BT INVESTMENT FUNDS, 485APOS, 2000-11-30

BT INVESTMENT FUNDS
485APOS, 2000-11-30

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<PAGE>

As filed with the Commission on November 30, 2000
1933 Act File No. 33-07404
1940 Act File No. 811-4760

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X

Post-Effective Amendment No. 76 X

and

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X

Amendment No. 76 X

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

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

(410) 895-3433
(Registrant's Telephone Number)

Daniel O. Hirsch, Esq. Copies to:Burton M. Leibert, Esq.
One South Street Willkie Farr & Gallagher
Baltimore, Maryland 21202 787 Seventh Ave
(Name and Address of Agent New York, New York 10019
for Service)

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

[_] Immediately upon filing pursuant to paragraph (b)
[_] On August 31, 2000 pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[X] On January 31, 2000 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.

<PAGE>

Deutsche Asset Management

Mutual Fund
Prospectus
January 31, 2001

PreservationPlus Income
formerly BT PreservationPlus Income Fund

The Fund is designed exclusively for IRAs, 401(k)s, 403(b)s and other similar
plans.

[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.]

A Member of the
Deutsche Bank Group
<PAGE>

Overview
of PreservationPlus Income

Goal: The Fund seeks a high level of current income while seeking to maintain a
stable value per share.

Core Strategy: The Fund invests primarily in fixed income securities. The Fund
also enters into contracts with financial institutions that are designed to
stabilize the Fund's share value.

INVESTMENT POLICIES AND STRATEGIES
The Fund invests all of its assets in a master portfolio with the same
investment goal as the Fund. The Fund, through the master portfolio, seeks to
achieve that goal by investing in fixed income securities of varying maturities,
money market instruments and futures and options (including futures and options
traded on foreign exchanges, such as bond and equity indices of foreign
countries). The Fund attempts to maintain a stable share value by entering into
contracts, called Wrapper Agreements, with financial institutions, such as
insurance companies and banks.

PreservationPlus Income

Overview of PreservationPlus Income

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

A Detailed Look at PreservationPlus Income

Objective..............................................
Strategy...............................................
Principal Investments..................................
Investment Process.....................................
Risks..................................................
Management of the Fund.................................
Calculating the Fund's Share Price.....................
Dividends and Distributions............................
Tax Considerations.....................................
Buying and Selling Fund Shares.........................
Financial Highlights...................................
<PAGE>

Overview of PreservationPlus Income

PRINCIPAL RISKS OF INVESTING IN THE FUND

Although the Fund seeks to preserve a stable share value, there are risks
associated with fixed income investing. For example, the value of fixed income
securities could fluctuate or fall if:

. There is a sharp rise in interest rates.
. An issuer's creditworthiness declines.
. Changes in interest rates or economic downturns have a negative effect on
issuers in the financial services industry.

The Fund attempts to offset these risks by purchasing Wrapper Agreements. The
use of Wrapper Agreements has its own risks, including:

. The possibility of default by a financial institution providing a Wrapper
Agreement ("Wrapper Provider").
. The inability of the Fund to obtain Wrapper Agreements covering the Fund's
assets.

The Fund is also subject to the risk that we incorrectly judge the potential
risks and rewards of investing in derivatives.

WHO SHOULD CONSIDER INVESTING IN THE FUND

You should consider investing in the Fund if you are seeking current income
higher than money market mutual funds over most time periods and to preserve the
value of your investment. The Fund is offered as an alternative to short-term
bond funds and as a comparable investment to stable value or guaranteed
investment contract options offered in employee benefit plans.

PreservationPlus Income offers shares only to individual retirement accounts
(IRAs) and to employees investing through participant-directed employee benefit
plans. IRAs include traditional IRAs, Roth IRAs, education IRAs, simplified
employee pension IRAs (SEP IRAs), savings incentive match plans for employees
(SIMPLE IRAs), and Keogh plans.

You should not consider investing in PreservationPlus Income if you seek capital
growth. Although it provides a convenient means of diversifying short-term
investments, the Fund by itself does not constitute a balanced investment
program.

An investment in PreservationPlus Income is not a bank deposit and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. Although the Fund seeks to preserve a stable share value, it
is possible to lose money by investing in the Fund.
<PAGE>

Overview of PreservationPlus Income

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. The bar chart shows the Fund's actual
return for the full calendar year since it began selling shares on December 23,
1998 (its inception date). The table compares the Fund's return for the one year
period ended December 31, 2000 with the Lehman 1-3 Year Government/Corporate
Total Return Index, the IBC First Tier Retail Money Market Universe and the
Wrapped Lehman Intermediate Aggregate Income Index. An index is a group of
securities whose overall performance is used as a standard to measure investment
performance. It does not factor in the costs of buying, selling and holding
securities--costs that are reflected in the Fund's results. Total returns for
the Fund assume that an investor did not pay a redemption fee at the end of the
periods shown.

As of December 31, 2000, the Fund's 30-day yield was ____%.

CALLOUT: The Lehman 1-3 Year Government/Corporate Total Return Index is a widely
accepted benchmark of short-term fixed income securities. It is a total return
index consisting of all U.S. Government agency securities, U.S. Government
Treasury securities and all investment grade corporate debt securities with
maturities of one to three years. The Wrapped Lehman Intermediate Aggregate
Income Index is a custom benchmark representing investment in a portfolio
consisting of the Lehman Intermediate Aggregate Index and a book value wrapper
agreement, at an assumed expense level of 0.20%. The Wrapped Lehman Index more
closely reflects the market sector in which the Fund invests than the other
Lehman index.

The 30-day yield is a measure of the income generated by the Fund over a thirty-
day period. This amount is then annualized, which means that we assume the Fund
generates the same income every month for a year. The "total return" of the Fund
is the change in the value of an investment in the Fund over a given period.
Average annual returns are calculated by averaging the year-by-year returns of
the Fund over a given period.

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

% %
1999 2000

Since inception, the Fund's highest return in any calendar quarter was ___%
(third quarter ____) and its lowest quarterly return was ___% (first quarter
____). Past performance offers no indication of how the Fund will perform in the
future.
<PAGE>

PERFORMANCE FOR PERIODS ENDED DECEMBER 31, 2000

Average Annual Returns
1 Year
PreservationPlus Income ____%

Lehman 1-3 Year Government/Corporate
Total Return Index ____%

IBC First Tier Retail Money Market Universe
Average/1/ ____%

Wrapped Lehman Intermediate Aggregate Income Index ____%

/1/Unweighted average return, net of fees and expenses, of all money market
mutual funds that invested in non-Government securities, but the average is
restricted to those money market instruments rated first tier (the top rating)
by two or more nationally recognized statistical rating organizations.
<PAGE>

Overview of PreservationPlus Income

ANNUAL FUND OPERATING EXPENSES
(expenses paid from Fund assets)

The Shareholder Fees and Annual Fees and Expenses tables to the right describe
the fees and expenses that you may pay if you buy and hold shares of
PreservationPlus Income.

Under normal circumstances, qualified IRA redemptions and qualified plan
redemptions that are directed by plan participants are not subject to a
redemption fee. All other redemptions are subject to a redemption fee of 2% on
the proceeds of the redemption on any day that the "Interest Rate Trigger" is
"active," as described under "Buying and Selling Fund Shares."

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 that you sold your shares at the end of the period. The expense
example does not include a redemption fee.

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.

SHAREHOLDER FEES
(fees paid directly from your investment)

<TABLE>
<S> <C>
------------------------------------------------------------------------------------------------
Maximum Sales Charge Imposed on Purchases None
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
Maximum Sales Charge on Reinvested Dividends None
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
Maximum Redemption Fee (as a percentage of amount redeemed, as applicable) 2.0%/2/
------------------------------------------------------------------------------------------------
</TABLE>

__________________________
/1/ Information on the annual operating expenses reflects the expenses of both
the Fund and the PreservationPlus Income Portfolio, the master portfolio into
which PreservationPlus Income invests all of its assets. (A further discussion
of the relationship between the Fund and the master portfolio appears in the
"Organizational Structure" section of this prospectus.)

/2/ The redemption fee payable to the master portfolio is designed primarily to
offset those expenses that may be incurred by the master portfolio in connection
with certain shareholder redemptions. Proceeds from the redemption fee will be
used by the master portfolio to offset the actual portfolio and administrative
costs associated with such redemptions, including custodian, transfer agent,
settlement, and account processing costs, as well as the adverse impact of such
redemptions on the premiums paid for Wrapper Agreements and the yield on Wrapper
Agreements. The redemption fee may also have the effect of discouraging
redemptions by shareholders attempting to take advantage of short-term interest
rate movements. On October 1, 2000 the Fund reduced the redemption fee from 3%
to 2% and accordingly adjusted the Interest Rate Trigger.

The amount of, and method of applying, the Redemption Fee, including the
operation of the Interest Rate Trigger, may be changed in the future. Shares
currently offered in this prospectus would be subject to the new combination of
Redemption Fee and Interest Rate Trigger.
<PAGE>

ANNUAL FEES AND EXPENSES

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
Percentage of Average
Daily Net Assets1
---------------------------------------------------------------------------------------------------
<S> <C>
Management Fees 0.70%
---------------------------------------------------------------------------------------------------
Distribution (12b-1) and Shareholder Service 0.25%
Fees
---------------------------------------------------------------------------------------------------
Other Fund Operating Expenses %/3/
---------------------------------------------------------------------------------------------------
Total Fund Operating Expenses %
---------------------------------------------------------------------------------------------------
Less: Fee Waivers or
Expense
Reimbursements %/4/
---------------------------------------------------------------------------------------------------
Net Expenses 1.50%/5/
---------------------------------------------------------------------------------------------------
</TABLE>

Expense Example/4/

------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------------------------------------------------
$152 $818 $818 $1,791
------------------------------------------------

________________________________________________________________________________

/3/ "Other Expenses" include the annual premium rate the Fund paid for Wrapper
Agreements.

/4/ The investment adviser and administrator have agreed, for the 10-year period
beginning January 31, 2000, to waive their fees and reimburse expenses so that
total expenses will not exceed 1.50%.

/5/ The investment adviser and administrator have voluntarily agreed to waive
their fees and reimburse expenses so that total expenses will not exceed 1.00%.
We may terminate or adjust these voluntary waivers and reimbursements at any
time at our sole discretion without notice to shareholders.
<PAGE>

A detailed look
at PreservationPlus Income

OBJECTIVE

PreservationPlus Income seeks a high level of current income while seeking to
maintain a stable value per share.

The Fund invests for current income; capital appreciation is not a goal of the
Fund. While we give priority to earning income and maintaining the value of the
Fund's principal, we cannot offer any assurance of achieving this goal.

STRATEGY

The Fund seeks current income that is higher than that of money market funds by
investing in fixed income securities with varying maturities and maintaining an
average portfolio duration of 2.5 to 4.5 years. In addition, the Fund enters
into Wrapper Agreements designed to stabilize the Fund's share value. Wrapper
Agreements are provided by financial institutions, such as insurance companies
and banks. In an attempt to enhance return, the Fund also employs a global asset
allocation strategy, which evaluates the equity, bond, cash and currency
opportunities across domestic and international markets.

PRINCIPAL INVESTMENTS

Fixed Income Securities. The Fund invests at least 65% of its total assets in
fixed income securities rated, at the time of purchase, within the top four
long-term rating categories by a nationally recognized statistical rating
organization (or, if unrated, are determined by us to be of similar quality).
However, the Fund may invest up to 10% of its assets in high yield debt
securities (also known as junk bonds) rated in the fifth and sixth long-term
rating categories by a nationally recognized statistical rating organization
(or, if unrated, are determined by us to be of similar quality).

CALLOUT: 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.

Fixed income securities in which the Fund may invest include the following:

. U.S. government securities that are issued or guaranteed by the U.S.
Treasury, or by agencies or instrumentalities of the U.S. Government.

. U.S. dollar-denominated securities issued by domestic or foreign
corporations, foreign governments or supranational entities.
<PAGE>

. U.S. dollar-denominated asset-backed securities issued by domestic or foreign
entities.

. Mortgage pass-through securities issued by governmental and non-governmental
issuers.

. Collateralized mortgage obligations and real estate mortgage investment
conduits.

. Obligations issued or guaranteed, or backed by securities issued or
guaranteed, by the U.S. government, or any of its agencies or
instrumentalities, including CATS, TIGRs, TRs and zero coupon securities,
which are securities consisting of either the principal component or the
interest component of a U.S. Treasury bond.

We employ the following policies to attempt to reduce the risks involved in
investing in fixed income securities:

. We allocate assets among a diversified group of issuers.

. We primarily invest in fixed income securities that are rated, at the time of
purchase, within the top four rating categories as rated by Moody's Investors
Service, Inc., Standard & Poor's Ratings Service or Duff & Phelps Credit
Rating Co., another nationally recognized statistical rating organization,
or, if unrated, are determined by us to be of comparable quality.

. We target an average portfolio duration of 2.5 to 4.5 years by investing in
fixed income securities with short- to intermediate-term maturities.
Generally, rates of short-term investments fluctuate less than longer-term
investments.

CALLOUT: Maturity measures the time remaining until an issuer must repay a
bond's principal in full.
<PAGE>

A Detailed Look at PreservationPlus Income

Wrapper Agreements. The Fund enters into Wrapper Agreements with insurance
companies, banks and other financial institutions. Unlike traditional fixed
income portfolios, the Fund's purchases of Wrapper Agreements should offset
substantially the price fluctuations typically associated with fixed income
securities. In using Wrapper Agreements, the Fund seeks to eliminate the effect
of any gains or losses on its value per share. Wrapper Agreements obligate the
Wrapper Provider to maintain the book value of the Covered Assets up to
specified amounts, under certain circumstances. In general, if the Fund sells
securities to meet shareholder redemptions and the market value (plus accrued
interest) of those securities is less than their book value, the Wrapper
Provider must pay the difference to the Fund. On the other hand, if the Fund
sells securities and the market value (plus accrued interest) is more than the
book value, the Fund must pay the difference to the Wrapper Provider. The
circumstances under which payments are made and the timing of payments between
the Fund and the Wrapper Provider vary. More than one Wrapper Provider
provides coverage with respect to the same securities and pays, when applicable,
based on the pro rata portion of the Fund's assets that it covers.

The Crediting Rate:

. Is the actual interest earned on the Covered Assets based on the formula
stated in the Wrapper Agreements and is generally adjusted monthly for price
movements in the Covered Assets and amounts payable to or receivable from the
Wrapper Provider; and

. Is a significant component of the Fund's yield.

We employ the following policies to attempt to reduce the risks involved in
using Wrapper Agreements:

. We purchase Wrapper Agreements from multiple issuers, each of which has
received a high quality rating from Moody's or Standard & Poor's.

. We monitor, on a continual basis, the financial well being of the issuers of
the securities in which the Fund invests and the Wrapper Providers providing
Wrapper Agreements to the Fund.

Generally, unless the Wrapper Agreement requires the sale of a security that has
been downgraded below a specified rating, the Fund is not required to dispose of
any security or Wrapper Agreement whose issuer's rating has been downgraded.

CALLOUT: Book value of the Covered Assets is their purchase price, plus interest
(as specified in the Wrapper Agreements), less an adjustment to reflect any
defaulted securities.

CALLOUT: A high quality rating means a security is rated within the top two
long-term ratings categories by a nationally recognized statistical rating
organization.

Short-Term Investments. The Fund will also invest in short-term investments,
including money market mutual funds, to meet shareholder withdrawals and other
liquidity needs. These short-term
<PAGE>

investments, such as commercial paper and certificates of deposit, will be
rated, at the time of purchase, within one of the top two short-term rating
categories by a nationally recognized statistical rating organization, or if
unrated, are determined by us to be of similar quality.

Derivative Instruments. The Fund may invest in various instruments commonly
known as "derivatives" to increase its exposure to certain groups of securities.
The derivatives that the Fund may use include futures contracts, options on
futures contracts and forward contracts. The Fund may use derivatives to keep
cash on hand to meet shareholder redemptions, as a hedging strategy to maintain
a specific portfolio duration, or to protect against market risk. When employing
the global asset allocation strategy, the Fund may use derivatives for
leveraging, which is a way to attempt to enhance returns. We will only use
these securities if we believe that their return potential more than compensates
for the extra risks associated with using them.

Other Investments. The Fund may also invest in and utilize the following
investments and investment techniques and practices: Rule 144A securities, to be
announced (TBA) securities, when-issued and delayed delivery securities,
repurchase agreements, reverse repurchase agreements and dollar rolls.

INVESTMENT PROCESS

The Fund's investment strategy emphasizes a diversified exposure to higher
yielding mortgage, corporate and asset-backed sectors of the investment grade
fixed income markets. These "spread" sectors have historically offered higher
returns than U.S. government securities. The investment process focuses on a
top-down approach, first focused on the sector allocations, then using relative
value analysis to select the best securities within each sector. To select
securities, we analyze such factors as credit quality, interest rate sensitivity
and spread relationships between individual bonds.

CALLOUT: Futures contracts, options on futures contracts and forward contracts
are commonly used for traditional hedging purposes to attempt to protect an
investor from the risks of changing interest rates, securities prices or
currency exchange rates and for cash management purposes as a low cost method of
gaining exposure to a particular securities market without investing directly in
those securities.
<PAGE>

A Detailed Look at PreservationPlus Income

The Fund also purchases Wrapper Agreements, which seek to offset price
fluctuations of the fixed income securities and, as a result, provide a stable
value per share for the Fund. A primary emphasis is placed on assessing the
credit quality of financial institutions that may provide a Wrapper Agreement to
the Fund. We perform proprietary credit analysis on a large universe of issuers.
We actively manage the negotiation and maintenance of these Wrapper Agreements.

The global asset allocation strategy attempts to enhance long-term returns and
manage risk by responding effectively to changes in global markets using
instruments including but not limited to futures, options and currency forwards.
This strategy employs a multi-factor global asset allocation model that
evaluates equity, bond, cash and currency opportunities across domestic and
international markets.

In implementing the global asset allocation strategy, the Fund invests in
options and futures based on any type of security or index including options and
futures traded on foreign exchanges, such as bond and equity indices of foreign
countries. Some options and futures strategies, including selling futures,
buying puts and writing calls, hedge the Fund's investments against price
fluctuations. Other strategies, including buying futures, writing puts and
buying calls, tend to increase and will broaden the Fund's market exposure.
Options and futures may be combined with each other, or with forward contracts,
in order to adjust the risk and return characteristics of an overall strategy.

The Fund may also enter into forward currency exchange contracts (agreements to
exchange one currency for another at a future date), may buy and sell options
and futures contracts relating to foreign currencies and may purchase securities
indexed to foreign currencies. Currency management strategies allow us to shift
investment exposure from one currency to another or to attempt to profit from
anticipated declines in the value of a foreign currency relative to the U.S.
dollar. Successful implementation of the global asset allocation strategy
depends on our judgment as to the potential risks and rewards of implementing
the different types of strategies.

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 may invest up to 100% of the Fund's assets in short-term
obligations within one of the top two investment ratings, if the situated
warranted. These short-term obligations may not be covered by a Wrapper
Agreement. To the extent we might adopt such a position and over the course of
its duration, the Fund may not meet its goal of a high level of current income
or a stable net asset value.

CALLOUT Portfolio Turnover. The portfolio turnover rate measures the frequency
that the master 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.

RISKS

Below we set forth some of the prominent risks associated with fixed income
investing, the use of Wrapper Agreements, as well as the risks of investing in
general. Although we attempt to assess the
<PAGE>

likelihood that these risks may actually occur and to limit them, we make no
guarantee that we will succeed.

Primary Risks

Interest Rate Risk. All debt securities face the risk that the 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 fall).

Credit Risk. An investor purchasing a fixed income security faces the risk that
the value of the security may decline because the creditworthiness of the issuer
may decline or the issuer may fail to make timely payment of interest or
principal.

Wrapper Agreement Risk. Although the Fund uses Wrapper Agreements to attempt to
maintain a stable value per share, there are risks associated with the Wrapper
Agreements, including:

. A Wrapper Provider could default, which could cause the Fund's share value
to fluctuate and could result in losses for plan participants who sell
their shares.

. The Wrapper Agreements may require the Fund to maintain a certain
percentage of its assets in short-term investments. This could result in a
lower return than if the Fund invested those assets in longer-term
securities. The Fund may elect not to cover a fixed income security with a
remaining maturity of 60 days or less, cash or short-term investments with
Wrapper Agreements.

. The Wrapper Agreements generally do not protect the Fund from loss caused
by a fixed income security issuer's default on principal or interest
payments.

. The Fund may not be able to obtain Wrapper Agreements to cover all of its
assets.

. If a Wrapper Provider is unable to make timely payments, the Fund's Board
may determine the fair value of that Wrapper Agreement to be less than the
difference between the book value and the market value, which could cause
the Fund's net asset value to fluctuate.

. Compared to investing in a traditional fixed income fund, the Fund trades
the potential for capital appreciation and some yield for protection from a
decline in the value of its holdings caused by changes in interest rates.

Market Risk. Although individual securities may outperform their market, the
entire market may decline as a result of rising interest rates, regulatory
developments or deteriorating economic conditions.

Security Selection Risk. While the Fund invests in short- to intermediate-term
securities, which by nature are relatively stable investments, the risk remains
that the securities we have selected will
<PAGE>

not perform as expected. This could cause the Fund's returns to lag behind those
of money market funds.

Liquidity Risk. Liquidity risk is the risk that a security cannot be sold
quickly at a price that reflects our estimate of its value. Because there is no
active trading market for Wrapper Agreements, the Fund's investments in the
Wrapper Agreements are considered illiquid. In an effort to minimize this risk,
the Fund limits its investments in illiquid securities, including Wrapper
Agreements, to 15% of net assets.

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 judgment of the Board of Trustees. If Wrapper Agreements are not in
place, 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.

According to the procedures adopted by the Board of Trustees, the fair value of
the Wrapper Agreements generally will equal the difference between the book
value and the market value (plus accrued interest) of the Fund's assets. In
determining fair value, the Board will consider the creditworthiness and ability
of a Wrapper Provider to pay amounts due under the Wrapper Agreements. If the
Board of Trustees determines that a Wrapper Agreement should not be valued this
way, the net asset value of the Fund could fluctuate.

Derivative Risk. Derivatives are more volatile and less liquid than traditional
fixed income securities. Risks associated with derivatives include:

. the derivative may not fully offset the underlying positions;

. the derivatives used for risk management may not have the intended effects
and may result in losses or missed opportunities; and

. the possibility the Fund cannot sell the derivative because of an illiquid
secondary market.

The use of derivatives for leveraging purposes tends to magnify the effect of an
instrument's price changes as market conditions change.

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 other
investments.

Foreign Investment Risk. To the extent that the Fund invests in securities
traded on exchanges 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
<PAGE>

the Fund from realizing their full value. Financial reporting standards for
companies based in foreign markets differ from those in the United States. Since
the "numbers" themselves sometimes mean different things, we devote much of our
research effort to understanding and assessing the impact of these differences
upon a company's financial condition. 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 decrease the value of the investment to U.S. investors.

Secondary Risks

Lower Rated Securities. The Fund may invest in debt securities rated in the
fifth and sixth long-term ratings categories. 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 lower-rated
securities 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. 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 availability of outside pricing
services to value lower-rated debt securities and the Fund's ability to dispose
of these securities. Since the risk of default is higher for lower-rated
securities, our research and credit analysis are an especially important part of
managing securities of this type.

In considering investments for the Fund, we 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. Our
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.

MANAGEMENT OF THE FUND

Deutsche Asset Management is the marketing name for the asset management
activities of Deutsche Bank A.G., Deutsche Funds Management, Bankers Trust
Company, DB Alex. Brown LLC, Deutsche Asset Management, Inc., and Deutsche Asset
Management Investment Services Limited.

Board of Trustees. The 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 the Fund's investment adviser. Bankers Trust is an indirect wholly-owned
subsidiary of Deutsche Bank A.G. As investment adviser, Bankers Trust makes the
Fund's investment decisions. It buys and sells securities for the Fund and
conducts the research that leads to the purchase and sale decisions. The
investment adviser received a fee of 0.70% of the Fund's average daily net
assets for its services in the last fiscal year. The investment adviser waived a
portion of its fee during the period.
<PAGE>

As of December 31, 2000, Bankers Trust had total assets under management of
approximately $___ billion. Bankers Trust is dedicated to servicing the needs of
corporations, governments, financial institutions, and private clients and has
invested retirement assets on behalf of the nation's largest corporations and
institutions for more than 50 years. 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.
As of December 31, 2000, Bankers Trust managed approximately $___ billion in
stable value assets.

At a special meeting of shareholders held in 1999, shareholders of the Fund
approved a new investment advisory agreement with Deutsche Asset Management,
Inc. (formerly Morgan Grenfell Inc.). The new investment advisory agreement may
be implemented within two years of the date of the special meeting upon approval
of a majority of the members of the Board of Trustees who are not "interested
persons," generally referred to as independent trustees. Shareholders of the
Fund also approved a new sub-investment advisory agreement among the Trust,
Deutsche Asset Management, Inc. and Bankers Trust under which Bankers Trust may
perform certain of Deutsche Asset Management, Inc.'s responsibilities, at
Deutsche Asset Management, Inc.'s expense, upon approval of the independent
trustees, within two years of the date of the special meeting. Under the new
investment advisory agreement and new sub-advisory agreement, the compensation
paid and the services provided would be the same as those under the existing
advisory agreement with Bankers Trust.

Deutsche Asset Management, Inc. is located at 885 Third Avenue, 32nd Floor, New
York, New York 10022. The firm provides a full range of investment advisory
services to institutional clients. It serves as investment adviser to 11 other
investment companies and as sub-adviser to five other investment companies.

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

Eric Kirsch, CFA
. Portfolio Manager of the master portfolio since its inception.
. Joined the investment adviser in 1980.
. Head of the Stable Value investment group.

Louis R. D'Arienzo
. Portfolio Manager of the fixed income portion of the master portfolio since
its inception.
. Joined the investment adviser in 1981.
. Portfolio Manager in the Structured Fixed Income investment group.

John D. Axtell
. Portfolio Manager of the Wrapper Agreements in the master portfolio since
its inception.
. Joined the investment adviser in 1990.
. Portfolio Manager in the Stable Value investment group.

Other Services. Bankers Trust provides administrative services--such as
portfolio accounting, legal services and others--for the Fund. In addition,
Bankers Trust--or your service agent--performs the
<PAGE>

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.

Service agents include brokers, financial advisors or any other bank, dealer or
other institution that has a sub-shareholder servicing agreement with Bankers
Trust. Service agents 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 Fund is a "feeder fund" that invests all of its
assets in a "master portfolio," the PreservationPlus Income Portfolio. The Fund
and the master portfolio have the same investment objective. The master
portfolio is advised by Bankers Trust, an indirect wholly-owned subsidiary of
Deutsche Bank A.G.

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
shareholders' 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.

CALCULATING THE FUND'S SHARE PRICE

We calculate the daily price of a 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 the Fund owns may
ultimately affect the price of Fund shares the next time the NAV is calculated.)
<PAGE>

We value the securities in the 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 the Fund's daily share price in the mutual fund listings
of most major newspapers.

CALLOUT: The New York Stock 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), Independence
Day (July 4th), Labor Day (the first Monday in September), Thanksgiving Day (the
fourth Thursday in November) and Christmas Day.

DIVIDENDS AND DISTRIBUTIONS

Income dividends, if any, for the Fund are declared daily and paid monthly. The
Fund reserves the right to include in the daily dividend any short-term capital
gains on securities that it sells. Also, the Fund will normally declare and pay
annually any long-term capital gains as well as any short-term capital gains
that it did not distribute during the year.

On occasion, the dividends the Fund distributes may differ from the income the
Fund earns. When the Fund's income exceeds the amount distributed to
shareholders, the Fund may make an additional distribution. When an additional
distribution is necessary, the Board of Trustees may declare a reverse stock
split to occur at the same time the additional distribution is made. Making the
additional distribution simultaneously with the reverse stock split will
minimize fluctuations in the net asset value of the Fund's shares.

We automatically reinvest all dividends and capital gains, if any, unless you
elect to receive your distributions in cash.

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.

For IRA Owners and plan participants utilizing the Fund as an investment option
under their plan, dividend and capital gain distributions from the Fund
generally will not be subject to current taxation, but will accumulate on a tax-
deferred basis.
<PAGE>

Because each participant's tax circumstances are unique and because the tax laws
governing plans are complex and subject to change, we recommend that you consult
your plan administrator, your plan's Summary Plan Description, and/or your tax
advisor about the tax consequences of your participation in your plan and of any
plan contributions or withdrawals.

CALLOUT: A reverse stock split reduces the number of total shares the Fund has
outstanding. The market value of the shares will be the same after the stock
split as before the split, but each share will be worth more.

BUYING AND SELLING FUND SHARES

Contacting the Mutual Fund Service Center of Deutsche Asset Management Service
Center

By phone 1-800-730-1313
By mail Service Center
P.O. Box 219210
Kansas City, MO 64121-9210
By overnight mail Service Center
210 West 10th Street, 8th floor
Kansas City, MO 64105-1716

Our representatives are available to assist you personally Monday through
Friday, 9:00 a.m. to 7:00 p.m., Eastern time each day the New York Stock
Exchange is open for business. You can reach the Service Center's automated
assistance line 24 hours a day, 7 days a week.

Minimum Account Investments

To open an account $500
To add to an account $100
Minimum account balance $500

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

IRAs

Purchasing Shares. Please contact your IRA service agent for information on
purchasing shares. If you established your IRA with Deutsche Asset Management
mutual funds, you may purchase additional shares by contacting the Service
Center.

Redeeming Shares. All redemption requests must be made in writing and must
include the reason you are selling your shares. Call the Service Center at 1-
800-730-1313 or your service agent to
<PAGE>

request a redemption form. When the Interest Rate Trigger is active, redemptions
that are not qualified IRA redemptions, as described in the next section, will
be subject to the 2% redemption fee. Therefore, it is important to consult with
your IRA service agent and/or a professional tax advisor regarding the terms,
conditions and tax consequences of withdrawal of IRAs.

Listed below are some examples of qualified IRA redemptions. For complete
information, please contact your IRA service agent.

. Distributions made on or after the date on which the IRA owner attains age
59 1/2.

. Distributions made to a beneficiary or to the IRA owner's estate on or
after the IRA owner's death.

. Distributions made as a result of the IRA owner becoming disabled.

. Direct trustee-to-trustee transfers and conversions of traditional IRAs to
Roth IRAs where the IRA owner continues the investment of the transferred
amount in the Fund.

Participant-Directed Employee Benefit Plans

Purchasing Shares. You must contact your plan administrator for information on
how to purchase shares. Your plan may have specific provisions with respect to
the timing and method of share purchases, exchanges and redemptions by its
participants. Plan administrators and fiduciaries should call 1-800-730-1313 for
information regarding a plan's account with the Fund.

Redeeming Shares. You must contact your plan administrator for information on
how to redeem shares. There will be no redemption fee assessed for qualified
plan redemptions, which are:

. Redemptions resulting from the plan participant's death, disability,
retirement or termination of employment;
. Redemptions to fund loans to, or "in service" withdrawals by, a plan
participant; and
. Transfers to other plan investment options that are not competing funds*
if:
. your plan does not allow transfers to competing funds; or

. your plan requires transfers between the Fund and a non-competing fund
to remain in the non-competing fund for a period of at least three
months before transfer to a competing fund.

* Competing funds are any fixed income investment options with a targeted
average duration of three years or less, or any investment option that seeks to
maintain a stable value per unit or share, including money market funds.

All other redemptions of shares will be subject to the 2% redemption fee, if the
Interest Rate Trigger is active. Specifically, if your plan allows transfers to
competing funds or if they do not require transfers between the Fund and a non-
competing fund to remain in the non-competing fund for a period of at least
three months before transfer to a competing fund, all transfers will be subject
to a redemption fee.

Shareholders who purchase through certain platforms will be charged the
redemption fee for both qualified and non-qualified redemptions if the Interest
Rate Trigger is on. You should consult with your platform representative to
determine whether the redemption fee is applicable to your shares.

<PAGE>

The Fund reserves the right to require written verification of whether a
redemption request is for a qualified plan redemption in accordance with plan
provisions and to establish the authenticity of this information before
processing a redemption request. Normally, the Fund will make payment for all
shares redeemed within one business day after a request is received. In no event
will payment be made more than seven days after receipt of a redemption request
in good order.

The value of shares at the time of redemption may be more or less than the plan
participant's cost at the time of purchase, depending upon the then-current
market value of the Fund's assets (its interest in the master portfolio). Plan
participants should consult with their plan administrator and/or professional
tax advisor with respect to the terms and conditions for withdrawal from, or
redemption of their interests in, their plan.

Interest Rate Trigger

Qualified IRA redemptions and qualified plan redemptions (as described above)
are not subject to the redemption fee at any time. All other redemptions are
subject to the redemption fee, in the amount of 2%, on the proceeds of such
redemptions of shares by shareholders on any day that the "Interest Rate
Trigger" (as described below) is "active," and not subject to those charges on
days that the Interest Rate Trigger is "inactive." The Interest Rate Trigger is
active on any day when, as of the preceding day, the "Reference Index Yield"
exceeds the sum of the "Annual Effective Yield" of the PreservationPlus Income
Portfolio plus 1.55%. The Reference Index Yield on any determination date is
the previous day's closing "Yield to Worst" on the Lehman Brothers Intermediate
Treasury Bond Index (R). The status of the Interest Rate Trigger will either be
"active" or "inactive" on any day, and shall be determined on every day that the
NAV is calculated for the Fund. Once the Interest Rate Trigger is active, it
remains active every day until the Reference Index Yield is less than the sum of
the Annual Effective Yield of the Portfolio plus 1.30%, at which time the
Interest Rate Trigger becomes inactive on the following day and remains inactive
every day thereafter until it becomes active again. An example of when and how
the redemption fee will apply to the redemption of shares follows.

The Annual Effective Yield of the Portfolio is intended to represent one
day's investment income expressed as an annualized yield and compounded
annually. The Annual Effective Yield of the Portfolio shall be expressed as a
percentage and calculated on each business day as follows based on the dividend
declared for the previous day:

[(1 + Previous Day's Dividend Factor) .365-1]
NAV Per Share

Please note that the annual effective yield of the Fund will be lower than the
annual effective yield of the Portfolio because the Portfolio's expenses are
lower than the Fund's.

A shareholder is considering submitting a request for a redemption other than a
qualified IRA redemption or a qualified plan redemption to the Fund on March 2nd
in the amount of $5,000. Assume that the Reference Index Yield is 8.65% as of
the close of business on March 1st and the Annual Effective Yield of the
Portfolio is 6.20% as of that date. The Annual Effective Yield of the Portfolio
plus 1.55% equals 7.75%. Since this is less than the Reference Index Yield of
8.65%, the Interest Rate Trigger is active. Thus, the net redemption proceeds
to the shareholder will be $4,900. The redemption fee will continue to
<PAGE>

apply to all redemptions that are not qualified IRA redemptions or qualified
plan redemptions until the day after the Reference Index Yield is less than the
sum of the Annual Effective Yield of the Portfolio plus 1.30%.

(Please note that this example does not take into consideration an individual
shareholder's tax issues or consequences including, without limitation, any
withholding taxes that may apply.)

You can obtain information regarding when the Interest Rate Trigger is active,
as well as the Annual Effective Yield of the Portfolio and the Reference Index
Yield by calling 1-800-730-1313 or your service agent.

Important Information About Buying and Selling Shares

. After receiving a shareholder's order, the Fund buys or sells shares at the
next price calculated on any day the Fund is open for business.

. It is the responsibility of the plan administrator or IRA service agent to
forward purchase and redemption instructions to the Fund.

. Unless otherwise instructed, the Fund normally makes payment of the
proceeds from the sale of your shares the next business day but always
within seven days.

. Qualified plan redemptions and qualified IRA redemptions are not subject to
a 2% redemption fee at any time.

. The redemption fee does not apply to exchanges into another investment
company or other entity that invests exclusively in the master portfolio.

. All redemption requests in connection with qualified IRA withdrawals must
be in writing.

. The Fund remits proceeds from the sale of shares in U.S. dollars for
redemption requests up to $250,000 or 1% of the Fund's NAV, whichever is
less, during any 90-day period for any one IRA or plan shareholder. The
Fund may redeem "in kind" if a redemption request is larger than the lesser
of $250,000 or 1% of the Fund's NAV. The redemption-in-kind will not
include wrapper agreements.

. The Fund does not issue share certificates.

. We reserve the right to reject purchases of Fund shares (including
exchanges) for any reason. We will reject purchases if we conclude that the
purchaser may be investing only for the short-term or for the purpose of
profiting from day to day fluctuations in the Fund's share price.

. We reserve the right to reject purchases of Fund shares (including
exchanges) or to suspend or postpone redemptions at times when both the New
York Stock Exchange and the Fund's custodian are closed.
<PAGE>

The table below provides a picture of the Fund's financial performance since its
inception. The information selected reflects financial results for a single Fund
share. The total return in the table represents 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
_______________ 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 Service Center at 1-800-730-1313.

Financial Highlights

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
For the year ended For the period December
September 30, 2000 23, 1998/1/ through
September 30, 2000
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Per Share Operating Performance:
--------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Income from Investment Operations
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Net Investment Income
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Distributions to Shareholders
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Net Investment Income
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Total Investment Return /2/
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Supplemental Data and Ratios:
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s omitted)
--------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
--------------------------------------------------------------------------------------------------------------
Net Investment Income /3/
--------------------------------------------------------------------------------------------------------------
Net Expenses, Including Expense of the 5
PreservationPlus Income Portfolio
--------------------------------------------------------------------------------------------------------------
Decrease Reflected in Above Expense Ratio Due to 5
Fees Waived/Reimbursed by Bankers Trust
--------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate/4/
--------------------------------------------------------------------------------------------------------------
</TABLE>

________________________________
/1/ Commencement of operations.
/2/ Return is not annualized.
/3/ Annualized.
/4/ The portfolio turnover rate is for the master portfolio into which the Fund
invests all of its assets.
<PAGE>

Additional information about the Fund's investments 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, 2001, 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 the Fund, write to us at:

Service Center
P.O. Box 219210
Cansas City, MO 64121-9210

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

You can find reports and other information about the Fund on the EDGAR Database
on the SEC's website (http://www.sec.gov), or you can get copies of this
information, after payment of a duplicating fee, by electronic request at
[email protected] or by writing to the Public Reference Section of the SEC,
Washington, D.C. 20549-0102. 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 202-942-8090.

PreservationPlus Income

Distributed by:
ICC Distributors, Inc. CUSIP
Two Portland Square #055922660
Portland, ME 04101 815PRO (1/00)
811-4760
<PAGE>

WF&G Draft
11/17/00

STATEMENT OF
ADDITIONAL INFORMATION

January 31, 2001

BT Investment Funds
PreservationPlus Income
(formerly BT PreservationPlus Income Fund)

PreservationPlus Income (the "Fund") is a separate series of BT Investment Funds
(the "Trust"), an open-end, management investment company (mutual fund) offering
shares of the Fund ("Shares") as described herein.

As described in the Fund's Prospectus, the Fund seeks to achieve its investment
objective by investing all its net investable assets (the "assets") in
PreservationPlus Income Portfolio (the "Portfolio"), a diversified open-end
management investment company having the same investment objective as the Fund.
The Portfolio is a separate series of BT Investment Portfolios, a New York
master trust fund (the "Portfolio Trust").

Because the investment characteristics of the Fund correspond directly to those
of the Portfolio (in which the Fund invests all of its assets), the following is
a discussion of the various investments of and techniques employed by the
Portfolio. The Fund has been established to serve as an alternative investment
to short-term bond funds and money market funds. In addition, to date, there has
been no comparable investment substitute for those individuals who are "rolling"
assets over from the stable value or guaranteed investment contract ("GIC")
option of their employee benefit plans (such as 401(k) plans). The Fund is
designed to be a comparable alternative, to those investments as well.

Shares of the Fund are sold by ICC Distributors, Inc., the Fund's distributor
(the "Distributor"), solely to individual retirement accounts as defined in
Section 408 of the Internal Revenue Code of 1986, as amended (the "Code"),
including "SIMPLE IRAs" and "SEP IRAs", Roth IRAs as defined in Section 408A of
the Code, education individual retirement accounts as defined in Section 530 of
the Code and "Keogh Plans" (sometimes collectively referred to herein as
"IRAs"), and to employees investing through participant-directed employee
benefit plans (each a "Plan" and together "Plans"). Shares are offered to Plans
either directly, or through vehicles such as bank collective funds or insurance
company separate accounts consisting solely of such Plans. Shares are also
available to employee benefit plans which invest in the Fund through an omnibus
account or similar arrangement.

The Fund's Prospectus (the "Prospectus") is dated January 31, 2001. The
Prospectus provides the basic information investors should know before investing
and may be obtained without charge by calling the Trust at the telephone number
listed below. This Statement of Additional Information ("SAI"), which is not a
prospectus, is intended to provide additional information regarding the
activities and operations of the Fund and the Portfolio and should be read in
conjunction with the Prospectus. This SAI is not an offer by the Fund to an
investor that has not received a Prospectus. Capitalized terms not otherwise
defined in this SAI have the meanings accorded to them in the Prospectus. The
Fund's and Portfolio's financial statements for the fiscal year ended September
30, 2000, are incorporated herein by reference to the Annual Report to
shareholders dated September 30, 2000. A copy of the Fund's and 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 Portfolio and Administrator

ICC DISTRIBUTORS, INC.
Distributor

Two Portland Square
Portland, Maine 04101
1-(800) 730-1313
<PAGE>

TABLE OF CONTENTS

<TABLE>
<S> <C>
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS....................................... 1
Investment Objective................................................................ 1
Investment Policies................................................................. 1
Short-Term Instruments........................................................... 1
Certificates of Deposit and Bankers' Acceptances................................. 2
Commercial Paper................................................................. 3
U.S. Dollar-Denominated Domestic and Foreign Fixed Income Securities............. 3
U.S. Dollar-Denominated Sovereign and Supranational Fixed Income Securities...... 4
Fixed Income Security Risk....................................................... 4
Foreign Securities Risk.......................................................... 4
Mortgage- and Asset-Backed Securities............................................ 5
Mortgage-Backed Securities and Asset-Backed Securities--Types of Credit Support.. 7
Multiple Class Mortgage-Backed Securities........................................ 7
Zero Coupon Securities and Deferred Interest Bonds............................... 9
Wrapper Agreements............................................................... 10
Risks of Wrapper Agreements...................................................... 12
Illiquid Securities.............................................................. 14
TBA Purchase Commitments......................................................... 15
When-Issued and Delayed Delivery Securities...................................... 15
U.S. Government Obligations...................................................... 2
Lower-Rated Debt Securities ("Junk Bonds")....................................... 16
Hedging Strategies............................................................... 17
Futures Contracts and Options on Futures Contracts -- General.................... 18
Futures Contracts................................................................ 19
Options on Futures Contracts..................................................... 21
Options on Securities............................................................ 22
Global Asset Allocation Strategy ("GAA Strategy")................................ 24
Repurchase Agreements............................................................ 27
Reverse Repurchase Agreements.................................................... 27
Mortgage Dollar Rolls............................................................ 27
Borrowing........................................................................ 28
Asset Coverage................................................................... 28
Rating Services..................................................................... 30
Investment Restrictions............................................................. 30
Fundamental Restrictions......................................................... 30
Non-Fundamental Restrictions..................................................... 32
Portfolio Transactions and Brokerage Commissions.................................... 32
PERFORMANCE INFORMATION............................................................... 34
Standard Performance Information.................................................... 34
Yield............................................................................ 34
Total return..................................................................... 35
Performance Results.............................................................. 36
Comparison of Fund Performance...................................................... 36
ECONOMIC AND MARKET INFORMATION....................................................... 37
VALUATION OF ASSETS; REDEMPTIONS IN KIND.............................................. 37
OVERVIEW OF THE TYPES OF INDIVIDUAL RETIREMENT ACCOUNTS............................... 39
Types of Individual Retirement Accounts............................................. 40
Traditional IRAs................................................................. 40
Roth IRAs........................................................................ 40
SEP-IRAs......................................................................... 41
Simple IRAs...................................................................... 41
Keogh Plans...................................................................... 42
Education IRAs................................................................... 42
OWNERSHIP OF SHARES THROUGH PLANS..................................................... 42
Qualified Redemptions................................................................. 43
Traditional IRAs, SEP-IRAs and SIMPLE IRAs.......................................... 44
Roth IRAs........................................................................... 44
Keogh Plans......................................................................... 45
Education IRAs...................................................................... 46
MANAGEMENT OF THE TRUSTS.............................................................. 46
Trustees of the Trusts and Portfolio................................................ 46
Officers of the Trusts And Portfolio................................................ 48
Code of Ethics...................................................................... 49
Investment Adviser.................................................................. 50
Administrator....................................................................... 51
Distributor......................................................................... 52
Service Agent....................................................................... 52
Banking Regulatory Matters.......................................................... 52
Counsel and Independent Auditors.................................................... 53
ORGANIZATION OF THE TRUST............................................................. 53
TAXATION.............................................................................. 54
Taxation of The Fund................................................................ 54
Taxation of The Portfolio........................................................... 54
Other Taxation...................................................................... 56
Foreign Withholding Taxes........................................................... 57
APPENDIX.............................................................................. 58
</TABLE>
<PAGE>

INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS

Investment Objective

The Fund seeks a high level of current income while seeking to maintain a stable
value per share. 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 Trust Board determines that it is in the best
interests of the Fund to do so.

The Portfolio's investment objective is a high level of current income while
seeking to maintain a stable value per Share. The Portfolio expects to invest
primarily in fixed income securities ("Fixed Income Securities") of varying
maturities rated, at the time of purchase, in one of the top four long-term
rating categories by Standard & Poor's Ratings Services ("S&P"), Moody's
Investors Service, Inc. ("Moody's"), or Duff & Phelps Credit Rating Co. ("Duff
and Phelps"), or comparably rated by another nationally recognized statistical
rating organization ("NRSRO"), or, if not rated by a NRSRO, of comparable
quality as determined by Bankers Trust in its sole discretion.

In addition, the Portfolio will enter into contracts ("Wrapper Agreements") with
insurance companies, banks or other financial institutions ("Wrapper Providers")
that are rated, at the time of purchase, in one of the top two long-term rating
categories by Moody's or S&P. There is no active trading market for Wrapper
Agreements, and none is expected to develop; therefore, they will be considered
illiquid. At the time of purchase, the value of all of the Wrapper Agreements
and any other illiquid securities will not exceed 15% of the Portfolio's net
assets.

The following is a discussion of the various investments of and techniques
employed by the Portfolio.

Short-Term Instruments

The Portfolio's assets may be invested in high quality short-term investments
with remaining maturities of 397 days or less to maintain the Liquidity Reserve
(as defined below) or when the Portfolio experiences large cash inflows, for
example, through the sale of securities and attractive investments are
unavailable in sufficient quantities. The Portfolio may also hold short-term
investments (or shares of money market mutual funds) for a limited time pending
availability of such investments. In addition, when in the opinion of Bankers
Trust Company, the Portfolio's investment adviser (the "Adviser" or "Bankers
Trust"), it is advisable to adopt a temporary defensive position because of
unusual and adverse market or other conditions, up to 100% of the Portfolio's
assets may be invested in such short-term instruments.

Short-term instruments consist of foreign and domestic: (1) short-term
obligations of sovereign governments, their agencies, instrumentalities,
authorities or political subdivisions; (2) other
<PAGE>

short-term debt securities rated AA or higher by "S&P" or Aa or higher by
"Moody's" or, if unrated, are deemed to be of comparable quality in the opinion
of the Adviser; (3) commercial paper; (4) bank obligations, including negotiable
certificates of deposit, time deposits and banker's acceptances; and (5)
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;
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 deemed to
be of comparable quality in the opinion of the Adviser. These instruments may be
denominated in U.S. dollars or in foreign currencies.

Other U.S. government securities the Portfolio may invest in include (but are
not limited to) securities issued or guaranteed by the Federal Housing
Administration, Farmers Home Loan Administration, Export-Import Bank of the
U.S., Small Business Administration, General Services Administration, Central
Bank for Cooperatives, Federal Farm Credit Banks, Federal Intermediate Credit
Banks, Federal Land Banks, Maritime Administration, Tennessee Valley Authority,
District of Columbia Armory Board and Student Loan Marketing Association.
Because the U.S. government is not obligated by law to provide support to an
instrumentality it sponsors, the Portfolio will invest in obligations issued by
such an instrumentality only if the Adviser determines that the credit risk with
respect to the instrumentality does not make its securities unsuitable for
investment by the Portfolio.

The Portfolio may also invest in separately traded principal and interest
component of securities guaranteed or issued by the U.S. Government or its
agencies, instrumentalities or sponsored enterprises if such components trade
independently under the Separate Trading of Registered Interest and Principal of
Securities program ("STRIPS") or any similar program sponsored by the U.S.
Government. STRIPS are sold as zero coupon securities. See "Zero Coupon
Securities and Deferred Interest Bonds."

U.S. Government Obligations

The Portfolio may invest in obligations issued or guaranteed by the U.S.
government and include: (1) direct obligations of the U.S. Treasury and (2)
obligations issued by U.S. government agencies and instrumentalities. Included
among direct obligations of the U.S. are Treasury Bills, Treasury Notes and
Treasury Bonds, which differ in terms of their interest rates, maturities and
dates of issuance. Treasury Bills have maturities of less than one year,
Treasury Notes have maturities of one to 10 years and Treasury Bonds generally
have maturities of greater than 10 years at the date of issuance. Included among
the obligations issued by agencies and instrumentalities of the U.S. are:
instruments that are supported by the full faith and credit of the U.S. (such as
certificates issued by the Government National Mortgage Association ("GNMA" or
"Ginnie Mae")); instruments that are supported by the right of the issuer to
borrow from the U.S. Treasury (such as securities of Federal Home Loan Banks);
and instruments that are supported by the credit of the instrumentality (such as
Federal National Mortgage Association ("FNMA" or "Fannie Mae") and Federal Home
Loan Mortgage Corporation ("FHLMC" or "Freddie Mac")).

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Certificates of Deposit and Bankers' Acceptances

The Portfolio may invest in 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.

Commercial Paper

The Portfolio may invest in commercial paper. The Portfolio may invest in fixed
rate or variable rate commercial paper, issued by U.S. or foreign entities.
Commercial paper consists of short-term (usually from 1 to 270 days) unsecured
promissory notes issued by U.S. or foreign corporations in order to finance
their current operations. Any commercial paper issued by a foreign entity
corporation and purchased by the Portfolio must be U.S. dollar-denominated and
must not be subject to foreign withholding tax at the time of purchase.

Commercial paper when purchased by the Portfolio must be rated in the highest
short-term rating category by any two NRSROs (or one NRSRO if that NRSRO is the
only such NRSRO which rates such security) or, if not so rated, must be believed
by the Adviser, acting under the supervision of the Board of Trustees of the
Portfolio, to be of comparable quality. Investing in foreign commercial paper
generally involves risks similar to those described above relating to
obligations of foreign banks or foreign branches and subsidiaries of U.S. and
foreign banks.

The Portfolio may also invest in variable rate master demand notes. A variable
rate 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.

For a description of commercial paper ratings, see the Appendix to this SAI.

U.S. Dollar-Denominated Domestic and Foreign Fixed Income Securities

The Portfolio may invest in a broad range of domestic and foreign fixed income
(debt) securities. Fixed income securities, including (but not limited to)
bonds, are used by issuers to borrow money from investors. The issuer pays the
investor a fixed or variable rate of interest, and must

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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.

The value of fixed income securities in the Portfolio's investments generally
varies inversely with changes in interest rates. Prices of fixed income
securities with longer effective maturities are more sensitive to interest rate
changes than those with shorter effective maturities.

In periods of declining interest rates, the yield (the income generated over a
stated period of time) of the Portfolio that invests in fixed income securities
may tend to be higher than prevailing market rates, and in periods of rising
interest rates, the yield of the Portfolio may tend to be lower. Also, when
interest rates are falling, the inflow of net new money to such Portfolio from
the continuous sale of its shares will likely be invested in instruments
producing lower yields than the balance of the Portfolio's investments, thereby
reducing the yield of the Portfolio. In periods of rising interest rates, the
opposite can be true. The net asset value of a portfolio investing in fixed
income securities can generally be expected to change as general levels of
interest rates fluctuate.

U.S. Dollar-Denominated Sovereign and Supranational Fixed Income Securities

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. 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.

Fixed Income Security Risk

Fixed income securities generally expose the Portfolio to four types of risk:
(1) interest rate risk (the potential for fluctuations in bond prices due to
changing interest rates); (2) income risk (the potential for a decline in the
Portfolio's income due to falling market interest rates); (3) credit risk (the
possibility that a bond issuer will fail to make timely payments of either
interest or principal to the Portfolio); and (4) prepayment risk or call risk
(the likelihood that, during a period of falling interest rates, securities with
high stated interest rates will be prepaid, or "called" prior to maturity,
requiring the Portfolio to invest the proceeds at generally lower interest
rates).

Foreign Securities Risk

The Portfolio may invest a portion of its assets in the dollar-denominated debt
securities of foreign companies. Investing in the securities of foreign
companies involves more risks than investing in securities of U.S. companies.
Their value is subject to economic and political developments in the countries
where the companies operate and to changes in foreign currency values. Values
may also be affected by foreign tax laws, changes in foreign economic or

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monetary policies, exchange control regulations and regulations involving
prohibitions on the repatriation of foreign currencies.

In general, less information may be available about foreign companies than about
U.S. companies, and foreign companies are generally not subject to the same
accounting, auditing and financial reporting standards as are U.S. companies.
Foreign securities markets may be less liquid and subject to less regulation
than the U.S. securities markets. The costs of investing outside the United
States frequently are higher than those in the United States. These costs
include relatively higher brokerage commissions and foreign custody expenses.

Mortgage- and Asset-Backed Securities

Mortgage-Backed Securities. The Portfolio may invest in mortgage-backed
securities. A mortgage-backed security consists of a pool of mortgage loans
evidenced by promissory notes secured by first mortgages or first deeds of trust
or other similar security instruments creating a first lien on owner occupied
and non-owner occupied one-unit to four-unit residential properties, multifamily
(i.e., five or more) properties, agriculture properties, commercial properties
----
and mixed use properties.

The investment characteristics of adjustable and fixed rate mortgage-backed
securities differ from those of traditional fixed-income securities. The major
differences include the payment of interest and principal on mortgage-backed
securities on a more frequent (usually monthly) schedule, and the possibility
that principal may be prepaid at any time due to prepayments on the underlying
mortgage loans or other assets. These differences can result in significantly
greater price and yield volatility than is the case with traditional fixed-
income securities. As a result, if the Portfolio purchases mortgage-backed
securities at a premium, a faster than expected prepayment rate will decrease
both the market value and the yield to maturity from those which were
anticipated. A prepayment rate that is slower than expected will have the
opposite effect of increasing yield to maturity and market value. Conversely, if
the Portfolio purchases mortgage-backed securities at a discount, faster than
expected prepayments will increase, while slower than expected prepayments will
decrease yield to maturity and market values. To the extent that the Portfolio
invests in mortgage-backed securities, the Adviser may seek to manage these
potential risks by investing in a variety of mortgage-backed securities and by
using certain hedging techniques.

Asset-Backed Securities. The Portfolio may invest in securities generally
referred to as asset-backed securities. Asset-backed securities are secured by
and payable from, or directly or indirectly represent undivided fractional
interests in, pools of consumer loans (unrelated to mortgage loans) held in a
trust. Asset-backed securities may provide periodic payments that consist of
interest and/or principal payments. Consequently, the life of an asset-backed
security varies with the prepayment and loss experience of the underlying
assets. Payments of principal and interest are typically supported by some form
of credit enhancement, such as a letter of credit, surety bond, limited
guarantee or senior/subordination. The degree of credit enhancement varies, but
generally amounts to only a fraction of the asset-backed security's par value
until exhausted. If the credit enhancement is exhausted, certificate-holders may
experience losses or

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delays in payment if the required payments of principal and interest are not
made to the trust with respect to the underlying loans. The value of the
securities also may change because of changes in the market's perception of
creditworthiness of the servicing agent for the loan pool, the originator of the
loans or the financial institution providing the credit enhancement. Asset-
backed securities are ultimately dependent upon payment of consumer loans by
individuals, and the certificate-holder generally has no recourse against the
entity that originated the loans.

Asset-backed securities have structural characteristics similar to mortgage-
backed securities. However, the underlying assets are not first lien mortgage
loans or interests therein but include assets such as (but not limited to) motor
vehicle installment sale contracts, other installment sale contracts, home
equity loans, leases of various types of real and personal property, and
receivables from revolving credit (credit card) agreements. Such assets are
securitized through the use of trusts or special purpose corporations. Payments
or distributions of principal and interest on asset-backed securities may be
guaranteed up to certain amounts and for a certain time period by a letter of
credit or a pool insurance policy issued by a financial institution unaffiliated
with the issuer, or other credit enhancements may be present.

Asset-backed securities present certain additional risks that are not presented
by mortgage-backed securities. Primarily, these securities do not have the
benefit of the same type of security interest in the related collateral. Credit
card receivables are generally unsecured, and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
give such debtors the right to avoid payment of certain amounts owed on the
credit cards, thereby reducing the balance due. Most issuers of automobile
receivables permit the servicer to retain possession of the underlying
obligations. If the servicer were to sell these obligations to another party,
there is a risk that the purchaser would acquire an interest superior to that of
the holders of the related automobile receivables. In addition, because of the
large number of vehicles involved in a typical issuance and technical
requirements under state laws, the trustee for the holders of the automobile
receivables may not have a proper security interest in all of the obligations
backing such receivables. Therefore, there is the possibility that recoveries on
repossessed collateral may not, in some cases, be available to support payments
on these securities.

The market for privately issued asset-backed securities is smaller and less
liquid than the market for U.S. government mortgage-backed securities. The
asset-backed securities in which the Portfolio may invest are limited to those
which are readily marketable, dollar-denominated and rated BBB or higher by S&P
or Baa or higher by Moody's.

The yield characteristics of the mortgage- and asset-backed securities in which
the Portfolio may invest differ from those of traditional debt securities. Among
the major differences are that interest and principal payments are made more
frequently on the mortgage- and asset-backed securities (usually monthly) and
that principal may be prepaid at any time because the underlying assets
generally may be prepaid at any time. As a result, if the Portfolio purchases
these securities at a premium, a prepayment rate that is faster than expected
will reduce their yield, while a prepayment rate that is slower than expected
will have the opposite effect of increasing yield. Conversely, if the Portfolio
purchases these securities at a discount, faster than expected

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<PAGE>

prepayments will increase, while slower than expected prepayments will reduce,
the yield on these securities. Amounts available for reinvestment by the
Portfolio are likely to be greater during a period of declining interest rates
and, as a result, are likely to be reinvested at lower interest rates than
during a period of rising interest rates.

Mortgage-Backed Securities and Asset-Backed Securities--Types of Credit Support

Mortgage-backed securities and asset-backed securities are often backed by a
pool of assets representing the obligations of a number of different parties. To
lessen the effect of failure by obligors on underlying assets to make payments,
such securities may contain elements of credit support. Such credit support
falls into two categories: (1) liquidity protection and (2) protection against
losses resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the pass-through of
payments due on the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default enhances the likelihood of
ultimate payment of the obligations on at least a portion of the assets in the
pool. Such protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties; through
various means of structuring the transaction; or through a combination of such
approaches. The Portfolio will not pay any additional fees for such credit
support, although the existence of credit support may increase the price of a
security.

The ratings of mortgage-backed securities and asset-backed securities for which
third-party credit enhancement provides liquidity protection or protection
against losses from default are generally dependent upon the continued
creditworthiness of the provider of the credit enhancement. The ratings of such
securities could be subject to reduction in the event of deterioration in the
creditworthiness of the credit enhancement provider even in cases where the
delinquency and loss experience on the underlying pool of assets is better than
expected.

Examples of credit support arising out of the structure of the transaction
include "senior-subordinated securities" (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal thereof
and interest thereon, with the result that defaults on the underlying assets are
borne first by the holders of the subordinated class), creation of "reserve
funds" (where cash or investments, sometimes funded from a portion of the
payments on the underlying assets, are held in reserve against future losses)
and "over-collateralization" (where the scheduled payments on, or the principal
amount of, the underlying assets exceed those required to make payment of the
securities and pay any servicing or other fees). The degree of credit support
provided for each issue is generally based on historical information with
respect to the level of credit risk associated with the underlying assets.
Delinquency or loss in excess of that which is anticipated could adversely
affect the return on an investment in such a security.

Multiple Class Mortgage-Backed Securities

The Portfolio may invest in multiple class mortgage-backed securities including
collateralized mortgage obligations ("CMOs") and real estate mortgage
investments conduits ("REMIC")

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Certificates. These securities may be issued by U.S. Government agencies and
instrumentalities such as Fannie Mae or Freddie Mac or by trusts formed by
private originators of, or investors in, mortgage loans, including savings and
loan associations, mortgage bankers, commercial banks, insurance companies,
investment banks and special purpose subsidiaries of the foregoing. In general,
CMOs are debt obligations of a legal entity that are collateralized by a pool of
mortgage loans or mortgage-backed securities the payments on which are used to
make payments on the CMOs or multiple class mortgage-backed securities. REMIC
Certificates represent beneficial ownership interests in a REMIC trust,
generally consisting of mortgage loans or Fannie Mae, Freddie Mac or Ginnie Mae
guaranteed mortgage-backed securities (the "Mortgage Assets"). The obligations
of Fannie Mae or Freddie Mac under their respective guaranty of the REMIC
Certificates are obligations solely of Fannie Mae or Freddie Mac, respectively.
Although investors may purchase beneficial interests in REMICs, which are known
as "regular" interests or "residual" interests; the Portfolio does not intend to
purchase such residual interests in REMICs.

Fannie Mae REMIC Certificates are issued and guaranteed as to timely
distribution of principal and interest by Fannie Mae. In addition, Fannie Mae
will be obligated to distribute the principal balance of each class of REMIC
Certificates in full, whether or not sufficient funds are otherwise available.

Freddie Mac guarantees the timely payment of interest on Freddie Mac REMIC
Certificates and also guarantees the payment of principal as payments are
required to be made on the underlying mortgage participation certificates
("PCs"). PCs represent undivided interests in specified level payment,
residential mortgages or participation therein purchased by Freddie Mac and
placed in a PC pool. With respect to principal payments on PCs, Freddie Mac
generally guarantees ultimate collection of all principal of the related
mortgage loans without offset or deduction. Freddie Mac also guarantees timely
payment of principal of certain PCs.

CMOs and REMIC Certificates are issued in multiple classes. Each class of CMOs
or REMIC Certificates, often referred to as a "tranche," is issued at a specific
adjustable or fixed interest rate and must be fully retired no later than its
final distribution date. Principal prepayments on the underlying mortgage loans
or the mortgaged assets underlying the CMOs or REMIC Certificates may cause some
or all of the classes of CMOs or REMIC Certificates to be retired substantially
earlier than their final distribution dates. Generally, interest is paid or
accrues on all classes of CMOs or REMIC Certificates on a monthly basis.

The principal of and interest on the mortgaged assets may be allocated among the
several tranches in various ways. In certain structures (known as "sequential
pay" CMOs or REMIC Certificates), payments of principal, including any principal
prepayments, on the Mortgage Assets generally are applied to the classes of CMOs
or REMIC Certificates in the order of their respective final distribution dates.
Thus, no payment of principal will be made on any class of sequential pay CMOs
or REMIC Certificates until all other classes having an earlier final
distribution date have been paid in full. Additional structures of CMOs and
REMIC Certificates include, among others, "parallel pay" CMOs and REMIC
Certificates. Parallel pay CMOs or REMIC Certificates are those which are
structured to apply principal payments and prepayments

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<PAGE>

of the mortgaged assets to two or more classes concurrently on a proportionate
or disproportionate basis. These simultaneous payments are taken into account in
calculating the final distribution date of each class.

A wide variety of REMIC Certificates may be issued in parallel pay or sequential
pay structures. These securities include accrual certificates (also known as "Z-
Bonds"), which only accrue interest at a specified rate until all other
certificates having an earlier final distribution date have been retired and are
converted thereafter to an interest-paying security, and planned amortization
class ("PAC") certificates, which are parallel pay REMIC Certificates that
generally require that specified amounts or principal be applied on each payment
date to one or more classes or REMIC Certificates (the "PAC Certificates"), even
though all other principal payments and prepayments of the Mortgage Assets are
then required to be applied to one or more other classes of the PAC
Certificates. The scheduled principal payments for the PAC Certificates
generally have the highest priority on each payment date after interest due has
been paid to all classes entitled to receive interest currently. Shortfalls, if
any, are added to the amount payable on the next payment date. The PAC
Certificate payment schedule is taken into account in calculating the final
distribution date of each class of PAC. In order to create PAC tranches, one or
more tranches generally must be created that absorb most of the volatility in
the underlying mortgage assets. These tranches tend to have market prices and
yields that are much more volatile than other PAC classes.

Zero Coupon Securities and Deferred Interest Bonds

The Portfolio may invest in zero coupon securities that are "stripped" U.S.
Treasury notes and bonds and in deferred interest bonds. Zero Coupon Securities
including CATS, TIGRs and TRs, are the separate income or principal components
of a debt instrument. Zero coupon and deferred interest bonds are debt
obligations which are issued at a significant discount from face value. The
original discount approximates the total amount of interest the bonds will
accrue and compound over the period until maturity or the first interest accrual
date at a rate of interest reflecting the market rate of the security at the
time of issuance. Zero coupon securities are redeemed at face value at their
maturity date without interim cash payments of interest or principal. The amount
of this discount is accrued over the life of the security, and the accrual
constitutes the income earned on the security for both accounting and tax
purposes. Because of these features, the market prices of zero coupon securities
are generally more volatile than the market prices of securities that have
similar maturity but that pay interest periodically.

While zero coupon bonds do not require the periodic payment of interest,
deferred interest bonds generally provide for a period of delay before the
regular payment of interest begins. Although this period of delay is different
for each deferred interest bond, a typical period is approximately one-third of
the bond's term to maturity. Such investments benefit the issuer by mitigating
its initial need for cash to meet debt service, but some also provide a higher
rate of return to attract investors who are willing to defer receipt of such
cash.

The Portfolios will accrue income on such investments for tax and accounting
purposes, as required, which is distributable to shareholders and which, because
no cash is generally received

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<PAGE>

at the time of accrual, may require the liquidation of other portfolio
securities to satisfy the Portfolios' distribution obligations. See "Taxation."

Wrapper Agreements

Wrapper Agreements are structured with a number of different features. Wrapper
Agreements purchased by the Portfolio are of three basic types: (1) non-
participating, (2) participating and (3) "hybrid." In addition, the Wrapper
Agreements will either be of fixed-maturity or open-end maturity ("evergreen").
The Portfolio enters into particular types of Wrapper Agreements depending upon
their respective cost to the Portfolio and the Wrapper Provider's
creditworthiness, as well as upon other factors. Under most circumstances, it is
anticipated that the Portfolio will enter into participating Wrapper Agreements
of open-end maturity and hybrid Wrapper Agreements.

Under a non-participating Wrapper Agreement, the Wrapper Provider becomes
obligated to make a payment to the Portfolio whenever the Portfolio sells
Covered Assets at a price below Book Value to meet withdrawals of a type covered
by the Wrapper Agreement (a "Benefit Event"). Conversely, the Portfolio becomes
obligated to make a payment to the Wrapper Provider whenever the Portfolio sells
Covered Assets at a price above their Book Value in response to a Benefit Event.
In neither case is the Crediting Rate adjusted at the time of the Benefit Event.
Accordingly, under this type of Wrapper Agreement, while the Portfolio is
protected against decreases in the market value of the Covered Assets below Book
Value, it does not realize increases in the market value of the Covered Assets
above Book Value; those increases are realized by the Wrapper Providers.

Under a participating Wrapper Agreement, the obligation of the Wrapper Provider
or the Portfolio to make payments to each other typically does not arise until
all of the Covered Assets have been liquidated. Instead of payments being made
on the occurrence of each Benefit Event, these obligations are a factor in the
periodic adjustment of the Crediting Rate.

Under a hybrid Wrapper Agreement, the obligation of the Wrapper Provider or the
Portfolio to make payments does not arise until withdrawals exceed a specified
percentage of the Covered Assets, after which time payment covering the
difference between market value and Book Value will occur.

A fixed-maturity Wrapper Agreement terminates at a specified date, at which time
settlement of any difference between Book Value and market value of the Covered
Assets occurs. A fixed-maturity Wrapper Agreement tends to ensure that the
Covered Assets provide a relatively fixed rate of return over a specified period
of time through bond immunization, which targets the duration of the Covered
Assets to the remaining life of the Wrapper Agreement.

An evergreen Wrapper Agreement has no fixed maturity date on which payment must
be made, and the rate of return on the Covered Assets accordingly tends to vary.
Unlike the rate of return under a fixed-maturity Wrapper Agreement, the rate of
return on assets covered by an evergreen Wrapper Agreement tends to more closely
track prevailing market interest rates and thus tends to

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<PAGE>

rise when interest rates rise and fall when interest rates fall. An evergreen
Wrapper Agreement may be converted into a fixed-maturity Wrapper Agreement that
will mature in the number of years equal to the duration of the Covered Assets.

Wrapper Providers are banks, insurance companies and other financial
institutions. As of December 1999, there were approximately fifteen Wrapper
Providers rated in one of the top two long-term rating categories by Moody's,
S&P or another NRSRO. The cost of Wrapper Agreements is typically 0.10% to 0.25%
per dollar of Covered Assets per annum.

In the event of the default of a Wrapper Provider, the Portfolio could
potentially lose the Book Value protections provided by the Wrapper Agreements
with that Wrapper Provider. However, the impact of such a default on the
Portfolio as a whole may be minimal or non-existent if the market value of the
Covered Assets thereunder is greater than their Book Value at the time of the
default, because the Wrapper Provider would have no obligation to make payments
to the Portfolio under those circumstances. In addition, the Portfolio may be
able to obtain another Wrapper Agreement from another Wrapper Provider to
provide Book Value protections with respect to those Covered Assets. The cost of
the replacement Wrapper Agreement might be higher than the initial Wrapper
Agreement due to market conditions or if the market value (plus accrued interest
on the underlying securities) of those Covered Assets is less than their Book
Value at the time of entering into the replacement agreement. Such cost would
also be in addition to any premiums previously paid to the defaulting Wrapper
Provider. If the Portfolio were unable to obtain a replacement Wrapper
Agreement, participants redeeming Shares might experience losses if the market
value of the Portfolio's assets no longer covered by the Wrapper Agreement is
below Book Value. The combination of the default of a Wrapper Provider and an
inability to obtain a replacement agreement could render the Portfolio and the
Fund unable to achieve their investment objective of seeking to maintain a
stable value per Share.

With respect to payments made under the Wrapper Agreements between the Portfolio
and the Wrapper Provider, some Wrapper Agreements provide that payments may be
due upon disposition of the Covered Assets, while others provide for payment
only upon the total liquidation of the Covered Assets or upon termination of the
Wrapper Agreement. In none of these cases, however, would the terms of the
Wrapper Agreements specify which Portfolio Securities are to be disposed of or
liquidated. Moreover, because it is anticipated that each Wrapper Agreement will
cover all Covered Assets up to a specified dollar amount, if more than one
Wrapper Provider becomes obligated to pay to the Portfolio the difference
between Book Value and market value (plus accrued interest on the underlying
securities), each Wrapper Provider will pay a pro-rata amount in proportion to
the maximum dollar amount of coverage provided. Thus, the Portfolio will not
have the option of choosing which Wrapper Agreement to draw upon in any such
payment situation. Under the terms of most Wrapper Agreements, the Wrapper
Provider will have the right to terminate the Wrapper Agreement in the event
that material changes are made to the Portfolio's investment objectives or
limitations or to the nature of the Portfolio's operations. In such event, the
Portfolio may be obligated to pay the Wrapper Provider termination fees equal in
amount to the premiums that would have been due had the Wrapper Agreement
continued through the predetermined period. The Portfolio will have the right to
terminate a Wrapper Agreement for any reason. Such right, however, may also be

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subject to the payment of termination fees. In the event of termination of a
Wrapper Agreement or conversion of an evergreen Wrapper Agreement to a fixed
maturity, some Wrapper Agreements may require that the duration of some portion
of the Fund's portfolio securities be reduced to correspond to the fixed
maturity or termination date and that such securities maintain a higher credit
rating than is normally required, either of which requirements might adversely
affect the return of the Portfolio and the Fund.

Risks of Wrapper Agreements

Each Wrapper Agreement obligates the Wrapper Provider to maintain the "Book
Value" of a portion of the Portfolio's assets ("Covered Assets") up to a
specified maximum dollar amount, upon the occurrence of certain specified
events. The Book Value of the Covered Assets is their purchase price (i) plus
interest on the Covered Assets at a rate specified in the Wrapper Agreement
("Crediting Rate"), and (ii) less an adjustment to reflect any defaulted
securities. The Crediting Rate used in computing Book Value is calculated by a
formula specified in the Wrapper Agreement and is adjusted periodically. In the
case of Wrapper Agreements purchased by the Portfolio, the Crediting Rate is the
actual interest earned on the Covered Assets, or an index-based approximation
thereof, plus or minus amortization of gains and losses between the book value
and the market value of the Covered Assets. As a result, while the Crediting
Rate will generally reflect movements in the market rates of interest, it may at
any time be more or less than these rates or the actual interest income earned
on the Covered Assets. The Crediting Rate may also be impacted by defaulted
securities and by increases and decreases of the amount of Covered Assets as a
result of contributions and withdrawals tied to the sale and redemption of
Shares. Furthermore, the premiums due Wrapper Providers in connection with the
Portfolio's investments in Wrapper Agreements are offset against and thus reduce
the Crediting Rate. These premiums are generally paid quarterly. In no event
will the Crediting Rate fall below zero percent under the Wrapper Agreements
entered into by the Portfolio.

Under the terms of a typical Wrapper Agreement, if the market value (plus
accrued interest on the underlying securities) of the Covered Assets is less
than their Book Value at the time the Covered Assets are liquidated in order to
provide proceeds for withdrawals of Portfolio interests resulting from
redemptions of Shares by Plan participants, the Wrapper Provider becomes
obligated to pay to the Portfolio the difference. Conversely, the Portfolio
becomes obligated to make a payment to the Wrapper Provider if it is necessary
for the Portfolio to liquidate Covered Assets at a price above their Book Value
in order to make withdrawal payments. (Withdrawals generally will arise when the
Fund must pay shareholders who redeem their Shares.) Because it is anticipated
that each Wrapper Agreement will cover all Covered Assets up to a specified
dollar amount, if more than one Wrapper Provider becomes obligated to pay to the
Portfolio the difference between Book Value and market value (plus accrued
interest on the underlying securities), each Wrapper Provider will be obligated
to pay a pro-rata amount in proportion to the maximum dollar amount of coverage
provided. Thus, the Portfolio will not have the option of choosing which Wrapper
Agreement to draw upon in any such payment situation.

The terms of the Wrapper Agreements vary concerning when these payments must
actually be made between the Portfolio and the Wrapper Provider. In some cases,
payments may be due

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<PAGE>

upon disposition of the Covered Assets; other Wrapper Agreements provide for
settlement only upon termination of the Wrapper Agreement or total liquidation
of the Covered Assets.

The Fund expects that the use of Wrapper Agreements by the Portfolio will under
most circumstances permit the Fund to maintain a constant NAV per Share and to
pay dividends that will generally reflect over time both the interest income of,
and market gains and losses on, the Covered Assets held by the Portfolio less
the expenses of the Fund and the Portfolio. However, there can be no guarantee
that the Fund will maintain a constant NAV per Share or that any Fund
shareholder or Plan participant will realize the same investment return as might
be realized by investing directly in the Portfolio assets other than the Wrapper
Agreements. For example, a default by the issuer of a Portfolio Security or a
Wrapper Provider on its obligations might result in a decrease in the value of
the Portfolio assets and, consequently, the Shares. The Wrapper Agreements
generally do not protect the Portfolio from loss if an issuer of Portfolio
Securities defaults on payments of interest or principal. Additionally, a Fund
shareholder may realize more or less than the actual investment return on the
Portfolio Securities depending upon the timing of the shareholder's purchases
and redemption of Shares, as well as those of other shareholders. Furthermore,
there can be no assurance that the Portfolio will be able at all times to obtain
Wrapper Agreements. Although it is the current intention of the Portfolio to
obtain such agreements covering all of its assets (with the exceptions noted),
the Portfolio may elect not to cover some or all of its assets with Wrapper
Agreements should Wrapper Agreements become unavailable or should other
conditions such as cost, in the Adviser's sole discretion, render their purchase
inadvisable.

If, in the event of a default of a Wrapper Provider, the Portfolio were unable
to obtain a replacement Wrapper Agreement, participants redeeming Shares might
experience losses if the market value of the Portfolio's assets no longer
covered by the Wrapper Agreement is below Book Value. The combination of the
default of a Wrapper Provider and an inability to obtain a replacement agreement
could render the Portfolio and the Fund unable to achieve their investment
objective of maintaining a stable NAV per Share. If the Board of Trustees of the
Portfolio Trust (the "Portfolio Trust Board") determines that a Wrapper Provider
is unable to make payments when due, that Board may assign a fair value to the
Wrapper Agreement that is less than the difference between the Book Value and
the market value (plus accrued interest on the underlying securities) of the
applicable Covered Assets and the Portfolio might be unable to maintain NAV
stability.

Some Wrapper Agreements require that the Portfolio maintain a specified
percentage of its total assets in short-term investments ("Liquidity Reserve").
These short-term investments must be used for the payment of withdrawals from
the Portfolio and Portfolio expenses. To the extent the Liquidity Reserve falls
below the specified percentage of total assets, the Portfolio is obligated to
direct all net cash flow to the replenishment of the Liquidity Reserve. The
obligation to maintain a Liquidity Reserve may result in a lower return for the
Portfolio and the Fund than if these funds were invested in longer-term Fixed
Income Securities. The Liquidity Reserve required by all Wrapper Agreements is
not expected to exceed 20% of the Portfolio's total assets.

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<PAGE>

Wrapper Agreements also require that the Covered Assets have a specified
duration or maturity, consist of specified types of securities or be of a
specified investment quality. The Portfolio will purchase Wrapper Agreements
whose criteria in this regard are consistent with the Portfolio's (and the
Fund's) investment objective and policies as described in this Prospectus.
Wrapper Agreements may also require the disposition of securities whose ratings
are downgraded below a certain level. This may limit the Portfolio's ability to
hold such downgraded securities. For a description of Wrapper Provider ratings,
see the Appendix of this SAI.

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 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. Non-publicly traded securities (including Rule 144A
Securities) may involve a high degree of business and financial risk and may
result in substantial losses. These securities may be less liquid than publicly
traded securities, and it may take longer to liquidate these positions than
would be the case for publicly traded securities. Companies whose securities are
not publicly traded may not be subject to the disclosure and other investor
protection requirements applicable to companies whose securities are publicly
traded. 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. An investment in
illiquid securities is subject to the risk that should the Portfolio desire to
sell any of these securities when a ready buyer is not available at a price that
is deemed to be representative of their value, the value of the Portfolio's net
assets could be adversely affected.

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. 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, non-U.S. 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.

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<PAGE>

The Securities and Exchange Commission ("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 for 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 non-U.S. issuers, such as the PORTAL
System sponsored by the National Association of Securities Dealers, Inc.

An investment in Rule 144A Securities will be considered illiquid and therefore
subject to the Portfolio's limit on the purchase of illiquid securities unless
the Board or its delegates determines that the Rule 144A Securities are liquid.
In reaching liquidity decisions, the Board and its delegates may consider, inter
alia, the following factors: (i) the unregistered nature of the security; (ii)
the frequency of trades and quotes for the security; (iii) the number of dealers
wishing to purchase or sell the security and the number of other potential
purchasers; (iv) dealer undertakings to make a market in the security and (v)
the nature of the security and the nature 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).

Investing in Rule 144A Securities could have the effect of increasing the level
of illiquidity in the Portfolio to the extent that qualified institutional
buyers are unavailable or uninterested in purchasing such securities from the
Portfolio. The Board has adopted guidelines and delegated to the Adviser the
daily function of determining and monitoring the liquidity of Rule 144A
Securities, although the Board will retain ultimate responsibility for any
liquidity determinations.

TBA Purchase Commitments

The Portfolio may enter into TBA purchase commitments to purchase securities for
a fixed price at a future date, typically not exceeding 45 days. TBA purchase
commitments may be considered securities in themselves, and involve a risk of
loss if the value of the security to be purchased declines prior to settlement
date, which risk is in addition to the risk of decline in the value of the
Portfolio's other assets. Unsettled TBA purchase commitments are valued at the
current market value of the underlying securities.

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 can take place a month or
more after the date of the purchase commitment. The payment obligation and the
interest rate that will be received on when-issued and delayed-delivery
securities are fixed at the time the buyer enters into the commitment. Due to
fluctuations in the value of securities purchased or sold on a when-issued or
delayed-delivery basis, the yields obtained on such securities may be higher or
lower than the yields available in the market on the dates when the investments
are actually delivered to the buyers. When-issued securities may include
securities purchased on a "when, as and if issued" basis, under which the
issuance of the security depends on the occurrence of a subsequent event, such
as approval of a

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<PAGE>

merger, corporate reorganization or debt restructuring. The value of such
securities is subject to market fluctuation during this period and no interest
or income, as applicable, accrues to the Portfolio until settlement takes place.

At the time the Portfolio makes the commitment to purchase securities on a when-
issued or delayed delivery basis, it will record the transaction, reflect the
value each day of such securities in determining its net asset value and, if
applicable, calculate the maturity for the purposes of average maturity from
that date. At the time of settlement a when-issued security may be valued at
less than the purchase price. To facilitate such acquisitions, the Portfolio
identifies on its books cash or liquid assets in an amount at least equal to
such commitments. It may be expected that the Portfolio's net assets will
fluctuate to a greater degree when it sets aside portfolio securities to cover
such purchase commitments than when it sets aside cash. On delivery dates for
such transactions, the Portfolio will meet its obligations from maturities or
sales of the segregated securities and/or from cash flow. If the Portfolio
chooses to dispose of the right to acquire a when-issued security prior to its
acquisition, it could, as with the disposition of any other portfolio
obligation, incur a gain or loss due to market fluctuation. It is the current
policy of the Portfolio not to enter into when-issued commitments exceeding in
the aggregate 15% of the market value of the Portfolio's total assets, less
liabilities other than the obligations created by when-issued commitments. When
the Portfolio engages in when-issued or delayed-delivery transactions, it relies
on the other party to consummate the trade. Failure of the seller to do so may
result in the Portfolio's incurring a loss or missing an opportunity to obtain a
price considered to be advantageous.

Lower-Rated Debt Securities ("Junk Bonds")

The Portfolio may invest in debt securities rated in the fifth and sixth long-
term rating categories by S&P, Moody's and Duff & Phelps Credit Rating Company,
or comparably rated by another NRSRO, or if not rated by a NRSRO, of comparable
quality as determined by the Adviser in its sole discretion.

These securities, often referred to as Junk Bonds or High Yield Debt Securities,
are considered speculative and, while generally offering greater income than
investments in higher quality securities, involve greater risk of loss of
principal and income, including the possibility of default or bankruptcy of the
issuers of such securities, and have greater price volatility, especially during
periods of economic uncertainty or change. These lower quality bonds tend to be
affected by economic changes and short-term corporate and industry developments,
as well as public perception of those changes and developments, to a greater
extent than higher quality securities, which react primarily to fluctuations in
the general level of interest rates.

In addition, 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

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<PAGE>

available. Adverse publicity and changing investor perception may also affect
the availability of outside pricing services to value lower-rated debt
securities and the Portfolio's ability to dispose of these securities. In
addition, such securities generally present a higher degree of credit risk.
Issuers of lower-rated debt securities are often highly leveraged and may not
have more traditional methods of financing available to them so that their
ability to service their obligations during an economic downturn or during
sustained periods of rising interest rates may be impaired. The risk of loss due
to default by such issuers is significantly greater because below investment
grade securities generally are unsecured and frequently are subordinated to the
prior payment of senior indebtedness.

Since the risk of default is higher for lower-rated debt securities, the
Adviser'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, the Adviser 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. The Adviser'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.

While the market for high yield corporate debt securities has been in existence
for many years and has weathered previous economic downturns, past experience
may not provide an accurate indication of future performance of the high yield
bond market, especially during periods of economic recession.

The Portfolio may choose, at its expense or in conjunction with others, to
pursue litigation or otherwise exercise its rights as a security holder to seek
to protect the interest of security holders if it determines this to be in the
interest of the Portfolio.

Hedging Strategies

The Portfolio may use certain strategies designed to adjust the overall risk of
its investment portfolio. These "hedging" strategies involve derivative
contracts, including (but not limited to) U.S. Treasury and Eurodollar futures
contracts and exchange-traded put and call options on such futures contracts.
New financial products and risk management techniques continue to be developed
and may be used if consistent with the Portfolio's investment objective and
policies. Among other purposes, these hedging strategies may be used to
effectively maintain a desired portfolio duration or to protect against market
risk should the Portfolio change its investments among different types of Fixed
Income Securities. In this respect, these hedging strategies are designed for
different purposes than the investments in Wrapper Agreements.

The Portfolio might not use any hedging strategies, and there can be no
assurance that any strategy used will succeed. If the Adviser is incorrect in
its judgment on market values, interest rates or other economic factors in using
a hedging strategy, the Portfolio may have lower net income and a net loss on
the investment. Each of these strategies involves certain risks, which include:

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<PAGE>

. the fact that the skills needed to use hedging instruments are different from
those needed to select securities for the Portfolio;

. the possibility of imperfect correlation, or even no correlation, between the
price movements of hedging instruments and price movements of the securities
or currencies being hedged;

. possible constraints placed on the Portfolio's ability to purchase or sell
portfolio investments at advantageous times due to the need for the Portfolio
to maintain "cover" or to segregate securities; and

. the possibility that the Portfolio will be unable to close out or liquidate
its hedged position.

A hedge is designed to offset a loss in a portfolio position with a gain in the
hedged position; at the same time, however, a properly correlated hedge will
result in a gain in the portfolio position being offset by a loss in the hedged
position. As a result, the use of options, futures and currency exchange
transactions for hedging purposes could limit any potential gain from an
increase in the value of the position hedged. With respect to futures contracts,
since the value of portfolio securities will far exceed the value of the futures
contracts sold by the Portfolio, an increase in the value of the futures
contracts could only mitigate, but not totally offset, the decline in the value
of the Portfolio's assets.

To the extent that the Portfolio engages in the strategies described above, the
Portfolio may experience losses greater than if these strategies had not been
utilized. In addition to the risks described above, these instruments may be
illiquid and/or subject to trading limits, and the Portfolio may be unable to
close out a position without incurring substantial losses, if at all. The
Portfolio is also subject to the risk of a default by a counterparty to an off-
exchange transaction. See "Illiquid Securities."

Futures Contracts and Options on Futures Contracts -- General

The Portfolio may enter into futures contracts on securities, securities
indices, foreign currencies and interest rates, and purchase and write (sell)
options thereon which are traded on exchanges designated by the Commodity
Futures Trading Commission (the "CFTC") or, if consistent with CFTC regulations,
on foreign exchanges. These futures contracts are standardized contracts for the
future delivery of, among other things, a commodity, a non-U.S. currency, an
interest rate sensitive security or, in the case of index futures contracts or
certain other futures contracts, a cash settlement with reference to a specified
multiplier times the change in the index. An option on a futures contract gives
the purchaser the right, in return for the premium paid, to assume a position in
a futures contract.

The Portfolio may enter into futures contracts and options on futures contracts
on securities, securities indices and currencies for speculative purposes and to
manage its exposure to changing interest rates, security prices and currency
exchange rates and also as an efficient means of managing allocations between
asset classes. Aggregate initial margin and premiums required to establish
positions other than those considered by the CFTC to be "bona fide hedging" will
not

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<PAGE>

exceed 5% of the Portfolio's net asset value, after taking into account
unrealized profits and unrealized losses on any such contracts.

The successful use of futures contracts and options thereon draws upon the
Adviser's skill and experience with respect to such instruments and are subject
to special risk considerations. A liquid secondary market for any futures or
options contract may not be available when a futures or options position is
sought to be closed. In addition, there may be an imperfect correlation between
movements in the securities or currency in the Portfolio. Successful use of
futures or options contracts is further dependent on the Adviser's ability to
predict correctly movements in the securities or foreign currency markets and no
assurance can be given that its judgment will be correct.

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, through their clearing corporations, the exchanges guarantee
performance of the contracts as between the clearing members of the exchange.
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, foreign government securities
or corporate debt 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
and 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 for speculative purposes or
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 liquid securities as a good faith deposit to maintain the position
("initial margin"). Daily thereafter, the futures contract is valued and the
payment of a "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 or "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
an identical futures contract on the commodities exchange on which the futures
contract was entered into (or a linked exchange) calling for delivery in the
same month. 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

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<PAGE>

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 purpose of the acquisition or sale of a futures contract, in cases where the
Portfolio holds or intends to acquire fixed-income securities, is to attempt to
protect the Portfolio from fluctuations in interest or foreign exchange rates
without actually buying or selling fixed-income securities or foreign
currencies. For example, if interest rates were expected to increase (which thus
would cause the prices of debt securities to decline), the 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 may otherwise. The
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 the Portfolio to
maintain a defensive position without having to sell its portfolio securities.

Similarly, when it is expected that interest rates may decline (thus increasing
the value of debt securities), 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, the Portfolio could take advantage of the anticipated rise in
the value of debt securities without actually buying them until the market had
stabilized. At that time, the futures contracts could be liquidated and the
Portfolio could then buy debt securities on the cash market. The segregated
assets maintained to cover the Portfolio's obligations with respect to such
futures contracts will consist of cash or liquid 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 requirements in the
futures market are less onerous than margin requirements in the securities
market. Therefore, increased participation by speculators in the futures market
may cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of securities price, 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 significant 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 or an index 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 or a decrease in an
index which would adversely affect the value of securities held in its portfolio
and interest rates decrease or securities prices increase instead, the Portfolio
will lose part or all of the benefit of the increased value of its 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 securities from its portfolio to meet daily variation
margin requirements. Such sales of securities 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

The Portfolio may purchase and write (sell) options on futures contracts for
speculative or hedging purposes. For example, as with the purchase of futures
contracts, when the 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 call option on a futures contract is similar in some respects
to the purchase of a call option on an index or 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.

The writing of a call option on a futures contract may constitute a partial
hedge against declining prices of the underlying portfolio securities which are
the same as or correlate with the security or foreign currency futures contract
that is deliverable upon exercise of the option on that futures contract. If the
futures price at expiration of the option is below the price specified in the
premium received for writing the option ("exercise price"), the Portfolio will
retain the full amount of the net premium (the premium received for writing the
option less any commission), which provides a partial hedge against any decline
that may have occurred in the Portfolio's holdings.

The writing of a put option on an index futures contract may constitute a
partial hedge against increasing prices of the underlying securities or foreign
currency that are 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 net premium, which provides
a partial hedge against any increase in the price of securities that the
Portfolio intends to purchase.

If a put or call option the Portfolio has written is exercised, the Portfolio
will incur a loss that will be reduced by the amount of the net 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

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<PAGE>

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.

The amount of risk the Portfolio assumes when it purchases an option on a
futures contract with respect to an index is the premium paid for the option
plus related transaction costs. In addition to the correlation risks discussed
above, the purchase of such 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.

Options on Securities

The Portfolio may write (sell) covered call and put options to a limited extent
on its portfolio securities ("covered options") to a limited extent in an
attempt to increase income through the premiums it receives for writing the
option(s). However, in return for the premium, 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.

A call option written by the Portfolio is "covered" if the Portfolio owns the
underlying security covered by the call or has an absolute and immediate right
to acquire that security without additional cash consideration (or for
additional cash consideration held in a segregated account by its custodian)
upon conversion or exchange of other securities held in its portfolio. A call
option is also covered if the Portfolio holds a call option on the same security
and in the same principal amount as the written call option where the exercise
price of the call option so held (a) is equal to or less than the exercise price
of the written call option or (b) is greater than the exercise price of the
written call option if the difference is segregated by the Portfolio in cash or
liquid securities.

When the 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. In addition, the Portfolio may continue to
hold a stock which might otherwise have been sold to protect against
depreciation in the market price of the stock.

A put option written by the Portfolio is "covered" when, among other things,
cash or liquid securities acceptable to the broker are placed in a segregated
account to fulfill the obligations undertaken. When the 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 net premium received for writing the option.
If the put option is exercised, a

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<PAGE>

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.

The 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 on 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 enter into 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 the 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 identified on
the Portfolio's books.

The Portfolio may also 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.

The 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 by the Portfolio at a specified price
during the option period. The purchase of protective puts is designed merely to
offset or

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<PAGE>

hedge against a decline in the market value of the Portfolio. Put options also
may be purchased by the Portfolio for the purpose of affirmatively benefiting
from a decline in the price of securities that 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.

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.

The Portfolio may also engage in options transactions in the over-the-counter
("OTC") market with broker-dealers who make markets in these options. At
present, approximately ten broker-dealers, including several of the largest
primary dealers in U.S. government securities, make these markets. The ability
to terminate OTC 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
U.S. 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 Portfolio's Board of Trustees.
Unless the Trustees conclude otherwise, the Portfolio intends to treat OTC
options purchased and the assets used to "cover" OTC options written as not
readily marketable and therefore subject to the Portfolio's limit on investments
in illiquid securities. See "Illiquid Securities."

The Portfolio has adopted certain non-fundamental policies concerning option
transactions that are discussed below.

Global Asset Allocation Strategy ("GAA Strategy")

In connection with the GAA Strategy and in addition to the securities described
above, the Portfolio may invest in indexed securities, futures contracts on
securities indices, securities representing securities of foreign issuers (e.g.
ADRs, GDRs and EDRs), options on stocks, options on futures contracts, foreign
currency exchange transactions and options on foreign currencies. These are
discussed below, to the extent not already described above.

Indexed Securities. The indexed securities in which the Portfolio may invest
include debt securities whose value at maturity is determined by reference to
the relative prices of various

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<PAGE>

currencies or to the price of a stock index. The value of such securities
depends on the price of foreign currencies, securities indices or other
financial values or statistics. These securities may be positively or negatively
indexed; that is, their value may increase or decrease if the underlying
instrument appreciates.

Futures contracts on securities indices. Futures contracts on securities indices
provide for the making and acceptance of a cash settlement based upon changes in
the value of an index of securities, and will be entered into by the Portfolio
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, or as an efficient means of
managing allocations between asset classes. A futures contract may also be
entered into to close out or offset an existing futures position. The risks
attendant to futures contracts on securities indices are similar to those of
futures contracts, discussed above.

Securities representing securities of foreign issuers. The Portfolio's
investments in the securities of foreign issuers may be made directly or in the
form of American Depositary Receipts ("ADRs"), Global Depositary Receipts
("GDRs"), European Depositary Receipts ("EDRs") or other similar securities
representing securities of foreign issuers. These securities may not necessarily
be denominated in the same currency as the securities they represent, and while
designed for use as alternatives to the purchase of the underlying securities in
their national markets and currencies, are subject to the same risks as the
foreign securities to which they relate.

Foreign currency exchange transactions. The Portfolio from time to time may
enter into foreign currency exchange transactions to convert to and from
different foreign currencies and to convert foreign currencies to and from the
U.S. dollar, either on a spot (i.e., cash) basis at the spot rate prevailing in
the foreign currency exchange market, or through forward contracts to purchase
or sell foreign currencies. A forward foreign currency exchange contract
obligates the 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 their
customers. A forward foreign currency exchange contract generally has no deposit
requirement and is traded at a net price without commission. 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.

The 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, the 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

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<PAGE>

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.

Options on foreign currencies. The Portfolio may write covered put and call
options and purchase put and call options on foreign currencies for the purpose
of protecting against declines in the dollar value of portfolio securities and
against increases in the dollar cost of securities to be acquired. The Portfolio
may use options on currency to cross hedge, which involves writing or purchasing
options on one currency to hedge against changes in exchange rates for a
different, but related currency. As with other types of options, however, the
writing of an option on foreign currency will constitute only a partial hedge up
to the amount of the premium received, and the Portfolio could be required to
purchase or sell foreign currencies at disadvantageous exchange rates, thereby
incurring losses. 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 currency when the Adviser anticipates that the
currency will appreciate in value.

There is no assurance that a liquid secondary market on an options exchange will
exist for any particular option, or at any particular time. If the 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. The Portfolio pays brokerage
commissions or spreads in connection with its options transactions.

As in the case of forward contracts, certain options on foreign currencies are
traded over the counter and involve liquidity and credit risks which may not be
present in the case of exchange traded currency options. The Portfolio's ability
to terminate OTC options will be more limited than with exchange traded options.
It is also possible that broker dealers participating in OTC options
transactions will not fulfill their obligations. Until such time as the staff of
the SEC changes its position, the Portfolio will treat purchased OTC options and
assets used to cover written OTC options as illiquid securities. With respect to
options written with primary dealers in U.S. Government securities pursuant to
an agreement requiring a closing purchase transaction at a formula price, the
amount of illiquid securities may be calculated with reference to the repurchase
formula.

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<PAGE>

Repurchase Agreements

The Portfolio may engage in repurchase agreement transactions with member banks
of the Federal Reserve System and certain non-bank dealers, including
governmental securities dealers approved by the Portfolio's Board of Trustees.
Under the terms of a typical repurchase agreement, the Portfolio would acquire
any underlying security for a relatively short period (usually not more than one
week), subject to an obligation of the seller to repurchase, and the Portfolio
to resell, the obligation at an agreed price and time, thereby determining the
yield during the Portfolio's holding period. This arrangement results in a fixed
rate of return that is not subject to market fluctuations during the Portfolio's
holding period. The value of the underlying securities will be at least equal at
all times to the total amount of the repurchase obligations, including interest.
The Portfolio bears a risk of loss in the event of default by or bankruptcy of
the other party to a repurchase agreement. The Portfolio may be delayed in, or
prevented from, exercising its rights to dispose of the collateralized
securities. To the extent that, in the meantime, the value of the securities
repurchased had decreased or the value of the securities had increased, the
Portfolio could experience a loss. The Adviser reviews the creditworthiness of
those banks and dealers with which the Portfolio enters into repurchase
agreements and monitors on an ongoing basis the value of the securities subject
to repurchase agreements to ensure that it is maintained at the required level.
A repurchase agreement is considered to be a loan under the Investment Company
Act of 1940, as amended (the "1940 Act").

Reverse Repurchase Agreements

The Portfolio may borrow funds for temporary or emergency purposes, such as
meeting larger than anticipated redemption requests, and not for leverage, by
among other things, agreeing to sell portfolio securities to financial
institutions such as member banks of the Federal Reserve System and certain non-
bank dealers and to repurchase them at a mutually agreed date and price (a
"reverse repurchase agreement"). At the time the Portfolio enters into a reverse
repurchase agreement it will segregate cash or liquid securities having a value
equal to the repurchase price, including accrued interest. The segregated assets
will be marked-to-market daily and additional assets will be segregated on any
day in which the assets fall below the repurchase price (plus accrued interest).
The Portfolio's liquidity and ability to manage its assets might be affected
when it sets aside cash or portfolio securities to cover such commitments.
Reverse repurchase agreements involve the risk that the market value of the
securities sold by the Portfolio may decline below the repurchase price of those
securities. In the event the buyer of securities under a reverse repurchase
agreement files for bankruptcy or becomes insolvent, such buyer or its trustee
or receiver may receive an extension of time to determine whether to enforce the
Portfolio's obligation to repurchase the securities, and the Portfolio's use of
the proceeds of the reverse repurchase agreement may effectively be restricted
pending such decision. Reverse repurchase agreements are considered to be
borrowings by the Portfolio.

Mortgage Dollar Rolls

The Portfolio may enter into mortgage "dollar rolls" in which the Portfolio
sells securities for delivery in the current month and simultaneously contracts
to repurchase substantially similar,

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<PAGE>

but not identical (same type, coupon and maturity), securities on a specified
future date. During the roll period, the Portfolio forgoes principal and
interest paid on the securities. The Portfolio is compensated by the difference
between the current sales price and the lower forward price for the future
purchase (often referred to as the "drop") or fee income and by the interest
earned on the cash proceeds of the initial sale. A "covered roll" is a specific
type of dollar roll for which there is an offsetting cash position or a cash
equivalent security position which matures on or before the forward settlement
date of the dollar roll transaction. The Portfolios may enter into both covered
and uncovered rolls. At the time the Portfolio enters into a dollar roll
transaction, it will segregate, with an approved custodian, cash or liquid
securities having a value not less than the repurchase price (including accrued
interest) and will subsequently monitor the segregated assets to ensure that its
value is maintained.

Borrowing

The Portfolio will not borrow money (including through reverse repurchase
agreements or dollar roll transactions) for any purpose in excess of 5% of its
total assets, except that it may borrow for temporary or emergency purposes up
to 1/3 of its total assets. Under the 1940 Act, the 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 liquidation of the Portfolio's holdings may be
disadvantageous from an investment standpoint.

Leveraging by means of borrowing may exaggerate the effect of any increase or
decrease in the value of the Portfolio's securities and the Fund's NAV per
Share, 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) that may exceed the income received from the securities
purchased with the borrowed funds. It is not the intention of the Adviser to use
leverage as a normal practice in the investment of the Portfolio's assets.

Asset Coverage

The Portfolio will comply with the segregation or coverage guidelines
established by the SEC and other applicable regulatory bodies with respect to
certain transactions, including (but not limited to) options written on
securities and indexes; currency, interest rate and security index futures
contracts and options on these futures contracts; and forward currency
contracts. These guidelines may, in certain instances, require segregation by
the Portfolio of cash or liquid securities to the extent the Portfolio's
obligations with respect to these strategies are not otherwise covered through
ownership of the underlying security or financial instrument, by other portfolio
positions or by other means consistent with applicable regulatory policies.
Unless the transaction is covered, the segregated assets must at all times equal
or exceed the Portfolio's obligations with respect to these strategies.
Segregated assets cannot be sold or transferred unless equivalent assets are
substituted in their place or it is no longer necessary to segregate them. As a
result, there is a possibility that segregation of a large percentage of the
Portfolio's assets could impede the Adviser or the Portfolio's ability to meet
redemption requests or other current obligations. The Portfolio will also cover
its use of Wrapper Agreements to the extent

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<PAGE>

required to avoid the creation of a "senior security" (as defined in the 1940
Act) in connection with its use of such agreements.

For example, a call option written on securities may require the Portfolio to
hold the securities subject to the call (or securities convertible into the
securities without additional consideration) or to segregate assets (as
described above) sufficient to purchase and deliver the securities if the call
is exercised. A call option written on an index may require the Portfolio to own
portfolio securities that correlate with the index or to segregate assets (as
described above) equal to the excess of the index value over the exercise price
on a current basis. A put option written by the Portfolio may require the
Portfolio to segregate assets (as described above) equal to the exercise price.
The Portfolio could purchase a put option if the strike price of that option is
the same or higher than the strike price of a put option sold by the Portfolio.
If the Portfolio holds a futures contract, the Portfolio could purchase a put
option on the same futures contract with a strike price as high or higher than
the price of the contract held. The Portfolio may enter into fully or partially
offsetting transactions so that its net position, coupled with any segregated
assets (equal to any remaining obligation), equals its net obligation. Asset
coverage may be achieved by other means when consistent with applicable
regulatory policies.

The Board of Trustees of the Portfolio has adopted the requirement that futures
contracts and options on futures contracts be used as a hedge and may also use
stock index futures on a continual basis to equitize cash so that the Portfolio
may maintain 100% equity exposure. In compliance with current CFTC regulations,
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.

The use of options, futures and foreign currency contracts is a highly
specialized activity which involves investment techniques and risks that are
different from those associated with ordinary portfolio transactions. Gains and
losses on investments in options and futures depend on the Adviser's ability to
predict the direction of stock prices, interest rates, currency movements and
other economic factors. The loss that may be incurred by the Portfolio in
entering into futures contracts and written options thereon and forward currency
contracts is potentially unlimited. There is no assurance that higher than
anticipated trading activity or other unforeseen events might not, at times,
render certain facilities of an options clearing entity or other entity
performing the regulatory and liquidity functions of an options clearing entity
inadequate, and thereby result in the institution by an exchange of special
procedures which may interfere with the timely execution of customers' orders.
Most futures exchanges limit the amount of fluctuation permitted in a futures
contract's prices during a single trading day. Once the limit has been reached
no further trades may be made that day at a price beyond the limit. The price
limit will not limit potential losses, and may in fact prevent the prompt
liquidation of futures positions, ultimately resulting in further losses.
Options and futures traded on foreign exchanges generally are not regulated by
U.S. authorities, and may offer less liquidity and less protection to the
Portfolio in the event of default by the other party to the contract.

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<PAGE>

Except as set forth above under "Futures Contracts and Options on Futures
Contracts -- General" (and the sub-sections thereunder), there is no limit on
the percentage of the assets of the Portfolio that may be at risk with respect
to futures contracts and related options or forward currency contracts. The
Portfolio may not invest more than 15% of its total assets in purchased
protective put options. The Portfolio's transactions in options, forward
currency contracts, futures contracts and options on futures contracts may be
limited by the requirements for qualification of the Portfolio as a regulated
investment company for tax purposes. See "Taxation." There can be no assurance
that the use of these portfolio strategies will be successful.

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 Portfolio Trust Board. 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. A description of the ratings referred to herein
and in the Prospectus is set forth in the Appendix of this SAI.

Investment Restrictions

The following investment restrictions are "fundamental policies" of the Fund and
the Portfolio and may not be changed without the approval of a "majority of the
outstanding voting securities" of the Fund or the Portfolio, as the case may be.
The phrase "Majority of the outstanding voting securities" under the 1940 Act,
and as used in this SAI and the Prospectus, means, with respect to the Fund (or
the Portfolio), the lesser of (1) 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 (2) 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
the Portfolio, the Trust will hold a meeting of the Fund's shareholders and will
cast its vote as instructed by them. 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.

None of the fundamental and non-fundamental policies described below shall
prevent the Fund from investing all of its assets in an open-end investment
company with substantially the same investment objective. Because the Fund and
the Portfolio have the same fundamental policies and the Fund invests all of its
Assets in the Portfolio, the following discussion (though speaking only of the
Portfolio) applies to the Fund as well.

Fundamental Restrictions

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<PAGE>

As a matter of fundamental policy, the Portfolio may not:

1. Borrow money (including through reverse repurchase or dollar roll
transactions) in excess of 5% of the Portfolio's total assets (taken at
cost), except that the Portfolio may borrow for temporary or emergency
purposes up to 1/3 of its net assets. The Portfolio may pledge, mortgage or
hypothecate not more than 1/3 of such assets to secure such borrowings
provided that collateral arrangements with respect to options and futures,
including deposits of initial 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;

2. Underwrite securities issued by other persons except insofar as the
Portfolio may 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 portfolio securities and provided that any such loans not
exceed 30% of its 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 may hold and sell, for its portfolio, real
estate acquired as a result of the Portfolio'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 investment objective, up to 25% of its total assets may
be invested in any one industry;

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 contracts, including deposits of
initial and variation margin, are not considered to be the issuance of a
senior security for purposes of this restriction;

7. Purchase, with respect to 75% of the Portfolio's total assets, securities
of any issuer if such purchase at the time thereof would cause the
Portfolio to hold more than 10% of any class of securities of such issuer,
for which purposes all indebtedness of an issuer shall be deemed a single
class and all preferred stock of an issuer shall be deemed a single class,
except that options or futures contracts shall not be subject to this
restriction; and

8. Invest, with respect to 75% of the Portfolio's total assets, more than 5%
of its total assets in the securities (excluding U.S. government
securities) of any one issuer.

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<PAGE>

Non-Fundamental Restrictions

In order to comply with certain statutes and policies and for other reasons, the
Portfolio will not, as a matter of operating policy (these restrictions may be
changed by a vote of the Trustees or the Portfolio Trust or the Trust as
applicable without shareholder approval):

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

ii. sell securities it does not own (short sales). (This restriction does not
preclude short sales "against the box" (that is, sales of securities (a)
the Portfolio contemporaneously owns or (b) where the Portfolio has the
right to obtain securities equivalent in kind and amount to those sold).
The Portfolio has no current intention to engage in short selling);

iii. purchase securities issued by any investment company except to the extent
permitted by the 1940 Act (including any exemptions or exclusions
therefrom), except that this limitation does not apply to securities
received or acquired as dividends, through offers of exchange, or as a
result of reorganization, consolidation or merger; and

iv. invest more than 15% of the Portfolio'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 Portfolio Board
to be liquid).

An investment restriction will not be considered violated 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.

The Portfolio will comply with the permitted investments and investment
limitations in the securities laws and regulations of all states in which the
Fund, or any other registered investment company investing in the Portfolio, is
registered.

Portfolio Transactions and Brokerage Commissions

The Adviser is responsible for decisions to buy and sell securities, futures
contracts and options thereon for the 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
contracts 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, the Adviser or its subsidiaries or
affiliates. Purchases and sales of certain portfolio securities on behalf of the
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

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<PAGE>

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 that 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 the 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.

For the period or year ended September 30, 1999 and September 30, 2000, the
Portfolio paid brokerage commissions in the amount of $180 and $____,
respectively.

The Adviser is authorized, consistent with Section 28(e) of the Securities
Exchange Act of 1934, when placing portfolio transactions for the 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 (a) advice as to (i)
the value of securities, (ii) the advisability of investing in, purchasing or
selling securities, and (iii) the availability of securities or purchasers or
sellers of securities and (b) furnishing analyses and reports concerning
issuers, industries, securities, economic factors and trends, portfolio strategy
and the performance of accounts. 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.

Consistent with the policy stated above, the Conduct Rules of the National
Association of Securities Dealers, Inc. and such other policies as the Portfolio
Trust Board may determine, the Adviser may consider sales of shares of the Fund
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.

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 or statistical information from brokers and
dealers can be useful to the Portfolio and to the Adviser, it is the opinion of
the Portfolio's management that such information is only supplementary to the
Adviser's own research effort, since the

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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 Portfolio, and not all such information is used by the Adviser in
connection with the Portfolio. 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 Portfolio.

In certain instances there may be securities that are suitable for the
Portfolio, as well as for one or more of the Adviser's other clients.
Investment decisions for the 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 between (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 the
Portfolio is concerned. However, it is believed that the ability of the
Portfolio to participate in volume transactions will produce better executions
for the Portfolio.

PERFORMANCE INFORMATION

Standard Performance Information

From time to time, quotations of the Fund's performance may be included in
advertisements, sales literature or shareholder reports. These performance
figures are calculated in the following manner:

Yield

Yield refers to the income generated by an investment over a given period of
time, expressed as an annual percentage rate. Yields are calculated according to
a standard that is required for all stock and bond mutual funds. Because this
differs from other accounting methods, the quoted yield may not equal the income
actually paid to shareholders.

Per SEC regulations, the yield of the Fund (the "SEC yield") shall be calculated
on any determination date as follows:

2[((a - b)/(c * d) + 1)/6/ - 1] where
---------------------

a = current income measured over a 30-day period.

b = Expenses accrued during the same 30-day period.

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c = Average daily number of shares outstanding during the same 30-day period.

d = Maximum offering price per share on the last day of the period.

The "annual effective yield" of the fund is intended to represent one day's
investment income expressed as an annualized yield and compounded annually. It
shall be expressed as a percentage and calculated on each business day as
follows based on the dividend declared for the previous day.

[(1 + previous day's dividend factor)) 365 - 1]
------------------------------

NAV per share

Example: If on March 1, the Fund's dividend factor is 0.00174163 and the Fund's
NAV per share is $10, then the Fund's annual effective yield for March 2 equals
6.56%.

The Fund's annual effective yield is used in determining when the interest rate
trigger is active.

The 30-day yield for the shares for the period ending September 30, 1999 was
6.24%.

Performance information or advertisements may include comparisons of the Fund's
investment results to various unmanaged indices or results of other mutual funds
or investment or savings vehicles. From time to time, the Fund's ranking may be
quoted from various sources, such as Lipper Analytical Services, Inc., Value
Line, Inc. and Morningstar, Inc.

Unlike some bank deposits or other investments that pay a fixed yield for a
stated period of time, the total return of the Shares will vary depending upon
interest rates, the current market value of the securities held by the Portfolio
and the Wrapper Agreements and changes in the expenses of the Shares and the
Portfolio. In addition, during certain periods for which total return may be
provided, the Adviser may have voluntarily agreed to waive portions of its fees,
or to reimburse certain operating expenses of the Fund or the Portfolio, on a
month-to-month basis. Such waivers will have the effect of increasing the
Fund's net income (and therefore its yield and total return) during the period
such waivers are in effect.

Total return

Total return is the change in value of an investment in the shares over a given
period, assuming reinvestment of any dividends and capital gain distributions. 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.

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<PAGE>

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 that
represent aggregate performance over a period or year-by-year performance.

These figures are calculated by finding the average annual compounded rates of
return for the one-, five- and ten- (or such shorter period as the relevant
class of shares has been offered) year periods that would equate the initial
amount invested to the ending redeemable value according to the following
formula: P (1 + T)/n/ = ERV. For purposes of this formula, "P" is a
hypothetical investment of $1,000; "T" is average annual total return; "n" is
number of years; and "ERV" is the ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the one-, five- or ten-year periods (or
fractional portion thereof). Total return or "T" is computed by finding the
average annual change in the value of an initial $1,000 investment over the
period and assumes that all dividends and distributions are reinvested during
the period. Investors should note that this performance may not be
representative of the Fund's total return over longer market cycles.

When considering average total return figures for periods longer than one year,
it is important to note that the annual total return for one year in the period
might have been greater or less than the average for the entire period. When
considering total return figures for periods shorter than one year, investors
should bear in mind that such return may not be representative of the Fund's
return over a longer market cycle. Aggregate and average total returns may be
shown by means of schedules, charts or graphs and may indicate various
components of total return (i.e., change in value of initial investment, income
dividends and capital gain distributions).

The total return for the shares for the period or year ended September 30, 1999
and September 30, 2000 was 4.46% (non-annualized) and 6.65%, respectively.

Performance Results

Any performance information provided for the Fund should not be considered as
representative of its performance in the future, because the NAV and public
offering price of Shares will vary based not only on the type, quality and
maturities of the securities held by the Portfolio but also on changes in the
current value of such securities and on changes in the expenses of the Fund and
the Portfolio. Total return reflects the performance of both principal and
income.

Comparison of Fund Performance

Comparison of the quoted non-standardized 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 the Fund with performance quoted with respect to other investment companies
or types of investments.

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<PAGE>

In connection with communicating its performance to current or prospective
shareholders, the Fund also may compare these figures to the performance of
other mutual funds tracked by mutual fund rating services or to unmanaged
indices that may assume reinvestment of dividends but generally do not reflect
deductions for administrative and management costs. Evaluations of the Fund's
performance made by independent sources may also be used in advertisements
concerning the Fund. Sources for the Fund's performance information could
include, but are not limited to, the following: Asian Wall Street Journal,
-------------------------
Barron's, Business Week, Changing Times, The Kiplinger Magazine, Consumer
-------- ------------- -------------------------------------- --------
Digest, Financial Times, Financial World, Forbes, Fortune, Global Investor,
------ --------------- --------------- ------ ------- ---------------
Investor's Daily, Lipper Analytical Services, Inc.'s Mutual Fund Performance
---------------- ----------------------------------------------------------
Analysis, Money, Morningstar Inc., New York Times, Personal Investing News,
-------- ----- ---------------- -------------- -----------------------
Personal Investor, Success, U.S. News and World Report, ValueLine, Wall Street
----------------- ------- -------------------------- --------- -----------
Journal, Weisenberger Investment Companies Services, Working Women and Worth.
------- ------------------------------------------ ------------- -----

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").

VALUATION OF ASSETS; REDEMPTIONS IN KIND

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 quotes received from dealers
or market makers in the relevant securities or may be determined through the 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.
Securities for which market quotations are not readily available are valued by
the adviser pursuant to procedures adopted by the Portfolio's Trust Board.

The NAV per Share is calculated once on each Valuation Day as of the Valuation
Time, which is currently 4:00 p.m., Eastern time, or if 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, if any), less all liabilities, by the total number
of its Shares outstanding. 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 that the Portfolio Trust Board believes
accurately reflects fair value.

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<PAGE>

Pursuant to procedures adopted by the Portfolio Trust Board, the Wrapper Value
generally will be equal to the difference between the Book Value and the market
value (plus accrued interest on the underlying securities) of the applicable
Covered Assets. If the market value (plus accrued interest on the underlying
securities) of the Covered Assets is greater than their Book Value, the Wrapper
Value will be reflected as a liability of the Portfolio in the amount of the
difference, i.e., a negative value, reflecting the potential liability of the
Portfolio to the Wrapper Provider. If the market value (plus accrued interest
on the underlying securities) of the Covered Assets is less than their Book
Value, the Wrapper Value will be reflected as an asset of the Portfolio in the
amount of the difference, i.e., a positive value, reflecting the potential
liability of the Wrapper Provider to the Portfolio. In performing its fair
value determination, the Portfolio Trust Board expects to consider the
creditworthiness and ability of a Wrapper Provider to pay amounts due under the
Wrapper Agreement. If the Portfolio Trust Board determines that a Wrapper
Provider is unable to make such payments, that Board may assign a fair value to
the Wrapper Agreement that is less than the difference between the Book Value
and the market value (plus accrued interest on the underlying securities) of the
applicable Covered Assets and the Portfolio might be unable to maintain NAV
stability.

The problems inherent in making a good faith determination of value are
recognized in the codification effected by SEC Financial Reporting Release No. 1
(formerly Accounting Series Release No. 113) ("FRR 1"), 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.

The Adviser will value securities purchased by the Portfolio that are restricted
as to resale or for which current market quotations are not readily available,
including Wrapper Agreements, based upon all relevant factors as outlined in FRR
1.

The Fund and the Portfolio each reserves the right, if conditions exist that
make cash payments undesirable, or for other reasons, to honor any request for
redemption or withdrawal, respectively, by making payment wholly or partly in
Portfolio Securities, as the same may be chosen by the Adviser in its sole
discretion (a "redemption in kind"). Such securities shall not include Wrapper
Agreements, and shall be valued as they are for purposes of computing the Fund's
or the Portfolio's NAV, as the case may be. If payment is made to a Fund
shareholder in securities, the shareholder may incur transaction expenses in
converting those securities into cash.

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<PAGE>

The Trust, on behalf of the Fund, and the Portfolio have elected to redeem
Shares or beneficial interests, respectively, 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 NAV 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 to a shareholder thereof, and therefore
Fund shareholders 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 the Portfolio, including the Fund, may add to or reduce its
investment in the Portfolio on each business day the Portfolio determines its
NAV. At the close of business on each such day, the value of each investor's
beneficial interest in the Portfolio will be determined by multiplying the NAV
of the Portfolio by the percentage effective for that day that represents that
investor's share of the aggregate beneficial interests in the Portfolio. Any
additions or withdrawals that 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 a fraction (a) the numerator of which is the value of the investor's
investment in the Portfolio as of the close of business on that 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 that day, and (b) the denominator of which is the aggregate NAV of the
Portfolio as of the close of business on that 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 therein. 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.

The Fund and the Portfolio each reserves the right to redeem all of its shares,
if the Board of Trustees votes to liquidate the Fund and/or Portfolio.

OVERVIEW OF THE TYPES OF INDIVIDUAL RETIREMENT ACCOUNTS

In general, an IRA is a trust or custodial account established in the United
States for the exclusive benefit of an individual or his or her
beneficiaries.(Keogh plans are established by self-employed persons, including
partnerships, and also cover eligible non-owner employees.) Most IRAs are
designed principally as retirement savings vehicles. Education IRAs are designed
to provide a tax-favored means of saving for a child's educational expenses.
IRAs may provide significant tax savings to individuals, but are governed by a
complex set of tax rules set out under the Code and the regulations promulgated
by the Department of the Treasury thereunder. If you already have an IRA, your
IRA may be able to invest in the Fund. If you do not presently have an IRA and
you meet the requirements of the applicable tax rules, you may be able to create
an IRA and invest in Shares of the Fund through that IRA. Included below is a
general discussion of some IRA features. However, IRA Owners and other
prospective investors should

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<PAGE>

consult with their IRA provider and/or professional tax and financial advisors
before establishing an IRA or investing in Shares. Certain types of the IRAs
described below may not be available through Deutsche Asset Management mutual
funds. For more information call 1-800-730-1313.

Types of Individual Retirement Accounts

Traditional IRAs

If you are under age 70 1/2, and you (or if you file a joint return, your
spouse) have taxable compensation, you may set up a Traditional IRA and make
annual IRA contributions of up to $2,000, or 100% of your taxable compensation,
whichever is less. Taxable income includes wages, salaries, and other amounts
reported in box 1 of Form W-2, as well as earnings from self-employment. If you
file a joint return and your taxable compensation is less than that of your
spouse, you may make annual contributions to a Traditional IRA equal to the
lesser of $2,000, or the sum of (i) your taxable compensation and (ii) the
taxable compensation of your spouse, reduced by the amount of his or her IRA
deduction for the year. Amounts contributed to a Traditional IRA generally are
deductible for federal income tax purposes. However, if you were covered by an
employer retirement plan, the amount of your contribution to a Traditional IRA
that you may deduct will be reduced or eliminated if your modified adjusted
gross income exceeds certain amounts (currently $50,000 for a married couple
filing a joint return and $30,000 for a single taxpayer). If your spouse is
covered by an employer retirement plan but you are not, you may be able to
deduct your contributions to a Traditional IRA; however, the deduction will be
reduced or eliminated if your adjusted gross income on a joint return exceeds
$150,000. Even if your ability to deduct contributions to a Traditional IRA is
limited, you may still make contributions up to the limits described above. In
general, you may also make a contribution to a Traditional IRA by "rolling over"
all or a portion of a distribution you receive from a qualified retirement plan
(such as a pension or profit-sharing plan or a 401(k) plan) or another
Traditional IRA. Amounts distributed from a Traditional IRA and eligible
rollover distributions from qualified retirement plans will not be includible in
income if they are contributed to a Traditional IRA in a rollover transaction
which meets certain conditions; however, a federal withholding tax may be
imposed on such distributions. Consult your Service Agent (which is a broker,
financial advisor or other bank, dealer or other institution that has a sub-
shareholder servicing agreement with Bankers Trust) and professional tax advisor
for complete details on Traditional IRAs.

Roth IRAs

Regardless of your age, you may be able to establish a Roth IRA. Contributions
to Roth IRAs are not deductible for federal income tax purposes. However, if all
of the applicable requirements are met, earnings in the account accumulate tax
free, and all withdrawals are also tax free. Generally, you may contribute up to
$2,000 annually to a Roth IRA; however, your ability to contribute to a Roth IRA
will be reduced or eliminated if your adjusted gross income exceeds certain
amounts (currently $150,000 for a married couple filing a joint return and
$95,000 for a single taxpayer). In addition, if you make contributions to both a
Traditional IRA and a Roth IRA, your contribution limit for the Roth IRA will be
reduced by the amount of the contribution you make to the Traditional IRA. If
certain requirements are met, and (i) your modified adjusted gross

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<PAGE>

income is not more than $100,00, and (ii) you are not married and filing a
separate tax return, you can roll over amounts from a Traditional IRA to a Roth
IRA. The amount rolled over generally will be included in your taxable income.
You may also roll over amounts from one Roth IRA to another Roth IRA. Consult
your Service Agent and professional tax adviser for complete details on Roth
IRAs.

SEP-IRAs

SEP-IRAs are IRAs that are created in connection with a simplified employee
pension ("SEP") established and maintained by a self-employed individual, a
partnership or a corporation. SEP-IRAs must be created for each qualifying
employee of the employer that establishes a SEP. In general, a qualifying
employee is an employee who has: (i) reached the age of 21; and (ii) worked for
the employer at least three out of the past five years. Each SEP-IRA is owned by
the employee for whom it is created; assets of a SEP are not pooled together.
SEPs must provide for discretionary employer contributions. In other words,
employers are not required to make contributions to SEP-IRAs each year, but if
they do make contributions for any year, the contributions must be based on a
specific allocation formula set forth in the SEP, and must not discriminate in
favor of highly compensated employees. Contributions to SEP-IRAs generally are
deductible by the employer, subject to certain limitations. Contributions to
SEP-IRAs of self-employed individuals are subject to certain additional
limitations. SEP-IRAs generally are subject to the same distribution and
rollover rules that apply to Traditional IRAs.

Simple IRAs

In general, a SIMPLE plan may be established by any employer, including a sole
proprietorship, partnership or corporation, with 100 or fewer employees, and
must be the only retirement plan maintained by the employer. Under a SIMPLE plan
using SIMPLE IRAs, a SIMPLE IRA is created for each eligible employee which, in
general, includes all employees who received at least $5,000 in compensation
during any two years preceding the year for which eligibility is being
determined (i.e., the current year) and is reasonably expected to earn at least
$5,000 during the current year. As with SEP-IRAs, SIMPLE IRAs are individual
accounts owned by each eligible employee. Under a SIMPLE IRA plan, eligible
employees can elect to contribute a portion of their salary to their SIMPLE IRA.
(These contributions are referred to as "elective deferrals.") Elective
deferrals are based on a stated percentage of the employee's compensation, and
are limited to $6,000 per year (indexed for inflation). Elective deferrals are
included in employees' gross income only for Social Security and Medicare tax
purposes (i.e., they are not included in wages for federal income tax
purposes).In addition to elective deferrals by employees, under a SIMPLE IRA
plan, employers must make either: (i) matching contributions equal to each
employee' selective deferral, up to a maximum of 3% of the employee's
compensation, or (ii) nonelective contributions of 2% of compensation for each
eligible employee(subject to certain limits). Employer contributions to SIMPLE
IRAs are excluded from employees' gross income and are deductible by the
employer. SIMPLE IRAs generally are subject to the same distribution and
rollover rules that apply to Traditional IRAs. However, a rollover from a SIMPLE
IRA to a Traditional IRA can be made tax free only after the employee has
participated in the SIMPLE IRA plan for at least two years.

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<PAGE>

Keogh Plans

Keogh plans are qualified retirement plans established by sole proprietors or
partnerships. As with other qualified retirement plans, in general,
contributions to Keogh plans are deductible, and neither such contributions nor
the investment earnings thereon are subject to tax until they are distributed by
the plan. A number of different types of plans may qualify as Keogh plans. In
certain circumstances, Keogh plans may provide greater tax advantages than other
types of retirement plans. However, Keogh plans must satisfy a number of complex
rules, including minimum participation requirements, under which certain
employees must be covered by the plan, and in some cases, minimum funding
requirements. Professional assistance generally is required to establish and
maintain a Keogh plan.

Education IRAs

An education IRA is a trust or custodial account created for the purpose of
paying the qualified higher education expenses of a designated beneficiary,
i.e., a child under the age of 18 at the time of the contributions. In general,
qualified higher education expenses include expenses for tuition, fees, books,
supplies and equipment required for the designated beneficiary of the Education
IRA to attend an eligible educational institution, which includes essentially
all accredited post-secondary educational institutions. Any individual may make
contributions to an education IRA so long as his or her modified adjusted gross
income is less than $110,000 ($160,000 for married taxpayers filing jointly).The
maximum total contributions that may be made to education IRAs for each child is
$500 per year. Generally, amounts may be rolled over from an Education IRA to
another education IRA established for the same beneficiary or for certain
members of the beneficiary's family. Beneficiaries may make tax free withdrawals
from education IRAs to pay qualified higher education expenses. Other
withdrawals generally will be subject to tax. Consult your Service Agent and or
professional tax adviser for complete details on Education IRAs.

OWNERSHIP OF SHARES THROUGH PLANS

Fund Shares owned by Plan Participants through Plans are held either directly by
the respective Plan, or beneficially through vehicles such as bank collective
funds or insurance company separate accounts consisting solely of such Plans
(collectively, "Plan Pools"), which will in turn offer the Fund as an investment
option to their participants. Investments in the Fund may by themselves
represent an investment option for a Plan or may be combined with other
investments as part of a pooled investment option for the Plan. In the latter
case, the Fund may require Plans to provide information regarding the withdrawal
order and other characteristics of any pooled investment option in which the
Shares are included prior to a Plan's initial investment in the Fund.
Thereafter, the Fund will require the Plan to provide information regarding any
changes to the withdrawal order and other characteristics of the pooled
investment option before such changes are implemented. The Fund in its sole
discretion may decline to sell Shares to Plans if the governing withdrawal order
or other characteristics of any pooled investment option in which the Shares are
included is determined at any time to be disadvantageous to the Fund. Plan
Participants should contact their Plan administrator or the organization that
provides

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<PAGE>

recordkeeping services if they have questions concerning their account. Plan
administrators and fiduciaries should call 1-800-730-1313 for information
regarding a Plan's account with the Fund.

Qualified Redemptions

At any time, a redemption of Fund Shares can be effected without assessment of
the Redemption Fee described in "Fees and Expenses of the Fund" in the
Prospectus, if such redemption is a "Qualified Plan Redemption" or a "Qualified
IRA Redemption." "Qualified Plan Redemptions" are redemptions resulting from a
Plan Participant's death, disability, retirement or termination of employment or
to fund loans to, or "in service" withdrawals by, a Plan Participant.
A "Qualified IRA Redemption" is a redemption made by an IRA Owner to effect a
distribution from his or her IRA account that is not subject to the 10% penalty
tax imposed by section 72(t) or 530(d), as applicable, other than IRA rollovers,
direct trustee-to-trustee transfers and conversions of Traditional IRAs to Roth
IRAs, unless the IRA Owner continues the investment of the transferred amount in
the Fund. In general, section 72(t) of the Code imposes a 10% penalty tax on any
distribution received by a taxpayer from a Traditional IRA, SEP-IRA or SIMPLE
IRA prior to the date on which the taxpayer reaches age 59 1/2, unless the
distribution meets the requirements of a specific exception to the penalty tax.
Similar penalties apply to early withdrawals from Roth IRAs and Keogh Plans.
Section 530(d) as currently written, imposes a separate 10% penalty tax on
distributions from an education IRA not used to pay qualified higher education
expenses. In general, rollovers from one IRA to another and direct trustee-to-
trustee transfers from an IRA to another IRA (or in some cases to other types of
qualified plans) are not subject to tax. In addition, conversions of Traditional
IRAs to Roth IRAs are subject to income tax but are not subject to the early
withdrawal penalty tax. IRA Owners requesting a redemption of Fund Shares will
be required to provide a written statement as to whether the proceeds of the
redemption will be subject to a penalty tax and, if not, to identify the
specific exception upon which the IRA Owner intends to rely. The information
provided by the IRA Owner will be reflected on the Form 1099-R issued to the IRA
Owner and filed with the Internal Revenue Services in connection with the
redemption as well as forming the basis for redemption as a Qualified IRA
Redemption. The Fund may require additional evidence, such as the opinion of a
certified public accountant or tax attorney, that any particular redemption will
not be subject to any penalty tax. IRA Owners should consult their tax advisers
regarding the tax consequences of any redemption.

Some of the exceptions to the 10% penalty taxes are described below. This
description is intended to provide only a brief summary of the principal
exceptions to the additional tax imposed on early withdrawals under the current
provisions of the Code, which may change from time to time. The Fund intends to
conform the definition of Qualified IRA Redemptions to changes in applicable tax
laws; however, the Fund reserves the right to continue to define Qualified IRA
Redemptions by reference to Code provisions now in effect or otherwise to define
such phrase independently of future Code provisions.

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<PAGE>

Traditional IRAs, SEP-IRAs and SIMPLE IRAs

In general, the 10% penalty tax imposed by section 72(t) of the Code will not
apply to the following types of distributions from a Traditional IRA, SEP-IRA or
SIMPLE IRA:

1. Distributions made on or after the date on which the IRA Owner attains age
59 1/2;

2. Distributions made to a beneficiary (or to the estate of the IRA Owner) on
or after the death of the IRA Owner;

3. Distributions attributable to the IRA Owner's being disabled within the
meaning of section 72(m)(7) of the Code;

4. Distributions made to the IRA Owner to the extent such distributions do not
exceed the amount of unreimbursed medical expenses allowed as a deduction
under section 213 of the Code;

5. Distributions to unemployed individuals to the extent such distributions do
not exceed the amount paid for medical insurance as described in section
213(d)(1)(D) of the Code for the IRA Owner, and his or her spouse and
dependents;

6. Distributions to an IRA Owner to the extent such distributions do not
exceed the qualified higher education expenses, as defined in section
72(t)(7), for the IRA Owner;

7. Distributions to an IRA Owner that are used to acquire a first home, and
that meet the definition of "qualified first-time homebuyer distributions"
under section 72(t) (8) of the Code; and

8. Distributions that are part of a series of substantially equal periodic
payments made at least annually for the life (or life expectancy) of the
IRA Owner, or the joint lives (or life expectancies) of the IRA Owner and
his or her designated beneficiary.

Roth IRAs

With respect to a Roth IRA, all "qualified distributions" are excluded from
gross income and, therefore, from the 10% penalty tax imposed by section 72(t).
In general, qualified distributions from a Roth IRA include:

1. Distributions made on or after the date on which the IRA Owner attains age
59 1/2;

2. Distributions made to a beneficiary (or to the estate of the IRA Owner) on
or after the death of the IRA Owner;

3. Distributions attributable to the IRA Owner's being disabled within the
meaning of section 72(m)(7) of the Code; and

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<PAGE>

4. Distributions to an IRA Owner that are used to acquire a first home, and
that meet the definition of "qualified first-time homebuyer distributions"
under section 72(t) (8) of the Code.

However, a distribution will not be a qualified distribution, even if it
otherwise meets the definition, if it is made within the 5-year period beginning
with the first taxable year for which the IRA Owner made a contribution to the
Roth IRA (or such person's spouse made a contribution to a Roth IRA established
for the IRA Owner). Special rules apply with respect to certain types of
rollovers.

To the extent a distribution from a Roth IRA is not a qualified distribution,
either because it does not meet the definition of a qualified distribution in
the first instance, or because it is made within the five-year period described
in section 408A(d)(2)(B), the portion of the distribution that represents
earnings will be subject to tax in accordance with section 72 of the Code,
including the 10% penalty tax imposed under section 72(t). The same exceptions
to the penalty tax that apply to Traditional IRAs will apply to nonqualified
distributions from Roth IRAs.

In the event of a nonqualified distribution from a Roth IRA, only the earnings
in the account are subject to tax; contributions may be recovered tax-free
(since no deduction is permitted for such contributions). Section 408A(d)
provides that distributions from Roth IRAs are considered to come first from
contributions, to the extent that distributions do not exceed the total amount
of contributions.

Keogh Plans

In general, the 10% penalty tax imposed by section 72(t) of the Code will not
apply to the following types of distributions from a Traditional IRA:

1. Distributions made on or after the date on which the IRA Owner attains age
59 1/2;

2. Distributions made to a beneficiary (or to the estate of the IRA Owner) on
or after the death of the IRA Owner;

3. Distributions attributable to the IRA Owner's being disabled within the
meaning of section 72(m)(7) of the Code;

4. Distributions made to the IRA Owner after separation from service after age
55;

5. Distributions to unemployed individuals to the extent such distributions do
not exceed the amount of unreimbursed medical expenses allowed as a
deduction under section 213 of the Code;

6. Distributions to an alternate payee (e.g., a former spouse) pursuant to a
qualified domestic relations order; and

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<PAGE>

7. Distributions that are part of a series of substantially equal periodic
payments made at least annually for the life (or life expectancy) of the
IRA Owner, or the joint lives (or life expectancies) of the IRA Owner and
his or her designated beneficiary.

Education IRAs

Distributions from an education IRA are included in income unless the qualified
higher education expenses of the designated beneficiary are equal to or greater
than the amount of such distributions. In addition, certain special rules are
provided that permit certain rollovers or changes in beneficiaries. Any
distribution that is subject to tax under section 530 is also subject to the 10%
penalty tax imposed by section 530(d)(4). Thus, in general, any distribution
from an education IRA that exceeds the amount of qualified higher education
expenses of the designated beneficiary will be subject to the 10% penalty tax.

MANAGEMENT OF THE TRUSTS

Each Board of Trustees is composed of persons experienced in financial matters
who meet throughout the year to oversee the activities of the Fund or the
Portfolio, as the case may be. 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 Portfolios, their birth dates, and
their principal occupations during the past five years are set forth below.
Their titles may have varied during that period.

Trustees of the Trust and Portfolio

CHARLES P. BIGGAR (birth date: October 13, 1930) -- Trustee of the Trust and
Portfolio; Trustee of each of the other investment companies in the Fund
Complex/1/; Retired; former Vice President, International Business Machines
("IBM") and President, National Services and the Field Engineering Divisions of
IBM. His address is 12 Hitching Post Lane, Chappaqua, New York 10514.

S. LELAND DILL (birth date: March 28, 1930) -- Trustee of the Trust and
Portfolio; Trustee of each of the other investment companies in the Fund
Complex; Retired; Director, Coutts (U.S.A.)

_______________
/1/ The "Fund Complex" consists of BT Investment Funds, BT Institutional Funds,
BT Pyramid Mutual Funds, BT Advisor Funds, Cash Management Portfolio,
Intermediate Tax Free Portfolio, Tax Free Money Portfolio, NY Tax Free
Money Portfolio, Treasury Money Portfolio, International Equity Portfolio,
Equity 500 Index Portfolio, Capital Appreciation Portfolio, Asset
Management Portfolio and BT Investment Portfolios.

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<PAGE>

International; Trustee, Phoenix-Zweig Trust/2/ and Phoenix-Euclid Market Neutral
Fund/2/; former Partner, KPMG Peat Marwick; Director, Vintners International
Company Inc.; Director, Coutts Trust Holdings Ltd., Director, Coutts Group;
General Partner, Pemco2. His address is 5070 North Ocean Drive, Singer Island,
Florida 33404.

MARTIN J. GRUBER (birth date: July 15, 1937) -- Trustee of the Trust and
Portfolio; Trustee of each of the other investment companies in the Fund
Complex; Nomura Professor of Finance, Leonard N. Stern School of Business, New
York University (since 1964); Trustee, TIAACREF/2/; Trustee, SG Cowen Mutual
Funds/2/; Trustee, Japan Equity Fund/2/; Trustee, Taiwan Equity Fund/2/. His
address is 229 South Irving Street, Ridgewood, New Jersey 07450.

RICHARD HALE/3/ (birth date: July 17, 1945) -- President and Chief Executive
Officer of the Trust; Trustee of each of the other investment companies in the
Deutsche Asset Management Fund Complex; Managing Director, Deutsche Asset
Management; Director, Flag Investors Funds and ISI Family of Funds (registered
investment companies); President, Morgan Grenfell Investment Trust (registered
investment company); Managing Director, DB Alex. Brown LLC; Director and
President, Investment Company Capital Corp./2/; Chartered Financial Analyst. His
address is One South Street, Baltimore, Maryland 21202.

RICHARD J. HERRING (birth date: February 18, 1946) -- Trustee of the Trust and
Portfolio; Trustee of each of the other investment companies in the Fund
Complex; Jacob Safra Professor of International Banking, Professor of Finance
and Vice Dean, The Wharton School, University of Pennsylvania (since 1972). His
address is 325 South Roberts Road, Bryn Mawr, Pennsylvania 19010.

BRUCE E. LANGTON (birth date: May 10, 1931) -- Trustee of the Trust and
Portfolio; Trustee of each of the other investment companies in the Fund
Complex; Retired; Trustee, Allmerica Financial Mutual Funds (1992-present);
Member, Pension and Thrift Plans and Investment Committee, Unilever U.S.
Corporation (1989 to present)/4/; Director, TWA Pilots Directed Account Plan and
401(k) Plan (1988 to present)/4/. His address is 99 Jordan Lane, Stamford,
Connecticut 06903.

PHILIP SAUNDERS, JR. (birth date: October 11, 1935) -- Trustee of the Trust and
Portfolio; Trustee of each of the other investment companies in the Fund
Complex; Principal, Philip Saunders Associates (Economic and Financial
Analysis); former Director, Financial Industry

_______________
/2/ An investment company registered under the Investment Company Act of 1940,
as amended (the "Act").

/3/ "Interested Person" within the meaning of Section 2(a)(19) of the Act. Mr.
Hale is a Managing Director of Deutsche Asset Management, the U.S. asset
management unit of Deutsche Bank and its affiliates.

/4/ A publicly held company with securities registered pursuant to Section 12
of the Securities Exchange Act of 1934, as amended.

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<PAGE>

Consulting, Wolf & Company; President, John Hancock Home Mortgage Corporation;
Senior Vice President of Treasury and Financial Services, John Hancock Mutual
Life Insurance Company, Inc. His address is 445 Glen Road, Weston, Massachusetts
02193.

HARRY VAN BENSCHOTEN (birth date: February 18, 1928) -- Trustee of the Trust and
Portfolio; Trustee of each of the other investment companies in the Fund
Complex; Retired; Director, Canada Life Insurance Corporation of New York. His
address is 6581 Ridgewood Drive, Naples, Florida 34108.

The Board has an Audit Committee that meets with the Trusts' and Portfolio's
independent auditors to review the financial statements of the Trust, the
adequacy of internal controls and the accounting procedures and policies of the
Trust. Each member of the Board except Mr. Hale also is a member of the Audit
Committee.

Officers of the Trust And Portfolio

DANIEL O. HIRSCH (birth date: March 27, 1954) -- Vice President and Secretary of
the Trust and Portfolio; Vice President and Secretary of each of the other
investment companies in the Fund Complex; Director, Deutsche Asset Management;
Director, Deutsche Banc Alex. Brown LLC; Former Assistant General Counsel,
Office of the General Counsel, United States Securities and Exchange Commission
from 1993 to 1998. His address is One South Street, Baltimore, Maryland 21202.

CHARLES A. RIZZO (birth date: August 5, 1958) Treasurer of the Trust and
Portfolio; Treasurer of each of the other investment companies in the Fund
Complex. Director and Department Head, Deutsche Asset Management since 1998;
Senior Manager, PricewaterhouseCoopers LLP from 1993 to 1998. His address is
One South Street, Baltimore, MD 21202.

Messrs. Hirsch and Rizzo also hold similar positions for other investment
companies for which ICC Distributors, or an affiliate serves as the principal
underwriter.

No director, officer or employee of the Adviser or the principal underwriter or
any of their affiliates will receive any compensation from the Trust for serving
as an officer or Trustee of the Trust.

Trustee Compensation Table

<TABLE>
<CAPTION>
====================================================================================================
Name of Person, Aggregate Aggregate Total Compensation
Position Compensation Compensation from Fund Complex
from Trust*+ from Portfolio+ Paid to Trustees**
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Charles P. Biggar N/A [$1,288] [$43,750]
----------------------------------------------------------------------------------------------------
S. Leland Dill [$17,104] [$1,086] [$43,750]
====================================================================================================
</TABLE>

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<PAGE>

<TABLE>
<S> <C> <C> <C>
====================================================================================================
Martin J. Gruber N/A N/A [$45,000]
----------------------------------------------------------------------------------------------------
Richard J. Herring N/A N/A [$43,750]
----------------------------------------------------------------------------------------------------
Kelvin J. Lancaster [$18,567] N/A [$27,500]
----------------------------------------------------------------------------------------------------
Bruce E. Langton N/A N/A [$43,750]
----------------------------------------------------------------------------------------------------
Harry Van Benschoten N/A N/A [$45,000]
----------------------------------------------------------------------------------------------------
Philip Saunders, Jr. [$17,645] [$1,120] [$45,000]
====================================================================================================
</TABLE>

* The aggregate compensation is provided for the BT Investment Funds which is
comprised of 16 funds.

+ Information is provided for the Trust's fiscal year ended September 30,
2000.

** Aggregated information is furnished for the Fund Complex 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, Short Intermediate US
Government Securities Portfolio, Asset Management Portfolio, Equity 500
Index Portfolio, and Capital Appreciation Portfolio. The compensation is
provided for the fiscal year ended September 30, 2000.

As of [October 31, 2000], the Trustees and officers of the Trust and the Fund
owned in the aggregate less than 1% of the shares of any fund or the Trust (all
series taken together).

As of [October 31, 2000], the following shareholders of record owned 5% or more
of the Fund: [Inv. Fiduciary Trust Co. Cust. IRA R/O Fred C. Luffey, 102
Channel Run Dr., New Bern, NC 28562-8909 (41%); Inv. Fiduciary Trust Co. IRA A/C
Katarina Bagar, 301 West 45th Street, Apt. 17K, New York, NY 10036-3837 (21%);
Inv. Fiduciary Trust Co. Cust. IRA R/O Janice A. Mohs, 104 Westminster Blvd.,
Goose Creek, SC 29445-4872 (12%); Janice A. Mohs, 104 Westminster Blvd. Goose
Creek, SC 29445-4872 (6%); Inv. Fiduciary Trust Co. Cust. IRA A/C Marilyn
Weisberg, 405 Bayberry Court, Englishtown, NJ 07726-4740; Inv. Fiduciary Trust
Co. Cust. IRA A/C Harry W. Weisberg, 405 Bayberry Court, Englishtown, NJ 07726-
4740 (6%).]

Code of Ethics

The Board of Trustees of the Fund has adopted a Code of Ethics pursuant to Rule
17j-1 under the 1940 Act. The Fund's Code of Ethics permits Fund personnel to
invest in securities for their own accounts, but requires compliance with the
Code's pre-clearance requirements (with certain exceptions). In addition, the
Fund's Code of Ethics provides for trading "blackout periods" that prohibit
trading by personnel within periods of trading by the Fund in the same security.
The Fund's Code of Ethics also prohibits short term trading profits and personal
investment in initial

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<PAGE>

public offerings. The Code requires prior approval with respect to purchases of
securities in private placements.

The Fund's adviser, Bankers Trust Company, has also adopted a Code of Ethics.
The Code of Ethics allows personnel to invest in securities for their own
accounts, but require compliance with the Code's pre-clearance requirements and
other restrictions including "blackout periods" and minimum holding periods,
subject to limited exceptions. The Code prohibits purchases of securities in
initial public offerings (the prohibition is limited to U.S. public offerings)
and requires prior approval for purchases of securities in private placements.

The Fund's principal underwriter, ICCD Distributors, Inc., has adopted a Code of
Ethics applicable to ICCD's distribution services to registered investment
companies such as the Fund. The ICCD Code of Ethics prohibits directors and
officers of ICCD from executing trades on a day during which the individual
knows or should have known that a Fund in the individual's complex has a pending
"buy" or "sell" order in the same security, subject to certain exceptions. The
ICCD Code of Ethics also requires pre-clearance for purchases of securities in
an initial public offering or private placement.

Investment Adviser

Bankers Trust is the Portfolio's investment adviser. Bankers Trust is a wholly-
owned subsidiary of Deutsche Bank AG. Deutsche Bank is a banking company with
limited liability organized under the laws of the Federal Republic of Germany.
Deutsche Bank is the parent company of a group consisting of banks, capital
markets companies, fund management companies, mortgage banks, a property finance
company, installment financing and leasing companies, insurance companies,
research and consultancy companies and other domestic and foreign companies.

Bankers Trust may have deposit, loan and other commercial banking relationships
with the issuers of obligations 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 affiliates
deal, trade and invest for their own accounts in such obligations and are among
the leading dealers of various types of such obligations. 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.

For the period or year ended September 30, 1999 and September 30, 2000, Bankers
Trust earned $64,673 and $______, respectively, for compensation of investment
advisory services provided to the Portfolio. For the same periods, Bankers
Trust reimbursed $42,363 and $______, respectively, to the Portfolio to cover
expenses.

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<PAGE>

At a special meeting held in 1999, shareholders of the Portfolio approved a new
investment advisory agreement with Deutsche Asset Management, Inc. (formerly
Morgan Grenfell Inc.). The new investment advisory agreement may be implemented
within two years of the date of the special meeting upon approval of a majority
of the members of the Board of Trustees who are not "interested persons"
("Independent Trustees"). Shareholders of the Portfolio also approved a new
sub-investment advisory agreement among the Portfolio, Deutsche Asset
Management, Inc. and Bankers Trust under which Bankers Trust may perform certain
of Deutsche Asset Management Inc.'s responsibilities, at Deutsche Asset
Management Inc.'s expense, upon approval of the Independent Trustees, within two
years of the date of the special meeting. Deutsche Asset Management, Inc. is an
indirect wholly-owned subsidiary of Deutsche Bank.

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 the 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 record keeping 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.

For the period or year ended September 30, 1999 and September 30, 2000, Bankers
Trust earned $170 and $______, respectively, as compensation for administrative
and other services provided to the Fund. During the same periods, Bankers Trust
reimbursed $169 and $______, respectively, to the Fund to cover expenses. For
the period or year ended September 30, 1999 and September 30, 2000, Bankers
Trust earned $4,620 and $______, respectively, for administrative and other
services provided to the Portfolio. During the same periods, Bankers Trust
reimbursed $3,026 and $______, respectively, to the Portfolio to cover expenses.

Custodian and Transfer Agent

Bankers Trust, 130 Liberty Street, New York, New York 10006, serves as Custodian
for the Trust and the Portfolio pursuant to an administration and services
agreement. As Custodian, it holds the Fund's and Portfolio's assets. Bankers
Trust will comply with the self-custodian provisions of Rule 17f-2 under the
1940 Act.

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<PAGE>

Investment Company Capital Corp. ("ICCC"), One South Street, Baltimore,
Maryland, 21202, serves as transfer agent of the Trust and of the Portfolio
pursuant to a transfer agency agreement. Under its transfer agency agreement
with the Trust, ICCC 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. ICCC may be
reimbursed by the Fund or the Portfolio for its out-of-pocket expenses.

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 Two Portland
Square, 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 Agreements with the
Trusts 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 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 Trusts, 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 Trusts
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 Agreements 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 Service
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.

Banking Regulatory Matters

Bankers Trust has been advised by its counsel that in its opinion Bankers Trust
may perform the services for the Portfolio contemplated by the Advisory
Agreement 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

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<PAGE>

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
Boards of Trustees would review the relationships with Bankers Trust and
consider taking all actions necessary in the circumstances.

Counsel and Independent Auditors

Willkie Farr & Gallagher, 787 Seventh Avenue, New York, New York 10019-6099,
serves as counsel to the Trusts. Ernst & Young LLP, Two Commerce Square, 2001
Market Street, Philadelphia, Pennsylvania 19103, acts as independent auditors of
the Fund and the Portfolio.

ORGANIZATION OF THE TRUST

BT Investment Funds was organized on July 21, 1986, under the name BT Tax-Free
Investment Trust, and assumed its current name on May 16, 1988. The shares of
each series participate equally in the earnings, dividends and assets of the
particular series. The Trusts may create and issue additional series of shares.
Each Trust's Declaration of Trust permits the Trustees to divide or combine the
shares into a greater or lesser number of shares without thereby changing the
proportionate beneficial interest in series. Each share represents an equal
proportionate interest in a series with each other share. Shares when issued
are fully paid and non-assessable, except as set forth below. Shareholders are
entitled to one vote for each share held.

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.

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.

Whenever a Trust is requested to vote on matters pertaining to the Portfolio,
the Trust will vote its shares without a meeting of shareholders of the
respective Fund if the proposal is one, which if made with respect to the Fund,
would not require the vote of shareholders of the Fund as long

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<PAGE>

as such action is permissible under applicable statutory and regulatory
requirements. For all other matters requiring a vote, a Trust will hold a
meeting of shareholders of its respective Fund and, at the meeting of the
investors in the Portfolio, the Trust will cast all of its votes in the same
proportion as votes in all its shares at the Portfolio meeting, other investors
with a greater pro rata ownership of the Portfolio could have effective voting
control of the operations of the Portfolio.

TAXATION

Taxation of The Fund

The Fund intends to qualify annually to be treated as a regulated investment
company under the Code. To qualify for that treatment, the Fund must, among
other things, (a) derive at least 90% of its gross income each taxable year from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of securities or foreign currencies, or other
income (including gains from options, futures or forward contracts) derived with
respect to its business of investing in securities or those currencies (the
"Income Requirement"), (b) diversify its holdings so that, at the end of each
quarter of its taxable year, (i) at least 50% of the value of its assets is
represented by cash and cash items (including receivables), U.S. government
securities, securities of other regulated investment companies and other
securities, with such other securities of any one issuer limited to an amount
not greater than 5% of the value of the Fund's total assets and not greater than
10% of the issuer's outstanding voting securities and (ii) not more than 25% of
the value of its total assets is invested in the securities of any one issuer
(other than U.S. government securities or the securities of other regulated
investment companies), and (c) distribute for each taxable year at least 90% of
its investment company taxable income (generally consisting of interest,
dividends and the excess of net short-term capital gain over net long-term
capital loss).

The Fund will be subject to a nondeductible 4% federal excise tax to the extent
it fails to distribute by the end of any calendar year substantially all of its
ordinary income for that year and capital gain net income for the one-year
period ending on October 31 of that year, plus any undistributed amount from the
prior year.

The Fund, as an investor in the Portfolio, will be deemed to own a proportionate
share of the Portfolio's assets, and to earn a proportionate share of the
Portfolio's income, for purposes of determining whether the Fund satisfies all
the requirements described above to qualify as a regulated investment company.
See the next section for a discussion of the tax consequences to the Fund of
hedging transactions engaged in by the Portfolio.

Taxation of The Portfolio

The Portfolio will be treated as a separate partnership for federal income tax
purposes and will not be a "publicly traded partnership." As a result, the
Portfolio will not be subject to federal income tax. Instead, the Fund and
other investors in the Portfolio will be required to take into account, in
computing their federal income tax liability, their respective shares of the
Portfolio's

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<PAGE>

income, gains, losses, deductions and credits, without regard to whether they
have received any cash distributions from the Portfolio. The Portfolio also will
not be subject to state income or franchise tax.

Because, as noted above, the Fund will be deemed to own a proportionate share of
the Portfolio's assets, and to earn a proportionate share of the Portfolio's
income, for purposes of determining whether the Fund satisfies the requirements
to qualify as a regulated investment company, the Portfolio intends to conduct
its operations so that the Fund will be able to satisfy all those requirements.

Distributions received by the Fund from the Portfolio (whether pursuant to a
partial or complete withdrawal or otherwise) generally will not result in the
Fund's recognizing any gain or loss for federal income tax purposes, except that
(a) gain will be recognized to the extent any cash that is distributed exceeds
the Fund's basis for its interest in the Portfolio prior to the distribution,
(b) income or gain will be realized if the distribution is 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 (c) gain or loss will be
recognized if a liquidation distribution consists solely of cash and/or
unrealized receivables. The Fund's basis for its interest in the Portfolio
generally will equal the amount of cash and the basis of any property the Fund
invests in the Portfolio, increased by the Fund's share of the Portfolio's net
income and gains and decreased by (i) the amount of any cash and the basis of
any property distributed from the Portfolio to the Fund and (ii) the Fund's
share of the Portfolio's losses, if any.

The Portfolio's use of hedging strategies, such as writing (selling) and
purchasing options and futures contracts, involves complex rules that will
determine for income tax purposes the amount, character and timing of
recognition of the gains and losses it realizes in connection therewith. Gains
from options and futures contracts derived by the Portfolio with respect to its
business of investing in securities will qualify as permissible income for the
Fund under the Income Requirement.

Certain futures and foreign currency contracts in which the Portfolio may invest
may be subject to section 1256 of the Code ("section 1256 contracts"). Any
section 1256 contracts held by the Portfolio at the end of each taxable year,
other than contracts subject to a "mixed straddle" election made by the
Portfolio, must be "marked-to-market" (that is, treated as having been sold at
that time for their fair market value) for federal income tax purposes, with the
result that unrealized gains or losses will be treated as though they were
realized. Sixty percent of any net gain or loss recognized on these deemed
sales, and 60% of any net realized gain or loss from any actual sales of section
1256 contracts, will be treated as long-term capital gain or loss, and the
balance will be treated as short-term capital gain or loss. Section 1256
contracts also may be marked-to-market for purposes of the 4% excise tax
mentioned previously.

Code section 1092 (dealing with straddles) also may affect the taxation of
options and futures contracts in which the Portfolio may invest. Section 1092
defines a "straddle" as offsetting positions with respect to personal property;
for these purposes, options and futures contracts are personal property. Under
that section, any loss from the disposition of a position in a straddle

-55-
<PAGE>

generally may be deducted only to the extent the loss exceeds the unrealized
gain on the offsetting position(s) of the straddle; in addition, these rules may
apply to postpone the recognition of loss that otherwise would be recognized
under the mark-to-market rules discussed above. The regulations under section
1092 also provide certain "wash sale" rules, which apply to transactions where a
position is sold at a loss and a new offsetting position is acquired within a
prescribed period, and "short sale" rules applicable to straddles. If the
Portfolio makes certain elections, the amount, character and timing of
recognition of gains and losses from the affected straddle positions would be
determined under rules that vary according to the elections made. Because only
a few of the regulations implementing the straddle rules have been promulgated,
the tax consequences to the Portfolio of straddle transactions are not entirely
clear.

If the Portfolio has an "appreciated financial position" -- generally, an
interest (including an interest through an option, futures or forward contract,
or short sale) with respect to any debt instrument (other than "straight debt")
or partnership interest the fair market value of which exceeds its adjusted
basis -- and enters into a "constructive sale" of the same or substantially
similar property, the Portfolio will be treated as having made an actual sale
thereof, with the result that gain will be recognized at that time. A
constructive sale generally consists of a short sale, an offsetting notional
principal contract, or a futures or forward contract entered into by the
Portfolio or a related person with respect to the same or substantially similar
property. In addition, if the appreciated financial position is itself a short
sale or such a contract, acquisition of the underlying property or substantially
similar property will be deemed a constructive sale. The foregoing will not
apply, however, to any transaction during any taxable year that otherwise would
be treated as a constructive sale if the transaction is closed within 30 days
after the end of that year and the Portfolio holds the appreciated financial
position unhedged for 60 days after that closing (i.e., at no time during that
60-day period is the Portfolio's risk of loss regarding that position reduced by
reason of certain specified transactions with respect to substantially similar
or related property, such as having an option to sell, being contractually
obligated to sell, making a short sale or granting an option to buy
substantially identical stock or securities).

Other Taxation

The Trust is organized as a Massachusetts business trust and, under current law,
neither the Trust nor the Fund will be liable for any income or franchise tax in
the Commonwealth of Massachusetts, provided that the Fund continues to qualify
as a regulated investment company ("RIC") under Subchapter M of the Code. The
investment by the Fund in the Portfolio should not cause the Fund to be liable
for any income or franchise tax in the State of New York.

The Portfolio is organized as a New York trust. The Portfolio is not subject to
any income or franchise tax in the State of New York or the Commonwealth of
Massachusetts.

If the Fund fails to qualify as a RIC for any taxable year, all of its taxable
income will be subject to tax at regular corporate income tax rates without any
deduction for distributions to shareholders and such distributions generally
will be taxable to shareholders as ordinary dividends to the extent of the
Fund's current and accumulated earnings and profits. In this event,

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<PAGE>

distributions generally will be eligible for the dividends-received deduction
for corporate shareholders.

Foreign Withholding Taxes

Income received and gains realized by the Portfolio from sources within foreign
countries may be subject to withholding and other taxes imposed by those
countries that would reduce the yield and/or total return on its securities.
Tax conventions between certain countries and the United States may reduce or
eliminate these foreign taxes, however, and many foreign countries do not impose
taxes on capital gains in respect of investments by foreign investors.

FINANCIAL STATEMENTS

The financial statements for the Fund and the Portfolio for the fiscal year
ended September 30, 2000 are incorporated herein by reference to the Annual
Report to shareholders of the Fund dated September 30, 2000, which either
accompanies this SAI or has previously been provided to the investor to whom
this SAI is being sent. A copy of the Annual Report may be obtained without
charge by contacting the Fund.

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<PAGE>

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.

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.

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<PAGE>

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.

Description Of S&P's 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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<PAGE>

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.

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

Duff & Phelps' Long-Term Debt Ratings:

-------------------------------------------------------------------------------
AAA Highest credit quality. The risk factors are negligible, being
only slightly more than for risk-free U.S. Treasury debt.
-------------------------------------------------------------------------------
AA+, AA, AA- High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of
economic conditions.
-------------------------------------------------------------------------------
A+, A, A- Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic
stress.
-------------------------------------------------------------------------------
BBB+, BBB, BBB- Below-average protection factors but still considered sufficient
for prudent investment. Considerable variability in risk during
economic cycles.
-------------------------------------------------------------------------------
BB+, BB, BB- Below investment grade but deemed likely to meet obligation when
due. Present or prospective financial protection factors
fluctuate according to industry conditions or company fortunes.
Overall quality may move up or down frequently within this
category.
-------------------------------------------------------------------------------
B+, B, B- Below investment grade and possessing risk that obligations will
not be met when due. Financial protection factors will fluctuate
widely according to economic cycles, industry conditions and/or
company fortunes. Potential exists for frequent changes in the
rating within this category or into a higher or lower rating
grade.
-------------------------------------------------------------------------------
CCC Well below investment-grade securities. Considerable uncertainty
exists as to timely payment of principal, interest or preferred
dividends. Protection factors are narrow and risk can be
substantial with unfavorable economic/industry conditions,
and/or with unfavorable company developments.
-------------------------------------------------------------------------------
DD Defaulted debt obligations. Issuer failed to meet scheduled
principal and/or interest payments.
-------------------------------------------------------------------------------
DP Preferred stock with dividend arrearages.
===============================================================================

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<PAGE>

Description Of Moody's Short-Term Debt 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.

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.

Description Of S&P Short-Term Issuer Credit Ratings:

A-1 An obligor rated `A-1' has STRONG capacity to meet its financial
commitments. It is rated in the highest category by Standard & Poor's. Within
this category, certain obligors are designated with a plus sign (+). This
indicates that the obligor's capacity to meet its financial commitments is
EXTREMELY STRONG.

A-2 An obligor rated `A-2' has SATISFACTORY capacity to meet its financial
commitments. However, it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligors in the highest
rating category.

A-3 An obligor rated `A-3' has ADEQUATE capacity to meet its financial
obligations. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitments.

Description Of Duff & Phelps' Commercial Paper Ratings:

D-1+ Highest certainty of timely payment. Short term liquidity, including
internal operating factors and/or access to alternative sources of funds, is
outstanding, and safety is just below risk free U.S. Treasury short term
obligations.

D-1 Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.

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<PAGE>

D-1- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.

D-2 Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.

D-3 Satisfactory liquidity and other protection factors qualify issues as to
investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.

Description Of Moody's Insurance Financial Strength Ratings:

Aaa. Insurance companies rated Aaa offer exceptional financial security. While
the financial strength of these companies is likely to change, such changes as
can be visualized are most unlikely to impair their fundamentally strong
position.

Aa. Insurance companies rated Aa offer excellent financial security. Together
with the Aaa group they constitute what are generally known as high grade
companies. They are rated lower than Aaa companies because long-term risks
appear somewhat larger.

A. Insurance companies rated A offer good financial security. However, elements
may be present which suggest a susceptibility to impairment sometime in the
future.

Baa. Insurance companies rated Baa offer adequate financial security. However,
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time.

Ba. Insurance companies rated Ba offer questionable financial security. Often
the ability of these companies to meet policyholder obligations maybe very
moderate and thereby not well safeguarded in the future.

B. Insurance companies rated B offer poor financial security. Assurance of
punctual payment of policyholder obligations over any long period of time is
small.

Caa. Insurance companies rated Caa offer very poor financial security. They may
be in default on their policyholder obligations or there may be present elements
of danger with respect to punctual payment of policyholder obligations and
claims.

Ca. Insurance companies rated Ca offer extremely poor financial security. Such
companies are often in default on their policyholder obligations or have other
marked shortcomings.

C. Insurance companies rated C are the lowest rated class of insurance company
and can be regarded as having extremely poor prospects of ever offering
financial security.

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<PAGE>

Numeric modifiers: Numeric modifiers are used to refer to the ranking within the
group -- one being the highest and three being the lowest. However, the
financial strength of companies within a generic rating symbol (Aa, for example)
is broadly the same.

Description Of S&P Claims Paying Ability Rating Definitions:

Secure Range: AAA to BBB

"AAA" Superior financial security on an absolute and relative basis. Capacity
to meet policyholder obligations is overwhelming under a variety of economic and
underwriting conditions.

"AA" Excellent financial security. Capacity to meet policyholder obligations is
strong under a variety of economic and underwriting conditions.

"A" Good financial security, but capacity to meet policyholder obligations is
somewhat susceptible to adverse economic and underwriting conditions.

"BBB" Adequate financial security, but capacity to meet policyholder
obligations is susceptible to adverse economic and underwriting conditions.

Vulnerable Range: BB to CCC

"BB" Financial security may be adequate, but capacity to meet policyholder
obligations, particularly with respect to long-term or "long-tail" policies, is
vulnerable to adverse economic and underwriting conditions.

"B" Vulnerable financial security. Currently able to meet policyholder
obligations, but capacity to meet policyholder obligations is particularly
vulnerable to adverse economic and underwriting conditions.

"CCC" Extremely vulnerable financial security. Continued capacity to meet
policyholder obligations is highly questionable unless favorable economic and
underwriting conditions prevail.

"R" Regulatory action. As of the date indicated, the insurer is under
supervision of insurance regulators following rehabilitation, receivership,
liquidation, or any other action that reflects regulatory concern about the
insurer's financial condition. Information on this status is provided by the
National Association of Insurance Commissioners and other regulatory bodies.
Although believed to be accurate, this information is not guaranteed. The "R"
rating does not apply to insurers subject only to nonfinancial actions such as
market conduct violations.

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

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<PAGE>

Duff & Phelps' Claims Paying Ability Ratings:

<TABLE>
<S> <C>
===============================================================================================
AAA Highest claims paying ability. Risk factors are negligible.
-----------------------------------------------------------------------------------------------
AA+ Very high claims paying ability. Protection factors are strong. Risk is
AA modest, but may vary slightly over time due to economic and/or underwriting
AA- conditions.
-----------------------------------------------------------------------------------------------
A+ High claims paying ability. Protection factors are average and there is an
A expectation of variability in risk over time due to economic and/or underwriting
A- conditions.
-----------------------------------------------------------------------------------------------
BBB+ Adequate claims paying ability. Protection factors are adequate. There is
BBB considerable variability in risk over time due to economic and/or underwriting
BBB- conditions.
-----------------------------------------------------------------------------------------------
BB+ Uncertain claims paying ability and less than investment grade quality.
BB However, the company is deemed likely to meet these obligations when due.
BB- Protection factors will vary widely with changes in economic and/or underwriting
conditions.
-----------------------------------------------------------------------------------------------
B+ Possessing risk that policyholder and contractholder obligations will not be
B paid when due. Protection factors will vary widely with changes in economic and
B- underwriting conditions or company fortunes.
-----------------------------------------------------------------------------------------------
CCC There is substantial risk that policyholder and contractholder obligations will
not be paid when due. Company has been or is likely to be placed under state
insurance department supervision.
-----------------------------------------------------------------------------------------------
DD Company is under an order of liquidation.
===============================================================================================
</TABLE>

-64-
<PAGE>

Investment Adviser of the Portfolio and Administrator

BANKERS TRUST COMPANY

Distributor

ICC DISTRIBUTORS, INC.

Custodian

BANKERS TRUST COMPANY

Transfer Agent

INVESTMENT COMPANY CAPITAL CORP.

Independent Auditors

ERNST & YOUNG 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 Fund's Prospectus, its SAI or
the Fund's official sales literature in connection with the offering of the
Fund'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 SAI constitutes an offer in any state in which, or to any
person to whom, such offer may not lawfully be made.

____________________

CUSIP #55922660

-65-

<PAGE>

PART C - OTHER INFORMATION

ITEM 23. Exhibits.

(a) Declaration of Trust dated July 21, 1986; 1
(i) Supplement to Declaration of Trust dated October 20, 1986; 1
(ii) Second Supplement to Declaration of Trust dated May 16, 1988; 1
(b) By-Laws; 1
(c) Incorporated by reference to Exhibit (b) above;
(d Not applicable
(e) Distribution Agreement dated August 11, 1998; 5
(i) Appendix A dated September 29, 2000, to Distribution
Agreement - filed September 29, 2000; 18
(f) Bonus or Profit Sharing Contracts - Not applicable;
(g) Custodian Agreement dated July 1, 1996; 2
(i) Amendment No. 2 to Exhibit A of the Custodian Agreement dated
October 8, 1997; 3
(ii) Amendment No. 3 to Exhibit A of the Custodian Agreement dated June
10, 1998; 7
(iii) Amendment No. 4 to Exhibit A of the Custodian Agreement dated
December 9, 1998; 7
(iv) Amendment No. 5 to Exhibit A of the Custodian Agreement dated
December 23, 1999; 12
(v) Amendment No. 6 to Exhibit A of the Custodian Agreement dated
September 29, 2000 - filed September 29, 2000; 18
(vi) Cash Services Addendum to Custodian Agreement dated December 18,
1997;
(vii) Amendment No.7 to be filed.
(h) Administration and Services Agreement dated October 28, 1992; 8
(i) Exhibit D to the Administration and Services Agreement as of October
28, 1992, as revised September 29, 2000 - filed September 29, 2000;
18
(ii) Agreement to Provide Shareholder Services for BT Preservation Plus
Income Fund as of June 10, 1998; 5
(iii) Shareholder Services Plan for BT Preservation Plus Income Fund as of
June 10, 1998; 5
(iv) Expense Limitation Agreement dated September 30, 1999 on behalf of
Intermediate Tax Free Fund, Capital Appreciation Fund, Small Cap
Fund; 13
(v) Expense Limitation Agreement dated October 31, 1999 on behalf of
International Equity Fund, Latin American Equity Fund and Pacific
Basin Equity Fund; 13
(vi) Expense Limitation Agreement dated March 31, 2000, on behalf of BT
Investment Lifecycle Long Range Fund, BT
<PAGE>

Investment Lifecycle Mid Range Fund, and BT Investment Lifecycle
Short Range Fund; 15
(vii) Expense Limitation Agreement dated December 31, 1999 on behalf of
Cash Management Fund, Tax Free Money Fund, NY Tax Free Money Fund,
Treasury Money Fund and Quantitative Equity Fund; 14
(viii) Expense Limitation Agreement on behalf of Mid Cap for the period
August 31, 2000 through January 31, 2001; 17
(ix) Expense Limitation Agreement on behalf of Communications for the
period September 29, 2000 through December 31, 2001 - filed
September 29, 2000; 18
(x) Expense Limitation Agreement on behalf of Global Equity for the
period December 29, 2000 through February 28, 2002 - to be filed;
(xi) Transfer Agency Agreement dated October 1, 2000 with Investment
Company Capital Corp.; 19
(xii) Expense Limitation Agreement dated September 30, 2000 on behalf of
Preservation Plus Income Fund-to be filed;
(i) Legal Opinion - Not applicable;
(j) Consent of Independent Accountants - to be filed;
(k) Omitted Financial Statements - Not applicable;
(l) Initial Capital Agreements - Not applicable;
(m) Rule 12b-1 Plans - Not applicable;
(n) Not applicable.
(o) Rule 18f-3 Plan; 13
(p) Codes of Ethics for Funds, Adviser and Distributor; 16

___________________________________

1. Incorporated by reference to Post-Effective Amendment No. 34 to
Registrant's Registration Statement on Form N-1A ("Registration Statement")
as filed with the Securities and Exchange Commission ("Commission") on July
31, 1995.
2. Incorporated by reference to Post-Effective Amendment No. 44 to
Registrant's Registration Statement as filed with the Commission on July 1,
1997.
3. Incorporated by reference to Post-Effective Amendment No. 46 to
Registrant's Registration Statement as filed with the Commission on January
28, 1998.
4. Incorporated by reference to Post-Effective Amendment No. 50 to
Registrant's Registration Statement as filed with the Commission on June
30, 1998.
5. Incorporated by reference to Post-Effective Amendment No. 55 to
Registrant's Registration Statement as filed with the Commission on
November 25, 1998.
<PAGE>

6. Incorporated by reference to Post-Effective Amendment No. 56 to
Registrant's Registration Statement as filed with the Commission on January
28, 1999.
7. Incorporated by reference to Post-Effective Amendment No. 57 to
Registrant's Registration Statement as filed with the Commission on
February 8, 1999.
8. Incorporated by reference to Post-Effective Amendment No. 29 to
Registrant's Registration Statement as filed with the Commission on
November 8, 1993.
9. Incorporated by reference to Post-Effective Amendment No. 60 to
Registrant's Registration Statement as filed with the Commission on March
15, 1999.
10. Incorporated by reference to Post-Effective Amendment No. 63 to
Registrant's Registration Statement as filed with the Commission on July
29, 1999.
11. Incorporated by reference to Post-Effective Amendment No. 64 to
Registrant's Registration Statement as filed with the Commission on October
22, 1999.
12. Incorporated by reference to Post-Effective Amendment to No. 66 to
Registrant's Registration Statement as filed with the Commission on
December 23, 1999.
13. Incorporated by reference to Post-Effective Amendment to No. 67 to
Registrant's Registration Statement as filed with the Commission on January
28, 2000.
14. Incorporated by reference to Post-Effective Amendment to No. 68 to
Registrant's Registration Statement as filed with the Commission on April
28, 2000.
15. Incorporated by reference to Post-Effective Amendment to No. 69 to
Registrant's Registration Statement as filed with the Commission on May 1,
2000.
16. Incorporated by reference to Post-Effective Amendment No. 70 to
Registrant's Registration Statement as filed with the Commission on June
26, 2000.
17. Incorporated by reference to Post-Effective Amendment No. 73 to
Registrant's Registration Statement as filed with the Commission on August
31, 2000.
18. Incorporated by reference to Post-Effective Amendment No. 74 to
Registrant's Registration Statement as filed with the Commission on
September 29, 2000.
19. Incorporated by reference to Post-Effective Amendment No. 75 to
Registrant's Registration Statement as filed with the Commission on
September 29, 2000.

ITEM 24. Persons Controlled by or Under Common Control with Registrant.

Not applicable.
<PAGE>

ITEM 25. Indemnification.

Incorporated by reference to Post-Effective Amendment No. 38 to Registrant's
Registration Statement as filed with the Commission on April 29, 1996.

ITEM 26. Business and Other Connections of Investment Adviser.

All of the information required by this item is set forth in the Form ADV, as
amended, of Deutsche Asset Management, Inc. (formerly Morgan Grenfell Inc.)
(File No. 801-27291). The following sections of each such Form ADV are
incorporated herein by reference:

(a) Items 1 and 2 of Part II

(b) Section 6, Business Background, of each Schedule D.

Item 27. Principal Underwriters.

(a) ICC Distributors, Inc., the Distributor for shares of the Registrant, also
acts as principal underwriter for the following open-end investment companies:
BT Advisor Funds, BT Institutional Funds, BT Pyramid Mutual Funds, Cash
Management Portfolio, Intermediate Tax Free Portfolio, NY Tax Free Money
Portfolio, Treasury Money Portfolio, International Equity Portfolio, Equity 500
Index Portfolio, Capital Appreciation Portfolio, Asset Management Portfolio, BT
Investment Portfolios, Deutsche Banc Alex. Brown Cash Reserve Fund, Inc., Flag
Investors Communications Fund, Inc., Flag Investors Emerging Growth Fund, Inc.,
the Flag Investors Total Return U.S. Treasury Fund Shares of Total Return U.S.
Treasury Fund, Inc., the Flag Investors Managed Municipal Fund Shares of Managed
Municipal Fund, Inc., Flag Investors Short-Intermediate Income Fund, Inc., Flag
Investors Value Builder Fund, Inc., Flag Investors Real Estate Securities Fund,
Inc., Flag (formerly known as Deutsche Funds, Inc.), Flag Investors Portfolios
Trust (formerly known as Deutsche Portfolios), Morgan Grenfell Investment Trust,
DP Trust, The Glenmede Funds, Inc. and The Glenmede Portfolios.

(b) Unless otherwise stated, the principal business address for the following
persons is Two Portland Square, Portland, Maine 04101.
<PAGE>

Name and Positions and Positions and
Principal Business Offices with Offices with
Address Distributor Registrant

John A. Keffer President None
Ronald H. Hirsch Treasurer None
Nanette K. Chern Chief Compliance Officer None
David I. Goldstein Secretary None
Benjamin L. Niles Vice President None
Frederick Skillin Assistant Treasurer None
Marc D. Keffer Assistant Secretary None

ITEM 28. Location of Accounts and Records.

BT Investment Funds: Deutsche Asset Management
(Registrant) One South Street
Baltimore, MD 21202

Bankers Trust Company: 130 Liberty Street
(Custodian, Investment Adviser New York, NY 10006
and Administrator)

DST: 210 West 10/th/ Street
Kansas City, MO 64105.

ICC Distributors, Inc.: Two Portland Square
(Distributor) Portland, ME 04101

ITEM 29. Management Services.

Not Applicable

ITEM 30. Undertakings.

Not Applicable
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, and
the Investment Company Act of 1940, as amended, the Registrant, BT INVESTMENT
FUNDS, certifies that it meets all of the requirements for effectiveness of this
Amendment to its Registration Statement pursuant to Rule 485(a) under the
Securities Act of 1933, as amended, and has duly caused this Post-Effective
Amendment No. 76 to its Registration Statement to be signed on its behalf by the
undersigned, duly authorized, in the City of Baltimore and the State of Maryland
on this 30th day of November, 2000.

BT INVESTMENT FUNDS

By: /s/ Daniel O. Hirsch
______________________
Daniel O. Hirsch, Secretary

Pursuant to the requirements of the Securities Act of 1933, this Amendment
to its Registration Statement has been signed below by the following persons in
the capacity and on the date indicated:

NAME TITLE DATE

By: /s/ Daniel O. Hirsch Secretary November 30, 2000
______________________ (Attorney in Fact
Daniel O. Hirsch For the Persons Listed Below)

/s/ RICHARD T. HALE* President, Chief Executive
________________________ Officer and Trustee
Richard T. Hale

/s/ CHARLES A. RIZZO* Treasurer (Principal
________________________ Financial and Accounting Officer)
Charles A. Rizzo

/s/ CHARLES P. BIGGAR* Trustee
________________________
Charles P. Biggar

/s/ S. LELAND DILL* Trustee
________________________
S. Leland Dill

/s/ MARTIN J. GRUBER* Trustee
________________________
Martin J. Gruber

/s/ RICHARD J. HERRING* Trustee
________________________
Richard J. Herring

/s/ BRUCE T. LANGTON* Trustee
________________________

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Bruce T. Langton

/s/ PHILIP SAUNDERS, JR.* Trustee
Philip Saunders, Jr.

/s/ HARRY VAN BENSCHOTEN* Trustee
Harry Van Benschoten

* By Power of Attorney. Incorporated by reference to Post-Effective Amendment
No. 64 of BT Investment Funds as filed with the Commission on October 22, 1999.
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PROPOSED RESOLUTION RELATING TO RATIFICATION OF REGISTRATION STATEMENTS

(To be voted on by the Boards of each Investment Company
with a Fiscal Year End of September 30)

RESOLVED, That the proper officers of the Trust be, and they hereby are,
authorized and directed to execute, in the name and on behalf of the
Trust, a Post-Effective Amendment under the Securities Act of 1933
(the "1933 Act") and an Amendment under the Investment Company Act of
1940, as amended, (the "1940 Act") to the Trust's Registration
Statement on Form N-1A, and all necessary exhibits and other
instruments relating thereto (collectively, the "Registration
Statement"), to procure all other necessary signatures thereon, and to
file the appropriate exhibits thereto, with the Securities and
Exchange Commission (the "Commission"), under the 1933 Act and the
1940 Act and to appear, together with legal counsel, on behalf of the
Trust before the Commission in connection with any matter relating to
the Registration Statement; and further

RESOLVED, That the proper officer of the Trust be, and he or she hereby
is, authorized and directed in the name and on behalf of the Trust to
take any and all action which the officer so acting may deem necessary
or advisable in order to obtain a permit to register or qualify shares
of common stock of the Trust for issuance and sale or to request an
exemption from registration of shares of common stock of the Trust
under the securities laws of such of the states of the United States
of America or other jurisdictions, including Canada, as such officer
may deem advisable, and in connection with such registration, permits,
licenses, qualifications and exemptions to execute, acknowledge,
verify, deliver, file and publish all such applications, reports,
issuer's covenants, resolutions, irrevocable consents to service of
process, powers of attorney and other papers and instruments as may be
required under such laws or may be deemed by such officer to be useful
or advisable to be filed thereunder, and that the form of any and all
resolutions required by any such state authority in connection with
such registration, licensing, permitting, qualification
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or exemption is hereby adopted if (1) in the opinion of the officer of
the Trust so acting the adoption of such resolutions is necessary or
advisable, and (2) the Secretary of the Trust evidences such adoption
by filing herewith copies of such resolutions which shall thereupon be
deemed to be adopted by the Board of Directors and incorporated in the
minutes as a part of this resolution and with the same force and
effect as if attached hereto and that the proper officers of the Trust
are hereby authorized to take any and all action that they may deem
necessary or advisable in order to maintain such registration in
effect for as long as they may deem to be in the best interests of the
Trust; and further

RESOLVED, That the proper and all actions heretofore or hereafter taken by
such officer or officers within the terms of the foregoing resolutions
be, and they hereby are, ratified and confirmed as the authorized act
and deed of the Trust; and further

RESOLVED, That the proper officers of the Portfolio Trust be, and they
hereby are, authorized and directed to execute, in the name and on
behalf of the Portfolio Trust, an Amendment under the 1940 Act to the
Portfolio Trust's Registration Statement, to procure all other
necessary signatures thereon, and to file the appropriate exhibits
thereto, with the Commission, and to appear, together with legal
counsel, on behalf of the Portfolio Trust before the Commission in
connection with any matter relating to the Registration Statement; and
further

RESOLVED, That the proper officer of the Portfolio Trust be, and he or she
hereby is, authorized and directed in the name and on behalf of the
Portfolio Trust to take any and all action which the officer so acting
may deem necessary or advisable in order to obtain a permit to
register or qualify shares of common stock of the Portfolio Trust for
issuance and sale or to request an exemption from registration of
shares of common stock of the Portfolio Trust under the securities
laws of such of the states of the United States of America or other
jurisdictions, including Canada, as such officer may deem advisable,
and in connection with
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such registration, permits, licenses, qualifications and exemptions to
execute, acknowledge, verify, deliver, file and publish all such
applications, reports, issuer's covenants, resolutions, irrevocable
consents to service of process, powers of attorney and other papers
and instruments as may be required under such laws or may be deemed by
such officer to be useful or advisable to be filed thereunder, and
that the form of any and all resolutions required by any such state
authority in connection with such registration, licensing, permitting,
qualification or exemption is hereby adopted if (1) in the opinion of
the officer of the Portfolio Trust so acting the adoption of such
resolutions is necessary or advisable, and (2) the Secretary of the
Portfolio Trust evidences such adoption by filing herewith copies of
such resolutions which shall thereupon be deemed to be adopted by the
Board of Trustees and incorporated in the minutes as a part of this
resolution and with the same force and effect as if attached hereto
and that the proper officers of the Portfolio Trust are hereby
authorized to take any and all action that they may deem necessary or
advisable in order to maintain such registration in effect for as long
as they may deem to be in the best interests of the Portfolio Trust;
and further

RESOLVED, That any and all actions heretofore or hereafter taken by such
officer or officers within the terms of the foregoing resolutions be,
and they hereby are, ratified and confirmed as the authorized act and
deed of the Portfolio Trust.