
certain foreign exchange transactions. Furthermore, a Portfolio's foreign
investments may be less liquid and their prices may be more volatile than
comparable investments in securities of U.S. companies. The settlement periods
for foreign securities, which are often longer than those for securities of U.S.
issuers, may affect portfolio liquidity. Finally, there may be less government
supervision and regulation of securities exchanges, brokers and issuers in
foreign countries than in the United States.

Emerging Markets. The risks involved when investing in emerging markets are of a
nature generally not encountered when investing in securities traded on major
international markets.

The world's industrialized markets generally include but are not limited to the
following: Australia, Austria, Belgium, Canada, Denmark, Finland, France,
Germany, Hong Kong, Ireland, Italy, Japan, Luxembourg, the Netherlands, New
Zealand, Norway, Singapore, Spain, Sweden, Switzerland, the United Kingdom, and
the United States; the world's emerging markets generally include but are not
limited to the following: Argentina, Bolivia, Brazil, Bulgaria, Chile, China,
Colombia, Costa Rica, the Czech Republic, Ecuador, Egypt, Greece, Hungary,
India, Indonesia, Israel, the Ivory Coast, Jordan, Malaysia, Mexico, Morocco,
Nicaragua, Nigeria, Pakistan, Peru, the Philippines, Poland, Portugal, Romania,
Russia, Slovakia, Slovenia, South Africa, South Korea, Sri Lanka, Taiwan,
Thailand, Turkey, Uruguay, Venezuela, Vietnam and Zimbabwe.

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Investment in securities of issuers based in underdeveloped emerging markets
entails all of the risks of investing in securities of foreign issuers outlined
in the above section to a heightened degree. These heightened risks include: (i)
greater risks of expropriation, confiscatory taxation, nationalization, and less
social, political and economic stability; (ii) the smaller size of the market
for such securities and a low or nonexistent volume of trading, resulting in
lack of liquidity and in price volatility; (iii) certain national policies which
may restrict a Portfolio's investment opportunities including restrictions on
investing in issuers or industries deemed sensitive to relevant national
interests; (iv) accounting, auditing and financial reporting standards
applicable can be less demanding than the levels acceptable in the United States
which can result in incomplete company information; and (v) in the case of
Eastern Europe and in China and other Asian countries, the absence of developed
capital markets and legal structures governing private or foreign investment and
private property and the possibility that recent favorable economic and
political developments could be slowed or reversed by unanticipated events.

Although external debt in most emerging markets is generally falling, it remains
at high levels. This acts as a depressant on economic growth and limits access
to global savings. As a result, many emerging markets are reliant on foreign
capital inflows for fund development. During periods of uncertainty, foreign
capital may be withdrawn from these economies, causing financial market
weakness.

Investments in certain countries may require government approval which may
restrict the size and nature of investments. These restrictions may limit a
Portfolio's access to certain emerging markets. Additionally, the Adviser may be
required to obtain government consent to redeem a Portfolio's capital and
profits. Therefore, a Portfolio could encounter delays or refusals to grant
permission for money to be removed from the country. This could impact the
amount of cash available to meet shareholder redemptions.

In addition to brokerage commissions, custodial services and other costs
relating to investment in emerging markets are generally more expensive than in
the United States. Such markets have been unable to keep pace with the volume of
securities transactions, making it difficult to conduct such transactions. The
inability of a Portfolio to make intended security purchases due to settlement
problems could cause the Portfolio to miss attractive investment opportunities.
Inability to dispose of a security due to settlement problems could result
either in losses to the Portfolio due to subsequent declines in the value of the
security or, if the Portfolio has entered into a contract to sell the security,
could result in possible liability to the purchaser.

It should be noted that developments affecting emerging market investments
cannot always be foreseen. Therefore, a shareholder may find it difficult to
protect their investments against risk.

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Foreign Securities: Special Considerations Concerning Eastern Europe. The
Portfolios may invest in foreign securities issued by Eastern European
countries. Investments in companies domiciled in Eastern European countries may
be subject to potentially greater risks than those of other foreign issuers.
These risks include: (i) potentially less social, political and economic
stability; (ii) the small current size of the markets for such securities and
the low volume of trading, which result in less liquidity and in greater price
volatility; (iii) certain national policies which may restrict a Portfolio's
investment opportunities, including restrictions on investment in issuers or
industries deemed sensitive to national interests; (iv) foreign taxation; (v)
the absence of developed legal structures governing private or foreign
investment or allowing for judicial redress for injury to private property; (vi)
the absence, until recently in certain Eastern European countries, of a capital
market structure or market-oriented economy; and (vii) the possibility that
recent favorable economic developments in Eastern Europe may be slowed or
reversed by unanticipated political or social events in such countries, or in
the Commonwealth of Independent States (consisting of the Republics of the
former Union of Soviet Socialist Republics).

The economic situation remains difficult for Eastern European countries in
transition from central planning, following what has already been a sizable
decline in output. The contraction now appears to be bottoming out in parts of
Eastern Europe. Following three successive years of output declines, there are
preliminary indications of a turnaround in the former Czech and Slovak Federal
Republic, Hungary and Poland; growth in private sector activity and strong
exports now appear to have contained the fall in output. A number of their
governments, including those of Hungary and Poland, are currently implementing
or considering reforms directed at political and economic liberalization,
including efforts to foster multi-party political systems, decentralize economic
planning, and a move toward free-market economies. But key aspects of the reform
and stabilization efforts have not yet been fully implemented, and there remain
risks of policy slippage. At present, no Eastern European country has a
developed stock market, but Poland, Hungary and the Czech Republic have small
securities markets in operation.

In many other countries of the region, output losses have been even larger.
These declines reflect the adjustment difficulties during the early stages of
the transition, high rates of inflation, the compression of imports, disruption
in trade among the countries of the former Soviet Union, and uncertainties about
the reform process itself. Large-scale subsidies are delaying industrial
restructuring and are exacerbating the fiscal situation. A reversal of these
adverse factors is not anticipated in the near term, and output is expected to
decline further in most of these countries. In the Russian Federation and most
other countries of the former Soviet Union, economic conditions are of
particular concern because of economic instability due to political unrest and
armed conflicts in many regions. Further, no accounting standards exist in
Eastern European countries. Although certain Eastern European currencies may be
convertible into U.S. dollars, the conversion rates may be artificial to the
actual market values and may be adverse to each Fund's shareholders.

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Foreign Securities: Special Considerations Concerning Latin America. Investing
in securities of Latin American issuers may entail risks relating to the
potential political and economic instability of certain Latin American countries
and the risks of expropriation, nationalization, confiscation or the imposition
of restrictions on foreign investment and on repatriation of capital invested.
In the event of expropriation, nationalization or other confiscation by any
country, the Fund could lose its entire investment in any such country.

The securities markets of Latin American countries are substantially smaller,
less developed, less liquid and more volatile than the major securities markets
in the U.S. Disclosure and regulatory standards are in many respects less
stringent than U.S. standards. Furthermore, there is a lower level of monitoring
and regulation of the markets and the activities of investors in such markets.

The limited size of many Latin American securities markets and limited trading
volume in the securities of Latin American issuers compared to volume of trading
in the securities of U.S. issuers could cause prices to be erratic for reasons
apart from factors that affect the soundness and competitiveness of the
securities issuers. For example, limited market size may cause prices to be
unduly influenced by traders who control large positions. Adverse publicity and
investors' perceptions, whether or not based on in-depth fundamental analysis,
may decrease the value and liquidity of portfolio securities.

The economies of Latin American countries may be predominantly based in only a
few industries, may be highly vulnerable to changes in local or global trade
conditions, and may suffer from extreme and volatile debt burdens or inflation
rates. Securities of issuers located in Latin America may have limited
marketability and may be subject to more abrupt or erratic price movements.

The Portfolio invests in securities denominated in currencies of Latin American
countries. Accordingly, changes in the value of these currencies against the
U.S. dollar will result in corresponding changes in the U.S. dollar value of the
Portfolio's assets denominated in those currencies.

Some Latin American countries also may have managed currencies, which are not
free floating against the U.S. dollar. In addition, there is risk that certain
Latin American countries may restrict the free conversion of their currencies
into other currencies. Further, certain Latin American currencies may not be
internationally traded. Certain of these currencies have experienced a steep
devaluation relative to the U.S. dollar. Any devaluations in the currencies in
which the Portfolio's securities are denominated may have a detrimental impact
on the Fund's net asset value.

The economies of individual Latin American countries may differ favorably or
unfavorably from the U.S. economy in such respects as the rate of growth of
gross domestic product, the rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position. Certain Latin American
countries have experienced high levels of inflation which can have a
debilitating effect on an economy. Furthermore, certain Latin American countries
may impose withholding taxes on dividends payable to the Portfolio at a higher
rate than those imposed by other foreign countries. This may reduce the Fund's
investment income available for distribution to shareholders.

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Certain Latin American countries such as Argentina, Brazil and Mexico are among
the world's largest debtors to commercial banks and foreign governments. At
times, certain Latin American countries have declared moratoria on the payment
of principal and/or interest on outstanding debt. Investment in sovereign debt
can involve a high degree of risk. The governmental entity that controls the
repayment of sovereign debt may not be able or willing to repay the principal
and/or interest when due in accordance with the terms of such debt. A
governmental entity's willingness or ability to repay principal and interest due
in a timely manner may be affected by, among other factors, its cash flow
situation, the extent of its foreign reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of the debt
service burden to the economy as a whole, the governmental entity's policy
towards the International Monetary Fund, and the political constraints to which
a governmental entity may be subject. Governmental entities may also be
dependent on expected disbursements from foreign governments, multilateral
agencies and others abroad to reduce principal and interest arrearage on their
debt. The commitment on the part of these governments, agencies and others to
make such disbursements may be conditioned on a governmental entity's
implementation of economic reforms and/or economic performance and the timely
service of such debtor's obligations. Failure to implement such reforms, achieve
such levels of economic performance or repay principal or interest when due may
result in the cancellation of such third parties' commitments to lend funds to
the governmental entity, which may further impair such debtor's ability or
willingness to service its debts in a timely manner. Consequently, governmental
entities may default on their sovereign debt.

Holders of sovereign debt, including the Portfolio, may be requested to
participate in the rescheduling of such debt and to extend further loans to
governmental entities. There is no bankruptcy proceeding by which defaulted
sovereign debt may be collected in whole or in part.

Foreign Securities: Special Considerations Concerning the Pacific Basin. Many
Asian countries may be subject to a greater degree of social, political and
economic instability than is the case in the United States and European
countries. Such instability may result from (i) authoritarian governments or
military involvement in political and economic decision-making; (ii) popular
unrest associated with demands for improved political, economic and social
conditions; (iii) internal insurgencies; (iv) hostile relations with neighboring
countries; and (v) ethnic, religious and racial disaffection.

The economies of most of the Asian countries are heavily dependent upon
international trade and are accordingly affected by protective trade barriers
and the economic conditions of their trading partners, principally, the United
States, Japan, China and the European Community. The enactment by the United
States or other principal trading partners of protectionist trade legislation,
reduction of foreign investment in the local economies and general declines in
the international securities markets could have a significant adverse effect
upon the securities markets of the Asian countries.

27
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The securities markets in Asia are substantially smaller, less liquid and more
volatile than the major securities markets in the United States. A high
proportion of the shares of many issuers may be held by a limited number of
persons and financial institutions, which may limit the number of shares
available for investment by a Portfolio. Similarly, volume and liquidity in the
bond markets in Asia are less than in the United States and, at times, price
volatility can be greater than in the United States. A limited number of issuers
in Asian securities markets may represent a disproportionately large percentage
of market capitalization and trading value. The limited liquidity of securities
markets in Asia may also affect a Portfolio's ability to acquire or dispose of
securities at the price and time it wishes to do so. Accordingly, during periods
of rising securities prices in the more illiquid Asian securities markets, a
Portfolio's ability to participate fully in such price increases may be limited
by its investment policy of investing not more than 15% of its net assets in
illiquid securities. Conversely, a Portfolio's inability to dispose fully and
promptly of positions in declining markets will cause the Portfolio's net asset
value to decline as the value of the unsold positions is marked to lower prices.
In addition, the Asian securities markets are susceptible to being influenced by
large investors trading significant blocks of securities.

Many stock markets are undergoing a period of growth and change which may result
in trading volatility and difficulties in the settlement and recording of
transactions, and in interpreting and applying the relevant law and regulations.

The Portfolio invests in securities denominated in currencies of Asian
countries. Accordingly, changes in the value of these currencies against the
U.S. dollar will result in corresponding changes in the U.S. dollar value of the
Portfolio's assets denominated in those currencies.

Foreign Securities: Special Considerations Concerning China and China Region.
China's economic reform plan was designed to bring in foreign investment capital
and technological skills. The result has been a move towards a more mixed
economy away from the previous centrally planned economy. The process of
devolving responsibility for all aspects of enterprise to local management and
authorities continues, even though the system of socialism with Chinese
characteristics involves considerable influence by the central government on
production and marketing.

In order to attract foreign investment, China has since 1978 designated certain
areas of the country where overseas investors can receive special investment
incentives and tax concessions. There are five Special Economic Zones (Shenzhen,
Shantou and Zhuhai in Guangdong Province, Xiamen in Fujian Province and Hainan
Island, which itself is a province). Fourteen coastal cities have been
designated as "open cities" and certain Open Economic Zones have been
established in coastal areas. Shanghai has established the Pudong New Area.
Twenty-seven High and New Technology Industrial Development Zones have been
approved where preferential treatment is given to enterprises which are
confirmed as technology intensive.

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China has had for many centuries a well deserved reputation for being closed to
foreigners, with trade with the outside world being carried on under terms of
extreme restriction and under central control. Such conditions were maintained
in the first thirty years of the Communist regime which began in 1949; however,
there have been several stages of evolution, from the institution of an
industrialization program in the 1950s to a modernization policy commencing in
1978 which combined economic development with the beginnings of opening the
country.

China governmental actions can have a significant effect on the economic
conditions in China, which could adversely affect the value and liquidity of a
Portfolio's investments. Although the Chinese government has recently begun to
institute economic reform policies, there can be no assurances that it will
continue to pursue such policies or, if it does, that such policies will
succeed.

The securities industry in China is not well developed. China has no securities
laws of nationwide applicability. The municipal securities regulations adopted
by Shanghai and Shenzhen municipalities are very new, as are their respective
securities exchanges and other self-regulatory organizations. In addition,
Chinese stockbrokers and other intermediaries may not perform as well as their
counterparts in the United States and other more developed securities markets.
The prices at which a Portfolio may acquire investments may be affected by
trading by persons with material non-public information and by securities
transactions by brokers in anticipation of transactions by a Portfolio in
particular securities.

China does not have a comprehensive system of laws, although substantial changes
have occurred in this regard in recent years. The corporate form of organization
has only recently been permitted in China and national regulations governing
corporations were introduced only in May 1992. Prior to the introduction of such
regulations, Shanghai had adopted a set of corporate regulations applicable to
corporations located or listed in Shanghai, and the relationship between the two
sets of regulations is not clear. Consequently, until a firmer legal basis is
provided, even such fundamental corporate law tenets as the limited liability
status of Chinese issuers and their authority to issue shares remain open to
question. Laws regarding fiduciary duties of officers and directors and the
protection of shareholders are not well developed. China's judiciary is
relatively inexperienced in enforcing the laws that exist, leading to a higher
than usual degree of uncertainty as to the outcome of any litigation. Even where
adequate law exists in China, it may be impossible to obtain swift and equitable
enforcement of such law, or to obtain enforcement of the judgment by a court of
another jurisdiction. The bankruptcy laws pertaining to state enterprises have
rarely been used and are untried in regard to an enterprise with foreign
shareholders, and there can be no assurance that such shareholders, including
the Portfolio, would be able to realize the value of the assets of the
enterprise or receive payment in convertible currency. As the Chinese legal
system develops, the promulgation of new laws, changes to existing laws and the
preemption of local laws by national laws may adversely affect foreign
investors, including the Portfolio. The uncertainties faced by foreign investors
in China are exacerbated by the fact that many laws, regulations and decrees of
China are not publicly available, but merely circulated internally.

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There are currently two officially recognized securities exchanges in China --
The Shanghai Securities Exchange which opened in December 1990 and The Shenzhen
Stock Exchange which opened in July 1991. Shares traded on these Exchanges are
two types -- "A" shares which can be traded only by Chinese investors and "B"
shares which can be traded only by individuals and corporations not resident in
China.

In Shanghai, all "B" shares are denominated in Chinese renminbi ("RMB"), but all
transactions in "B" shares must be settled in U.S. dollars, and all
distributions made on "B" shares are payable in U.S. dollars, the exchange rate
being the weighted average exchange rate for the U.S. dollar as published by the
Shanghai Foreign Exchange Adjustment Centre.

In Shenzhen, the purchase and sale prices for "B" shares are quoted in Hong Kong
dollars. Dividends and other lawful revenue derived from "B" shares are
calculated in RMB but payable in Hong Kong dollars, the rate of exchange being
the average rate published by Shenzhen Foreign Exchange Adjustment Centre.

There are no foreign exchange restrictions on the repatriation of gains made on
or income derived from "B" shares, subject to the payment of taxes imposed by
China thereon.

Company law relating to companies limited by shares and regulations regarding
the issuing of shares by equity joint ventures have not yet been developed on a
national basis. The Shenzhen municipality issued regulations in 1992 relating to
joint stock companies, and the Shanghai municipality has a draft joint stock
company law under review. Regulations governing the trading of securities on
both the Shenzhen and the Shanghai stock exchanges have been issued by each
municipality; there is no national securities legislation as yet.

Economies of countries in the China region may differ favorably or unfavorably
from the U.S. economy in such respects as rate of growth of gross domestic
product, rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments position. As an export-driven economy, the economy of China
is affected by developments in the economies of its principal trading partners.
Revocation by the United States of China's "Most Favored Nation" trading status,
which the U.S. President and Congress reconsider annually, would adversely
affect the trade and economic development of China and Hong Kong. Hong Kong and
Taiwan have limited natural resources, resulting in dependence on foreign
sources for certain raw materials and economic vulnerability to global
fluctuations of price and supply.

30
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31
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High Yield Securities ("Junk Bonds"). Lower-rated long-term securities,
including securities rated from BB to D by S&P or Baa to C by Moody's or, if
unrated, of comparable quality in the opinion of Bankers Trust, will usually
offer higher yields than higher-rated securities. However, there is more risk
associated with these investments. This is because of the reduced
creditworthiness and increased risk of default that these securities carry.
Lower-rated long-term securities generally tend to reflect short-term corporate
and market developments to a greater extent than higher-rated securities which
react primarily to fluctuations in the general level of interest rates. Lower
rated long-term securities also involve greater sensitivity to significant
increases in interest rates. Short-term corporate and market developments
affecting the prices and liquidity of lower-rated long-term securities could
include adverse news impacting major issues or underwriters or dealers in
lower-rated long-term or unrated securities. In addition, since there are fewer
investors in lower-rated long-term securities, it may be harder to sell
securities at an optimum time.

An economic downturn may adversely affect the value of some lower-rated
long-term bonds. Such a downturn may especially affect highly leveraged
companies or companies in cyclically sensitive industries, where deterioration
in a company's cash flow may impair its ability to meet its obligation to pay
principal and interest to bondholders in a timely fashion. From time to time, as
a result of changing conditions, issuers of lower-rated long-term bonds may seek
or may be required to restructure the terms and conditions of the securities
they have issued. As a result of these restructurings, holders of lower-rated
long-term securities may receive less principal and interest than originally
expected at the time such bonds were purchased. In the event of a restructuring,
the Portfolio may bear additional legal or administrative expenses in order to
maximize recovery from an issuer. The secondary trading market for lower-rated
long-term bonds is generally less liquid than the secondary trading market for
higher-rated bonds.

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<PAGE>

The risk of loss due to default by the issuer is significantly greater for the
holders of high yield securities because such securities are generally unsecured
and are often subordinated to other obligations of the issuer. During an
economic downturn or a sustained period of rising interest rates, highly
leveraged issuers of high yield securities may experience financial stress and
may not have sufficient revenues to meet their interest payment obligations. An
issuer's ability to service its debt obligations may also be adversely affected
by specific corporate developments, its inability to meet specific projected
business forecasts, or the unavailability of additional financing.

Factors adversely affecting the market value of high yield and other Portfolio
securities will adversely affect the corresponding Fund's net asset value. In
addition, a Portfolio may incur additional expenses to the extent it is required
to seek recovery upon a default in the payment of principal or interest on its
portfolio holdings. As a matter of operating policy, the Latin American Equity
Portfolio will not invest more than 10% of its total assets (at the time of
purchase) in defaulted debt securities, which may be illiquid.

Risks of Investing in Medium- and Small-Capitalization Stocks. Historically,
medium- and small-capitalization stocks have been more volatile in price than
the larger-capitalization stocks included in the S&P 500. Among the reasons for
the greater price volatility of these securities are the less certain growth
prospects of smaller firms, the lower degree of liquidity in the markets for
such stocks, and the greater sensitivity of medium- and small-size companies to
changing economic conditions. In addition to exhibiting greater volatility,
medium- and small-size company stocks may fluctuate independently of larger
company stocks. Medium- and small-size company stocks may decline in price as
large company stocks rise, or rise in prices as large company stocks decline.

Special Information Concerning Master-Feeder Fund Structure. Unlike other
open-end management investment companies (mutual funds) which directly acquire
and manage their own portfolio securities, each Fund seeks to achieve its
investment objective by investing all of its Assets in the corresponding
Portfolio, a separate registered investment company with the same investment
objective as the corresponding Fund. Therefore, an investor's interest in the
corresponding Portfolio's securities is indirect. In addition to selling a
beneficial interest to the corresponding Fund, each Portfolio may sell
beneficial interests to other mutual funds, investment vehicles or institutional
investors. Such investors will invest in a Portfolio on the same terms and
conditions and will pay a proportionate share of a Portfolio's expenses.
However, the other investors investing in a Portfolio are not required to sell
their shares at the same public offering price as the Fund due to variations in
sales commissions and other operating expenses. Therefore, investors in a Fund
should be aware that these differences may result in differences in returns
experienced by investors in the different funds that invest in each Portfolio.
Such differences in returns are also present in other mutual fund structures.
Information concerning other holders of interests in each Portfolio is available
from Bankers Trust at 1-800-730-1313.

33
<PAGE>

Smaller funds investing in a Portfolio may be materially affected by the actions
of larger funds investing in the Portfolio. For example, if a large fund
withdraws from a Portfolio, the remaining funds may experience higher pro rata
operating expenses, thereby producing lower returns (however, this possibility
exists as well for traditionally structured funds which have large institutional
investors). Additionally, a Portfolio may become less diverse, resulting in
increased portfolio risk. Also, funds with a greater pro rata ownership in a
Portfolio could have effective voting control of the operations of the
Portfolio. Except as permitted by the SEC, whenever the Trust is requested to
vote on matters pertaining to a Portfolio, the Trust will hold a meeting of
shareholders of the Fund and will cast all of its votes in the same proportion
as the votes of the Fund's shareholders. Fund shareholders who do not vote will
not affect the Trust's votes at the Portfolio meeting. The percentage of the
Trust's votes representing the Fund's shareholders not voting will be voted by
the Trustees or officers of the Trust in the same proportion as the Fund
shareholders who do, in fact, vote.

Certain changes in a Portfolio's investment objectives, policies or restrictions
may require the Fund to withdraw its interest in the Portfolio. Any such
withdrawal could result in a distribution "in kind" of portfolio securities (as
opposed to a cash distribution from the Portfolio). If securities are
distributed, the Fund could incur brokerage, tax or other charges in converting
the securities to cash. In addition, the distribution in kind may result in a
less diversified portfolio of investments or adversely affect the liquidity of
the Fund. Notwithstanding the above, there are other means for meeting
redemption requests, such as borrowing.

The Fund may withdraw its investment from a Portfolio at any time, if the Board
of Trustees of the Trust determines that it is in the best interests of the
shareholders of the Fund to do so. Upon any such withdrawal, the Board of
Trustees of the Trust would consider what action might be taken, including the
investment of all the Assets of the Fund in another pooled investment entity
having the same investment objective as the Fund or the retaining of an
investment adviser to manage the Fund's assets in accordance with the investment
policies described herein with respect to the corresponding Portfolio.

Each Fund's investment objective is not a fundamental policy and may be changed
upon notice to, but without the approval of, the Fund's shareholders. If there
is a change in the Fund's investment objective, the Fund's shareholders should
consider whether the Fund remains an appropriate investment in light of their
then-current needs. The investment objective of each Portfolio is also not a
fundamental policy. Shareholders of the Funds will receive 30 days prior written
notice with respect to any change in the investment objective of the Fund or the
corresponding Portfolio.

Rating Services. The ratings of rating services represent their opinions as to
the quality of the securities that they undertake to rate. It should be
emphasized, however, that ratings are relative and subjective and are not
absolute standards of quality. Although these ratings are an initial criterion
for selection of portfolio investments, the Adviser also makes its own
evaluation of these securities, subject to review by the Board of Trustees.
After purchase by a Portfolio, an obligation may cease to be rated or its rating
may be reduced below the minimum required for purchase by the Portfolio. Neither
event would require a Portfolio to eliminate the obligation from its portfolio,
but the Adviser will consider such an event in its determination of whether a
Portfolio should continue to hold the obligation. A description of the ratings
is included in the Appendix herein.

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<PAGE>

Investment Restrictions

Fundamental Policies. The following investment restrictions are "fundamental
policies" of each Fund and each Portfolio and may not be changed with respect to
each Fund or Portfolio without the approval of a "majority of the outstanding
voting securities" of the Fund or the Portfolio, as the case may be. "Majority
of the outstanding voting securities" under the 1940 Act, and as used in this
SAI, means, with respect to each Fund (or Portfolio), the lesser of (i) 67% or
more of the outstanding voting securities of the Fund (or of the total
beneficial interests of the corresponding Portfolio) present at a meeting, if
the holders of more than 50% of the outstanding voting securities of the Fund
(or of the total beneficial interests of the Portfolio) are present or
represented by proxy or (ii) more than 50% of the outstanding voting securities
of the Fund (or of the total beneficial interests of the Portfolio). Whenever
the Trust is requested to vote on a fundamental policy of a Portfolio, the Trust
will hold a meeting of the corresponding Fund's shareholders and will cast its
vote as instructed by that Fund's shareholders. Fund shareholders who do not
vote will not affect the Trust's votes at the Portfolio meeting. The percentage
of the Trust's votes representing Fund shareholders not voting will be voted by
the Trustees of the Trust in the same proportion as the Fund shareholders who
do, in fact, vote.

As a matter of fundamental policy, no Portfolio (or Fund) may (except that no
investment restriction of a Fund shall prevent a Fund from investing all of its
Assets in an open-end investment company with substantially the same investment
objectives):

(1) borrow money or mortgage or hypothecate assets of the Portfolio
(Fund), except that in an amount not to exceed 1/3 of the current value
of the Portfolio's (Fund's) net assets, it may borrow money (but only as
a temporary measure for extraordinary or emergency purposes in the case
of the International Equity Portfolio (Fund)), and enter into reverse
repurchase agreements or dollar roll transactions, and except that it
may pledge, mortgage or hypothecate not more than 1/3 of such assets to
secure such borrowings (it is intended that money would be borrowed only
from banks and only either to accommodate requests for the withdrawal of
beneficial interests (redemption of shares) while effecting an orderly
liquidation of portfolio securities or to maintain liquidity in the
event of an unanticipated failure to complete a portfolio security
transaction or other similar situations) or reverse repurchase
agreements, provided that collateral arrangements with respect to
options and futures, including deposits of initial deposit and variation
margin, are not considered a pledge of assets for purposes of this
restriction and except that assets may be pledged to secure letters of
credit solely for the purpose of participating in a captive insurance
company sponsored by the Investment Company Institute; for additional
related restrictions, see clause (i) under the caption "Additional
Restrictions" below (as an operating policy, the Portfolios may not
engage in dollar-roll transactions);

35
<PAGE>

(2) underwrite securities issued by other persons except insofar as the
Portfolios (Trust or the Funds) may technically be deemed an underwriter
under the 1933 Act in selling a portfolio security;

(3) make loans to other persons except: (a) through the lending of the
Portfolio's (Fund's) portfolio securities and provided that any such
loans not exceed 30% of the Portfolio's (Fund's) total assets (taken at
market value); (b) through the use of repurchase agreements or the
purchase of short-term obligations; or (c) by purchasing a portion of an
issue of debt securities of types distributed publicly or privately;

(4) purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or interests
therein), interests in oil, gas or mineral leases, commodities or
commodity contracts (except futures and option contracts) in the
ordinary course of business (except that the Portfolio (Fund) may hold
and sell, for the Portfolio's (Fund's) portfolio, real estate acquired
as a result of the Portfolio's (Fund's) ownership of securities);

(6) issue any senior security (as that term is defined in the 1940 Act)
if such issuance is specifically prohibited by the 1940 Act or the rules
and regulations promulgated thereunder, provided that collateral
arrangements with respect to options and futures, including deposits of
initial deposit and variation margin, are not considered to be the
issuance of a senior security for purposes of this restriction.

(7) with respect to 75% of each Portfolio's (Fund's) total assets,
invest more than 5% of its total assets in the securities of any one
issuer (excluding cash and cash equivalents, U.S. government securities
and the securities of other investments companies) or own more than 10%
of the voting securities of any issuer.

Additional Restrictions. In order to comply with certain statutes and
policies, each Portfolio (or the Trust, on behalf of each Fund) will not
as a matter of operating policy (except that no operating policy shall
prevent a Fund from investing all of its Assets in an open-end
investment company with substantially the same investment objectives):

36
<PAGE>

(iii) purchase any security or evidence of interest therein on margin,
except that such short-term credit as may be necessary for the clearance
of purchases and sales of securities may be obtained and except that
deposits of initial deposit and variation margin may be made in
connection with the purchase, ownership, holding or sale of futures;

(iv) invest for the purpose of exercising control or management of
another company;

(v) purchase securities issued by any investment company except by
purchase in the open market where no commission or profit to a sponsor
or dealer results from such purchase other than the customary broker's
commission, or except when such purchase, though not made in the open
market, is part of a plan of merger or consolidation; provided, however,
that securities of any investment company will not be purchased for the
Portfolio (Fund) if such purchase at the time thereof would cause: (a)
more than 10% of the Portfolio's (Fund's) total assets (taken at the
greater of cost or market value) to be invested in the securities of
such issuers; (b) more than 5% of the Portfolio's (Fund's) total assets
(taken at the greater of cost or market value) to be invested in any one
investment company; or (c) more than 3% of the outstanding voting
securities of any such issuer to be held for the Portfolio (Fund),
unless permitted to exceed these limitations by an exemptive order of
the SEC; provided further that, except in the case of a merger or
consolidation, the Portfolio (Fund) shall not purchase any securities of
any open-end investment company unless (1) the Portfolio's investment
adviser waives the investment advisory fee with respect to assets
invested in other open-end investment companies and (2) the Portfolio
incurs no sales charge in connection with the investment;

37
<PAGE>

(vi) invest more than 15% of the Portfolio's (Fund's) net assets (taken at the
greater of cost or market value) in securities that are illiquid or not
currently marketable (excluding Rule 144A securities deemed by the Board
of Trustees of the Portfolio (Trust) to be liquid).

(vii) write puts and calls on securities unless each of the following
conditions are met: (a) the security underlying the put or call is
within the investment policies of the Portfolio (Fund) and the option is
issued by the OCC, except for put and call options issued by non-U.S.
entities or listed on non-U.S. securities or commodities exchanges; (b)
the aggregate value of the obligations underlying the puts determined as
of the date the options are sold shall not exceed 5% of the Portfolio's
(Fund's) net assets; (c) the securities subject to the exercise of the
call written by the Portfolio (Fund) must be owned by the Portfolio
(Fund) at the time the call is sold and must continue to be owned by the
Portfolio (Fund) until the call has been exercised, has lapsed, or the
Portfolio (Fund) has purchased a closing call, and such purchase has
been confirmed, thereby extinguishing the Portfolio's (Fund's)
obligation to deliver securities pursuant to the call it has sold; and
(d) at the time a put is written, the Portfolio (Fund) establishes a
segregated account with its custodian consisting of cash or liquid
securities equal in value to the amount the Portfolio (Fund) will be
obligated to pay upon exercise of the put (this account must be
maintained until the put is exercised, has expired, or the Portfolio
(Fund) has purchased a closing put, which is a put of the same series as
the one previously written); and

(viii) buy and sell puts and calls on securities, stock index futures or options
on stock index futures, or financial futures or options on financial futures
unless such options are written by other persons and: (a) the options or futures
are offered through the facilities of a national securities association or are
listed on a national securities or commodities exchange, except for put and call
options issued by non-U.S. entities or listed on non-U.S. securities or
commodities exchanges; (b) the aggregate premiums paid on all such options which
are held at any time do not exceed 20% of the Portfolio's (Fund's) total net
assets; and (c) the aggregate margin deposits required on all such futures or
options thereon held at any time do not exceed 5% of the Portfolio's
(Fund's) total assets.

38
<PAGE>

There will be no violation of any investment restriction (except with respect to
fundamental investment restriction (1) above) if that restriction is complied
with at the time the relevant action is taken, notwithstanding a later change in
the market value of an investment, in net or total assets or in the change of
securities rating of the investment, or any other later change.

Portfolio Transactions and Brokerage Commissions

39
<PAGE>

Consistent with the policy stated above, the Conduct Rules of the National
Association of Securities Dealers, Inc. and such other policies as the Trustees
of the Portfolio may determine, the Adviser may consider sales of shares of the
Trust and of other investment company clients of Bankers Trust as a factor in
the selection of broker-dealers to execute portfolio transactions. Bankers Trust
will make such allocations if commissions are comparable to those charged by
nonaffiliated, qualified broker-dealers for similar services.

Higher commissions may be paid to firms that provide research services to the
extent permitted by law. Bankers Trust may use this research information in
managing each Portfolio's assets, as well as the assets of other clients.

40
<PAGE>

For the fiscal years ended September 30, 1998, 1997 and 1996, International
Equity Portfolio paid brokerage commissions in the amount of $6,083,270,
$1,733,727 and $603,995, respectively.

For the period June 30, 1998 (commencement of operations) to September 30, 1998,
International Small Company Equity Portfolio paid brokerage commissions in the
amount of $1,294.

For the period June 30, 1998 (commencement of operations) to September 30, 1998,
the Global Emerging Markets Equity Portfolio paid brokerage commissions in the
amount of $7,522.

For the fiscal years ended September 30, 1998, 1997 and 1996, Pacific Basin
Equity Portfolio paid brokerage commissions in the amount of $119,572, $398,743
and $323,957, respectively.

For the fiscal years ended September 30, 1998, 1997 and 1996, Latin American
Equity Portfolio paid brokerage commissions in the amount of $183,892, $69,625
and $164,049, respectively.

PERFORMANCE INFORMATION

Standard Performance Information

From time to time, quotations of a Fund's performance may be included in
advertisements, sales literature or shareholder reports. For mutual funds,
performance is commonly measured as total return. Each Fund's performance is
affected by its expenses. These performance figures are calculated in the
following manner:

41
<PAGE>

Total return: Total return is the change in value of an investment in a
Fund over a given period, assuming reinvestment of any dividends and
capital gains. A cumulative total return reflects actual performance
over a stated period of time. An average annual total return is a
hypothetical rate of return that, if achieved annually, would have
produced the same cumulative total return if performance had been
constant over the entire period. Average annual total return
calculations smooth out variations in performance; they are not the same
as actual year-by-year results. Average annual total returns covering
periods of less than one year assume that performance will remain
constant for the rest of the year. A Fund's average annual total return
is calculated for certain periods by determining the average annual
compounded rates of return over those periods that would cause an
investment of $1,000 (made at the maximum public offering price with all
distributions reinvested) to reach the value of that investment at the
end of the periods. A Fund may also calculate total return figures which
represent aggregate performance over a period or year-by-year
performance.

<TABLE>
<CAPTION>
Annualized Cumulative Total Return Annualized Total Return
Total Return for the Total Return for the For the Period From For the Period From
One year Ended Five Years Ended Commencement of Operations Commencement of Operations
September 30, 1998 September 30, 1998 Through September 30, 1998 Through September 30, 1998
<S> <C> <C> <C> <C>
International
Equity Fund(1) -3.73% 14.41% 137.63% 15.10%

International
Small Company
Equity Fund(2) N/A N/A -19.70% -19.70%*

Global Emerging
Markets Equity
Fund(3) N/A N/A -19.60% -19.60%*

Pacific Basin
Equity Fund(4) -52.21% N/A -47.37% -12.25%

Latin American
Equity Fund(5) -44.28% N/A -10.80% -2.29%
</TABLE>

(1) Fund commenced operations on August 4, 1992.
(2) Fund commenced operations June 30, 1998.
(3) Fund commenced operations June 30, 1998.
(4) Fund commenced operations on November 1, 1993.
(5) Fund commenced operations on October 25, 1993.
* Not Annualized.