PACIFIC SELECT FUND, 497, 1998-05-05

PACIFIC SELECT FUND
497, 1998-05-05

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[LOGO OF PACIFIC SELECT FUND]
PACIFIC SELECT FUND

700 NEWPORT CENTER DRIVE
NEWPORT BEACH, CA 92660

Pacific Select Fund (the "Fund") is a mutual fund that currently offers
fourteen separate portfolios (each a "Portfolio"). The Portfolios serve as the
investment medium for variable life insurance policies and variable annuity
contracts (the "Variable Contracts") issued or administered by Pacific Life
Insurance Company ("Pacific Life" or the "Adviser", formerly known as Pacific
Mutual Life Insurance Company). You can instruct Pacific Life to allocate cash
value under your Variable Contract to investment options funded by an account
known as a "Separate Account," which invests in the Portfolios. Your
allocation rights are described in the accompanying Prospectus for the
Separate Account.

The fourteen Portfolios of the Fund are as follows:

The Money Market Portfolio* The Equity Income
The High Yield Bond Portfolio
Portfolio The Multi-Strategy
The Managed Bond Portfolio Portfolio
The Government Securities The Equity Portfolio
Portfolio The Bond and Income
The Growth Portfolio** Portfolio
The Aggressive Equity The Equity Index Portfolio
Portfolio The International
The Growth LT Portfolio Portfolio
The Emerging Markets
Portfolio

This Prospectus contains information about the investment objective and
policies of each Portfolio and related information. You should carefully
consider a Portfolio's investment objective and policies and potential risks
before investing.

THE FUND'S SHARES INVOLVE INVESTMENT RISK, INCLUDING LOSS OF PRINCIPAL, AND
ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK.
THE FUND'S SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.

This Prospectus sets forth concisely the information a prospective investor
should know before investing in the Fund. A Statement of Additional
Information ("SAI"), dated May 1, 1998, containing additional and more
detailed information about the Fund has been filed with the Securities and
Exchange Commission ("SEC") and is hereby incorporated by reference into this
Prospectus. The SAI is available without charge and may be obtained by writing
to the Fund at the address printed above or calling the Fund at (800) 800-
7681. The SEC maintains a Web site (http://www.sec.gov) that contains the SAI
material incorporated by reference and other information regarding registrants
that file electronically with the SEC.

- --------

* Investment in the Money Market Portfolio (or in any other Portfolio) is
neither insured nor guaranteed by the U.S. Government.

** The Growth Portfolio is not available for variable annuity contracts issued
on or after January 1, 1994 or for Pacific Corinthian variable annuity
contracts. See "How Do You Purchase Shares of the Fund?" on page 35.

----------------
THIS PROSPECTUS SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS OF
THE SEPARATE ACCOUNT, WHICH ACCOMPANIES THIS PROSPECTUS. BOTH
PROSPECTUSES SHOULD BE READ CAREFULLY AND RETAINED FOR
FUTURE REFERENCE.

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

THE DATE OF THIS PROSPECTUS IS MAY 1, 1998
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TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
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<S> <C>
THE FUND'S PORTFOLIOS AT A GLANCE.......................................... 1
CONDENSED FINANCIAL INFORMATION............................................ 1
THE PORTFOLIOS: INVESTMENT OBJECTIVES AND POLICIES......................... 4
General.................................................................. 4
Money Market Portfolio................................................... 5
High Yield Bond Portfolio................................................ 5
Managed Bond Portfolio................................................... 6
Government Securities Portfolio.......................................... 7
Growth Portfolio......................................................... 8
Aggressive Equity Portfolio.............................................. 9
Growth LT Portfolio...................................................... 9
Equity Income Portfolio.................................................. 10
Multi-Strategy Portfolio................................................. 11
Equity Portfolio......................................................... 12
Bond and Income Portfolio................................................ 13
Equity Index Portfolio................................................... 14
International Portfolio.................................................. 15
Emerging Markets Portfolio............................................... 16
All Portfolios: Diversification and Changes in Policies.................. 17
SECURITIES AND INVESTMENT TECHNIQUES....................................... 18
Derivatives.............................................................. 18
Mortgage-Related Securities.............................................. 18
High Yield Bonds......................................................... 20
Variable and Floating Rate Securities.................................... 21
Small Capitalization Stocks.............................................. 21
Borrowing................................................................ 22
Illiquid and Restricted Securities....................................... 22
Precious Metals-Related Securities....................................... 22
Foreign Securities....................................................... 22
Forward Foreign Currency Contracts....................................... 24
Options.................................................................. 24
Foreign Currency Options................................................. 25
Swap Agreements and Options on Swap Agreements........................... 25
Spread Transactions...................................................... 26
Futures Contracts and Futures Options.................................... 26
ORGANIZATION AND MANAGEMENT OF THE FUND.................................... 27
MORE ON THE FUND'S SHARES.................................................. 35
OTHER INFORMATION ABOUT THE FUND........................................... 37
TOTAL RETURN............................................................... 39
Prior Performance of A Comparable Fund Managed by Alliance Capital....... 40
Prior Performance of Comparable Accounts Managed by Goldman Sachs........ 41
APPENDIX................................................................... 43
Description of Bond Ratings.............................................. 43
</TABLE>
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THE FUND'S PORTFOLIOS AT A GLANCE

A summary of the highlights of Pacific Select Fund's Portfolios appears
below. THIS CHART IS ONLY A SUMMARY. YOU SHOULD ALSO READ THE COMPLETE
DESCRIPTIONS OF EACH PORTFOLIO'S INVESTMENT OBJECTIVES AND POLICIES, WHICH
BEGIN ON PAGE 4, AND RELATED INFORMATION. Pacific Life as investment adviser
to the Fund has retained other investment advisory firms as Portfolio Managers
for twelve of the Portfolios of the Fund.

<TABLE>
<CAPTION>
PRIMARY INVESTMENTS
PORTFOLIO OBJECTIVE (UNDER NORMAL CIRCUMSTANCES) PORTFOLIO MANAGER

<S> <C> <C> <C>
Money Market Current income consistent Highest quality money Pacific Life
with preservation of capital market instruments
- ------------------------------------------------------------------------------------------------------------------
High Yield Bond High level of current income Intermediate and long- Pacific Life
term, high-yielding,
lower and medium quality
(high risk) fixed-income
securities
- ------------------------------------------------------------------------------------------------------------------
Managed Bond Maximize total return Investment grade Pacific Investment
consistent with prudent marketable debt Management Company
investment management securities. Will
normally maintain an
average portfolio
duration of 3-7 years
- ------------------------------------------------------------------------------------------------------------------
Government Maximize total return U.S. Government Pacific Investment
Securities consistent with prudent securities including Management Company
investment management futures and options
thereon and high-grade
corporate debt
securities. Will
normally maintain an
average portfolio
duration of 3-7 years
- ------------------------------------------------------------------------------------------------------------------
Growth Growth of capital Common stock Capital Guardian Trust Company
- ------------------------------------------------------------------------------------------------------------------
Aggressive Capital appreciation Common stock of small Alliance Capital Management L.P.
Equity emerging growth and
medium capitalization
companies
- ------------------------------------------------------------------------------------------------------------------
Growth LT Long-term growth of capital Common stock Janus Capital Corporation
consistent with the
preservation of capital
- ------------------------------------------------------------------------------------------------------------------
Equity Income Long-term growth of capital Dividend paying common J.P. Morgan Investment
and income stock Management Inc.
- ------------------------------------------------------------------------------------------------------------------
Multi-Strategy High total return Equity and fixed income J.P. Morgan Investment
securities Management Inc.
- ------------------------------------------------------------------------------------------------------------------
Equity Capital appreciation Common stocks and Goldman Sachs Asset Management
securities convertible
into or exchangeable for
common stocks
- ------------------------------------------------------------------------------------------------------------------
Bond and Provide total return and income Investment grade debt Goldman Sachs Asset Management
Income consistent with prudent securities. Will
investment management normally maintain an
average portfolio
duration within one-half
year of a long-term bond
index
- ------------------------------------------------------------------------------------------------------------------
Equity Index Provide investment results that Stocks included in the Bankers Trust Company
correspond to the total return S&P 500
performance of common stocks
publicly traded in the U.S.
- ------------------------------------------------------------------------------------------------------------------
International Long-term capital Equity securities of Morgan Stanley Asset
appreciation corporations domiciled Management Inc.
outside the United
States
- ------------------------------------------------------------------------------------------------------------------
Emerging Markets Long-term growth of capital Common stocks of Blairlogie Capital Management
companies domiciled in
emerging market
countries
</TABLE>

CONDENSED FINANCIAL INFORMATION

The following tables present condensed financial information about each
Portfolio of the Fund. The tables present historical information based upon a
single share outstanding through each fiscal year. The information in the
tables for the years 1993 through 1997 is included and can be read in
conjunction with the Fund's financial statements, which are in the Fund's
Annual Report dated as of December 31, 1997. These financial statements have
been audited by Deloitte & Touche LLP, independent auditors, except for
information with respect to the Equity Portfolio and Bond and Income Portfolio
for years prior to 1994, which was audited by other independent auditors. The
Annual Report, which is available without charge, contains more information
about the Fund's performance.

1
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FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
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INVESTMENT ACTIVITIES DISTRIBUTIONS RATIOS/SUPPLEMENTAL DATA
---------------------------- -------------------------- -------------------------------------------------------------
RATIO
OF NET AVER-
NET INVEST- AGE
NET REALIZED DIVIDENDS MENT COM-
ASSET AND (FROM NET NET RATIO OF INCOME PORT- MIS-
VALUE, NET UNREALIZED TOTAL NET ASSET ASSETS, EXPENSES TO FOLIO SIONS
YEAR BEGIN- INVEST- GAIN FROM INVEST- FROM TOTAL VALUE, END OF TO AVERAGE AVERAGE TURN- PAID
ENDED NING OF MENT (LOSS) ON INVESTMENT MENT CAPITAL DISTRI- END OF TOTAL PERIOD (IN NET NET OVER PER
12/31 PERIOD INCOME SECURITIES OPERATIONS INCOME) GAINS BUTION PERIOD RETURN(8) THOUSANDS) ASSETS ASSETS RATE SHARE
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MONEY MARKET PORTFOLIO
1997 $10.04 $ 0.51 $0.01 $ 0.52 $0.50 $0.00 $0.50 $10.06 5.28% $451,505 0.44% 5.17% N/A N/A
1996 10.02 0.47 0.02 0.49 0.47 0.00 0.47 10.04 5.07% 322,193 0.50% 4.93% N/A N/A
1995 10.03 0.54 0.00 0.54 0.55 0.00 0.55 10.02 5.54% 95,949 0.53% 5.41% N/A N/A
1994 9.99 0.33 0.04 0.37 0.33 0.00 0.33 10.03 3.76% 94,150 0.64% 3.94% N/A N/A
1993 9.96 0.23 0.03 0.26 0.23 0.00 0.23 9.99 2.58% 33,910 0.65% 2.56% N/A N/A
1992 9.94 0.29 0.02 0.31 0.29 0.00 0.29 9.96 3.22% 23,905 0.65% 3.13% N/A N/A
1991 9.94 0.56 0.00 0.56 0.56 0.00 0.56 9.94 5.74% 14,502 0.65% 5.53% N/A N/A
1990 9.82 0.79 (0.03) 0.76 0.64 0.00 0.64 9.94 7.92% 15,401 0.65% 7.57% N/A N/A
1989 9.81 0.82 0.01 0.83 0.82 0.00 0.82 9.82 8.73% 4,252 1.00% 8.38% N/A N/A
1988(1) 10.00 0.58 (0.01) 0.57 0.76 0.00 0.76 9.81 5.85% 3,913 1.65%* 6.04%* N/A N/A
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HIGH YIELD BOND PORTFOLIO
1997 $ 9.94 $ 0.78 $0.12 $ 0.90 $0.77 $0.09 $0.86 $ 9.98 9.44% $311,125 0.65% 7.89% 103.19% N/A
1996 9.79 0.79 0.25 1.04 0.79 0.10 0.89 9.94 11.31% 184,744 0.71% 8.28% 120.06% N/A
1995 8.91 0.76 0.88 1.64 0.76 0.00 0.76 9.79 18.87% 84,425 0.77% 8.51% 127.31% N/A
1994 9.67 0.73 (0.70) 0.03 0.73 0.06 0.79 8.91 0.42% 25,338 0.88% 8.13% 141.86% N/A
1993 9.24 0.86 0.77 1.63 0.86 0.34 1.20 9.67 18.01% 16,017 0.75% 8.37% 185.83% N/A
1992 8.54 0.87 0.69 1.56 0.86 0.00 0.86 9.24 18.72% 14,152 0.75% 9.46% 186.23% N/A
1991 7.84 0.91 0.95 1.86 0.91 0.25 1.16 8.54 24.58% 10,356 0.75% 10.77% 149.20% N/A
1990 8.90 1.04 (1.01) 0.03 1.04 0.05 1.09 7.84 0.38% 8,288 0.75% 12.02% 69.59% N/A
1989 9.72 1.20 (0.79) 0.41 1.23 0.00 1.23 8.90 4.16% 8,208 0.95% 12.48% 121.76% N/A
1988(1) 10.00 1.07 (0.26) 0.81 0.99 0.10 1.09 9.72 8.30% 7,871 1.65%* 10.63%* 69.14% N/A
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MANAGED BOND PORTFOLIO
1997 $10.75 $ 0.59 $0.44 $ 1.03 $0.60 $0.04 $0.64 $11.14 9.92% $468,575 0.66% 5.72% 230.87% N/A
1996 11.10 0.59 (0.15) 0.44 0.57 0.22 0.79 10.75 4.25% 260,270 0.71% 5.71% 386.16% N/A
1995 9.90 0.65 1.19 1.84 0.64 0.00 0.64 11.10 19.04% 126,992 0.76% 6.04% 191.39% N/A
1994 10.89 0.50 (0.98) (0.48) 0.50 0.01 0.51 9.90 (4.36)% 53,219 0.84% 5.04% 127.95% N/A
1993 10.62 0.52 0.70 1.22 0.52 0.43 0.95 10.89 11.63% 43,116 0.75% 4.74% 163.11% N/A
1992 10.79 0.68 0.23 0.91 0.67 0.41 1.08 10.62 8.68% 26,406 0.75% 6.39% 89.55% N/A
1991 10.35 0.82 0.88 1.70 0.82 0.44 1.26 10.79 17.03% 16,645 0.75% 7.74% 80.96% N/A
1990 10.43 0.85 (0.01) 0.84 0.85 0.07 0.92 10.35 8.52% 12,412 0.75% 8.32% 68.79% N/A
1989 9.99 0.86 0.56 1.42 0.86 0.12 0.98 10.43 14.74% 11,371 0.91% 8.36% 115.89% N/A
1988(1) 10.00 0.68 0.03 0.71 0.62 0.10 0.72 9.99 7.11% 9,031 1.69%* 6.76%* 209.49% N/A
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GOVERNMENT SECURITIES PORTFOLIO
1997 $10.38 $ 0.53 $ 0.42 $ 0.95 $0.55 $0.00 $0.55 $10.78 9.48% $129,900 0.66% 5.39% 203.01% N/A
1996 10.84 0.56 (0.27) 0.29 0.53 0.22 0.75 10.38 2.94% 97,542 0.72% 5.33% 307.13% N/A
1995 9.64 0.58 1.19 1.77 0.57 0.00 0.57 10.84 18.81% 59,767 0.82% 5.58% 298.81% N/A
1994 10.64 0.44 (0.99) (0.55) 0.44 0.01 0.45 9.64 (5.10)% 21,489 0.88% 4.29% 232.99% N/A
1993 10.48 0.34 0.78 1.12 0.34 0.62 0.96 10.64 10.79% 23,584 0.75% 3.15% 402.37% N/A
1992 10.55 0.51 0.27 0.78 0.51 0.34 0.85 10.48 7.52% 17,701 0.75% 4.95% 212.31% N/A
1991 10.07 0.69 0.93 1.62 0.71 0.43 1.14 10.55 16.67% 10,841 0.75% 6.90% 110.74% N/A
1990 10.22 0.79 (0.02) 0.77 0.78 0.14 0.92 10.07 8.01% 7,469 0.75% 7.87% 45.99% N/A
1989 9.82 0.84 0.56 1.40 0.84 0.16 1.00 10.22 14.61% 6,428 0.98% 8.22% 151.10% N/A
1988(1) 10.00 0.65 0.01 0.66 0.65 0.19 0.84 9.82 6.65% 5,523 1.77%* 6.42%* 284.30% N/A
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GROWTH PORTFOLIO(3)
1997 $21.45 $ 0.05 $ 5.65 $ 5.70 $0.05 $2.49 $2.54 $24.61 30.27% $246,555 0.70% 0.22% 52.20% $0.044
1996 18.57 0.08 4.11 4.19 0.09 1.22 1.31 21.45 23.62% 167,335 0.76% 0.44% 70.22% 0.047
1995 14.90 0.15 3.67 3.82 0.15 0.00 0.15 18.57 25.75% 129,741 0.79% 0.88% 46.76% 0.052
1994 18.20 0.10 (2.01) (1.91) 0.10 1.29 1.39 14.90 (10.49)% 81,451 0.86% 0.58% 40.42% N/A
1993 15.76 0.08 3.37 3.45 0.08 0.93 1.01 18.20 21.89% 77,405 0.71% 0.51% 35.08% N/A
1992 13.70 0.11 2.69 2.80 0.11 0.63 0.74 15.76 20.53% 34,747 0.75% 0.81% 39.97% N/A
1991 10.09 0.15 3.78 3.93 0.15 0.17 0.32 13.70 39.15% 13,482 0.75% 1.31% 31.48% N/A
1990 13.67 0.20 (2.39) (2.19) 0.19 1.20 1.39 10.09 (17.30)% 6,351 0.75% 1.75% 41.18% N/A
1989 11.15 0.18 3.70 3.88 0.17 1.19 1.36 13.67 34.96% 5,896 0.97% 1.42% 65.35% N/A
1988(1)(2)10.00 0.00 1.53 1.53 0.02 0.36 0.38 11.15 15.31% 3,335 2.46%* 0.01%* 33.61% N/A
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AGGRESSIVE EQUITY PORTFOLIO(12)
1997 $10.78 $(0.01) $ 0.41 $ 0.40 $0.00 $0.00 $0.00 $11.18 3.78% $122,752 0.86% (0.13)% 189.21% $0.054
1996(9) 10.00 0.01 0.78 0.79 0.01 0.00 0.01 10.78 7.86% 49,849 1.02%* (0.11)%* 79.86% 0.051
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GROWTH LT PORTFOLIO
1997 $16.50 $ 0.16 $ 1.51 $ 1.67 $0.09 $0.77 $0.86 $17.31 10.96% $677,147 0.82% 0.52% 145.17% $0.046
1996 14.12 0.14 2.37 2.51 0.13 0.00 0.13 16.50 17.87% 438,154 0.87% 0.74% 147.02% 0.045
1995 11.11 0.10 3.96 4.06 0.10 0.95 1.05 14.12 36.75% 200,785 0.94% 0.90% 165.83% 0.052
1994(4) 10.00 0.10 1.21 1.31 0.12 0.08 0.20 11.11 13.25% 49,374 1.08%* 1.32%* 257.20% N/A
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</TABLE>
(continued on next page)
LOGO

2
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1997 $20.45 $0.20 $ 5.35 $5.55 $0.20 $1.33 $0.00 $1.53
1996 18.21 0.24 3.15 3.39 0.24 0.91 0.00 1.15
1995 14.05 0.26 4.16 4.42 0.26 0.00 0.00 0.26
1994 15.52 0.20 (0.25) (0.05) 0.20 1.22 0.00 1.42
1993 15.11 0.26 0.98 1.24 0.26 0.57 0.00 0.83
1992 14.74 0.19 0.59 0.78 0.19 0.22 0.00 0.41
1991 11.64 0.32 3.28 3.60 0.32 0.18 0.00 0.50
1990 13.11 0.32 (1.30) (0.98) 0.32 0.17 0.00 0.49
1989 10.68 0.17 2.94 3.11 0.30 0.38 0.00 0.68
1988(1) 10.00 0.12 0.70 0.82 0.12 0.02 0.00 0.14
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MULTI-STRATEGY PORTFOLIO(3)(6)

1997 $14.75 $0.50 $ 2.23 $2.73 $0.50 $0.80 $0.00 $1.30
1996 14.20 0.48 1.20 1.68 0.48 0.65 0.00 1.13
1995 11.73 0.45 2.47 2.92 0.45 0.00 0.00 0.45
1994 12.66 0.32 (0.51) (0.19) 0.32 0.42 0.00 0.74
1993 12.18 0.35 0.77 1.12 0.35 0.29 0.00 0.64
1992 11.99 0.37 0.27 0.64 0.37 0.08 0.00 0.45
1991 10.14 0.46 1.93 2.39 0.45 0.09 0.00 0.54
1990 10.84 0.51 (0.66) (0.15) 0.48 0.07 0.00 0.55
1989 10.35 0.57 1.82 2.39 0.59 1.31 0.00 1.90
1988(1) 10.00 0.34 0.34 0.68 0.32 0.01 0.00 0.33
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EQUITY PORTFOLIO (FORMERLY A SERIES OF PACIFIC CORINTHIAN VARIABLE FUND)(13)

1997 $21.07 $0.14 $ 3.58 $3.72 $0.13 $0.77 $0.00 $0.90
1996 17.52 0.02 4.71 4.73 0.02 1.16 0.00 1.18
1995 14.20 0.05 3.33 3.38 0.06 0.00 0.00 0.06
1994 14.94 0.32 (0.74) (0.42) 0.32 0.00 0.00 0.32
1993 14.39 0.22 1.90 2.12 0.22 0.81 0.54 1.57
1992 14.83 0.19 0.49 0.68 0.19 0.93 0.00 1.12
1991 11.71 0.33 3.12 3.45 0.33 0.00 0.00 0.33
1990 12.59 0.56 (0.88) (0.32) 0.56 0.00 0.00 0.56
1989 10.37 0.82 2.23 3.05 0.83 0.00 0.00 0.83
1988 10.23 0.56 0.14 0.70 0.56 0.00 0.00 0.56
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BOND AND INCOME PORTFOLIO (FORMERLY A SERIES OF PACIFIC CORINTHIAN VARIABLE
FUND)(13)

1997 $12.05 $0.80 $ 1.05 $1.85 $0.76 $0.17 $0.00 $0.93
1996 13.02 0.79 (0.94) (0.15) 0.79 0.03 0.00 0.82
1995 10.42 0.82 2.59 3.41 0.81 0.00 0.00 0.81
1994 13.05 0.83 (1.87) (1.04) 0.83 0.53 0.23 1.59
1993 11.70 0.87 1.35 2.22 0.87(10) 0.00 0.00 0.87
1992 11.69 0.89 0.01 0.90 0.89 0.00 0.00 0.89
1991 10.27 0.93 1.42 2.35 0.93 0.00 0.00 0.93
1990 10.93 0.97 (0.66) 0.31 0.97 0.00 0.00 0.97
1989 10.40 1.00 0.69 1.69 1.00 0.16 0.00 1.16
1988 10.75 1.01 (0.35) 0.66 1.01 0.00 0.00 1.01
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EQUITY INDEX PORTFOLIO(3)

1997 $20.42 $0.37 $ 6.13 $6.50 $0.37 $0.84 $0.00 $1.21
1996 17.45 0.37 3.42 3.79 0.37 0.45 0.00 0.82
1995 13.02 0.34 4.43 4.77 0.34 0.00 0.00 0.34
1994 13.24 0.30 (0.18) 0.12 0.30 0.04 0.00 0.34
1993 12.43 0.29 0.86 1.15 0.29 0.05 0.00 0.34
1992 11.98 0.29 0.53 0.82 0.29 0.08 0.00 0.37
1991(5) 10.00 0.30 2.16 2.46 0.30 0.18 0.00 0.48
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INTERNATIONAL PORTFOLIO(3)(7)

1997 $15.40 $0.41 $ 1.00 $1.41 $0.29 $0.31 $0.00 $0.60
1996 12.93 0.28 2.54 2.82 0.23 0.12 0.00 0.35
1995 11.94 0.33 0.91 1.24 0.25 0.00 0.00 0.25
1994 12.09 0.07 0.30 0.37 0.07 0.45 0.00 0.52
1993 9.38 0.09 2.73 2.82 0.11(11) 0.00 0.00 0.11
1992 10.59 0.15 (1.19) (1.04) 0.17 0.00 0.00 0.17
1991 9.72 0.13 0.94 1.07 0.17 0.03 0.00 0.20
1990 12.44 0.16 (1.84) (1.68) 0.16 0.88 0.00 1.04
1989 11.29 0.02 2.30 2.32 0.06 1.11 0.00 1.17
1988(1) 10.00 0.09 1.66 1.75 0.06 0.40 0.00 0.46
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EMERGING MARKETS PORTFOLIO

1997 $ 9.68 $ 0.06 $(0.22) $(0.16) $0.05 $0.00 $0.00 $0.05
1996(9) 10.00 (0.02) (0.30) (0.32) 0.00 0.00 0.00 0.00
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<CAPTION>
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RATIOS/SUPPLEMENTAL DATA
-----------------------------------------------------------------------------------------
RATIO OF
NET
NET ASSET NET ASSETS, RATIO OF INVESTMENT AVERAGE
VALUE, END OF EXPENSES TO INCOME TO PORTFOLIO COMMISSIONS
YEAR ENDED END OF TOTAL PERIOD AVERAGE NET AVERAGE TURNOVER PAID PER
12/31 PERIOD RETURN (8) (IN THOUSANDS) ASSETS NET ASSETS RATE SHARE
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<S> <C> <C> <C> <C> <C> <C> <C>
EQUITY INCOME PORTFOLIO(3)(6)

1997 $24.47 28.60% $806,112 0.70% 0.91% 105.93% $0.045
1996 20.45 19.43% 429,262 0.75% 1.31% 94.95% 0.048
1995 18.21 31.66% 206,653 0.83% 1.59% 86.47% 0.048
1994 14.05 (0.28)% 75,083 0.94% 1.39% 134.57% N/A
1993 15.52 8.29% 33,356 0.75% 1.74% 27.67% N/A
1992 15.11 5.36% 22,021 0.75% 1.39% 18.52% N/A
1991 14.74 31.42% 12,117 0.76% 2.49% 17.43% N/A
1990 11.64 (7.54)% 5,974 0.75% 2.67% 17.63% N/A
1989 13.11 29.22% 5,449 1.02% 2.52% 24.89% N/A
1988(1) 10.68 8.25% 3,292 2.45%* 1.21%* 8.15% N/A
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MULTI-STRATEGY PORTFOLIO(3)(6)

1997 $16.18 19.62% $367,128 0.71% 3.25% 71.89% $0.045
1996 14.75 12.56% 225,619 0.78% 3.37% 132.94% 0.048
1995 14.20 25.25% 134,501 0.84% 3.49% 176.45% 0.048
1994 11.73 (1.50)% 79,147 0.94% 2.78% 187.40% N/A
1993 12.66 9.25% 41,448 0.75% 3.01% 27.87% N/A
1992 12.18 5.57% 19,931 0.75% 3.36% 16.52% N/A
1991 11.99 24.03% 10,454 0.75% 4.30% 11.24% N/A
1990 10.14 (1.47)% 4,559 0.75% 4.77% 26.04% N/A
1989 10.84 23.42% 3,120 1.10% 4.38% 19.67% N/A
1988(1) 10.35 6.85% 4,111 2.20%* 3.33%* 22.30% N/A
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EQUITY PORTFOLIO (FORMERLY A SERIES OF PACIFIC CORINTHIAN VARIABLE FUND)(13)

1997 $23.89 18.18% $318,143 0.70% 0.59% 159.88% $0.060
1996 21.07 28.03% 207,897 0.74% 0.05% 90.98% 0.060
1995 17.52 23.80% 108,136 0.80% 0.27% 226.45% 0.060
1994 14.20 (2.87)% 73,125 0.96% 2.19% 178.63% N/A
1993 14.94 16.06% 84,791 0.93% 1.52% 229.77% N/A
1992 14.39 6.30% 81,902 0.93% 1.30% 242.37% N/A
1991 14.83 29.77% 107,366 0.91% 2.52% 449.75% N/A
1990 11.71 (2.55)% 178,191 0.86% 4.63% 541.61% N/A
1989 12.59 30.12% 239,478 0.74% 7.01% 621.45% N/A
1988 10.37 7.19% 233,020 0.69% 5.41% 402.26% N/A
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BOND AND INCOME PORTFOLIO (FORMERLY A SERIES OF PACIFIC CORINTHIAN VARIABLE
FUND)(13)

1997 $12.97 16.32% $112,507 0.66% 6.62% 15.32% N/A
1996 12.05 (0.80)% 81,810 0.71% 6.74% 26.50% N/A
1995 13.02 33.71% 56,853 0.80% 6.93% 51.84% N/A
1994 10.42 (8.36)% 34,078 0.93% 7.25% 31.97% N/A
1993 13.05 19.39% 43,223 0.84% 6.86% 41.92% N/A
1992 11.70 8.09% 42,731 0.85% 7.67% 21.99% N/A
1991 11.69 24.32% 59,323 0.78% 8.70% 131.40% N/A
1990 10.27 3.27% 107,921 0.73% 9.35% 43.52% N/A
1989 10.93 17.04% 146,310 0.61% 9.30% 108.64% N/A
1988 10.40 6.37% 161,208 0.61% 10.05% 50.49% N/A
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EQUITY INDEX PORTFOLIO(3)

1997 $25.71 32.96% $874,136 0.23% 1.61% 2.58% $0.022
1996 20.42 22.36% 393,412 0.31% 2.05% 20.28% 0.024
1995 17.45 36.92% 137,519 0.42% 2.26% 7.52% 0.026
1994 13.02 1.05% 40,612 0.51% 2.37% 2.02% N/A
1993 13.24 9.38% 33,836 0.50% 2.34% 1.15% N/A
1992 12.43 6.95% 23,030 0.50% 2.53% 3.52% N/A
1991(5) 11.98 24.88% 15,205 0.50%* 3.03%* 4.26% N/A
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INTERNATIONAL PORTFOLIO(3)(7)

1997 16.21 9.28% $764,036 1.02% 1.81% 84.34% $0.004
1996 15.40 21.89% 454,019 1.07% 2.28% 20.87% 0.001
1995 12.93 10.56% 182,199 1.12% 1.87% 16.07% 0.018
1994 11.94 3.01% 75,971 1.22% 1.28% 52.22% N/A
1993 12.09 30.02% 30,574 1.04% 0.92% 46.48% N/A
1992 9.38 (9.78)% 19,402 1.05% 1.43% 38.99% N/A
1991 10.59 10.92% 18,239 1.04% 1.19% 69.71% N/A
1990 9.72 (13.48)% 14,266 1.05% 1.48% 69.24% N/A
1989 12.44 20.51% 15,735 1.20% 0.14% 94.35% N/A
1988(1) 11.29 17.69% 13,980 1.69%* 0.84%* 62.48% N/A
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EMERGING MARKETS PORTFOLIO

1997 $9.47 (1.69)% $99,425 1.46% 0.80% 69.60% $0.002
1996(9) 9.68 (3.23)% 44,083 2.18%* (0.11)%* 47.63% 0.001
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</TABLE>
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LOGO

3
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(1) Information is for the period from January 4, 1988 (commencement of
operations) to December 31, 1988.

(2) The net investment income per share for the Growth Portfolio for the
period from January 4, 1988 (commencement of operations) to December 31,
1988, has been calculated by dividing the Portfolio's net investment
income by the average shares of beneficial interest outstanding during
the period. Due to fluctuations in shares outstanding and in investment
income during the period, this acceptable method derives a more accurate
per share amount than the prescribed method.

(3) The ratios of expenses to average net assets for the years prior to 1994
have been restated for comparative purposes to reflect expenses exclusive
of foreign taxes on dividends which are reflected as a component of
dividend income.

(4) Information is for the period from January 4, 1994 (commencement of
operations) to December 31, 1994.

(5) Information is for the period from January 30, 1991 (commencement of
operations) to December 31, 1991.

(6) J.P. Morgan Investment began serving as Portfolio Manager to the Equity
Income and Multi-Strategy Portfolios on January 1, 1994. Prior to January
1, 1994, a different firm served as Portfolio Manager.

(7) Morgan Stanley began serving as Portfolio Manager to the International
Portfolio on June 1, 1997. Prior to June 1, 1997, different firms served
as Portfolio Manager.

(8) Total return includes reinvestment of dividends and distributions. Total
return does not include deductions at the separate account or contract
level for fees and charges that may be incurred under a variable
contract.

(9) Information is for the period from April 1, 1996 (commencement of
operations) to December 31, 1996.

(10) Including dividend in excess of $0.01 of net investment income.

(11) Including dividend in excess of $0.02 of net investment income.

(12) Alliance Capital Management L.P. began serving as Portfolio Manager to
the Aggressive Equity Portfolio on May 1, 1998. Prior to May 1, 1998, a
different firm served as Portfolio Manager.

(13) Goldman Sachs Asset Management began serving as Portfolio Manager to the
Equity and Bond and Income Portfolios on May 1, 1998. Prior to May 1,
1998, a different firm served as Portfolio Manager.

* Ratios are annualized.

THE PORTFOLIOS: INVESTMENT OBJECTIVES AND POLICIES

GENERAL

Each Portfolio of the Fund has its own investment objective and investment
policies which are described below. There can be no assurance that any
Portfolio will achieve its investment objective. YOU SHOULD CAREFULLY CONSIDER
THE INVESTMENT OBJECTIVE, INVESTMENT POLICIES, AND POTENTIAL RISKS OF ANY
PORTFOLIO BEFORE INVESTING. YOU SHOULD ALSO CAREFULLY CONSIDER AND CONSULT
YOUR INVESTMENT PROFESSIONAL ON THE ALLOCATION OF YOUR INVESTMENT TO A
PORTFOLIO OR PORTFOLIOS IN SEEKING YOUR FINANCIAL GOALS, AND CONSIDER THE
APPROPRIATENESS OF ANY PORTFOLIO OR PORTFOLIOS AS A COMPLETE INVESTMENT
PROGRAM. As with any security, a risk of loss is inherent in investment in the
Fund's shares. Each Portfolio is subject to varying degrees of financial,
market, and credit risks. Each Portfolio is subject to the risk of changing
economic conditions.

The different types of securities and investment techniques used by the
individual Portfolios all have attendant risks of varying degrees. For
example, for equity securities, there can be no assurance of capital
appreciation and there is a substantial risk of market decline. For debt
securities, there is a risk of market decline and there is the risk that the
issuer of a security may not be able to meet its obligations on interest or
principal payments at the time called for by an instrument. In addition,
because the value of debt instruments generally rises and falls inversely with
interest rates, the longer the maturity of a debt security and the average
portfolio duration of a Portfolio, the more volatile it can be in terms of
changes in value. Both equity and debt securities can also be subject to
general economic conditions, company and industry earnings prospects and
investor psychology.

Certain types of investments and investment techniques common to one or more
Portfolios are described in greater detail, including the risks of each, in
this Prospectus under "Securities and Investment Techniques" and in the SAI.

4
<PAGE>

MONEY MARKET PORTFOLIO

INVESTMENT OBJECTIVE. Current income consistent with preservation of
capital.

INVESTMENT POLICIES. The Portfolio invests at least 95% of its total assets,
measured at the time of investment, in a diversified portfolio of money market
securities that are in the highest rating category for short term instruments,
or, if not rated, are of equivalent quality. The Portfolio may also invest up
to 5% of its total assets, measured at the time of investment, in money market
securities that are in the second-highest rating category for short-term debt
obligations, or, if not rated, are of equivalent quality. Money market
securities in which the Portfolio may invest may include: U.S. Government
obligations; bank obligations; commercial paper; short-term corporate debt
securities; savings and loan obligations; repurchase agreements involving
these securities; and foreign securities--U.S. dollar denominated money market
securities issued by foreign issuers and foreign branches of U.S. banks. The
Portfolio may also lend its securities to brokers, dealers and other financial
institutions to earn income.

ELIGIBLE SECURITIES. The Portfolio may invest only in U.S. dollar
denominated money market instruments that present minimal credit risk. The
Adviser shall determine whether a security presents minimal credit risk under
procedures adopted by the Fund's Board of Trustees that conform to Securities
and Exchange Commission ("SEC") rules for money market funds.

The Money Market Portfolio's investments are limited to securities that
mature in 13 months or less from the date of purchase (except that securities
held subject to repurchase agreements having terms of 13 months or less from
the date of delivery may mature in excess of 13 months from such date). It is
anticipated that the dollar-weighted average portfolio maturity of the
Portfolio will not exceed 90 days. The Portfolio is subject to diversification
standards applicable to money market funds under SEC rules.

Unlike many money market funds that are offered to the public, the Fund's
Money Market Portfolio does not attempt to maintain a stable net asset value
of $1.00 per share.

HIGH YIELD BOND PORTFOLIO

INVESTMENT OBJECTIVE. High level of current income.

INVESTMENT POLICIES. The Portfolio invests primarily in a diversified
portfolio of intermediate and long-term, high-yielding, lower and medium
quality ("high risk") fixed-income securities, including corporate bonds and
notes, convertible securities and preferred stock. Such securities will be
rated Baa or lower by Moody's Investors Service, Inc. ("Moody's"), or BBB or
lower by Standard & Poor's Rating Services ("S&P"), or, if not rated by
Moody's or S&P, be of equivalent investment quality as determined by the
Adviser. These debt securities include high yield bonds that are commonly
referred to as "junk bonds."

The convertible securities in which the Portfolio may invest include debt
securities convertible into or exchangeable for equity securities. The
Portfolio may also invest in: U.S. Government securities (including securities
of U.S. agencies and instrumentalities); bank obligations; commercial paper;
repurchase and reverse repurchase agreements involving these securities;
foreign securities--U.S. dollar-denominated debt securities issued by foreign
issuers and foreign branches of U.S. banks; dividend-paying common stocks
(including up to 10% of the market value of the Portfolio's total assets in
warrants to purchase common stocks) that are considered by Pacific Life to be
consistent with the investment objective of current income; and higher-quality
corporate bonds.

The Portfolio will hold short-term cash reserves (money market instruments
maturing in 13 months or less) as Pacific Life believes is advisable to
maintain liquidity or for temporary defensive purposes. During times that
Pacific Life believes that adoption of a temporary defensive position is
desirable due to prevailing market or economic conditions, the Portfolio may
invest to a greater degree in U.S. Government securities, higher-quality
corporate securities, and money market securities.

5
<PAGE>

OTHER TECHNIQUES. In seeking higher income or a reduction in principal
volatility, the Portfolio may purchase and sell put and call options on debt
securities, purchase or sell interest rate futures contracts and options on
interest rate futures contracts, and invest up to 5% of the Portfolio's total
assets in spread transactions, which give the Portfolio the right to sell or
receive a security or a cash payment with respect to an index at a fixed
dollar spread or yield spread in relationship to another security or index
which is used as a benchmark. The Portfolio may also lend its securities to
brokers, dealers, and other financial institutions to earn income. Certain of
these techniques may involve a greater degree or different type of risk than
those inherent in more conservative investment approaches.

HIGH YIELD BONDS. In general, debt securities rated lower than Baa by
Moody's or BBB by S&P or of equivalent quality ("high yield bonds") are not
considered to be investment grade, and are regarded as predominantly
speculative with respect to the issuer's continuing ability to meet principal
and interest payments. See the Appendix for a description of Moody's and S&P
ratings applicable to the fixed-income securities.

In an effort to reduce credit risk, the Portfolio diversifies its holdings
among many issuers. As of December 31, 1997, the Portfolio held securities of
136 corporate issuers, excluding short-term obligations. Based upon an average
of the Portfolio's holdings at the end of each month in 1997, an average of
approximately 71% of the Portfolio's holdings during 1997 were invested in
bonds rated lower than Baa by Moody's or BBB by S&P or if unrated, determined
to be of equivalent rating as determined by the Adviser. The asset composition
after this time may or may not be the same as shown in 1997.

VOLATILITY. Since shares of the Portfolio normally represent an investment
primarily in securities with fluctuating market prices, an investor should
understand that the value of the Portfolio's shares will vary as the aggregate
value of the Portfolio's securities increases or decreases. Changes in the
value of portfolio securities subsequent to their acquisition will normally
not affect the Portfolio's income, but will be reflected in the net asset
value of the Portfolio's shares. The Portfolio is intended for long-term
investors who can accept the risks associated with investment in high yield
securities.

MANAGED BOND PORTFOLIO

INVESTMENT OBJECTIVE. Maximize total return consistent with prudent
investment management.

INVESTMENT POLICIES. The Portfolio will primarily invest in the following
types of securities: obligations issued or guaranteed by the U.S. Government,
its agencies, or instrumentalities; U.S. dollar-denominated corporate debt
securities of domestic or foreign issuers; mortgage and other asset-backed
securities; variable and floating rate debt securities; U.S. dollar-
denominated obligations of foreign governments, foreign government agencies,
and international agencies (such as the International Bank for Reconstruction
and Development); and any of the following: high quality commercial paper;
certificates of deposit; fixed time deposits and bankers' acceptances issued
by domestic and foreign banks denominated in U.S. dollars; and repurchase and
reverse repurchase agreements.

The Portfolio, except as provided below, may invest only in securities rated
Baa or better by Moody's or BBB or better by S&P or, if not rated by Moody's
or S&P, determined by the Portfolio Manager to be of comparable quality. The
dollar-weighted average quality of all fixed-income securities held by the
Portfolio will be A or higher as rated by Moody's and S&P. The Portfolio may
also invest up to 10% of its assets in debt securities that are below
investment grade, but rated B or higher by Moody's or S&P or, if not rated by
Moody's or S&P, of equivalent quality. A security is generally of investment
grade when rated in one of the top four categories of investment ratings as
described by Moody's or S&P. In general, debt securities rated lower than Baa
by Moody's or BBB by S&P or of equivalent quality ("high yield/high risk
bonds") are not considered to be investment grade, and are regarded as
predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. For more information on the risks of
such securities, see "High Yield Bonds." In the event that a security owned by
the Portfolio is downgraded to below a rating of B, the Portfolio may
nonetheless retain the security. See the Appendix for a description of Moody's
and S&P ratings applicable

6
<PAGE>

to fixed income securities. For the year ended December 31, 1997, the amount
of the Portfolio's average total assets, measured on the basis of month-end
values, invested in debt securities rated less than investment grade was
approximately 4.77%.

SELECTION OF SECURITIES. The Portfolio invests in a diversified portfolio
primarily consisting of long, intermediate, and short-term marketable debt
securities. The proportion invested in each category of maturity can be
expected to vary depending upon the evaluation of market patterns and trends
by the Portfolio Manager. In selecting securities for the Portfolio, the
Portfolio Manager will use economic forecasting, interest rate anticipation,
credit and call risk analysis, and other security selection techniques. The
proportion of the Portfolio's assets committed to investment in securities
with particular characteristics of maturity, type, and coupon rate may vary
based on the Portfolio Manager's outlook for the economy, the financial
markets, and other factors.

DURATION. The Portfolio will invest in a portfolio of securities of varying
maturities and, under normal circumstances, will maintain an average portfolio
duration of 3 to 7 years. Duration is one of the fundamental tools used by the
Portfolio Manager in security selection. Historically, the maturity of a bond
was used as a proxy for the sensitivity of a bond's price to changes in
interest rates, otherwise known as a bond's "interest rate risk" or
"volatility." According to this measure, the longer the maturity of a bond,
the more its price will change for a given change in market interest rates.
However, this method ignores the amount and timing of all cash flows from the
bond prior to final maturity. Duration is a measure of average life of a bond
on a present value basis, which was developed to incorporate a bond's yield,
coupons, final maturity and call features into one measure. For point of
reference, the duration of a noncallable 7% coupon bond with a remaining
maturity of 5 years is approximately 4.5 years, and the duration of a
noncallable 7% coupon bond with a remaining maturity of 10 years is
approximately 8 years. Material changes in interest rates may impact the
duration calculation.

OTHER TECHNIQUES. In pursuing its investment objective, the Portfolio may
purchase and sell put and call options on debt securities; purchase and sell
spread transactions; and enter into interest rate, interest rate index, and
currency exchange rate swap agreements, and purchase and sell options thereon.
In addition, the Portfolio may purchase or sell interest rate futures
contracts and options on interest rate futures contracts. The Portfolio may
also lend its securities to brokers, dealers, and other financial institutions
to earn income, and borrow money for temporary administrative or emergency
purposes. In addition, the Portfolio may invest up to 20% of its assets in
debt securities of foreign issuers which may be denominated in foreign
currencies. Furthermore, the Portfolio may engage in forward currency
contracts, options on foreign currency contracts, and foreign currency futures
and options thereon, in anticipation of or to protect itself against
fluctuations in currency exchange rates with respect to investments in
securities of foreign issuers. These investment techniques may involve a
greater degree or different type of risk than those inherent in more
conservative investment approaches.

GOVERNMENT SECURITIES PORTFOLIO

INVESTMENT OBJECTIVE. Maximize total return consistent with prudent
investment management.

INVESTMENT POLICIES. The Portfolio invests primarily in securities that are
obligations of or guaranteed by the U.S. Government, its agencies or
instrumentalities. Among the securities the Portfolio may purchase are
mortgage-backed securities guaranteed by the Government National Mortgage
Association, the Federal Home Loan Mortgage Corporation, or the Federal
National Mortgage Association.

The Portfolio normally maintains at least 65% of its assets invested in U.S.
Government securities (including futures contracts and options thereon and
options relating to U.S. Government securities). The remainder of the
Portfolio's assets may be invested in corporate debt securities of domestic
issuers rated Aa or better by Moody's or AA or better by S&P, or, if not rated
by Moody's or S&P, of comparable quality as determined by the Portfolio
Manager, in mortgage-related securities, including collateralized mortgage
obligations and mortgage-backed bonds, and in cash or high quality money
market instruments. The Portfolio may increase the amount of its assets
invested in money market securities during times that the Portfolio Manager

7
<PAGE>

believes that adoption of a temporary defensive position is desirable due to
prevailing market or economic conditions.

DURATION. The Portfolio invests in securities of varying maturities and,
under normal circumstances, intends to maintain an average portfolio duration
of 3 to 7 years. A discussion of "duration" is provided above in the
description of the Managed Bond Portfolio and in the SAI.

OTHER TECHNIQUES. In pursuing its investment objective, the Portfolio may
purchase and sell put and call options on U.S. Government securities and on
other debt securities; purchase and sell spread transactions; and enter into
interest rate, interest rate index, and currency exchange rate swap
agreements, and purchase and sell options thereon. In addition, the Portfolio
may purchase or sell interest rate futures contracts and options on interest
rate futures contracts. The Portfolio also may make loans of portfolio
securities (up to an aggregate of 25% of its total assets) and enter into
reverse repurchase agreements. In addition, the Portfolio may invest up to 20%
of its assets in debt securities of foreign issuers, which may be denominated
in foreign currencies. Furthermore, the Portfolio may engage in forward
currency contracts, options on forward currency contracts, and foreign
currency futures and options thereon, in anticipation of or to protect itself
against fluctuations in currency exchange rates with respect to investments in
securities of foreign issuers. These investment techniques may involve a
greater degree or different type of risk than those inherent in more
conservative investment approaches.

GROWTH PORTFOLIO

THE GROWTH PORTFOLIO OFFERS ITS SHARES ONLY TO (1) SEPARATE ACCOUNTS OF
PACIFIC LIFE TO SERVE AS AN INVESTMENT MEDIUM FOR VARIABLE LIFE INSURANCE
POLICIES, AND (2) SEPARATE ACCOUNTS OF PACIFIC LIFE TO SERVE AS THE INVESTMENT
MEDIUM FOR VARIABLE ANNUITY CONTRACTS THAT WERE ISSUED PRIOR TO JANUARY 1,
1994. THE PORTFOLIO IS NOT AVAILABLE FOR VARIABLE ANNUITY CONTRACTS ISSUED ON
OR AFTER JANUARY 1, 1994.

INVESTMENT OBJECTIVE. Growth of capital. The realization of current income
will not be a factor in considering portfolio securities.

INVESTMENT POLICIES: The Portfolio seeks to invest in the common stocks of
growing and profitable companies, turnaround situations, and unseasoned
companies. The major portion of investments of the Portfolio will be in common
stocks. The Portfolio may also invest in convertible debt securities and in
convertible preferred stocks of companies which, in the opinion of the
Portfolio Manager, appear to have growth possibilities that are consistent
with the investment objective. If economic conditions warrant, the Portfolio
may temporarily invest in defensive type securities, including U.S. Government
securities, short-term corporate debt, preferred stocks, and money market
instruments.

Among the investments the Portfolio will consider are the stocks of smaller
emerging growth companies still in the developing stage of their life cycle or
companies embarking upon a new, promising development that is expected to
reverse a past downswing in earnings. These growing companies or "turnaround
situations" may offer the possibility of accelerating earnings growth due to
factors such as rejuvenated management, new innovative products, or change in
the economy. However, small-to-medium size companies often have limited
product and market diversification, fewer financial resources, or may be
dependent on a few key managers. Any one of the foregoing may change suddenly
and have an immediate impact on the value of the company's securities.
Furthermore, whenever the securities markets are experiencing rapid price
changes due to national economic trends, emerging growth securities, often
valued at premium standards by investors, have historically been subject to
exaggerated price changes. The Portfolio is intended for aggressive long-term
investors seeking above average gains who are willing to accept the risks
associated with small capitalization stocks.

OTHER INVESTMENTS. A portion of assets may also be held in cash. To a
limited extent, the Portfolio may also invest in various foreign securities if
U.S. exchange-listed.

Convertible bonds and other fixed income securities (other than money market
instruments) in which the Portfolio may invest will, at the time of
investment, be rated Baa or better by Moody's or BBB or better by S&P

8
<PAGE>

or, if not rated by Moody's or S&P, will be of comparable quality as
determined by the Portfolio Manager. In the event that an existing holding is
downgraded below these ratings, the Portfolio may nonetheless retain the
security.

AGGRESSIVE EQUITY PORTFOLIO

INVESTMENT OBJECTIVE. Capital appreciation. No consideration is given to
income.

INVESTMENT POLICIES. The Portfolio invests primarily in common stock and
other equity-type securities of small emerging-growth and medium-
capitalization companies. It may also invest in more well-established
companies. Investments may include preferred stocks, convertible debt, and
warrants. From time to time, the Portfolio may emphasize securities of
companies in cyclical industries, securities believed to be undervalued, and
companies in special situations. The Portfolio is intended for aggressive
long-term investors seeking above-average gains who are willing to accept the
greater risks associated with small-capitalization stocks. See "Small
Capitalization Stocks" under "Securities and Investment Techniques."

The Portfolio may also invest a portion of its assets in high-quality money
market instruments. For temporary defensive purposes, the Portfolio may invest
to a significant degree in U.S. Government securities, mortgage-related and
other asset-backed securities, and in corporate fixed-income securities that
are rated, at the time of acquisition, investment grade, or, if not rated, are
determined by the Portfolio Manager to be of comparable quality.

The Portfolio may invest in securities of foreign issuers, although the
Portfolio may not acquire a security of a foreign issuer principally traded
outside of the United States, if, at the time of such investment, more than
20% of the Portfolio's total assets would be invested in such foreign
securities. For more information on the risks of investment in foreign
securities, see "Foreign Securities."

OTHER TECHNIQUES. For hedging purposes, the Portfolio may purchase put and
call options on securities and securities indexes and may write covered call
and secured put options. The Portfolio may purchase and sell stock index
futures contracts and options thereon. The Portfolio may make secured loans of
its portfolio securities to others with securities that constitute up to 25%
of the Portfolio's total assets. To hedge against the risk of currency
fluctuation associated with investment in foreign securities, the Portfolio
may buy or sell foreign currencies on a spot (cash) basis and enter into
forward foreign currency contracts or options on foreign currencies or foreign
currency futures contracts and options thereon. These investment techniques
and investment in securities of foreign issuers may involve a greater degree
of risk than more conservative approaches.

GROWTH LT PORTFOLIO

INVESTMENT OBJECTIVE. Long-term growth of capital in a manner consistent
with the preservation of capital.

INVESTMENT POLICIES. The Portfolio pursues its investment objective by
investing in the common stock of a large number of issuers of any size. The
Portfolio may invest in large, well-established companies, as well as smaller
emerging growth companies. Small-to-medium size companies may suffer more
significant losses as well as realize more substantial growth than larger,
more established issuers. Thus, investments in such companies tend to be more
volatile and somewhat speculative. The Portfolio may invest in securities of
both domestic and foreign issuers. The Portfolio is not designed as a short-
term trading vehicle.

9
<PAGE>

the market. Securities are selected solely for their capital growth potential;
investment income is not a consideration and any income realized on the
Portfolio's investments will be incidental to its primary objective. These
selection criteria apply equally to stocks of foreign issuers. In selecting
foreign stocks, factors such as expected levels of inflation, government
policies influencing business conditions, the outlook for currency
relationships, and prospects for relative economic growth among countries,
regions, or geographic areas may warrant greater consideration.

OTHER INVESTMENTS. Although the Portfolio normally invests primarily in
equity securities, it may increase its cash position when the Portfolio
Manager is unable to locate investment opportunities with desirable
risk/reward characteristics. The Portfolio may invest in government
securities, corporate bonds and debentures, high-grade commercial paper,
warrants, preferred stocks, certificates of deposit, or other debt securities
when the Portfolio Manager perceives an opportunity for capital growth from
such securities or so that the Portfolio may receive a return on idle cash.
The Portfolio may also invest in money market funds, including those managed
by Janus Capital Corporation as a means of receiving a return on idle cash,
pursuant to an exemptive order received by Janus Capital Corporation from the
SEC. The Portfolio may invest up to 10% of its assets, measured at the time of
investment, in debt securities that are lower rated bonds, i.e., rated below
investment grade by one of the primary rating agencies (or if not rated,
deemed to be of comparable quality by the Portfolio Manager), but which may
offer higher yields. When the Portfolio invests in fixed income securities,
investment income will increase and may constitute a large portion of the
return on the Portfolio, and the Portfolio probably would not participate in
market advances or declines to the extent that it would if it remained fully
invested in common stocks.

The Portfolio may invest up to 25% of its assets in foreign securities
denominated in a foreign currency and not publicly traded in the United
States. In addition, the Portfolio may purchase American Depositary Receipts
("ADRs"), European Depositary Receipts ("EDRs"), Global Depositary Receipts
("GDRs"), and other types of receipts of shares evidencing ownership of the
underlying foreign securities. In pursuing its investment objective, the
Portfolio may engage in the purchase and writing of put and call options on
securities, stock indexes and foreign currencies. In addition, the Portfolio
may purchase or sell interest rate, stock index, and foreign currency futures
contracts and options thereon. The Portfolio may also engage in forward
foreign currency contracts. These investment techniques may involve a greater
degree or different type of risk than those inherent in more conservative
investment approaches.

EQUITY INCOME PORTFOLIO

INVESTMENT OBJECTIVE. Long-term growth of capital and income.

INVESTMENT POLICIES. The Portfolio seeks to achieve its objective consistent
with reasonable investment risk. Ordinarily, the Portfolio pursues its
investment objective by investing primarily in dividend-paying common stock.
The Portfolio may also invest in other equity securities, consisting of, among
other things, nondividend-paying common stock, preferred stock, and securities
convertible into common stock, such as convertible preferred stock and
convertible bonds, and warrants. The Portfolio may also invest in ADRs and in
various foreign securities if U.S. exchange-listed.

STOCK SELECTION. The Portfolio is not subject to any limit on the size of
companies in which it may invest, but intends, under normal circumstances, to
be fully invested to the extent practicable in the large- and medium-sized
companies primarily included in the Standard & Poor's 500 Composite Stock
Price Index ("S&P 500" or the "Index"). The Portfolio is designed for
investors who want an actively managed equity portfolio of selected equity
securities that seeks to outperform the total return of the S&P 500. In
managing the Portfolio, the potential for appreciation and dividend growth is
given more weight than current dividends. Nonetheless, the Portfolio Manager
will normally strive for gross income for the Portfolio at a level not less
than 75% of the dividend income generated on the stocks included in the S&P
500, although this income level is merely a guideline and there can be no
certainty that this income level will be achieved.

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under- or over-weight selected economic sectors against the S&P 500's sector
weightings to seek to enhance the Portfolio's total return or reduce
fluctuations in market value relative to the S&P 500. In selecting securities,
the Portfolio Manager may emphasize securities that it believes to be
undervalued. Securities of a company may be undervalued for a variety of
reasons such as an overreaction by investors to unfavorable news about a
company, an industry, or the stock markets in general; or as a result of a
market decline, poor economic conditions, tax-loss selling, or actual or
anticipated unfavorable developments affecting a company.

OTHER SECURITIES. During ordinary market conditions, the Portfolio Manager
will keep the Portfolio as fully invested as practicable in the equity
securities described above. The Portfolio may also invest in money market
instruments, including U.S. Government securities, short term bank obligations
rated in the highest two rating categories by Moody's or S&P, or, if unrated,
determined to be of equal quality by the Portfolio's Manager, certificates of
deposit, time deposits and banker's acceptances issued by U.S. and foreign
banks and savings and loan institutions with assets of at least $500 million
as of the end of their most recent fiscal year; and commercial paper and
corporate obligations, including variable rate demand notes, that are issued
by U.S. and foreign issuers and that are rated in the highest two rating
categories by Moody's or S&P, or if unrated, determined to be of equal quality
by the Portfolio Manager. Under normal circumstances, the Portfolio will
invest in such money market instruments to invest temporary cash balances or
to maintain liquidity to meet redemptions or expenses. The Portfolio may also,
however, invest in these instruments, without limitation, as a temporary
defensive measure taken during, or in anticipation of, adverse market
conditions.

The Portfolio may also invest in convertible bonds and other fixed income
securities (other than money market instruments) including, but not limited to
high yield/high risk debt securities. For more information on the risks of
non-investment grade securities, see "High Yield Bonds." For more information
on ratings of fixed income securities, see the Appendix.

OTHER TECHNIQUES. In pursuing its investment objective, the Portfolio may
purchase and sell put and call options on securities and stock indexes. In
addition, the Portfolio may purchase or sell stock index futures contracts and
options thereon. These investment techniques may involve a greater degree or
different type of risk than those inherent in more conservative investment
approaches.

MULTI-STRATEGY PORTFOLIO

INVESTMENT OBJECTIVE. Provide a high total return from a portfolio of equity
and fixed income securities. Total return will consist of income plus realized
and unrealized capital gains and losses.

INVESTMENT POLICIES. The Portfolio is managed to earn current income on, and
to anticipate long-term capital growth of, the Portfolio as a whole rather
than any of its individual securities. The Portfolio's equity investments will
be primarily the common stock of large- and medium-size U.S. companies,
including common stock of any class or series or any similar equity interest.
The Portfolio's equity investments may also include preferred stock, warrants,
rights, and convertible securities. The Portfolio may also invest in the
equity securities of small companies and foreign issuers. The Portfolio's
equity securities may or may not pay dividends and may or may not carry voting
rights. It is contemplated that most of the Portfolio's common stock
investments will be made in securities listed on a U.S. stock exchange. Fixed
income securities may include corporate bonds, debentures, notes, mortgage-
related securities, and asset-backed securities, U.S. Government securities,
preferred stock, money market instruments, and other securities that may have
conversion or purchase rights.

ASSET ALLOCATION. Under normal circumstances, the Portfolio Manager expects
that approximately 60% of the Portfolio's assets will be invested in equities
and approximately 40% in fixed income securities. However, these amounts may
vary in that the Portfolio Manager may allocate the Portfolio's investments
between these asset classes in a manner consistent with the Portfolio's
investment objective and current market conditions. Using a variety of
analytical tools, the Portfolio Manager assesses the relative attractiveness
of each asset class and determines an allocation between them believed to be
optimal. The Portfolio Manager then selects securities in each asset class
based on fundamental research and quantitative analysis.

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OTHER TECHNIQUES. In pursuing its investment objective, the Portfolio may
purchase and sell put and call options on securities and stock indexes. In
addition, the Portfolio may purchase or sell interest rate and stock index
futures contracts and options thereon. The Portfolio may also invest up to 10%
of its assets in debt securities of foreign issuers which may be denominated
in foreign currencies. Furthermore, the Portfolio may engage in forward
currency contracts in anticipation of or to protect itself against
fluctuations in currency exchange rates with respect to investments in
securities of foreign issuers. These investment techniques may involve a
greater degree or different type of risk than those inherent in more
conservative investment approaches.

EQUITY PORTFOLIO

INVESTMENT OBJECTIVE. The primary investment objective of the Equity
Portfolio is capital appreciation. Current income is of secondary importance.

INVESTMENT POLICIES. The Portfolio seeks to achieve this objective by
investing primarily in common stock, or securities convertible into or
exchangeable for common stock, including convertible preferred stocks,
convertible debentures, or warrants. The Portfolio invests, under normal
circumstances, at least 90% of its total assets in equity securities of U.S.
issuers.

The Portfolio Manager emphasizes a company's growth prospects in analyzing
equity securities to be purchased by the Portfolio. The Portfolio Manager
selects investments using both a variety of quantitative techniques and
fundamental research, while attempting to maintain risk, style,
capitalization, and industry characteristics similar to the Russell 1000
Growth Index ("Index"). The Portfolio seeks to maintain a portfolio composed
of companies with capitalizations and earnings growth expectations that are
above the average of the Index and dividend yields that are below the average
of the Index. The Portfolio also may invest in U.S. Government securities,
corporate bonds, money market instruments, and enter into repurchase
agreements. The Portfolio may increase its investment in these securities when
in a temporary defensive position.

The Portfolio Manager utilizes a "Computer-Optimized, Research-Enhanced"
("CORE") investment strategy in connection with its management of the
Portfolio. Under the CORE strategy, the Portfolio Manager begins with a broad
universe of U.S. equity securities and then uses a proprietary multifactor
model ("Multifactor Model") to assign each equity security a rating. The
Multifactor Model is a rigorous computerized rating system for forecasting the
returns of individual equity securities according to fundamental investment
characteristics. The Multifactor Model contains variables that measure value,
growth, momentum, and risk (e.g., book/price ratio, earnings/price ratio,
price momentum, price volatility, consensus growth forecasts, earnings
estimate revisions, and earnings stability).

The weightings assigned to the factors in the Multifactor Model are derived
from a statistical formulation that considers each factor's historical
performance in different market environments. As such, the Multifactor Model
is designed to evaluate each security using only the factors that are
statistically related to returns in the anticipated market environment.
Because it includes many disparate factors, the Portfolio Manager believes
that the Multifactor Model is broader in scope and provides a more thorough
evaluation than most conventional quantitative models.

OTHER TECHNIQUES. In pursuing its investment objective, the Portfolio may
purchase and sell put and call options on securities and stock indices. In
addition, the Portfolio may purchase or sell stock index futures contracts and
options thereon. These investment techniques may involve a greater degree or
different type of risk than those inherent in more conservative investment
approaches.

The Portfolio may also purchase Standard & Poor's Depository Receipts
("SPDRs"). SPDRs are American Stock Exchange-traded securities that represent
ownership in the SPDR Trust, a long-term unit investment trust which has been
established to accumulate and hold a portfolio of common stocks that is
intended to track the price performance and dividend yield of the Standard &
Poor's 500 Composite Stock Price Index ("S&P 500").

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BOND AND INCOME PORTFOLIO

INVESTMENT OBJECTIVE. Provide total return and income consistent with
prudent investment management.

INVESTMENT POLICIES. The Portfolio invests in the following types of
securities: U.S. dollar-denominated debt securities of U.S. or foreign
corporations; U.S. Government securities; mortgage-related and other asset-
backed securities; U.S. dollar-denominated obligations of foreign governments,
foreign governmental agencies, and international agencies (such as the
International Bank for Reconstruction and Development); within certain limits
as described below, non-U.S. dollar-denominated obligations of foreign
corporations, governments, governmental agencies, and international agencies;
certain derivative instruments for hedging purposes; municipal securities
issued by or on behalf of states, territories and possessions of the U.S.
(including the District of Columbia) and their political subdivisions,
agencies or instrumentalities, which securities may include private activity
bonds or industrial development bonds, which are issued by or on behalf of
public authorities to obtain funds for privately operated facilities; and
high-quality short-term instruments, including, among others, commercial
paper, bank instruments, and repurchase agreements. These securities may
include securities with debt characteristics such as convertible securities
and preferred stock.

The Portfolio normally invests at least 80% of its assets in securities
rated, at the time of acquisition, investment grade by at least one nationally
recognized statistical rating organization ("NRSRO") (e.g., Baa or better by
Moody's or BBB or better by S&P), or, if not rated by an NRSRO, of comparable
quality as determined by the Portfolio Manager. The Portfolio may invest up to
20% of its assets in securities that are not rated investment grade by at
least one NRSRO, 15% of which may consist of debt securities of issuers
located in emerging market countries. This may include securities of foreign
governments or their agencies that are emerging market countries. Generally,
debt securities that are not considered investment grade are regarded as
predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. For more information on the risks of
non-investment grade securities, see "High Yield Bonds"; on mortgage-related
securities, see "Mortgage-Related Securities"; and on the risks of investment
in foreign issuers, see "Foreign Securities." For more information on ratings
of fixed income securities, see the Appendix.

Other limitations apply to the Portfolio to address potential volatility
associated with certain investment techniques. The Portfolio may invest up to
10% of its assets in the following types of mortgage-related securities:
inverse floaters, super floating rate CMO's, interest-only ("IO's") and
principal-only ("PO's") tranches of stripped mortgage backed securities
(including planned amortization class certificates) and inverse IO's.

The Portfolio may invest up to 10% of its assets in non-U.S. dollar
denominated securities. The Portfolio may invest up to 15% of its net assets
in restricted securities that are illiquid, which, for these purposes, does
not include securities that may be sold without registration to qualified
institutional buyers under the Fund's procedures for restricted securities
under SEC Rule 144A. Measurement of these limits is determined at the time of
acquiring a security.

DURATION. The Portfolio invests in securities of varying maturities. Under
normal circumstances, the Portfolio maintains an average portfolio duration
that is within one-half year of the duration of the Lehman Brothers Long Term
Government/Corporate Bond Index ("Index"). The average duration of the Index
as of January 31, 1998 was 10.13 years. It is expected that the duration of
the Index will change over time, but only gradually. The Bond and Income
Portfolio ordinarily will have the potential to be more volatile than fixed-
income funds of shorter duration. A discussion of "duration" is provided above
in the description of the Managed Bond Portfolio and in the SAI.

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<PAGE>

collars; and interest rate swaps. To hedge against fluctuations in currency
exchange rates that affect non-U.S. dollar-denominated securities, the
Portfolio may (but is not obligated to) enter into spot (or cash) transactions
in currency, forward currency contracts, options on foreign currency
contracts, foreign currency futures and options thereon, and currency swaps.
The Portfolio may invest up to 5% of its assets in structured notes to hedge
interest rate or currency risk. The Portfolio may enter into swaps, caps,
floors, collars, structured notes, and non-exchange traded options only with
counterparties that have outstanding securities rated A or better by Moody's
or S&P or that have outstanding short-term securities rated P-2 or better by
Moody's or A-2 or better by S&P.

EQUITY INDEX PORTFOLIO

INVESTMENT OBJECTIVE. Provide investment results that correspond to the
total return performance of common stocks that are publicly traded in the
United States.

INVESTMENT POLICIES. The Portfolio attempts to achieve its objective by
investing in stocks included in the S&P 500. The Portfolio attempts to
replicate the investment results of the S&P 500, while minimizing
transactional costs and other expenses. The Portfolio will purchase the common
stock of those companies included in the S&P 500, which the Portfolio Manager
believes, based on statistical data, will represent the industry
diversification of the entire S&P 500. The Portfolio will be managed to
attempt to minimize the degree to which the investment results of the
Portfolio (before taking into account the Portfolio's expenses) differ from
the results of the Index ("tracking error"). The Portfolio will incur expenses
not reflected in the investment results of the Index, including advisory and
administrative fees and transactional and other expenses. The degree to which
the Portfolio correlates with the Index will depend upon the size and cash
flow of the Portfolio, the liquidity of the securities represented in the
Index, and the Portfolio's expenses, among other factors. There is no fixed
number of component stocks in which the Portfolio will invest. However, it is
anticipated that under normal circumstances the Portfolio will hold between
200 and 450 of the stocks listed in the S&P 500.

The composition of the portfolio securities may be rebalanced by the
Portfolio Manager at such times as it deems advisable in order to minimize
tracking error. No attempt is made, however, to "manage" the Portfolio in the
traditional sense, such as by using economic, financial, and market analysis,
nor will the adverse financial situation of a company directly result in its
elimination from the Portfolio unless, of course, the company is removed from
the Index. From time to time, administrative adjustments may be made in the
Portfolio because of mergers, changes in the composition of the Index, and
similar reasons, but such changes should be infrequent and the attendant costs
minimized. Thus, portfolio turnover is expected to be lower than that of most
other investment company portfolios investing in common stock. As a
consequence, brokerage costs are expected to be relatively low. Due to
tracking error, transactional costs, and other expenses, the return on the
Portfolio likely will be lower than the return on the S&P 500.

OTHER TECHNIQUES. The Portfolio may purchase and sell stock index futures,
purchase options on stock indexes, and purchase options on stock index futures
that are based on stock indexes which the Portfolio attempts to track or which
tend to move together with stocks included in the index. The Portfolio may use
these techniques as an adjunct to its securities activities or to hedge
against changes in securities prices.

The Portfolio may invest in foreign equity securities if U.S. exchange
listed to the extent included in the S&P 500. The Portfolio may temporarily
invest cash balances, maintained for liquidity purposes or pending investment,
in short-term high quality debt instruments, including commercial paper, bank
obligations, and U.S. Government securities. Temporary investments will not be
made for defensive purposes in the event of or in anticipation of a general
decline in the market price of stocks in which the Portfolio invests. A
defensive investment posture is precluded by the investment objective to
provide investment results that correspond to the total return performance of
common stocks that are publicly traded in the United States; accordingly,
investors in the Portfolio bear the risk of general declines in stock prices
in the stock markets.

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stock's relative total market value, that is, its market price per share
multiplied by the number of common shares outstanding for that company. S&P
may, from time to time, adjust the composition of common stocks in the Index.
Inclusion of a stock in the S&P 500 in no way implies an opinion by S&P as to
its attractiveness as an investment; nor is S&P a sponsor or in any way
affiliated with the Portfolio, the Fund, the Adviser, or the Portfolio
Manager.

The Fund reserves the right to change the index whose performance the
Portfolio will attempt to replicate or for the Portfolio to seek its
investment objective by means other than attempting to replicate an index,
such as by operating the Portfolio as a managed fund, and reserves the right
to do so without seeking shareholder approval, but only if operating the
Portfolio as described above is not permitted under applicable law for an
investment company that serves as an investment medium for variable insurance
contracts, or otherwise involves substantial legal risk. See "What is the
Federal Income Tax Status of the Fund" below.

INTERNATIONAL PORTFOLIO

INVESTMENT OBJECTIVE. Seek long-term capital appreciation primarily through
investment in equity securities of corporations domiciled in countries other
than the United States. Current income from dividends and interest will not be
an important consideration.

INVESTMENT POLICIES. Other than when in a defensive posture, at least 70% of
the Portfolio's assets will consist of corporate securities, primarily common
stock and, to a lesser extent, securities convertible into common stock. The
Portfolio may, however, for defensive purposes as described below, invest in
nonconvertible fixed income securities denominated in currencies of foreign
countries and in United States dollars.

The Portfolio will attempt to maximize opportunity and reduce risk by
investing in a diversified portfolio of companies in different stages of
development. Portfolio companies will range from large, well established
companies to medium-size companies and smaller, less seasoned companies in
earlier stages of development.

The allocation of the Portfolio's assets among the various securities
markets in the different countries will be determined by the Portfolio
Manager. In making the allocation of assets among the securities markets, the
Portfolio Manager may consider such factors as technological developments in
the various countries, the condition and growth potential for the various
economies and securities markets, currency and taxation considerations, and
other pertinent financial, social, national, and political factors. Some of
these countries can be considered "emerging market countries," which generally
refers to countries whose economies are less developed or mature than
economies in other countries or whose markets are undergoing a process of
development. Under certain adverse investment conditions, the Portfolio may
restrict the securities markets in which its assets will be invested, and may
increase the proportion of assets invested in United States Government and
money market securities.

The Portfolio reserves the right as a defensive measure to invest in
nonconvertible fixed income securities denominated in currencies of foreign
countries and in United States dollars. (For this purpose, investments made
for defensive purposes will be maintained only during periods in which the
Portfolio Manager determines that economic or financial conditions are adverse
for holding equity securities of corporate issuers.) Securities held for
defensive purposes, which include nonconvertible preferred stock, debt
securities, government securities issued by United States and foreign
countries, and money market securities, may be held in such proportions as, in
the opinion of the Portfolio Manager, prevailing market or economic conditions
warrant. The Portfolio may invest up to 5% of its assets, measured at the time
of investment, in debt securities that are rated below investment grade, or if
not rated, of equivalent quality.

The Portfolio may also hold cash (in United States dollars or foreign
currencies) or short-term securities denominated in such currencies to provide
for redemptions; it is not expected that such reserve for redemptions will
exceed 10% of the Portfolio's assets. Money market securities which may be
held for defensive purposes, or to provide for redemptions, include short-term
corporate or U.S. Government obligations and bank certificates of deposit.

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<PAGE>

The Portfolio is subject to guidelines for diversification of foreign
security investments that prescribe the minimum number of countries in which
the Portfolio's assets may be invested. These guidelines are discussed under
"Foreign Securities."

OTHER TECHNIQUES. The Portfolio may enter into repurchase agreements and may
lend its securities to brokers, dealers, and other financial institutions to
earn income. The Portfolio may purchase and sell financial futures contracts,
stock index futures contracts, and foreign currency futures contracts and
options on such futures contracts.

RISKS OF FOREIGN INVESTMENT. Investing in the securities of foreign issuers
involves special risks and considerations not typically associated with
investing in U.S. companies. These risks include exposure to foreign
currencies and fluctuations in such currencies and political, economic,
regulatory, and operational factors associated with exposure to foreign
countries. Investment in emerging market countries presents risks in greater
degree than, and in addition to, those presented by investment in foreign
issuers in general.

The United States Government has, from time to time in the past, imposed
restrictions, through taxation and otherwise, on foreign investments by United
States investors such as the Portfolio. If such restrictions should be
reinstituted, it might become necessary for the Portfolio to invest all, or
substantially all, of its assets in United States short-term securities. In
such event, the Portfolio would review its investment objective and investment
policies to determine whether changes are appropriate.

CURRENCY TECHNIQUES. The Portfolio may engage in foreign currency
transactions in anticipation of or to protect itself against fluctuations in
currency exchange rates. The Portfolio may enter into forward currency
contracts. The Portfolio may also purchase and write put and call options on
foreign currencies. The use of these techniques is discretionary with the
Portfolio Manager, and there is no commitment to use them.

EMERGING MARKETS PORTFOLIO

INVESTMENT OBJECTIVE. Long-term growth of capital.

INVESTMENT POLICIES. The Portfolio seeks its investment objective by
investing primarily in common stocks of companies domiciled in countries
identified as "emerging market countries" (See "International Portfolio--
Investment Policies"). The Morgan Stanley Capital International Emerging
Markets Free Index ("MSCI Index") is used as the basis for choosing the
countries in which the Portfolio invests. However, the Portfolio is not
limited to the countries and weightings in this index.

It is the policy of the Portfolio to be as fully invested in common stock as
practicable at all times. This policy precludes the Portfolio from investing
in debt securities as a defensive investment posture (although the Portfolio
may invest in such securities to provide for payment of expenses and meet
redemption requests). Accordingly, investors in this Portfolio bear the risk
of general declines in stock prices, and bear any risk that the Portfolio's
exposure to such declines cannot be lessened by investment in debt securities.
The Portfolio may temporarily not be invested primarily in equity securities
after receipt of significant new monies.

The Portfolio Manager applies two levels of screening in selecting
investments for the Portfolio. First, an active country selection model
analyzes world markets and assigns a relative value ranking, or "favorability
weighting," to each country in the relevant country universe to determine
markets that are relatively undervalued. Second, at the stock selection level,
quality analysis and value analysis are applied to each security, assessing
variables such as balance sheet strength and earnings growth (quality factors)
and performance relative to the industry, price to earnings ratios, and price
to book ratios (value factors). This two-level screening method identifies
undervalued securities for purchasing and provides a sell discipline for fully
valued securities.

For purposes of allocating the Portfolio's investments, a company is
considered to be located in the country in which it is domiciled, in which it
is primarily traded, from which it derives a significant portion of its
revenues, or in which a significant portion of its goods or services are
produced.

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The Portfolio is subject to guidelines for diversification of foreign
security investments that prescribe the minimum number of countries in which
the Portfolio may invest its assets. These guidelines are discussed under
"Foreign Securities."

CURRENCY TECHNIQUES. Most of the foreign securities in which the Portfolio
invests will be denominated in foreign currencies. The Portfolio may engage in
foreign currency transactions to protect itself against fluctuations in
currency exchange rates in relation to the U.S. dollar or to the weighting of
a particular foreign currency on the MSCI Index. These foreign currency
transactions may include forward foreign currency contracts, currency exchange
transactions on a spot (i.e., cash) basis, put and call options on foreign
currencies, and foreign exchange futures contracts.

OTHER TECHNIQUES. The Portfolio may invest up to 10% of its assets in U.S.
Government securities, high quality debt securities, money market obligations,
and in cash. Such money market obligations may include short-term corporate or
U.S. Government obligations and bank certificates of deposit. The debt
securities and money market obligations in which the Portfolio invests may be
issued by U.S. and foreign issuers and be denominated in U.S. dollars or
foreign currencies.

The Portfolio also may engage in transactions in options, futures, and
options on futures contracts on securities and securities indexes. The
Portfolio may purchase and sell stock index futures and options thereon. The
Portfolio also may purchase convertible securities, enter into equity index
swap agreements, lend its portfolio securities, purchase warrants on
securities that it is eligible to purchase, invest in preferred stock, enter
into repurchase agreements and reverse repurchase agreements, and enter into
firm commitment transactions and purchase and sell securities on a when-issued
basis.

RISKS OF FOREIGN INVESTMENT. Investing in the securities of foreign issuers
involves special risks and considerations not typically associated with
investing in U.S. companies. Investment in emerging market countries presents
risks in greater degree than, and in addition to, those presented by
investment in foreign issuers in general. Some of these risks include
restrictions on foreign investment and repatriation of investment income or
gain, risks of currency fluctuations, inflation, and illiquid or volatile
securities markets. The Portfolio is intended for aggressive long-term
investors who can accept the risks associated with emerging market countries.

As noted previously, the United States Government has, from time to time in
the past, imposed restrictions, through taxation and otherwise, on foreign
investments by United States investors such as the Portfolio. If such
restrictions should be reinstated, it might become necessary for the Portfolio
to invest all, or substantially all, of its assets in United States short-term
securities. In such event, the Portfolio would review its investment objective
and investment policies to determine whether changes are appropriate.

ALL PORTFOLIOS: DIVERSIFICATION AND CHANGES IN POLICIES

Each of the Portfolios is diversified, so that with respect to 75% of the
assets of each Portfolio (100% for the Money Market Portfolio), it may not
invest more than 5% of its assets (taken at market value at the time of
investment) in securities of any one issuer, except that this restriction does
not apply to U.S. Government securities.

The investment policies for any of the Portfolios may be changed by the
Fund's Board of Trustees. The investment objective of each Portfolio, as
described in the previous section, is considered "fundamental." In addition,
the Portfolios are subject to investment restrictions that are described in
the SAI. Some of those investment restrictions, including the diversified
status of each Portfolio, are also designated as "fundamental." These
fundamental investment objectives and investment restrictions require a vote
of a majority of the shareholders of a Portfolio to be changed.

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SECURITIES AND INVESTMENT TECHNIQUES

This section describes certain securities and investment techniques that may
be used by the Portfolios and the potential risks associated with these
securities and investment techniques. For more detailed information on these
investment techniques, see the SAI. The SAI also contains information on other
types of securities in which a Portfolio may invest, including U.S. Government
securities, debt securities generally, variable and floating rate securities,
repurchase agreements, reverse repurchase agreements, lending portfolio
securities, firm commitment agreements and when-issued securities, and
warrants.

DERIVATIVES

"Derivatives" is a broad term which may be used to describe many investment
instruments whose values are derived, at least in part, from the value of
another underlying asset or investment instrument. Some derivative instruments
have simple structures and others have intricate components and terms. Some
are more volatile and some have equal or less volatility than the investment
instrument upon whose value the derivative is based. If used to leverage a
portfolio, derivatives could magnify risk. However, the Fund is not permitted
to engage in leveraging transactions. Derivatives are often used by the
Portfolio Managers to hedge positions, defray the risks of interest rate or
currency changes and reduce portfolio or market risk.

Each Portfolio has its own authorizations to use prescribed derivative
instruments, which may include forward foreign currency contracts, options,
foreign currency options, swap agreements, spread transactions, futures
contracts and options thereon, foreign futures, mortgage-related securities,
collateralized mortgage obligations ("CMOs"), CMO residuals, stripped
mortgage-backed securities and other asset-backed securities. Each of the
Portfolios has the authority to use some type of derivative instrument. The
strategy employed and the magnitude of the position maintained will determine
the level of risk a Portfolio may assume by utilizing derivative instruments.
The types and investment techniques employed with respect to the derivative
instruments which are most commonly purchased and sold by the Portfolios are
included among the descriptions below and in the SAI.

MORTGAGE-RELATED SECURITIES

APPLICABLE PORTFOLIOS: Money Market, High Yield Bond, Managed Bond,
Government Securities, Aggressive Equity, Growth LT, Multi-Strategy, Equity,
and Bond and Income Portfolios. The Government Securities, Aggressive Equity,
Growth LT, and Multi-Strategy Portfolios, and the Money Market Portfolio,
subject to its investment policies, may invest only in high-quality, mortgage-
related (or other asset-backed) securities either (i) issued by United States
Government sponsored corporations (currently GNMA, FHLMC, FNMA) or (ii) rated
Aa or better by Moody's or AA or better by S&P or, if not rated, determined to
be of equivalent investment quality.

Mortgage-related securities include mortgage pass-through securities, which
are securities under which payments of both interest and principal from an
underlying pool of mortgages are made periodically, in effect "passing
through" payments made by the individual borrowers on the mortgage loans. The
underlying pool of mortgages can be backed by single family, multi-family or
commercial properties and may have a fixed or periodically resetting coupon
rate. Timely payment of principal and interest on mortgage backed securities
known as "GNMAs", which are guaranteed by the Government National Mortgage
Association, is guaranteed by the full faith and credit of the U.S.
Government. Many other mortgage related securities are not backed by the full
faith and credit of the U.S. Government, but are guaranteed by agencies or
instrumentalities of the U.S. Government such as the Federal National Mortgage
Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC").

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the holders, although not necessarily on a pro rata basis, on the same
schedule as they are received. CMOs are structured into multiple classes, with
each class bearing a different stated maturity. Monthly payments of principal,
including prepayments, generally are first returned to investors holding the
shortest maturity class; investors holding the longer maturity classes receive
principal only after the first class has been retired. CMOs may be issued by
U.S. Government agencies or by financial institutions such as commercial
banks, savings and loan associations, mortgage banks, and securities broker-
dealers (or affiliates).

The Managed Bond, Government Securities, Multi-Strategy, and Bond and Income
Portfolios may also invest in stripped mortgage-backed securities and CMO
residuals. Stripped mortgage-backed securities are usually structured with two
classes. One class will receive all of the interest (the interest-only class,
or "IO"), whereas the other class will receive all of the principal (the
principal-only class or "PO"). In addition, the Bond and Income Portfolio may
invest in inverse floaters and "IO" and "PO" tranches of planned amortization
class ("PAC") certificates. PAC certificates are parallel-pay real estate
mortgage investment conduit ("REMIC") certificates that generally require that
specified amounts of principal be applied on each payment date to one or more
classes of REMIC 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 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 the PAC certificate.
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.

A PAC IO is a PAC bond that pays an extremely high coupon rate, such as
200%, on its outstanding principal balance, and pays down according to a
designated PAC schedule. Due to their high-coupon interest, PAC IO's are
priced at very high premiums to par. Due to the nature of PAC prepayment bands
and PAC collars, the PAC IO has a greater call (contraction) potential and
thus would be impacted negatively by a sustained increase in payment speeds.

RISKS OF MORTGAGE-RELATED SECURITIES. Although mortgage loans underlying a
mortgage-related security may have maturities of up to 30 years, the actual
average life of a mortgage-backed security typically will be substantially
less because (1) the mortgages will be subject to normal principal
amortization, and (2) may be prepaid prior to maturity due to the sale of the
underlying property, the refinancing of the loan, or foreclosure. Early
repayment may expose a Portfolio to a lower rate of return upon reinvestment
of the principal. Prepayment rates vary widely and cannot be accurately
predicted. They may be affected by changes in market interest rates.
Therefore, prepayments will be reinvested at rates that are available upon
receipt, which likely will be higher or lower than the original yield on the
certificates. Accordingly, the actual maturity and realized yield on pass-
through or modified pass-through mortgage-related securities will vary from
the designated maturity and yield on the original security based upon the
prepayment experience of the underlying pool of mortgages.

Stripped mortgage-backed securities are likely to experience greater price
volatility than other types of mortgage securities. The yield to maturity on
the IO class is extremely sensitive, both to changes in prevailing interest
rates and to the rate of principal payments (including prepayments) on the
underlying mortgage assets. Similarly, the yield to maturity on CMO residuals
is extremely sensitive to prepayments on the related underlying mortgage
assets. In addition, if a series of a CMO includes a class that bears interest
at an adjustable rate, the yield to maturity on the related CMO residual will
also be extremely sensitive to changes in the level of the index upon which
interest rate adjustments are made. A Portfolio could fail to fully recover
its initial investment in a CMO residual or a stripped mortgage-backed
security.

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leases, credit card receivables, or other assets. As in the case of mortgage-
related securities, those asset-backed securities are subject to prepayment
risk, which will alter an instrument's maturity and yield. Other risks relate
to the nature of the underlying collateral. For example, credit card debt
receivables are generally unsecured and the debtors are entitled to the
protection of a number of consumer credit laws, many of which can result in
reductions in outstanding balances. Additionally, holders of asset-backed
securities may also experience delays in payments or losses if the full
amounts due on underlying sales contracts are not realized. Because asset-
backed securities are relatively new, the market experience in these
securities is limited and the market's ability to sustain liquidity through
all phases of the market cycle has not been tested.

HIGH YIELD BONDS

APPLICABLE PORTFOLIOS. High Yield Bond, Managed Bond (up to 10% of its
assets), Equity Income, Multi-Strategy, Growth LT (up to 10% of its assets),
Bond and Income (up to 20% of its assets), and International Portfolios (up to
5% of its assets).

Generally, high yield/high risk debt securities are those rated lower than
Baa or BBB, or, if not rated by Moody's or S&P, of equivalent quality
(although the Managed Bond Portfolio may not invest in securities rated lower
than B) and which are commonly referred to as "junk bonds". Investment in such
securities generally provides greater income and increased opportunity for
capital appreciation than investments in higher quality debt securities, but
they also typically entail greater potential price volatility and principal
and income risk.

In general, high yield bonds are not considered to be investment grade. They
are regarded as predominately speculative with respect to the issuing
company's continuing ability to meet principal and interest payments. The
prices of high yield bonds have been found to be less sensitive to interest-
rate changes than higher-rated investments, but more sensitive to adverse
economic downturns or individual corporate developments. A projection of an
economic downturn or of a period of rising interest rates, for example, could
cause a decline in high yield bond prices. In the case of high yield bonds
structured as zero-coupon or pay-in-kind securities, their market prices are
affected to a greater extent by interest rate changes, and therefore tend to
be more volatile than securities which pay interest periodically and in cash.

The secondary market in which high yield bonds are traded is generally less
liquid than the market for higher grade bonds. Less liquidity in the secondary
trading market could adversely affect the price at which a Portfolio could
sell a high yield bond, and could adversely affect the daily net asset value
of the Portfolio's shares. At times of less liquidity, it may be more
difficult to value the high yield bonds because such valuation may require
more research, and elements of judgment may play a greater role in the
valuation because there is less reliable, objective data available.

In addition, up to 15% of the assets that the Bond and Income Portfolio may
invest in high-yield securities may be invested in debt securities of foreign
governments or their agencies that are from emerging market countries.
Investments in these debt securities will be considered "high yield"
investments and thus may possess many of the risks factors discussed above. In
addition, as foreign securities, emerging market debt instruments are subject
to many risk considerations generally not common to domestic high yield
issuers. For more information on the risks of investment in foreign
securities, see "Foreign Securities."

Included among the emerging market debt obligations in which the Bond and
Income Portfolio may invest are "Brady Bonds," which are created through the
exchange of existing commercial bank loans to sovereign entities for new
obligations in connection with debt restructuring under a plan introduced by
former U.S. Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan").
Brady Bonds are not considered U.S. Government securities and are considered
speculative. Brady Bonds have been issued only recently, and accordingly, do
not have a long payment history. They may be collateralized or
uncollateralized, or have collateralized or uncollateralized elements, and
issued in various currencies (although most are U.S. dollar-denominated), and
they are traded in the over-the-counter secondary market.

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Brady Bonds involve various risk factors including residual risk and the
history of defaults with respect to commercial bank loans by public and
private entities of countries issuing Brady Bonds. There can be no assurance
that Brady Bonds in which the Portfolio may invest will not be subject to
restructuring arrangements or to requests for new credit, which may cause the
Portfolio to suffer a loss of interest or principal on any of its holdings.

VARIABLE AND FLOATING RATE SECURITIES

APPLICABLE PORTFOLIOS. All Portfolios.

Variable and floating rate securities provide for a specific adjustment in
the interest rate paid on the obligations. The terms of such obligations must
provide that the interest rates are adjusted periodically based upon an
interest rate adjustment index as provided in the respective obligations. The
adjustment intervals may be regular, and range from daily up to annually, or
may be based on an event, such as a change in the prime rate.

The interest rate on a floating rate debt instrument ("floater") is a
variable rate which is tied to another interest rate, such as a money market
index or Treasury bill rate. The interest rate on a floater resets
periodically, typically every six months. While, because of the interest rate
reset feature, floaters provide Portfolios with a certain degree of protection
against rises in interest rates, Portfolios investing in floaters will
participate in any declines in interest rates as well.

The interest rate on a leveraged inverse floating rate debt instrument
("inverse floater") resets in the opposite direction from the market rate of
interest to which the inverse floater is indexed. An inverse floater may be
considered to be leveraged to the extent that its interest rate varies by a
magnitude that exceeds the magnitude of the change in the index rate of
interest. The higher degree of leverage inherent in inverse floaters is
associated with greater volatility in their market values. Accordingly,
duration of an inverse floater may exceed its stated final maturity. Certain
inverse floaters may be deemed to be illiquid securities for purposes of a
Portfolio's limitations on investments in such securities.

The Bond and Income Portfolio may invest in super floating rate CMOs ("super
floaters"). A super floater is a leveraged floating-rate tranche in a CMO
issue. At each monthly reset date, a super floater's coupon rate is determined
by a slated formula. Typically, the rate is a multiple of some index minus a
fixed-coupon amount. When interest rates rise, a super floater is expected to
outperform regular floating rate CMOs because of its leveraging factor and
higher lifetime caps. Conversely, when interest rates fall, a super floater is
expected to underperform floating rate CMOs because its coupon rate drops by
the leveraging factor. In addition, a super floater may reach its cap as
interest rates increase and may no longer provide the benefits associated with
increasing coupon rates.

SMALL CAPITALIZATION STOCKS

APPLICABLE PORTFOLIOS. Growth, Aggressive Equity, Growth LT, Equity, and
Emerging Markets Portfolios, and to a lesser degree, Equity Income and Multi-
Strategy Portfolios.

Investments in larger companies present certain advantages in that such
companies generally have greater financial resources, more extensive research
and development, manufacturing, marketing and service capabilities, more
stability and greater depth of management and technical personnel. Investments
in smaller, less seasoned companies may present greater opportunities for
growth but also involve greater risks than customarily are associated with
more established companies. The securities of smaller companies may be subject
to more abrupt or erratic market movements than larger, more established
companies. These companies may have limited product lines, markets or
financial resources, or they may be dependent upon a limited management group.
Their securities may be traded only in the over-the-counter market or on a
regional securities exchange and may not be traded every day or in the volume
typical of trading on a major securities exchange. As a result, the
disposition

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by a Portfolio of securities to meet redemptions, or otherwise, may require
the Portfolio to sell these securities at a discount from market prices or to
sell during a period when such disposition is not desirable or to make many
small sales over a lengthy period of time.

BORROWING

APPLICABLE PORTFOLIOS. All Portfolios.

Though not an ordinary practice, each Portfolio may borrow money to help
meet redemptions or for other purposes. Borrowing may exaggerate the effect on
net asset value of any increase or decrease in the market value of a
Portfolio, and money borrowed will be subject to interest costs. For
information on limits on the ability of any Portfolio to borrow, see the SAI.

ILLIQUID AND RESTRICTED SECURITIES

APPLICABLE PORTFOLIOS: All Portfolios may acquire illiquid securities. The
Money Market, High Yield Bond, Managed Bond, Government Securities, Growth,
Aggressive Equity, Growth LT, Equity Income, Multi-Strategy, Equity, Bond and
Income, International, and Emerging Markets Portfolios may acquire restricted
securities.

A Portfolio may invest in an illiquid or restricted security if the
Portfolio Manager believes that it presents an attractive investment
opportunity. Generally, a security is considered illiquid if it cannot be
disposed of within seven days. Its illiquidity might prevent the sale of such
a security at a time when a Portfolio Manager might wish to sell, and these
securities could have the effect of decreasing the overall level of a
Portfolio's liquidity. Further, the lack of an established secondary market
may make it more difficult to value illiquid securities, requiring the Fund to
rely on judgments that may be somewhat subjective in determining value, which
could vary from the amount that a Portfolio could realize upon disposition.

Restricted securities, including private placements, are subject to legal or
contractual restrictions on resale. They can be eligible for purchase without
SEC registration by certain institutional investors known as "qualified
institutional buyers," and under the Fund's procedures, restricted securities
could be treated as liquid. However, some restricted securities may be
illiquid and restricted securities that are treated as liquid could be less
liquid than registered securities traded on established secondary markets. A
Portfolio may not invest more than 15%, (10% for the Money Market Portfolio),
of its net assets in illiquid securities, measured at the time of investment.

PRECIOUS METALS-RELATED SECURITIES

APPLICABLE PORTFOLIOS. Equity Portfolio, and possibly other Portfolios that
invest in equity securities.

Precious-metals-related securities are considered equity securities of U.S.
and foreign companies involved in the exploration, mining, development,
production, or distribution of gold or other natural resources, including
minerals and metals such as copper, aluminum, silver, platinum, uranium,
strategic metals, diamonds, coal, oil, and phosphates.

The value of these securities may be affected by worldwide financial and
political factors, and prices may fluctuate sharply over short time periods.
For example, precious metals securities may be affected by changes in
inflation expectations in various countries, metal sales by central banks of
governments or international agencies, governmental restrictions on the
private ownership of certain precious metals or minerals and other factors.

FOREIGN SECURITIES

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securities markets outside the United States (excluding Eurodollar
certificates of deposit). The Growth LT Portfolio may invest up to 25% of its
assets in foreign securities denominated in a foreign currency. The Growth,
Growth LT, Equity Income, Multi-Strategy, and Equity Index Portfolios may
invest in equity securities of foreign issuers if U.S. exchange listed or
included in the S&P 500. The Managed Bond and Government Securities Portfolios
may invest up to 20% of their assets in foreign debt securities denominated in
a foreign currency. The Multi-Strategy and Bond and Income Portfolios may
invest up to 10% of their assets in foreign debt securities denominated in a
foreign currency. The Money Market, High Yield Bond, Managed Bond, Government
Securities, Aggressive Equity, Growth LT, Multi-Strategy, Bond and Income,
International, and Emerging Markets Portfolios may invest in fixed income
securities, including money market instruments and bank obligations of foreign
issuers, including corporate, foreign governmental, and international agency
issuers, that are denominated in U.S. dollars. All Portfolios, except the
Equity Portfolio, may purchase American Depositary Receipts (ADRs), which are
dollar-denominated receipts issued generally by domestic banks and
representing the deposit with the bank of a security of a foreign issuer. ADRs
are publicly traded on exchanges or over-the-counter in the United States. The
Growth LT and International Portfolios may invest in European Depositary
Receipts (EDRs), which are receipts issued in Europe, typically by banking
institutions in London or Brussels, which evidence an ownership arrangement
similar to ADRs and are designed for use in European securities markets; and
may invest in Global Depositary Receipts (GDRs), which are similar to ADRs,
but are issued and traded in several international financial markets, as well
as other types of receipts of shares evidencing ownership of the underlying
foreign securities.

Most foreign securities are denominated in foreign currencies and investment
in foreign securities involves exposure to currency fluctuations. Transactions
in most foreign securities are conducted in foreign currencies, so a
Portfolio's assets must be exchanged for another currency each time a security
is bought or sold or a dividend is paid. Similarly, share price quotations and
total return information reflect conversion into U.S. dollars. Fluctuations in
foreign exchange rates can significantly increase or decrease the U.S. dollar
value of a foreign investment, which will enhance or diminish the return of a
foreign security in its own currency.

Investing in the securities of foreign issuers involves other special risks
and considerations not typically associated with investing in U.S. companies.
These include differences in accounting, auditing and financial reporting
standards, generally higher commission rates on foreign portfolio
transactions, the possibility of expropriation, nationalization or
confiscatory taxation, adverse changes in investment or exchange control
regulations, political instability that could affect U.S. investments in
foreign countries, and potential restrictions on the flow of international
capital. In many countries, there is less publicly available information about
issuers than is available in reports about companies in the United States. It
may be more difficult to obtain and enforce judgments against foreign
entities. Additionally, income (including interest and dividends) derived from
foreign securities may be subject to foreign taxes, including foreign
withholding taxes, and other foreign taxes may apply with respect to
securities transactions. Foreign securities often trade with less frequency
and volume than domestic securities and therefore may exhibit greater price
volatility and less liquidity. These risks are intensified with respect to
investments in emerging market countries. In addition, a number of the
currencies of developing countries have experienced significant declines
against the U.S. dollar in recent years, and devaluation may occur subsequent
to investments in these currencies by a Portfolio. Inflation and rapid
fluctuations in inflation rates have had and may continue to have negative
effects on the economies and securities markets of certain emerging market
countries. Emerging markets have different clearance and settlement procedures
and in certain markets there have been times when settlements have been unable
to keep pace with the volume of securities transactions making it difficult to
conduct such transactions. The inability of the Fund to make intended security
purchases due to settlement problems could cause the Fund to miss attractive
investment opportunities. Inability to dispose of a portfolio security due to
settlement problems could result either in losses to the Fund due to
subsequent declines in the value of the portfolio security or, if the Fund has
entered into a contract to sell a security, could result in possible liability
of the Fund to the purchaser. Investment in foreign securities also involves
the risk of possible losses through the holding of securities in custodian
banks and securities depositories in foreign countries. For information on the
risks of investing in emerging market debt securities, see "High Yield Bonds."
For a description of the Fund's custody arrangements for foreign securities,
see "Foreign Securities" in the SAI.

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DIVERSIFICATION. The International and Emerging Markets Portfolios are
subject to guidelines for diversification of foreign security investments that
are imposed by California insurance authorities. Under these guidelines,
foreign investments will be allocated to at least three countries at all
times. For further information regarding foreign diversification guidelines,
see "Foreign Securities" in the SAI.

FORWARD FOREIGN CURRENCY CONTRACTS

APPLICABLE PORTFOLIOS: Managed Bond, Government Securities, Aggressive
Equity, Growth LT, Multi-Strategy, Bond and Income, International, and
Emerging Markets Portfolios.

A forward currency contract is an obligation to purchase or sell a currency
against another currency at a future date at a price set at the time of the
contract. A Portfolio could engage in a forward currency transaction in
anticipation of or to protect itself against fluctuations in currency exchange
rates. Although forward contracts typically will involve the purchase or sale
of a foreign currency against the dollar, a Portfolio also may purchase or
sell one foreign currency forward against another foreign currency. In
addition, a Portfolio may hedge a foreign currency with forward contracts on
another ("proxy") currency of which changes in value generally correlate with
the currency to be hedged. There are certain markets where it is not possible
to engage in effective foreign currency hedging. This may be true, for
example, for the currencies of various Latin American countries in which the
foreign exchange markets are not sufficiently developed to permit hedging
activity to take place.

A Portfolio's dealings in forward foreign exchange will be limited to
hedging involving either specific transactions or portfolio positions.
Transaction hedging is the purchase or sale of forward foreign currency to
"lock in" the U.S. dollar price of a security purchased or sold by a
Portfolio. Position hedging is the sale of forward foreign currency with
respect to portfolio security positions denominated in a foreign currency. A
Portfolio will not speculate in forward foreign exchange.

Employing hedging strategies with forward currency contracts does not
eliminate fluctuations in the prices of portfolio securities or prevent losses
if the prices of such securities decline. Forward contracts involve some
transactional expense for a Portfolio. Although forward contracts will be used
primarily to protect a Portfolio from adverse currency movements, they also
involve the risk that anticipated currency movements will not be accurately
predicted and a Portfolio's total return could be adversely affected as a
result.

OPTIONS

APPLICABLE PORTFOLIOS: The High Yield Bond, Managed Bond, Government
Securities, Aggressive Equity, Growth LT, Equity Income, Multi-Strategy,
Equity, Bond and Income, and Emerging Markets Portfolios may purchase put and
call options on securities in pursuing their investment objectives. The High
Yield Bond, Managed Bond, Government Securities, Aggressive Equity, Growth LT,
Equity Income, Multi-Strategy, and Emerging Markets Portfolios may write
(sell) covered call and secured put options. The Growth LT, Equity Income,
Multi-Strategy, and Equity Index Portfolios may purchase put and call options
on securities indexes that are exchange traded or traded on over-the-counter
markets to protect against price movements in the stock market generally (or
in particular segments of the market) rather than in individual stocks. The
Aggressive Equity and Emerging Markets Portfolios may purchase and sell put
and call options on securities indexes that are exchange traded or traded on
over-the-counter markets.

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may move more or less than the price of the related security or index. In this
regard, index options can never be a perfect hedge against the overall risk of
a stock position except where the stock position and the index are composed of
exactly the same stocks, in the same proportions. There can be no assurance
that a liquid market will exist when a Portfolio seeks to close out an option
position. Furthermore, if trading restrictions or suspensions are imposed on
the options markets, a Portfolio may be unable to close out a position.

FOREIGN CURRENCY OPTIONS

APPLICABLE PORTFOLIOS: Managed Bond, Government Securities, Aggressive
Equity, Growth LT, Bond and Income, International, and Emerging Markets
Portfolios.

Options on foreign currencies may be purchased or written as a hedge against
changes in the value of the U.S. dollar (or another currency) in relation to a
foreign currency in which a Portfolio's securities may be denominated.
Currency options traded on U.S. or other exchanges may be subject to position
limits which may limit the ability of the Portfolio to reduce foreign currency
risk using such options. Over-the-counter options may be negotiated, but they
generally do not have as much market liquidity as exchange-traded options.
Employing hedging strategies with options on currencies does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Furthermore, such hedging transactions
reduce or preclude the opportunity for gain if the value of the hedged
currency should change relative to the U.S. dollar (or other hedged currency).
A Portfolio will not speculate in options on foreign currencies.

There is no assurance that a liquid secondary market will exist for any
particular foreign currency option, or at any particular time. In the event no
liquid secondary market exists, it might not be possible to effect closing
transactions in particular options. If a Portfolio cannot close out an option
which it holds, it would have to exercise its option in order to realize any
profit and would incur transactional costs on the sale of the underlying
assets.

SWAP AGREEMENTS AND OPTIONS ON SWAP AGREEMENTS

APPLICABLE PORTFOLIOS: Managed Bond, Government Securities, Bond and Income,
and Emerging Markets Portfolios.

The Emerging Markets Portfolio may enter into equity index swap agreements
for purposes of gaining exposure to the stocks making up an index of
securities in a foreign market without actually purchasing those stocks. The
Managed Bond and Government Securities Portfolios may enter into interest
rate, interest rate index, and currency exchange rate swap agreements, and may
purchase and sell options thereon. In a standard swap transaction, two parties
agree to exchange the returns (or differentials in rates of return) earned or
realized on particular predetermined investments or instruments, which may be
adjusted for an interest factor. The gross returns to be exchanged between the
parties (i.e., the return on or increase in value of a particular dollar
amount invested at a particular interest rate, or in a "basket" of securities
representing a particular index) generally are calculated with respect to a
"notional amount." The "notional amount" of the swap agreement is only a
fictive basis on which to calculate the obligations of the parties. A
Portfolio will not enter into a swap agreement with any single party if the
net amount owed or to be received under existing contracts with that party
would exceed 5% of the Portfolio's assets. The Bond and Income Portfolio may
invest in the following types of swap agreements: (1) "interest rate caps,"
under which, in return for a premium, one party agrees to make payments to the
other to the extent that interest rates exceed a specified rate, or "cap"; (2)
"interest rate floors," under which, in return for a premium, one party agrees
to make payments to the other to the extent that interest rates fall below a
certain level; and (3) "interest rate collars," under which one party sells a
cap and purchases a floor or vice-versa in an attempt to protect itself
against interest rate movements exceeding given minimum or maximum levels.

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of investments are likely to produce greater returns than other investments.
Because they are two-party contracts and because they may have terms of
greater than seven days, swap agreements may be considered to be illiquid
investments. It may not be possible to enter into a reverse swap or close out
a swap position prior to its original maturity and, therefore, a Portfolio may
bear the risk of such position until its maturity. Moreover, a Portfolio bears
the risk of loss of the amount expected to be received under a swap agreement
in the event of the default or bankruptcy of a swap agreement counterparty. A
Portfolio will enter into swap agreements only with counterparties that meet
certain standards for creditworthiness (generally, such counterparties would
have to be eligible counterparties under the terms of a Portfolio's repurchase
agreement guidelines). Certain tax considerations may limit a Portfolio's
ability to use swap agreements. The swaps market is a relatively new market
and is largely unregulated. It is possible that developments in the swaps
market, including potential government regulation, could adversely affect a
Portfolio's ability to terminate existing swap agreements or to realize
amounts to be received under such agreements. See "Swap Agreements and Options
on Swap Agreements" and "Taxation" in the SAI.

SPREAD TRANSACTIONS

APPLICABLE PORTFOLIOS: High Yield Bond, Managed Bond and Government
Securities Portfolios.

The High Yield Bond, Managed Bond and Government Securities Portfolios may
enter into spread transactions with securities dealers. Spread transactions
are not generally exchange listed or traded. Spread transactions may occur in
the form of options, futures, forwards, or swap transactions. The purchase of
a spread transaction gives a Portfolio the right to sell or receive a security
or a cash payment with respect to an index at a fixed dollar spread or fixed
yield spread in relationship to another security or index which is used as a
benchmark. The purchase and sale of spread transactions will be used in
furtherance of a Portfolio's objectives and to protect a Portfolio against
adverse changes in the yield spread between high quality and lower quality
securities. Such protection is only provided during the life of the spread
transaction. The sale of spread transactions will be "covered" or "secured" as
described in the "Options", "Options on Foreign Currencies", "Futures
Contracts and Options on Futures Contracts", and "Swap Agreements and Options
on Swap Agreements" sections in the SAI.

The risk of loss on a spread transaction includes the premium and any
transaction costs paid by a Portfolio to obtain the option. There is no
assurance that closing transactions will be available.

FUTURES CONTRACTS AND FUTURES OPTIONS

APPLICABLE PORTFOLIOS: The High Yield Bond, Managed Bond, Government
Securities, Growth LT, Multi-Strategy, Bond and Income, and International
Portfolios may purchase and sell interest rate futures contracts and options
thereon ("futures options"). The Aggressive Equity, Growth LT, Equity Income,
Multi-Strategy, Equity, Equity Index, International, and Emerging Markets
Portfolios may purchase and sell stock index futures contracts and may
purchase options thereon. The Managed Bond, Government Securities, Aggressive
Equity, Growth LT, Bond and Income, International, and Emerging Markets
Portfolios may purchase and sell foreign currency futures contracts and
options thereon. The Emerging Markets Portfolio may invest in futures
contracts on securities, and in options thereon.

USE OF FUTURES. These investments, the purchase or sale of futures contracts
or options thereon, may be made for bona fide hedging purposes and as an
adjunct to a Portfolio's securities activities, or to increase total return.
In addition, a Portfolio may engage in cross-hedging activities, which involve
the sale of a futures contract on one foreign currency to hedge against
changes in exchange rates for a different ("proxy") currency if there is an
established historical pattern of correlation between the two currencies. A
Portfolio is required to collateralize or cover a futures transaction or
futures option as required by applicable regulations.

26
<PAGE>

hedging transaction may not correlate perfectly with price movements in the
assets being hedged. An incorrect correlation could result in a loss on both
the hedged assets in a Portfolio and/or the hedging vehicle, so that the
Portfolio's return might have been better had hedging not been attempted.

There can be no assurance that a liquid market will exist at a time when a
Portfolio seeks to close out a futures contract or a futures option position.
Most futures exchanges and boards of trade limit the amount of fluctuation
permitted in futures contract prices during a single day; once the daily limit
has been reached on a particular contract, no trades may be made that day at a
price beyond that limit. In addition, certain of these instruments are
relatively new and lack a deep secondary market. Lack of a liquid market for
any reason may prevent a Portfolio from liquidating an unfavorable position
and the Portfolio would remain obligated to meet margin requirements until the
position is closed.

The High Yield Bond, Multi-Strategy, Equity, Equity Income and Equity Index
Portfolios will only enter into futures contracts or futures options which are
standardized and traded on a U.S. exchange or board of trade, or similar
entity, or, in the case of futures options, for which an established over-the-
counter market exists. Each Portfolio is subject to limitations on the amount
that may be invested in futures and futures options transactions for purposes
other than bona fide hedging, under which initial margin deposits for futures
contracts and premiums paid for futures options may not exceed 5% of a
Portfolio's total assets (net of amounts that are "in the money").

FOREIGN FUTURES. The Managed Bond, Government Securities, Aggressive Equity,
Growth LT, Bond and Income, International, and Emerging Markets Portfolios may
trade futures contracts and options on futures contracts on U.S. domestic
markets as well as on exchanges located outside of the United States. Foreign
markets may offer advantages such as trading in indices that are not currently
traded in the United States. Foreign markets, however, may have greater risk
potential than domestic markets. Unlike trading on domestic commodity
exchanges, trading on foreign commodity exchanges is not regulated by the
Commodity Futures Trading Commission ("CFTC"). Foreign exchanges generally are
principal markets so that no common clearing facility exists, and a Portfolio
might be able to look only to the broker for performance of the contract.
Amounts received for foreign futures or foreign options transactions may not
be provided the same protection as funds received in respect of transactions
on United States futures exchanges. Trading in foreign futures or foreign
options contracts may not be afforded certain of the protective measures
provided by U.S. law and regulation, including the right to use reparations
proceedings before the CFTC and arbitration proceedings provided by the
National Futures Association or any domestic futures exchange. In addition,
any profits that a Portfolio might realize in trading could be eliminated by
adverse changes in the exchange rate of the currency in which the transaction
is denominated. Transactions on foreign exchanges may include both commodities
that are traded on domestic exchanges or boards of trade and those that are
not.

The Fund reserves the right to engage in other types of futures transactions
in the future.

ORGANIZATION AND MANAGEMENT OF THE FUND

HOW IS THE FUND ORGANIZED? The Fund was organized as a Massachusetts
business trust on May 4, 1987, and currently consists of fourteen separate
Portfolios. The assets of each Portfolio are segregated, and your interest is
limited to the Portfolio to which proceeds from your Variable Contract's
Accumulated Value is allocated.

WHO OVERSEES THE BUSINESS OF THE FUND? The business and affairs of the Fund
are managed under the direction of the Board of Trustees under the Fund's
Agreement and Declaration of Trust. The Trustees are Thomas C. Sutton, Glenn
S. Schafer, Richard L. Nelson, Lyman W. Porter, and Alan Richards. Mr. Sutton
is the President and Chairman of the Fund and is also Chairman and Chief
Executive Officer of Pacific Life. Mr. Schafer is also the Director and
President of Pacific Life. Messrs. Nelson, Porter, and Richards are
independent Trustees. See the SAI under the heading "Management of the Fund."

27
<PAGE>

WHO IS THE FUND'S INVESTMENT ADVISER? Pacific Life Insurance Company. Under
an Investment Advisory Agreement with the Fund, Pacific Life, subject to the
supervision of the Fund's Board of Trustees, administers the affairs of the
Fund and supervises the investment program for the Fund's Portfolios. Pacific
Life also provides support services to the Fund pursuant to an Agreement for
Support Services with the Fund.

MORE ABOUT PACIFIC LIFE. Pacific Life is a life insurance company that is
domiciled in California. Pacific Life's operations include both life insurance
and annuity products as well as financial and retirement services. As of the
end of 1997, Pacific Life had $80.0 billion of individual life insurance in
force and total admitted assets of approximately $31.8 billion. Pacific Life
has been ranked according to admitted assets as the 20th largest life
insurance carrier in the nation for 1997. The Pacific Life family of companies
has total assets and funds under management of over $236 billion. Pacific Life
is authorized to conduct life insurance and annuity business in the District
of Columbia and all states except New York. Its principal offices are located
at 700 Newport Center Drive, Newport Beach, California 92660.

Pacific Life was originally organized on January 2, 1868, under the name
"Pacific Mutual Life Insurance Company of California" and reincorporated as
"Pacific Mutual Life Insurance Company" on July 22, 1936. On September 1,
1997, Pacific Life converted from a mutual life insurance company to a stock
life insurance company ultimately controlled by a mutual holding company.
Pacific Life is a subsidiary of Pacific LifeCorp, a holding company which, in
turn, is a subsidiary of Pacific Mutual Holding Company, a mutual holding
company. Under their respective charters, Pacific Mutual Holding Company must
always hold at least 51% of the outstanding voting stock of Pacific LifeCorp,
and Pacific LifeCorp must always own 100% of the voting stock of Pacific Life.
Owners of Pacific Life's annuity contracts and life insurance policies have
certain membership interests in Pacific Mutual Holding Company, consisting
principally of the right to vote on the election of the Board of Directors of
the mutual holding company and on other matters, and certain rights upon
liquidation or dissolutions of the mutual holding company.

DOES PACIFIC LIFE MANAGE ANY OF THE PORTFOLIOS DIRECTLY? Pacific Life
directly manages both the High Yield Bond and the Money Market Portfolios.

Mr. Raymond J. Lee has primary responsibility for investment management of
the Money Market and the High Yield Bond Portfolios; is in charge of all
publicly traded bonds; and has responsibility for portfolio management of
pension assets for Pacific Life. Mr. Lee is Senior Vice President, Portfolio
Manager, of Pacific Life, and joined Pacific Life in 1976 after completing his
MBA in Finance from the Wharton School of the University of Pennsylvania. Mr.
Lee received his bachelor's degree in Economics from UCLA. He is a member of
the Los Angeles Society of Financial Analysts. Mr. Simon T. Lee, Vice
President, Securities, of Pacific Life, shares portfolio management
responsibilities for the High Yield Bond Portfolio and has responsibility for
portfolio management of Pacific Life's high yield and convertible bond assets.
Mr. Lee joined Pacific Life in 1985. He holds a bachelor's degree in Business
Administration and an MBA from Loyola Marymount University. He is a Chartered
Financial Analyst. Mr. Dale W. Patrick, Investment Analyst, shares in the
responsibility for investment management of the Money Market Portfolio. Mr.
Patrick joined Pacific Life in 1985 and holds a Bachelor of Arts degree in
Economics from the University of Colorado. Mr. Patrick has assisted in
management of the Money Market Portfolio since 1994. Mr. Patrick is also
responsible for the investment management of Pacific Life's short-term fixed
income investments.

Pacific Life and the Fund employ other investment advisory firms as
Portfolio Managers for all of the Fund's Portfolios, except the Money Market
and High Yield Bond Portfolios.

WHO IS THE PORTFOLIO MANAGER FOR THE MANAGED BOND AND GOVERNMENT SECURITIES
PORTFOLIOS? Pacific Investment Management Company ("PIMCO") is an investment
counseling firm founded in 1971, and had approximately $118 billion in assets
under management as of December 31, 1997. PIMCO is a subsidiary partnership of
PIMCO Advisors L.P. ("PIMCO Advisors"). A majority interest in PIMCO Advisors
is held by PIMCO Partners, G.P., a general partnership between PIMCO, a
California corporation and indirect wholly owned subsidiary of Pacific Life
Insurance Company, and PIMCO Partners, LLC, a limited liability company

28
<PAGE>

controlled by the PIMCO managing directors. PIMCO also provides investment
advisory services to PIMCO Funds and several other mutual fund portfolios and
to private accounts for pension and profit sharing plans. PIMCO's address is
840 Newport Center Drive, Suite 360, Newport Beach, CA 92660.

Effective January 1, 1997, for the services provided, Pacific Life pays
PIMCO a fee based on a percentage of the combined average daily net assets of
the Managed Bond and Government Securities Portfolios according to the
following schedule:

MANAGED BOND AND GOVERNMENT SECURITIES PORTFOLIOS

<TABLE>
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- --------------------
<S> <C>
.50% On first $25 million
.375% On next $25 million
.25% On excess
</TABLE>

WHO AT PIMCO MANAGES THE MANAGED BOND AND GOVERNMENT SECURITIES
PORTFOLIOS? Mr. John L. Hague, Managing Director and senior member of PIMCO's
Portfolio Management Group, has primary responsibility for investment
management of the Managed Bond and Government Securities Portfolios as well as
various other accounts of PIMCO. Mr. Hague joined Pacific Investment
Management Company in 1987. During his 15 years of investment experience, he
was associated with Salomon Brothers, Inc. specializing in international fixed
income products and mortgage securities and Morgan Guaranty in credit
research. Mr. Hague holds a bachelor's degree in Economic Analysis from
Bowdoin College and an MBA in Finance from Stanford University.

WHO IS THE PORTFOLIO MANAGER FOR THE GROWTH PORTFOLIO? Capital Guardian
Trust Company ("Capital Guardian"), a wholly-owned subsidiary of The Capital
Group Companies, Inc. ("CG"). Capital Guardian's address is 333 South Hope
Street, Los Angeles, California 90071. Capital Research and Management Company
("CRMC"), another wholly-owned subsidiary of CG, provides investment advisory
services to mutual funds known collectively as the American Funds Group.

For the services provided, Pacific Life pays Capital Guardian a fee based on
a percentage of the average daily net assets of the Growth Portfolio according
to the following schedule:

GROWTH PORTFOLIO

<TABLE>
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- --------------------
<S> <C>
.50% On first $30 million
.40% On next $30 million
.30% On excess
</TABLE>

WHO AT CAPITAL GUARDIAN MANAGES THE GROWTH PORTFOLIO? The following persons
are primarily responsible for the portfolio management of the Growth
Portfolio. Michael R. Ericksen, Senior Vice President of Capital Guardian, has
had 17 years experience as an investment professional (11 years with Capital
Guardian or its affiliates). Robert G. Kirby, Senior Partner of The Capital
Group Partners L.P., an affiliate of CRMC, has had 45 years of experience as
an investment professional (32 years with Capital Guardian or its affiliates).
K. Bryan Jacoboski, Vice President of Capital Guardian, has had 17 years of
experience as an investment professional (4 with Capital Guardian). He spent
11 years with Paine-Webber, where he was a Managing Director in equity
research prior to joining Capital Guardian in 1994. James S. Kang, Vice
President of Capital Guardian Research Company, has had 11 years experience as
an investment professional (10 years with Capital Guardian). Mr. Ericksen is
the lead portfolio manager, and along with Messrs. Kang, Kirby, and Jacoboski,
is responsible for management of the Portfolio.

29
<PAGE>

WHO IS THE PORTFOLIO MANAGER FOR THE AGGRESSIVE EQUITY PORTFOLIO? Alliance
Capital Management L.P. ("Alliance Capital") is a leading international
investment manager supervising client accounts with assets as of December 31,
1997 totaling $218.7 billion. Alliance Capital is a Delaware limited
partnership. Alliance Capital Management Corporation ("ACMC") is the general
partner of Alliance Capital (and conducts no other active business). As of
June 30, 1997 The Equitable Life Assurance Society of the United States
("Equitable"), ACMC, Inc. and Equitable Capital Management Corporation
("ECMC") were the beneficial owners of approximately 57.1% of the outstanding
units of Alliance Capital. ACMC, ECMC and ACMC, Inc. are wholly owned
subsidiaries of The Equitable Companies Incorporated, a Delaware corporation
("ECI"). As of September 30, 1997, AXA-UAP, a French insurance holding
company, owned approximately 59% of the issued and outstanding shares of the
common stock of ECI.

Alliance Capital currently serves as investment adviser to other mutual
funds, as well as individual, corporate, retirement, and charitable accounts.
As of December 31, 1997, Alliance Capital was retained as an investment
manager of employee benefit fund assets for 31 of the Fortune 100 companies.
Alliance Capital's principal office is located at 1345 Avenue of the Americas,
New York, New York and the firm has five additional offices in the United
States and subsidiaries and affiliate offices in nineteen cities worldwide.

Effective May 1, 1998, for the services provided, Pacific Life pays Alliance
Capital a fee based on a percentage of the Portfolio's average daily net
assets according to the following schedule:

AGGRESSIVE EQUITY PORTFOLIO

<TABLE>
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- ---------------------
<S> <C>
.60% On first $100 million
.45% On next $400 million
.40% On excess
</TABLE>

WHO AT ALLIANCE CAPITAL MANAGES THE AGGRESSIVE EQUITY PORTFOLIO? Kevin J.
O'Brien, Senior Vice President and Portfolio Manager, and Alden M. Stewart,
Executive Vice President and Portfolio Manager, are primarily responsible for
the day to day management of the Aggressive Equity Portfolio. Mr. O'Brien has
had 19 years of investment experience (10 years with Alliance Capital). Prior
to joining Alliance Capital in 1988, he was a partner at Campbell Advisors and
a portfolio manager at Connecticut Mutual Life Insurance. Mr. O'Brien holds a
B.A. from Amherst College and an M.A. and Ph.D. from Cornell University. He is
a Chartered Financial Analyst and a member of Phi Beta Kappa. Mr. Stewart has
had 27 years of investment experience (27 years with Alliance Capital or
affiliated companies). He began his career in 1971 as an analyst following
various industry groups and has been a portfolio manager since 1977. Mr.
Stewart holds a B.A. from the University of Oregon and an M.B.A. from the
University of Chicago.

WHO IS THE PORTFOLIO MANAGER FOR THE GROWTH LT PORTFOLIO? Janus Capital
Corporation ("Janus"). Kansas City Southern Industries, Inc. owns
approximately 83% of the outstanding voting stock of Janus. Janus' address is
100 Fillmore Street, Denver, Colorado 80206-4928. Janus currently serves as
investment adviser or subadviser to the Janus Funds, as well as other mutual
funds and individual, corporate, charitable, and retirement accounts.

Effective January 1, 1997, for the services provided, Pacific Life pays
Janus a fee based on a percentage of the average daily net assets of the
Growth LT Portfolio according to the following schedule:

GROWTH LT PORTFOLIO

<TABLE>
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- ---------------------
<S> <C>
.55% On first $100 million
.50% On next $400 million
.45% On excess
</TABLE>

30
<PAGE>

WHO AT JANUS MANAGES THE GROWTH LT PORTFOLIO? Warren B. Lammert, III, Vice
President of Janus, is primarily responsible for the day-to-day management and
implementation of Janus' investment strategy for the Growth LT Portfolio. Mr.
Lammert is portfolio manager and Executive Vice President of Janus Mercury
Fund and Janus Venture Fund, Executive Vice President of Janus Investment
Fund, and has been the portfolio manager of various growth oriented accounts
since 1991. He joined Janus as a securities analyst in 1987, taking an
educational sabbatical from 1988 to 1989. He received his undergraduate degree
in economics from Yale University and received his M.S. in economic history
(with distinction) from the London School of Economics, London, England. Mr.
Lammert is a Chartered Financial Analyst.

WHO IS THE PORTFOLIO MANAGER FOR THE EQUITY INCOME AND MULTI-STRATEGY
PORTFOLIOS? J.P. Morgan Investment Management Inc. ("J.P. Morgan Investment"),
a wholly-owned subsidiary of J.P. Morgan & Co. Incorporated ("Morgan"). J.P.
Morgan Investment's address is 522 Fifth Avenue, New York, New York 10036.
J.P. Morgan Investment is an investment manager for corporate, public, and
union employee benefit funds, foundations, endowments, insurance companies,
government agencies and the accounts of other institutional investors. Capital
Guardian served as portfolio manager to the Equity Income and Multi-Strategy
Portfolios from their commencement of operations in 1988 through December 31,
1993.

Effective January 1, 1997, for the services provided, Pacific Life pays J.P.
Morgan Investment a fee based on a percentage of the combined average daily
net assets of the Equity Income and Multi-Strategy Portfolios according to the
following schedule:

EQUITY INCOME AND MULTI-STRATEGY PORTFOLIOS

<TABLE>
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- ---------------------
<S> <C>
.45% On first $100 million
.40% On next $100 million
.35% On next $200 million
.30% On next $350 million
.20% On excess
</TABLE>

WHO AT J.P. MORGAN INVESTMENT MANAGES THE EQUITY INCOME AND MULTI-STRATEGY
PORTFOLIOS? William M. Riegel and William G. Tennille are primarily
responsible for the day-to-day management and implementation of J.P. Morgan
Investment's process for the Multi-Strategy Portfolio, and Henry D. Cavanna
shares responsibility with Mr. Riegel for the Equity Income Portfolio. William
M. Riegel, Managing Director, is a senior equity portfolio manager in the
Equity and Balanced Accounts Group. Joining Morgan in 1979, he became an
investment research analyst specializing in energy and machinery companies
after completing the firm's commercial bank management training program. Mr.
Riegel joined the Equity group in 1984, assisting with the management of the
Convertible Fund and separately managed accounts. He assumed responsibility
for managing convertible portfolios in 1987. Mr. Riegel graduated from
Williams College in 1978 and is a Chartered Financial Analyst. Henry D.
Cavanna, Managing Director, is a senior U.S. equity portfolio manager in the
U.S. Equity and Balanced Accounts Group. His responsibility for several major
institutional clients draws on his extensive experience in this area. Before
becoming a portfolio manager, he was responsible for marketing and business
development activities, while his first assignment at Morgan was in Pension
Administration. Mr. Cavanna was with the Wall Street firm, Harris Upham & Co.,
prior to joining Morgan in 1971. He received his B.A. degree from Boston
College and L.L.B. degree from the University of Pennsylvania. William G.
Tennille, Vice President, is a portfolio manager for separately managed and
commingled funds with an emphasis in mortgage securities and derivatives.
Prior to joining Morgan in 1992, he managed the investment portfolios of
Manufacturers Hanover Trust, Deposit Guaranty Bank, and First Florida Banks.
He is a graduate of the University of North Carolina.

WHO IS THE PORTFOLIO MANAGER FOR THE EQUITY PORTFOLIO AND BOND AND INCOME
PORTFOLIO? Goldman Sachs Asset Management ("Goldman Sachs"), a separate
operating division of Goldman, Sachs & Co.

31
<PAGE>

Goldman Sachs and its affiliates are the investment management division of
Goldman, Sachs & Co. Founded in 1869, Goldman, Sachs & Co. is one of the
world's largest investment banking firms and a leader in almost every field of
finance.

As of January 26, 1998, Goldman Sachs and its affiliates manage, administer
and distribute over $140 billion for institutional and individual investors
worldwide, including fixed income assets in excess of $32 billion for which
they acted as investment adviser. Headquartered in New York at One New York
Plaza, New York, New York 10004, Goldman Sachs and its affiliates have offices
in major U.S. cities as well as London, Tokyo and Singapore.

Effective May 1, 1998, for the services provided, Pacific Life pays Goldman
Sachs a fee based on a percentage of the combined average daily net assets of
the Equity and Bond and Income Portfolios according to the following schedule:

EQUITY AND BOND AND INCOME PORTFOLIOS

<TABLE>
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- ---------------------
<S> <C>
.35% On first $100 million
.30% On next $100 million
.25% On next $800 million
.20% On excess
</TABLE>

WHO AT GOLDMAN SACHS MANAGES THE EQUITY PORTFOLIO AND BOND AND INCOME
PORTFOLIO? Robert C. Jones, Managing Director, Victor H. Pinter, Vice
President, and Kent A. Clark, Vice President, are primarily responsible for
the day to day management of the Equity Portfolio. Mr. Jones brings 17 years
of investment experience to his work in developing and implementing Goldman
Sachs' quantitative equity management services. Prior to joining Goldman Sachs
in 1989, he was the senior quantitative analyst in the Investment Research
Department at Goldman Sachs & Co. and provided quantitative research for both
a major investment banking firm and an options consulting firm. Mr. Jones is a
Chartered Financial Analyst and holds a B.A. degree from Brown University and
an M.B.A. from the University of Michigan. Prior to joining Goldman Sachs in
1985, Mr. Pinter was a project manager in the Information Technology Division
of Goldman Sachs & Co and a consultant at Chase Econometrics/IDC. He holds a
B.S. degree from Brooklyn College and an M.B.A. from New York University's
Stern School of Business. Mr. Clark joined Goldman Sach's quantitative equity
management team in 1992. He is a Chartered Financial Analyst and holds a
Bachelor of Commerce degree from the University of Calgary and an M.B.A. from
the University of Chicago. Jonathan A. Beinner, Managing Director, and C.
Richard Lucy, Vice President, are primarily responsible for the day to day
management of the Bond and Income Portfolio. Mr. Beinner is co-head of the
U.S. Fixed Income Team and heads the mortgage-backed and asset-backed
securities group. He joined Goldman Sachs in 1990 after working in the trading
and arbitrage group of Franklin Savings Association. Mr. Beinner holds two
B.S. degrees from the University of Pennsylvania. Prior to joining Goldman
Sachs in 1992, Mr. Lucy spent nine years managing fixed income assets at Brown
Brothers Harriman & Co. He is a Chartered Financial Analyst and holds B.S. and
M.B.A. degrees from New York University.

WHO IS THE PORTFOLIO MANAGER OF THE EQUITY INDEX PORTFOLIO? Bankers Trust
Company ("BTCo"), a wholly-owned subsidiary of Bankers Trust New York
Corporation. BTCo's address is 130 Liberty Street, New York, New York 10006.
Bankers Trust conducts a variety of general banking and trust activities and
is a major supplier of financial services to the international and domestic
institutional markets. BTCo is a wholly-owned subsidiary of Bankers Trust New
York Corporation, the seventh largest bank holding company in the United
States. BTCo is responsible for the management of the Equity Index Portfolio.
As of December 31, 1997, BTCo managed assets approximating $317.8 billion.
BTCo is the investment manager to over 25 other mutual fund portfolios.

32
<PAGE>

For the services provided, Pacific Life pays a quarterly fee in advance to
BTCo, based on the net assets of the Equity Index Portfolio at the beginning
of each calendar quarter according to the following schedule:

EQUITY INDEX PORTFOLIO

<TABLE>
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- ---------------------
<S> <C>
.07% On first $100 million
.03% On next $100 million
.01% On excess
</TABLE>

The fee is subject to a minimum annual fee of $100,000 for the calendar year
1997 and each year thereafter.

WHO IS THE PORTFOLIO MANAGER OF THE INTERNATIONAL PORTFOLIO? Morgan Stanley
Asset Management Inc. ("Morgan Stanley"), a subsidiary of Morgan Stanley, Dean
Witter, Discover & Co. Morgan Stanley, whose address is 1221 Avenue of the
Americas, New York, New York 10020, became the Portfolio Manager effective
June 1, 1997. Morgan Stanley, together with its affiliated asset management
companies, conducts a worldwide portfolio management business and provides a
broad range of portfolio management services to customers in the United States
and abroad. As of December 31, 1997 Morgan Stanley, together with its
affiliated institutional asset management companies, had approximately $146
billion in assets under management as an investment manager or as a fiduciary
adviser. Morgan Stanley has been managing international securities since 1986.

Pacific Life will pay Morgan Stanley a fee at an annual rate of .35% based
on the average daily net assets of the International Portfolio.

WHO AT MORGAN STANLEY MANAGES THE INTERNATIONAL PORTFOLIO? Francine J.
Bovich, a Managing Director of Morgan Stanley, is primarily responsible for
the day-to-day investment management and implementation of Morgan Stanley's
investment strategy for the International Portfolio. Prior to joining Morgan
Stanley in 1993, Ms. Bovich was a Principal and Executive Vice President of
Westwood Management Corp., a registered investment adviser (1986-1993). Before
joining Westwood, she was a Managing Director of Citicorp Investment
Management, Inc. (Now Chancellor Capital Management), where she was
responsible for the Institutional Investment Management group (1980-1986). Ms.
Bovich began her investment career with Bankers Trust Company (1973-1980). She
holds a B.A. in Economics from Connecticut College and an M.B.A. in Finance
from New York University.

WHO IS THE PORTFOLIO MANAGER OF THE EMERGING MARKETS PORTFOLIO? Blairlogie
Capital Management ("Blairlogie"), a subsidiary partnership of PIMCO Advisors,
L.P., an affiliate of Pacific Life. Blairlogie's address is 4th Floor, 125
Princes Street, Edinburgh EH2 4AD, Scotland. Blairlogie Capital Management,
Ltd., the predecessor investment advisor to Blairlogie, commenced operations
in 1992. As of December 31, 1997, accounts managed by Blairlogie had combined
assets of approximately $647 million.

Effective January 1, 1997, for the services provided, Pacific Life pays
Blairlogie a fee based on a percentage of the average daily net assets of the
Emerging Markets Portfolio according to the following schedule:

EMERGING MARKETS PORTFOLIO

<TABLE>
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- --------------------
<S> <C>
.85% On first $50 million
.75% On next $50 million
.70% On next $50 million
.65% On next $50 million
.60% On excess
</TABLE>

33
<PAGE>

turn, specialize in selection of stocks within Europe, Asia, the Americas, and
in currency and derivatives. He previously served as a Senior Portfolio
Manager at Murray Johnstone in Glasgow, Scotland, responsible for
international investment management for North American clients, and at
Schroder Investment Management in London. Mr. Smith received his bachelor's
degree in Economics from London University and his MBA from Edinburgh
University. He is an Associate of the Institute of Investment Management and
Research. Gavin Dobson, Chief Executive Officer and Managing Director of
Blairlogie Capital Management since 1992, oversees the relationship with the
Fund. He has 20 years of investment experience including the position of
President and Chief Operating Officer of Murray Johnstone International in
Chicago, Illinois from 1989 to 1992. Qualified as a Scottish attorney in 1976,
Mr. Dobson has degrees in Economics from Dundee University and Law from
Edinburgh University. Messrs. Dobson and Smith are co-founders of Blairlogie.

HOW HAS THE FUND SECURED THE SERVICES OF THE INVESTMENT ADVISER AND THE
PORTFOLIO MANAGERS? The Fund has entered into an Investment Advisory Agreement
with Pacific Life under which Pacific Life serves as Investment Adviser to the
Fund. The Fund and Pacific Life have entered into Portfolio Management
Agreements with the Portfolio Managers. After initial two year terms, the
Investment Advisory Agreement and the Portfolio Management Agreements require
renewal by the Fund's Board of Trustees annually. Any of these agreements can
be terminated by the Fund's Board of Trustees. The Portfolio Management
Agreements can be terminated by Pacific Life or by any of the Portfolio
Managers. In the event of termination of a Portfolio Management Agreement, the
current Portfolio Manager could no longer service the applicable Portfolio.
Pacific Life could manage the applicable Portfolio directly or could recommend
a replacement to the Fund's Board of Trustees.

Under the Portfolio Management Agreements, the Portfolio Managers are
compensated by Pacific Life, and not by the Fund. Pacific Life derives the
amounts that it pays the Portfolio Managers from its own fees under the
Investment Advisory Agreement.

HOW MUCH DOES THE FUND PAY FOR THE ADVISORY SERVICES OF PACIFIC LIFE AND THE
PORTFOLIO MANAGERS? The Fund pays the Adviser for its services under the
Investment Advisory Agreement, a fee based on an annual percentage of the
average daily net assets of each Portfolio. For the Money Market Portfolio,
the Fund pays to the Adviser a fee at an annual rate of .40% of the first $250
million of the average daily net assets of the Portfolio, .35% of the next
$250 million of the average daily net assets of the Portfolio, and .30% of the
average daily net assets of the Portfolio in excess of $500 million. For the
Equity Index Portfolio, the Fund pays .25% of the first $100 million of the
average daily net assets of the Portfolio, .20% of the next $100 million of
the average daily net assets of the Portfolio, and .15% of the average daily
net assets of the Portfolio in excess of $200 million. For the Managed Bond,
High Yield Bond, Government Securities, and Bond and Income Portfolios, the
Fund pays .60% of the average daily net assets of each of the Portfolios. For
the Growth, Equity Income, Equity, and Multi-Strategy Portfolios, the Fund
pays .65% of the average daily net assets of each of the Portfolios. For the
Growth LT Portfolio, the Fund pays .75% of the average daily net assets of the
Portfolio. For the Aggressive Equity Portfolio, the Fund pays .80% of the
average daily net assets of the Portfolio. For the International Portfolio,
the Fund pays .85% of the average daily net assets of the Portfolio. For the
Emerging Markets Portfolio, the Fund pays 1.10% of the average daily net
assets of the Portfolio. These fees are computed and accrued daily and paid
monthly.

WHAT OTHER EXPENSES DOES THE FUND BEAR? The Fund bears all costs of its
operations. These costs may include expenses for custody, audit fees, fees and
expenses of the independent trustees, organizational expenses and other
expenses of its operations, including the cost of support services, and may,
if applicable, include extraordinary expenses such as expenses for special
consultants or legal expenses.

The Fund is also responsible for bearing the expense of various matters,
including, among other things, the expense of registering and qualifying the
Fund on state and federal levels, legal and accounting services, maintaining
the Fund's legal existence, shareholders' meetings and expenses associated
with preparing, printing and distributing reports, proxies and prospectuses to
shareholders.

34
<PAGE>

The Fund and Pacific Life entered into an Agreement for Support Services
effective October 1, 1995, pursuant to which Pacific Life provides support
services such as those described above. Under the terms of the Agreement for
Support Services, it is not intended that Pacific Life will profit from these
services to the Fund.

Fund expenses directly attributable to a Portfolio are charged to that
Portfolio; other expenses are allocated proportionately among all the
Portfolios in relation to the net assets of each Portfolio. For the period
ended December 31, 1997, the total annualized expenses of each Portfolio that
had commenced operations on or before such date were the following percentages
of average daily net assets: Money Market Portfolio--.44%, High Yield Bond
Portfolio--.65%, Managed Bond Portfolio--.66%, Government Securities
Portfolio--.66%, Growth Portfolio--.70%, Aggressive Equity Portfolio--.86%,
Growth LT Portfolio--.82%, Equity Income Portfolio--.70%, Multi-Strategy
Portfolio--.71%, Equity Portfolio--.70%, Bond and Income Portfolio--.66%,
Equity Index Portfolio--.23%, International Portfolio--1.02%, and Emerging
Markets Portfolio--1.46%. The expenses of each Portfolio, expressed as a
percentage of the Portfolio's average daily net assets, is shown under "Ratio
of Expenses to Average Net Assets" in the Financial Highlights section at the
beginning of this Prospectus for each year of each Portfolio's operation. More
information on the expenses of the Portfolios is included in the Portfolios'
Statements of Operations, which can be found in the financial statements
included in the Fund's annual and semi-annual reports sent to shareholders.

WHAT IS PACIFIC LIFE DOING TO LIMIT FUND EXPENSES? Pacific Life has agreed,
until at least December 31, 1999, to reimburse each Portfolio for its
operating expenses to the extent that such expenses, exclusive of advisory
fees, additional custodial charges associated with holding foreign securities,
foreign taxes on dividends, interest, or gains, and extraordinary expenses,
exceed 0.25% of the Portfolio's average daily net assets. Pacific Life began
this expense reimbursement policy in April 1989. There can be no assurance
that this policy will be continued beyond December 31, 1999.

WHO DISTRIBUTES THE FUND'S SHARES? Shares of the Fund are distributed
through Pacific Mutual Distributors, Inc. (the "Distributor" or "PMD") a
subsidiary of Pacific Life. PMD's address is 700 Newport Center Drive, Newport
Beach, California 92660. PMD is a broker-dealer registered with the SEC and a
member of the National Association of Securities Dealers. PMD acts as
Distributor without remuneration from the Fund.

WHO IS THE CUSTODIAN OF THE FUND? Investor's Fiduciary Trust Company
("IFTC") provides the Fund with portfolio accounting and custodial services.
IFTC's address is 801 Pennsylvania, Kansas City, Missouri 64105.

MORE ON THE FUND'S SHARES

HOW ARE SHARES REDEEMED? Shares of any Portfolio may be redeemed on any
business day upon receipt of a request for redemption from the insurance
company whose separate account owns the shares. Redemptions are effected at
the per share net asset value next determined after receipt of the redemption
request. Redemption proceeds will ordinarily be paid within seven days
following receipt of instructions in proper form, or sooner, if required by
law. The right of redemption may be suspended by the Fund or the payment date
postponed beyond seven days when the New York Stock Exchange is closed (other
than customary weekend and holiday closings) or for any period during which
trading thereon is restricted because an emergency exists, as determined by
the SEC, making disposal of portfolio securities or valuation of net assets
not reasonably practicable, and whenever the SEC has by order permitted such
suspension or postponement for the protection of shareholders. If the Board of
Trustees should determine that it would be detrimental to the best interests
of the remaining shareholders of a Portfolio to make payment wholly or partly
in cash, the Portfolio may pay the redemption price in whole or part by a
distribution in kind of securities from the Portfolio, in lieu of cash, in
conformity with applicable rules of the SEC. If shares are redeemed in kind,
the redeeming shareholder might incur brokerage costs in converting the assets
into cash. Under the Investment Company Act of 1940, the Fund is obligated to
redeem shares solely in cash up to the lesser of $250,000 or 1 percent of its
net assets during any 90-day period for any one shareholder.

30
<PAGE>

HOW IS THE VALUE OF THE PORTFOLIOS' SHARES DETERMINED? Shares of each
Portfolio are sold at their respective net asset values (without a sales
charge) computed after receipt of a purchase order. Net asset value of a share
is determined by dividing the value of a Portfolio's net assets by the number
of its shares outstanding. That determination is made once each business day,
Monday through Friday, exclusive of federal holidays usually at or about 4:00
p.m. New York City time, on each day that the New York Stock Exchange is open
for trading. The New York Stock Exchange and other exchanges usually close for
trading at 4:00 p.m. New York City time. In the event that the New York Stock
Exchange or other exchanges close early, the Fund normally will deem the
closing price of each Portfolio's assets to be the price of those assets at
4:00 p.m. New York City time. To calculate a Portfolio's net asset value, a
Portfolio's assets are valued and totaled, liabilities are subtracted, and the
balance, called net assets, is divided by the number of shares outstanding. In
general, the value of assets is based on actual or estimated market value,
with special provisions for assets not having readily available market
quotations and short-term debt securities. The value of foreign portfolio
securities traded on foreign exchanges is based upon the price of the close of
the exchange immediately preceding the time of the Fund's valuation, or, if
earlier, at the time of the Fund's valuation. Therefore, the calculation of
the net asset value of the International Portfolio or other Portfolios that
invest in foreign securities may not take place contemporaneously with the
determination of the prices of certain foreign securities used in the
calculation. Further, under the Fund's procedures, the prices of foreign
securities are determined using information derived from pricing services and
other sources. Prices derived under these procedures will be used in
determining daily net asset value. Information that becomes known to the Fund
or its agents after the time that net asset value is calculated on any
business day (which may be after 4:00 p.m. New York City time) may be assessed
in determining net asset value per share after the time of receipt of the
information, but will not be used to retroactively adjust the price of the
security so determined earlier or on a prior day. Events affecting the values
of portfolio securities that occur between the time their prices are
determined and the time the Portfolio's net asset value is determined may not
be reflected in the calculation of net asset value. If events materially
affecting the value of such securities occur during such period, then these
securities may be valued at fair value as determined by the management and
approved in good faith by the Board of Trustees. In determining the fair value
of securities, the Fund may consider available information including
information that becomes known after 4:00 p.m. New York City time, and the
values that are determined will be deemed to be the price at 4:00 p.m. New
York City time. The Money Market Portfolio's securities are valued using the
amortized cost method of valuation, which involves valuing a security at cost
on the date of acquisition and thereafter assuming a constant accretion of a
discount or amortization of a premium to maturity. The net asset values per
share of each Portfolio will fluctuate in response to changes in market
conditions and other factors. See the SAI.

31
<PAGE>

in excess of 100% in certain years, which could be considered relatively high.
Such a Portfolio turnover rate may result in higher brokerage commissions or
other transactional expenses for these Portfolios than for other Portfolios,
which expenses must be borne, directly or indirectly, by a Portfolio and
ultimately by the Portfolio's shareholders. In addition, high portfolio
turnover may affect the ability of a Portfolio to qualify as a regulated
investment company. See "Taxation" and "Portfolio Turnover" in the SAI.

DO ANY ISSUES ARISE FROM THE FUND OFFERING ITS SHARES FOR VARIABLE ANNUITIES
AND VARIABLE LIFE INSURANCE POLICIES? The Fund serves as an investment medium
for both variable annuity contracts and variable life insurance policies. The
Fund currently does not foresee any disadvantages to Variable Contract Owners
due to the fact that the Fund serves as an investment medium for both variable
life insurance policies and annuity contracts; however, due to differences in
tax treatment or other considerations, it is theoretically possible that the
interests of owners of annuity contracts and insurance policies for which the
Fund serves as investment medium might at some time be in conflict. However,
the Fund's Board of Trustees and Pacific Life are required to monitor events
to identify any material conflicts between variable annuity contract owners
and variable life policy owners, and will determine what action, if any,
should be taken in the event of such a conflict. If such a conflict were to
occur, Pacific Life or another insurance company participating in the Fund
might be required to redeem the investment of one or more of its separate
accounts from the Fund. This might force the Fund to sell securities at
disadvantageous prices.

OTHER INFORMATION ABOUT THE FUND

32
<PAGE>

For more detailed information concerning the Adviser's year 2000 compliance
efforts, see the section entitled "Preparation for the Year 2000" in the
accompanying Prospectus for the Separate Account.

33
<PAGE>

TOTAL RETURN

<TABLE>
<CAPTION>
MONEY HIGH YIELD MANAGED GOVERNMENT GROWTH EQUITY
MARKET BOND BOND SECURITIES LT INCOME(4)
YEAR ENDED % % % % % %
- ---------- ------ ---------- --------- ---------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
12/31/84 -- -- -- -- -- --
12/31/85 -- -- -- -- -- --
12/31/86 -- -- -- -- -- --
12/31/87 -- -- -- -- -- --
12/31/88(1) 5.85 8.30 7.11 6.65 -- 8.25
12/31/89 8.73 4.16 14.74 14.61 -- 29.22
12/31/90 7.92 0.38 8.52 8.01 -- (7.54)
12/31/91 5.74 24.58 17.03 16.67 -- 31.42
12/31/92 3.22 18.72 8.68 7.52 -- 5.36
12/31/93 2.58 18.01 11.63 10.79 -- 8.29
12/31/94(3) 3.76 0.42 (4.36) (5.10) 13.25 (0.28)
12/31/95 5.54 18.87 19.04 18.81 36.75 31.66
12/31/96 5.07 11.31 4.25 2.94 17.87 19.43
12/31/97 5.28 9.44 9.92 9.48 10.96 28.60
Average annual total
return
(for all years
shown) 5.35 11.13 9.47 8.83 19.31 14.61
<CAPTION>
MULTI- BOND AND EQUITY
STRATEGY(4) EQUITY(5) INCOME(5) INDEX INTERNATIONAL(4)
YEAR ENDED % % % % %
- ---------- ----------- ---------- --------- ------ ----------------
<S> <C> <C> <C> <C> <C>
12/31/84 -- 9.80 14.76 -- --
12/31/85 -- 30.02 27.61 -- --
12/31/86 -- 20.92 21.39 -- --
12/31/87 -- 2.18 (2.09) -- --
12/31/88(1) 6.85 7.19 6.37 -- 17.69
12/31/89 23.42 30.12 17.04 -- 20.51
12/31/90 (1.47) (2.55) 3.27 -- (13.48)
12/31/91(2) 24.03 29.77 24.32 24.88 10.92
12/31/92 5.57 6.30 8.09 6.95 (9.78)
12/31/93 9.25 16.06 19.39 9.38 30.02
12/31/94 (1.50) (2.87) (8.36) 1.05 3.01
12/31/95 25.25 23.80 33.71 36.92 10.56
12/31/96 12.56 28.03 (0.80) 22.36 21.89
12/31/97 19.62 18.18 16.32 32.96 9.28
Average annual total
return
(for all years
shown) 11.93 15.01 12.48 18.75 9.25
</TABLE>
- --------
(1) Information is for the period from January 4, 1988 (commencement of
operations) to December 31, 1988 except as otherwise indicated.
(2) Information for the Equity Index Portfolio is for the period from January
30, 1991 (commencement of operations) to December 31, 1991.
(3) Information for the Growth LT Portfolio is for the period from January 4,
1994 (commencement of operations) to December 31, 1994.
(4) The performance results of the Equity Income and Multi-Strategy Portfolios
through December 31, 1993 and of the International Portfolio through
December 31, 1996 were achieved by different Portfolio Managers. J.P.
Morgan Investment began serving as Portfolio Manager to the Equity Income
Portfolio and Multi-Strategy Portfolio on January 1, 1994 and Morgan
Stanley began serving as Portfolio Manager of the International Portfolio
on June 1, 1997.
(5) The performance results of the Equity Portfolio and the Bond and Income
Portfolio are based on the performance of predecessor portfolios (series)
of Pacific Corinthian Variable Fund, which began their first full year of
operations on January 1, 1984 and were acquired by the Fund on December
31, 1994. Goldman Sachs Asset Management began serving as Portfolio
Manager to the Equity and Bond and Income Portfolios on May 1, 1998. Prior
to May 1, 1998, a different firm served as Portfolio Manager and achieved
the performance results shown through December 31, 1997.

34
<PAGE>

PRIOR PERFORMANCE OF COMPARABLE ACCOUNTS MANAGED BY GOLDMAN SACHS

The table below sets forth the performance data relating to the historical
performance of the Goldman Sachs CORE Large Cap Growth Composite
("Composite").

THE FOLLOWING PERFORMANCE DATA DOES NOT REFLECT THE DEDUCTION FOR SEPARATE
ACCOUNT OR CONTRACT LEVEL CHARGES.

35
<PAGE>

TOTAL RETURN FOR THE GOLDMAN SACHS CORE LARGE CAP
GROWTH COMPOSITE AND THE RUSSELL 1000 GROWTH INDEX

<TABLE>
<CAPTION>
GOLDMAN SACHS CORE
LARGE CAP GROWTH COMPOSITE
ADJUSTED TO REFLECT
GOLDMAN SACHS CORE EXPENSES OF THE EQUITY RUSSELL 1000
LARGE CAP GROWTH COMPOSITE* PORTFOLIO** GROWTH INDEX+
- ------------------------------------------------------------------------------------------
ANNUAL ANNUAL ANNUAL
YEAR TOTAL RETURN (%) TOTAL RETURN (%) TOTAL RETURN (%)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1997 32.46 32.41 30.49
1996 29.37 29.26 23.12
1995 38.11 37.98 37.19
1994 7.44 7.02 0.60
1993 12.09 11.72 0.87
1992 0.33 (0.10) N/A
- ------------------------------------------------------------------------------------------
<CAPTION>
TIME PERIOD AVERAGE ANNUAL AVERAGE ANNUAL AVERAGE ANNUAL
(THRU 12/31/97) TOTAL RETURN (%) TOTAL RETURN (%) TOTAL RETURN (%)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 year 32.46 32.41 30.49
3 years 33.26 33.19 30.11
5 years 23.31 23.15 18.40
Inception
(12/1/91) 21.55 21.37 17.54
</TABLE>
* Returns reflect the average investment advisory fees and expenses charged
to the accounts in the Composite. Expenses do not include the expenses for
custody (or other expenses for mutual funds), which if included, could
lessen performance and which are expenses the Equity Portfolio bears.

** Returns reflect expenses for each year.

36
<PAGE>

APPENDIX

DESCRIPTION OF BOND RATINGS

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

37
<PAGE>

bonds will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposure to adverse
conditions.

38
<PAGE>

[LOGO OF PACIFIC SELECT FUND]

PACIFIC SELECT FUND

INVESTMENT ADVISER Morgan Stanley Asset Management Inc.
Pacific Life Insurance Company 1221 Avenue of the Americas
700 Newport Center Drive New York, New York 10020
Post Office Box 9000
Newport Beach, California 92660
DISTRIBUTOR
Pacific Mutual Distributors, Inc.
PORTFOLIO MANAGERS Member: NASD & SIPC
Bankers Trust Company 700 Newport Center Drive
130 Liberty Street P.O. Box 9000
New York, New York 10006 Newport Beach, California 92660

Goldman Sachs Asset Management CUSTODIAN
One New York Plaza Investors Fiduciary Trust Company
New York, New York 10004 801 Pennsylvania
Kansas City, Missouri 64105
Janus Capital Corporation
100 Fillmore Street AUDITORS
Denver, Colorado 80206-4928 Deloitte & Touche LLP
695 Town Center Drive
J.P. Morgan Investment Management Inc. Suite 1200
522 Fifth Avenue Costa Mesa, California 92626
New York, New York 10036

COUNSEL
Pacific Investment Management Company Dechert Price & Rhoads
840 Newport Center Drive, Suite 360 1775 Eye Street, N.W.
Newport Beach, California 92660 Washington, D.C. 20006-2401

Prospectus dated May 1, 1998

FORM NO. 1010-8A

<PAGE>

STATEMENT OF ADDITIONAL INFORMATION

<PAGE>

[LOGO of PACIFIC SELECT FUND]

PACIFIC SELECT FUND

STATEMENT OF ADDITIONAL INFORMATION

DATE: MAY 1, 1998

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

Pacific Select Fund (the "Fund") is an open-end diversified management
investment company currently offering fourteen separate investment Portfolios:
the Money Market Portfolio; the High Yield Bond Portfolio; the Managed Bond
Portfolio; the Government Securities Portfolio; the Growth Portfolio; the
Aggressive Equity Portfolio; the Growth LT Portfolio; the Equity Income
Portfolio; the Multi-Strategy Portfolio; the Equity Portfolio; the Bond and
Income Portfolio; the Equity Index Portfolio; the International Portfolio; and
the Emerging Markets Portfolio. The Fund's Adviser is Pacific Life Insurance
Company.

This Statement of Additional Information ("SAI") is intended to supplement
the information provided to investors in the Prospectus dated May 1, 1998, of
the Fund and has been filed with the Securities and Exchange Commission as
part of the Fund's Registration Statement. Investors should note, however,
that this SAI is not itself a prospectus and should be read carefully in
conjunction with the Fund's Prospectus and retained for future reference. The
contents of this SAI are incorporated by reference in the Prospectus in their
entirety. A copy of the Prospectus may be obtained free of charge from the
Fund at the address and telephone numbers listed below.

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

Distributor:

Pacific Mutual Distributors, Inc.
700 Newport Center Drive
P.O. Box 9000
Newport Beach, CA 92660
(800) 800-7681

Adviser:

Pacific Life Insurance Company
700 Newport Center Drive
P.O. Box 9000
Newport Beach, CA 92660
(800) 800-7681
<PAGE>

TABLE OF CONTENTS

<TABLE>
<S> <C>
INTRODUCTION................................................................ 1
INVESTMENT POLICIES FOR MONEY MARKET PORTFOLIO.............................. 1
SECURITIES AND INVESTMENT TECHNIQUES........................................ 1
U.S. Government Securities................................................ 1
Mortgage-Related Securities............................................... 2
Mortgage Pass-Through Securities........................................ 2
GNMA Certificates....................................................... 2
FNMA and FHLMC Mortgage-Backed Obligations.............................. 3
Collateralized Mortgage Obligations (CMOs).............................. 3
FHLMC Collateralized Mortgage Obligations............................... 4
Other Mortgage-Related Securities....................................... 4
CMO Residuals........................................................... 5
Stripped Mortgage-Backed Securities..................................... 5
Mortgage Dollar Rolls................................................... 6
Other Asset-Backed Securities............................................. 6
High Yield Bonds.......................................................... 6
Bank Obligations.......................................................... 7
Municipal Securities...................................................... 9
Corporate Debt Securities................................................. 9
Variable and Floating Rate Securities..................................... 10
Commercial Paper.......................................................... 10
Convertible Securities.................................................... 11
Repurchase Agreements..................................................... 12
Borrowing................................................................. 13
Reverse Repurchase Agreements and Other Borrowings........................ 13
Firm Commitment Agreements and When-Issued Securities..................... 13
Loans of Portfolio Securities............................................. 14
Short Sales Against the Box............................................... 14
Restricted Securities (Private Placements)................................ 14
Foreign Securities........................................................ 15
Foreign Currency Transactions............................................. 17
Forward Foreign Currency Contracts...................................... 17
Options................................................................... 19
Purchasing and Writing Options on Securities............................ 19
Purchasing Options on Stock Indexes..................................... 20
Risks of Options Transactions........................................... 21
Spread Transactions..................................................... 21
Options on Foreign Currencies............................................. 22
Investments in SPDRs...................................................... 23
Futures Contracts and Options on Futures Contracts........................ 24
Interest Rate Futures................................................... 24
Stock Index Futures..................................................... 24
Futures Options......................................................... 25
Limitations............................................................. 26
Risks Associated with Futures and Futures Options....................... 26
Foreign Currency Futures and Options Thereon.............................. 28
Swap Agreements and Options on Swap Agreements............................ 28
Structured Notes.......................................................... 28
Warrants and Rights....................................................... 28
Duration.................................................................. 29
</TABLE>

i
<PAGE>

<TABLE>
<S> <C>
INVESTMENT RESTRICTIONS..................................................... 30
Fundamental Investment Restrictions....................................... 30
Nonfundamental Investment Restrictions.................................... 31
MANAGEMENT OF THE FUND...................................................... 33
Trustees and Officers..................................................... 33
Investment Adviser........................................................ 34
Portfolio Management Agreements........................................... 36
Distribution of Fund Shares............................................... 41
Purchases and Redemptions................................................. 41
PORTFOLIO TRANSACTIONS AND BROKERAGE........................................ 42
Investment Decisions...................................................... 42
Brokerage and Research Services........................................... 42
Portfolio Turnover........................................................ 44
NET ASSET VALUE............................................................. 44
PERFORMANCE INFORMATION..................................................... 46
TAXATION.................................................................... 48
Distributions............................................................. 49
Hedging Transactions...................................................... 50
OTHER INFORMATION........................................................... 50
Concentration Policy...................................................... 50
Capitalization............................................................ 50
Voting Rights............................................................. 50
Custodian and Transfer Agency and Dividend Disbursing Services............ 51
Financial Statements...................................................... 51
Independent Auditors...................................................... 51
Counsel................................................................... 51
Registration Statement.................................................... 51
</TABLE>

ii
<PAGE>

(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>

INTRODUCTION

This SAI is designed to elaborate upon information contained in the
Prospectus, including the discussion of certain securities and investment
techniques. The more detailed information contained herein is intended solely
for investors who have read the Prospectus and are interested in a more
detailed explanation of certain aspects of the Fund's securities and
investment techniques. Captions and defined terms in this SAI generally
correspond to like captions and terms in the Prospectus.

INVESTMENT POLICIES FOR MONEY MARKET PORTFOLIO

The investment objective and investment policies of the Money Market
Portfolio are described in the Prospectus. The following description presents
more detailed information on investment policies that apply to the Portfolio,
and is intended to supplement the information provided in the Prospectus. A
money market instrument will be considered to be highest quality (1) if the
instrument (or other comparable short-term instrument of the same issuer) is
rated in the highest rating category, (i.e., Aaa or Prime-1 by Moody's
Investors Service, Inc. ("Moody's"), AAA or A-1 by Standard & Poor's Rating
Services ("S&P")) by (i) any two nationally recognized statistical rating
organizations ("NRSROs") or, (ii) if rated by only one NRSRO, by that NRSRO;
(2) an unrated security that is of comparable quality to a security in the
highest rating category as determined by the Adviser; or (3) a U.S. Government
security. With respect to 5% of its total assets, measured at the time of
investment, the Portfolio may also invest in money market instruments that are
in the second-highest rating category for short-term debt obligations (i.e.,
rated Aa or Prime-2 by Moody's or AA or A-2 by S&P). A money market instrument
will be considered to be in the second-highest rating category under the
criteria described above with respect to instruments considered highest
quality, as applied to instruments in the second-highest rating category. The
quality of securities subject to guarantees may be determined based solely on
the quality of the guarantee. Additional eligibility restrictions apply with
respect to guarantees and demand features.

The Portfolio may not invest more than 5% of its total assets, measured at
the time of investment, in securities of any one issuer that are of the
highest quality, except that this limitation shall not apply to U.S.
Government securities and repurchase agreements thereon. The Portfolio may not
invest more than the greater of 1% of its total assets or $1,000,000, measured
at the time of investment, in securities of any one issuer that are in the
second-highest rating category. In addition, securities subject to guarantees
not issued by a person in a control relationship with the issuer of such
securities are not subject to the preceding diversification requirements.
However, the Portfolio must generally, with respect to 75% of its total
assets, invest no more than 10% of its total assets in securities issued by or
subject to guarantees or demand features from the same entity. In the event
that an instrument acquired by the Portfolio is downgraded or otherwise ceases
to be of the quality that is eligible for the Portfolio, the Adviser, under
procedures approved by the Board of Trustees shall promptly reassess whether
such security presents minimal credit risk and determine whether or not to
retain the instrument.

SECURITIES AND INVESTMENT TECHNIQUES

U.S. GOVERNMENT SECURITIES

All Portfolios may invest in U.S. Government securities. U.S. Government
securities are obligations of, or guaranteed by, the U.S. Government, its
agencies, or instrumentalities. Treasury bills, notes, and bonds are direct
obligations of the U.S. Treasury and they differ with respect to certain items
such as coupons, maturities, and dates of issue. Treasury bills have a
maturity of one year or less. Treasury notes have maturities of one to ten
years and Treasury bonds generally have a maturity of greater than ten years.
Securities guaranteed by the U.S. Government include federal agency
obligations guaranteed as to principal and interest by the U.S. Treasury (such
as GNMA certificates (described below) and Federal Housing Administration
debentures). In guaranteed securities, the payment of principal and interest
is unconditionally guaranteed by the U.S. Government, and thus they are of the
highest credit quality. Such direct obligations or guaranteed securities are
subject to variations in market value due to fluctuations in interest rates,
but, if held to maturity, the U.S. Government is obligated to or guarantees to
pay them in full.

1
<PAGE>

Securities issued by U.S. Government instrumentalities and certain federal
agencies are neither direct obligations of, nor guaranteed by, the U.S.
Treasury. However, they involve federal sponsorship in one way or another:
some are backed by specific types of collateral; some are supported by the
issuer's right to borrow from the U.S. Treasury; some are supported by the
discretionary authority of the U.S. Treasury to purchase certain obligations
of the issuer; others are supported only by the credit of the issuing
government agency or instrumentality. These agencies and instrumentalities
include, but are not limited to Federal National Mortgage Association, Federal
Home Loan Bank, Federal Land Banks, Farmers Home Administration, Central Bank
for Cooperatives, Federal Intermediate Credit Banks, Federal Financing Bank,
Farm Credit Banks, and the Tennessee Valley Authority.

MORTGAGE-RELATED SECURITIES

Mortgage-related securities are interests in pools of mortgage loans made to
residential home buyers, including mortgage loans made by savings and loan
institutions, mortgage banks, commercial banks, and others. Pools of mortgage
loans are assembled as securities for sale to investors by various
governmental, government-related, and private organizations. The High Yield
Bond, Managed Bond, Government Securities, Aggressive Equity, Growth LT,
Multi-Strategy, Equity, and Bond and Income Portfolios, and the Money Market
Portfolio, subject to its investment policies, may invest in mortgage-related
securities as well as debt securities which are secured with collateral
consisting of mortgage-related securities, and in other types of mortgage-
related securities. For information concerning the characterization of
mortgage-related securities (including collateralized mortgage obligations)
for various purposes including the Fund's policies concerning diversification
and concentration, see "Concentration Policy" on page 50.

Mortgage Pass-Through Securities. These are securities representing
interests in "pools" of mortgages in which payments of both interest and
principal on the securities are made periodically, in effect "passing through"
periodic payments made by the individual borrowers on the residential mortgage
loans which underlie the securities (net of fees paid to the issuer or
guarantor of the securities). Early repayment of principal on mortgage pass-
through securities (arising from prepayments of principal due to sale of the
underlying property, refinancing, or foreclosure, net of fees and costs which
may be incurred) may expose a Portfolio to a lower rate of return upon
reinvestment of principal. Payment of principal and interest on some mortgage
pass-through securities may be guaranteed by the full faith and credit of the
U.S. Government (in the case of securities guaranteed by the Government
National Mortgage Association, or "GNMAs"); or guaranteed by agencies or
instrumentalities of the U.S. Government (in the case of securities guaranteed
by the Federal National Mortgage Association ("FNMA") or the Federal Home Loan
Mortgage Corporation ("FHLMC"), which are supported only by the discretionary
authority of the U.S. Government to purchase the agency's obligations).
Mortgage pass-through securities created by nongovernmental issuers (such as
commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers, and other secondary market issuers) may be
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit, which may be
issued by governmental entities, private insurers, or the mortgage poolers.

GNMA Certificates. GNMA certificates are mortgage-backed securities
representing part ownership of a pool of mortgage loans on which timely
payment of interest and principal is guaranteed by the full faith and credit
of the U.S. Government. GNMA is a wholly-owned U.S. Government corporation
within the Department of Housing and Urban Development. GNMA is authorized to
guarantee, with the full faith and credit of the U.S. Government, the timely
payment of principal and interest on securities issued by institutions
approved by GNMA (such as savings and loan institutions, commercial banks, and
mortgage bankers) and backed by pools of mortgages insured by the Federal
Housing Administration ("FHA"), or guaranteed by the Department of Veterans
Affairs ("VA"). GNMA certificates differ from typical bonds because principal
is repaid monthly over the term of the loan rather than returned in a lump sum
at maturity. Because both interest and principal payments (including
prepayments) on the underlying mortgage loans are passed through to the holder
of the certificate, GNMA certificates are called "pass-through" securities.

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Interests in pools of mortgage-related securities differ from other forms of
debt securities, which normally provide for periodic payment of interest in
fixed amounts with principal payments at maturity or specified call dates.
Instead, these securities provide a periodic payment which consists of both
interest and principal payments. In effect, these payments are a "pass-
through" of the periodic payments made by the individual borrowers on the
residential mortgage loans, net of any fees paid to the issuer or guarantor of
such securities. Additional payments are caused by repayments of principal
resulting from the sale of the underlying residential property, refinancing or
foreclosure, net of fees or costs which may be incurred. Mortgage-related
securities issued by GNMA are described as "modified pass-through" securities.
These securities entitle the holder to receive all interest and principal
payments owed on the mortgage pool, net of certain fees, at the scheduled
payment dates regardless of whether or not the mortgagor actually makes the
payment. Although GNMA guarantees timely payment even if homeowners delay or
default, tracking the "pass-through" payments may, at times, be difficult.
Expected payments may be delayed due to the delays in registering the newly
traded paper securities. The custodian's policies for crediting missed
payments while errant receipts are tracked down may vary. Other mortgage-
backed securities such as those of FHLMC and FNMA trade in book-entry form and
are not subject to the risk of delays in timely payment of income.

Although the mortgage loans in the pool will have maturities of up to 30
years, the actual average life of the GNMA certificates typically will be
substantially less because the mortgages will be subject to normal principal
amortization and may be prepaid prior to maturity. Early repayments of
principal on the underlying mortgages may expose a Portfolio to a lower rate
of return upon reinvestment of principal. Prepayment rates vary widely and may
be affected by changes in market interest rates. In periods of falling
interest rates, the rate of prepayment tends to increase, thereby shortening
the actual average life of the GNMA certificates. Conversely, when interest
rates are rising, the rate of prepayment tends to decrease, thereby
lengthening the actual average life of the GNMA certificates. Accordingly, it
is not possible to accurately predict the average life of a particular pool.
Reinvestment of prepayments may occur at higher or lower rates than the
original yield on the certificates. Due to the prepayment feature and the need
to reinvest prepayments of principal at current rates, GNMA certificates can
be less effective than typical bonds of similar maturities at "locking in"
yields during periods of declining interest rates, although they may have
comparable risks of decline in value during periods of rising interest rates.

FNMA and FHLMC Mortgage-Backed Obligations. Government-related guarantors
(i.e., not backed by the full faith and credit of the U.S. Government) include
FNMA and FHLMC. FNMA, a federally chartered and privately-owned corporation,
issues pass-through securities representing interests in a pool of
conventional mortgage loans. FNMA guarantees the timely payment of principal
and interest but this guarantee is not backed by the full faith and credit of
the U.S. Government. FNMA is a government sponsored corporation owned entirely
by private stockholders. It is subject to general regulation by the Secretary
of Housing and Urban Development. FNMA purchases conventional (i.e., not
insured or guaranteed by any government agency) residential mortgages from a
list of approved seller/servicers which include state and federally-chartered
savings and loan associations, mutual savings banks, commercial banks and
credit unions, and mortgage bankers. FHLMC, a corporate instrumentality of the
United States, was created by Congress in 1970 for the purpose of increasing
the availability of mortgage credit for residential housing. Its stock is
owned by the 12 Federal Home Loan Banks. FHLMC issues Participation
Certificates ("PCs") which represent interests in conventional mortgages from
FHLMC's national portfolio. FHLMC guarantees the timely payment of interest
and ultimate collection of principal and maintains reserves to protect holders
against losses due to default, but PCs are not backed by the full faith and
credit of the U.S. Government. As is the case with GNMA certificates, the
actual maturity of and realized yield on particular FNMA and FHLMC pass-
through securities will vary based on the prepayment experience of the
underlying pool of mortgages.

Collateralized Mortgage Obligations (CMOs). A CMO is a hybrid between a
mortgage-backed bond and a mortgage pass-through security. Similar to a bond,
interest and prepaid principal is paid, in most cases, semiannually. CMOs may
be collateralized by whole mortgage loans but are more typically
collateralized by portfolios of mortgage pass-through securities guaranteed by
GNMA, FHLMC, or FNMA, and their income streams.

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CMOs are structured into multiple classes, each bearing a different stated
maturity. Actual maturity and average life will depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments,
generally is first returned to investors holding the shortest maturity class.
Investors holding the longer maturity classes receive principal only after the
first class has been retired. An investor is partially guarded against a
sooner than desired return of principal because of the sequential payments.

In a typical CMO transaction, a corporation ("issuer") issues multiple
series (e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond
offering are used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third party trustee as security
for the Bonds. Principal and interest payments from the Collateral are used to
pay principal on the Bonds in the order A, B, C, Z. The series A, B, and C
Bonds all bear current interest. Interest on the series Z Bond is accrued and
added to principal and a like amount is paid as principal on the series A, B,
or C Bond currently being paid off. When the series A, B, and C Bonds are paid
in full, interest and principal on the series Z Bond begins to be paid
currently. With some CMOs, the issuer serves as a conduit to allow loan
originators (primarily builders or savings and loan associations) to borrow
against their loan portfolios.

FHLMC Collateralized Mortgage Obligations. FHLMC CMOs are debt obligations
of FHLMC issued in multiple classes having different maturity dates which are
secured by the pledge of a pool of conventional mortgage loans purchased by
FHLMC. Unlike FHLMC PCs, payments of principal and interest on the CMOs are
made semiannually, as opposed to monthly. The amount of principal payable on
each semiannual payment date is determined in accordance with FHLMC's
mandatory sinking fund schedule, which, in turn, is equal to approximately
100% of FHA prepayment experience applied to the mortgage collateral pool. All
sinking fund payments in the CMOs are allocated to the retirement of the
individual classes of bonds in the order of their stated maturities. Payment
of principal on the mortgage loans in the collateral pool in excess of the
amount of FHLMC's minimum sinking fund obligation for any payment date are
paid to the holders of the CMOs as additional sinking fund payments. Because
of the "pass-through" nature of all principal payments received on the
collateral pool in excess of FHLMC's minimum sinking fund requirement, the
rate at which principal of the CMOs is actually repaid is likely to be such
that each class of bonds will be retired in advance of its scheduled maturity
date.

If collection of principal (including prepayments) on the mortgage loans
during any semiannual payment period is not sufficient to meet FHLMC's minimum
sinking fund obligation on the next sinking fund payment date, FHLMC agrees to
make up the deficiency from its general funds.

Criteria for the mortgage loans in the pool backing the CMOs are identical
to those of FHLMC PCs. FHLMC has the right to substitute collateral in the
event of delinquencies and/or defaults.

Other Mortgage-Related Securities. Commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers, and
other secondary market issuers also create pass-through pools of conventional
residential mortgage loans. Such issuers may, in addition, be the originators
and/or servicers of the underlying mortgage loans as well as the guarantors of
the mortgage-related securities. Pools created by such non-governmental
issuers generally offer a higher rate of interest than government and
government-related pools because there are no direct or indirect government or
agency guarantees of payments in the former pools. However, timely payment of
interest and principal of these pools may be supported by various forms of
insurance or guarantees, including individual loan, title, pool and hazard
insurance, and letters of credit. The insurance and guarantees are issued by
governmental entities, private insurers, and the mortgage poolers. Such
insurance and guarantees and the creditworthiness of the issuers thereof will
be considered in determining whether a mortgage-related security meets a
Portfolio's investment quality standards. There can be no assurance that the
private insurers or guarantors can meet their obligations under the insurance
policies or guarantee arrangements. A Portfolio may buy mortgage-related
securities without insurance or guarantees, if, in an examination of the loan
experience and practices of the originator/servicers and poolers, the Adviser
or Portfolio Manager determines

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that the securities meet a Portfolio's quality standards. Although the market
for such securities is becoming increasingly liquid, securities issued by
certain private organizations may not be readily marketable. A Portfolio will
not purchase mortgage-related securities or any other assets which in the
opinion of the Adviser or Portfolio Manager are illiquid if, as a result, more
than 15% of the value of a Portfolio's net assets (10% for the Money Market
Portfolio) will be illiquid. It is expected that governmental, government-
related, or private entities may create mortgage loan pools and other
mortgage-related securities offering mortgage pass-through and mortgage
collateralized investments in addition to those described above. As new types
of mortgage-related securities are developed and offered to investors, the
Adviser or Portfolio Manager will, consistent with a Portfolio's investment
objectives, policies, and quality standards, consider making investments in
such new types of mortgage-related securities.

CMO Residuals. CMO residuals are derivative mortgage securities issued by
agencies or instrumentalities of the U.S. Government or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
homebuilders, mortgage banks, commercial banks, investment banks and special
purpose entities of the foregoing.

The cash flow generated by the mortgage assets underlying a series of CMOs
is applied first to make required payments of principal and interest on the
CMOs and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess
cash flow remaining after making the foregoing payments. Each payment of such
excess cash flow to a holder of the related CMO residual represents income
and/or a return of capital. The amount of residual cash flow resulting from a
CMO will depend on, among other things, the characteristics of the mortgage
assets, the coupon rate of each class of CMO, prevailing interest rates, the
amount of administrative expenses and the prepayment experience on the
mortgage assets. In particular, the yield to maturity on CMO residuals is
extremely sensitive to prepayments on the related underlying mortgage assets,
in the same manner as an interest-only ("IO") class of stripped mortgage-
backed securities. See "Other Mortgage-Related Securities--Stripped Mortgage-
Backed Securities." In addition, if a series of a CMO includes a class that
bears interest at an adjustable rate, the yield to maturity on the related CMO
residual will also be extremely sensitive to changes in the level of the index
upon which interest rate adjustments are based. As described below with
respect to stripped mortgage-backed securities, in certain circumstances a
Portfolio may fail to recoup fully its initial investment in a CMO residual.

CMO residuals are generally purchased and sold by institutional investors
through several investment banking firms acting as brokers or dealers. The CMO
residual market has only very recently developed and CMO residuals currently
may not have the liquidity of other more established securities trading in
other markets. Transactions in CMO residuals are generally completed only
after careful review of the characteristics of the securities in question. In
addition, CMO residuals may or, pursuant to an exemption therefrom, may not
have been registered under the Securities Act of 1933, as amended. CMO
residuals, whether or not registered under such Act, may be subject to certain
restrictions on transferability, and may be deemed "illiquid" and subject to a
Portfolio's limitations on investment in illiquid securities.

Stripped Mortgage-Backed Securities. Stripped mortgage-backed securities
("SMBS") are derivative multi-class mortgage securities. SMBS may be issued by
agencies or instrumentalities of the U.S. Government, or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, mortgage banks, commercial banks, investment banks and special
purpose entities of the foregoing.

SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of SMBS will have one class receiving some of the
interest and most of the principal from the mortgage assets, while the other
class will receive most of the interest and the remainder of the principal. In
the most extreme case, one class will receive all of the interest (the IO
class), while the other class will receive all of the principal (the
principal-only or "PO" class). The yield to maturity on an IO class is
extremely sensitive to the rate of principal payments (including prepayments)
on the related underlying mortgage assets, and a rapid rate of principal
payments may have a material adverse effect on

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the Portfolio's yield to maturity from these securities. If the underlying
mortgage assets experience greater than anticipated prepayments of principal,
a Portfolio may fail to fully recoup its initial investment in these
securities even if the security is in one of the highest rating categories.

Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these
securities were only recently developed. As a result, established trading
markets have not yet developed and, accordingly, these securities may be
deemed "illiquid" and subject to a Portfolio's limitations on investment in
illiquid securities.

Mortgage Dollar Rolls. The Bond and Income Portfolio may enter into mortgage
"dollar rolls" in which the Portfolio sells securities for delivery in the
current month and simultaneously contracts with the same counterparty to
repurchase substantially similar (same type, coupon and maturity) but not
identical securities on a specified future date. During the roll period, the
Portfolio loses the right to receive principal and interest paid on the
securities sold. However, the Portfolio would benefit to the extent of any
difference between the price received for the securities sold and the lower
forward price for the future purchase or fee income plus the interest earned
on the cash proceeds of the securities sold until the settlement date for the
forward purchase. Unless such benefits exceed the income, capital appreciation
and gain or loss due to mortgage prepayments that would have been realized on
the securities sold as part of the mortgage dollar roll, the use of this
technique will diminish the investment performance of the Portfolio. The
Portfolio will hold and maintain in a segregated account until the settlement
date cash or liquid assets in an amount equal to the forward purchase price.
For financial reporting and tax purposes, the Portfolio treats mortgage dollar
rolls as two separate transactions; one involving the purchase of a security
and a separate transaction involving a sale. The Portfolio does not currently
intend to enter into mortgage dollar rolls that are accounted for as a
financing.

OTHER ASSET-BACKED SECURITIES

In addition to mortgage-related securities, the High Yield Bond, Managed
Bond, Government Securities, Aggressive Equity, Growth LT, Multi-Strategy,
Equity, and Bond and Income Portfolios, and the Money Market Portfolio,
subject to its investment policies, may invest in other asset-backed
securities which are securities that directly or indirectly represent a
participation interest in, or are secured by and payable from a stream of
payments generated by particular assets such as automobile loans or
installment sales contracts, home equity loans, computer and other leases,
credit card receivables, or other assets. Generally, the payments from the
collateral are passed through to the security holder. Due to the possibility
that prepayments (on automobile loans and other collateral) will alter cash
flow on asset-backed securities, generally it is not possible to determine in
advance the actual final maturity date or average life of many asset-backed
securities. Faster prepayment will shorten the average life and slower
prepayments will lengthen it. However, it may be possible to determine what
the range of that movement could be and to calculate the effect that it will
have on the price of the security. Other risks relate to limited interests in
applicable collateral. For example, credit card debt 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
set off certain amounts on credit card debt thereby reducing the balance due.
Additionally, holders of asset-backed securities may also experience delays in
payments or losses if the full amounts due on underlying sales contracts are
not realized. Because asset-backed securities are relatively new, the market
experience in these securities is limited and the market's ability to sustain
liquidity through all phases of the market cycle has not been tested.

HIGH YIELD BONDS

The High Yield Bond Portfolio, the Managed Bond Portfolio (up to 10% of its
assets), the Growth LT Portfolio (up to 10% of its assets), the Bond and
Income Portfolio (up to 20% of its assets), and the International Portfolio
(up to 5% of its assets), measured at the time of investment, may invest in
high risk debt securities rated lower than Baa or BBB, or, if not rated by
Moody's or S&P, of equivalent quality (although the Managed Bond Portfolio may
not invest in securities rated lower than B) ("high yield bonds," which are
commonly referred to as "junk bonds").

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In general, high yield bonds are not considered to be investment grade, and
investors should consider the risks associated with high yield bonds before
investing in the pertinent Portfolio, and in particular the High Yield Bond
and Bond and Income Portfolios. Investment in such securities generally
provides greater income and increased opportunity for capital appreciation
than investments in higher quality securities, but they also typically entail
greater price volatility and principal and income risk.

Investment in high yield bonds involves special risks in addition to the
risks associated with investments in higher rated debt securities. High yield
bonds are regarded as predominately speculative with respect to the issuer's
continuing ability to meet principal and interest payments. The high yield
bond market is relatively new, and many of the outstanding high yield bonds
have not endured a lengthy business recession. A long-term track record on
bond default rates such as that for investment grade corporate bonds, does not
exist for the high yield market. Analysis of the creditworthiness of issuers
of debt securities that are high yield bonds may be more complex than for
issuers of higher quality debt securities, and the ability of a Portfolio to
achieve its investment objective may, to the extent of investment in high
yield bonds, be more dependent upon such creditworthiness analysis than would
be the case if the Portfolio were investing in higher quality bonds.

High yield bonds may be more susceptible to real or perceived adverse
economic and competitive industry conditions than investment grade bonds. The
prices of high yield bonds have been found to be less sensitive to interest-
rate changes than higher-rated investments, but more sensitive to adverse
economic downturns or individual corporate developments. A projection of an
economic downturn or of a period of rising interest rates, for example, could
cause a decline in high yield bond prices because the advent of a recession
could lessen the ability of a highly leveraged company to make principal and
interest payments on its debt securities. If an issuer of high yield bonds
defaults, in addition to risking payment of all or a portion of interest and
principal, a Portfolio may incur additional expenses to seek recovery. In the
case of high yield bonds structured as zero-coupon or pay-in-kind securities,
their market prices are affected to a greater extent by interest rate changes,
and therefore tend to be more volatile than securities which pay interest
periodically and in cash.

The secondary market on which high yield bonds are traded may be less liquid
than the market for higher grade bonds. Less liquidity in the secondary
trading market could adversely affect the price at which a Portfolio could
sell a high yield bond, and could adversely affect and cause large
fluctuations in the daily net asset value of the Portfolio's shares. Adverse
publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of high yield bonds,
especially in a thinly-traded market. When secondary markets for high yield
bonds are less liquid than the market for higher grade bonds, it may be more
difficult to value the securities because such valuation may require more
research, and elements of judgment may play a greater role in the valuation
because there is less reliable, objective data available.

There are also certain risks involved in using credit ratings for evaluating
high yield bonds. For example, credit ratings evaluate the safety of principal
and interest payments, not the market value risk of high yield bonds. Also,
credit rating agencies may fail to timely reflect subsequent events.

BANK OBLIGATIONS

Bank obligations in which all Portfolios may invest include certificates of
deposit, bankers' acceptances, and fixed time deposits. Each Portfolio may
also hold funds on deposit with its sub-custodian bank in an interest-bearing
account for temporary purposes.

Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank for a definite period of time and earning a
specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Fixed time deposits are bank obligations payable at a stated maturity date and
bearing interest at a fixed rate. Fixed time deposits may be withdrawn on
demand by the investor, but may be subject to early withdrawal penalties which
vary depending upon market conditions and the remaining maturity of the
obligation.

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There are no contractual restrictions on the right to transfer a beneficial
interest in a fixed time deposit to a third party, although there is no market
for such deposits. A Portfolio will not invest in fixed time deposits which
(i) are not subject to prepayment, or (ii) incur withdrawal penalties upon
prepayment (other than overnight deposits) if, in the aggregate, more than 15%
of its net assets (10% for the Money Market Portfolio) would be invested in
such deposits, repurchase agreements maturing in more than seven days, and
other illiquid assets.

A Portfolio will not invest in any security issued by a commercial bank
unless: (i) the bank has total assets of at least U.S. $1 billion (U.S. $500
million in the case of the Equity Income Portfolio and U.S. $2 billion in the
case of the Bond and Income Portfolio), or the equivalent in other currencies,
or, in the case of domestic banks which do not have total assets of at least
U.S. $1 billion, the aggregate investment made in any one such bank is limited
to an amount, currently U.S. $100,000, insured in full by the Federal Deposit
Insurance Corporation ("FDIC"); (ii) in the case of U.S. banks, it is a member
of the FDIC; and (iii) in the case of foreign banks, the security is, in the
opinion of the Adviser or the Portfolio Manager, of an investment quality
comparable with other debt securities of similar maturities which may be
purchased by the Portfolio. These limitations do not prohibit investments in
securities issued by foreign branches of U.S. banks, provided such U.S. banks
meet the foregoing requirements.

All Portfolios may invest in short-term debt obligations of savings and loan
associations provided that the savings and loan association issuing the
security (i) has total assets of at least $1 billion (U.S. $500 million in the
case of the Equity Income Portfolio and U.S. $2 billion in the case of the
Bond and Income Portfolio), or, in the case of savings and loan associations
which do not have total assets of at least $1 billion, the aggregate
investment made in any one savings and loan association is insured in full,
currently up to $100,000, by the Savings Association Insurance Fund ("SAIF");
(ii) the savings and loan association issuing the security is a member of the
Federal Home Loan Bank System; and (iii) the institution is insured by the
SAIF.

A Portfolio will not purchase any security of a small bank or savings and
loan association which is not readily marketable if, as a result, more than
15% of the value of its net assets (10% for the Money Market Portfolio) would
be invested in such securities, other illiquid securities, or securities
without readily available market quotations, such as restricted securities and
repurchase agreements maturing in more than seven days.

The International Portfolio may only invest in obligations of foreign banks
(including U.S. branches of foreign banks) which at the time of investment (i)
have more than U.S. $1 billion, or the equivalent in other currencies, in
total assets; and (ii) in the opinion of the Portfolio Manager, are of an
investment quality comparable to fixed income obligations in which the
Portfolio may invest. The Aggressive Equity and Emerging Markets Portfolios
may only invest in obligations of foreign banks (including U.S. branches of
foreign banks) which at the time of investment (i) have more than $10 billion,
or the equivalent in other currencies, in total assets; (ii) in terms of
assets are among the 75 largest foreign banks in the world; (iii) have
branches or agencies (limited purpose offices which do not offer all banking
services) in the U.S.; and (iv) in the opinion of the Portfolio Manager, are
of an investment quality comparable to obligations of U.S. banks in which the
Portfolios may invest. There is no limitation on the amount of a Portfolio's
assets which may be invested in obligations of foreign banks if the bank
obligations meet the appropriate conditions set forth above.

Obligations of foreign banks involve somewhat different investment risks
than those affecting obligations of U.S. banks, including: (i) the
possibilities that their liquidity could be impaired because of future
political and economic developments; (ii) their obligations may be less
marketable than comparable obligations of U.S. banks; (iii) a foreign
jurisdiction might impose withholding taxes on interest income payable on
those obligations; (iv) foreign deposits may be seized or nationalized; (v)
foreign governmental restrictions, such as exchange controls, may be adopted
which might adversely affect the payment of principal and interest on those
obligations; and (vi) the selection of those obligations may be more difficult
because there may be less publicly available information concerning foreign
banks or the accounting, auditing, and financial reporting standards,
practices and requirements applicable to foreign banks may differ from those
applicable to U.S. banks. Foreign banks are not generally subject to
examination by any U.S. Government agency or instrumentality.

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The International Portfolio's investments in convertible securities,
described below, that are purchased in furtherance of the Portfolio's
investment objective, are not subject to the limitations described above with
respect to bank obligations.

MUNICIPAL SECURITIES

The Bond and Income Portfolio may invest up to 5% of its net assets in
municipal securities. Municipal securities consist of bonds, notes and other
instruments issued by or on behalf of states, territories and possessions of
the United States (including the District of Columbia) and their political
subdivisions, agencies or instrumentalities, the interest on which is exempt
from regular federal income tax. Municipal securities are often issued to
obtain funds for various public purposes. Municipal securities also include
"private activity bonds" or industrial development bonds, which are issued by
or on behalf of public authorities to obtain funds for privately operated
facilities, such as airports and waste disposal facilities, and, in some
cases, commercial and industrial facilities.

The yields and market values of municipal securities are determined
primarily by the general level of interest rates, the creditworthiness of the
issuers of municipal securities and economic and political conditions
affecting such issuers. Due to their tax exempt status, the yields and market
prices of municipal securities may be adversely affected by changes in tax
rates and policies, which may have less effect on the market for taxable fixed
income securities. Moreover, certain types of municipal securities, such as
housing revenue bonds, involve prepayment risks which could affect the yield
on such securities.

Investments in municipal securities are subject to the risk that the issuer
could default on its obligations. Such a default could result from the
inadequacy of the sources or revenues from which interest and principal
payments are to be made or the assets collateralizing such obligations.
Revenue bonds, including private activity bonds, are backed only by specific
assets or revenue sources and not by the full faith and credit of the
governmental issuer.

CORPORATE DEBT SECURITIES

All Portfolios may invest in U.S. dollar-denominated corporate debt
securities of domestic issuers and the Money Market, High Yield Bond, Managed
Bond, Government Securities, Aggressive Equity, Growth LT, Multi-Strategy,
Bond and Income, International and Emerging Markets Portfolios may invest in
U.S. dollar-denominated debt securities of foreign issuers. The Aggressive
Equity, Growth LT, International, and Emerging Markets Portfolios, and, to the
extent of 20% of their assets, the Managed Bond and Government Securities
Portfolios, and to the extent of 10% of their assets, the Multi-Strategy and
Bond and Income Portfolios, may also invest in debt securities of foreign
issuers denominated in foreign currencies. The debt securities in which any
Portfolio other than the Money Market Portfolio may invest are limited to
corporate debt securities (corporate bonds, debentures, notes, and other
similar corporate debt instruments) which meet the minimum ratings criteria
set forth for that particular Portfolio, or, if not so rated, are, in the
Portfolio Manager's opinion, comparable in quality to corporate debt
securities in which a Portfolio may invest. The debt securities in which the
Money Market Portfolio may invest are described in the discussion of the
investment objective and policies of that Portfolio.

The investment return on corporate debt securities reflects interest
earnings and changes in the market value of the security. The market value of
corporate debt obligations may be expected to rise and fall inversely with
interest rates generally. There also exists the risk that the issuers of the
securities may not be able to meet their obligations on interest or principal
payments at the time called for by an instrument.

The High Yield Bond, Managed Bond, Growth, Aggressive Equity, Growth LT,
Equity Income, Multi-Strategy, Bond and Income, International, and Emerging
Markets Portfolios may invest in corporate debt securities rated Baa (Moody's)
or BBB (S&P), or, if not rated by Moody's or S&P, of equivalent quality. Such
securities are considered medium grade, and do not have economic
characteristics that provide the high degree

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of security with respect to payment of principal and interest associated with
higher rated bonds, and generally have some speculative characteristics. A
bond will be placed in this rating category where interest payments and
principal security appear adequate for the present, but economic
characteristics that provide longer term protection may be lacking.

The High Yield Bond, Equity Income and Multi-Strategy Portfolios and, to the
extent of 10% of their assets, the Managed Bond and Growth LT Portfolios, and,
to the extent of 20% of its assets, the Bond and Income Portfolio and to the
extent of 5% of its assets, the International Portfolio, may invest in debt
securities rated lower than Baa or BBB (although the Managed Bond Portfolio
may not invest in securities rated lower than B), or, if not rated by Moody's
or S&P, of equivalent quality. Such securities are not considered to be
investment grade, and are regarded as predominately speculative with respect
to the issuer's continuing ability to meet principal and interest payments.
For more information on the risks of such securities, see the discussion of
"High Yield Bonds" above.

VARIABLE AND FLOATING RATE SECURITIES

All Portfolios may invest in variable and floating rate securities which
provide for a periodic adjustment in the interest rate paid on obligations.
The terms of such obligations must provide that interest rates are adjusted
periodically based upon an appropriate interest rate adjustment index as
provided in the respective obligations. The adjustment intervals may be
regular, and range from daily to annually, or may be event based, such as
based on a change in the prime rate.

COMMERCIAL PAPER

All of the Portfolios may invest in commercial paper (including variable
amount master demand notes). Each Portfolio, other than the Money Market and
Equity Portfolios may invest in commercial paper denominated in U.S. dollars,
issued by U.S. corporations or foreign corporations and (1) rated at the date
of investment Prime-1 or Prime-2 by Moody's or A-1 or A-2 by S&P or (2) if not
rated by either Moody's or S&P, issued by a corporation having an outstanding
debt issue rated Aa or better by Moody's or AA or better by S&P or (3) if not
rated, are determined to be of an investment quality comparable to rated
commercial paper in which a Portfolio may invest. If issued by a foreign
corporation, such commercial paper is U.S. dollar-denominated and not subject
at the time of purchase to foreign tax withholding. The Aggressive Equity,
International, and Emerging Markets Portfolios may, however, invest in
commercial paper denominated in foreign currencies. The Money Market Portfolio
may invest in commercial paper that meets the standards for money market
securities that Portfolio may acquire as described in the Prospectus in the
section "Investment Objectives and Policies." The Equity Portfolio may invest
in commercial paper (1) rated at the time of purchase Prime-1 by Moody's or A-
1 by S&P or (2) if not rated by either Moody's or S&P, issued by a corporation
having an outstanding debt issue rated Aa or better by Moody's or AA or better
by S&P.

Commercial paper obligations may include variable amount master demand
notes. These are obligations that permit the investment of fluctuating amounts
at varying rates of interest pursuant to direct arrangements between a
Portfolio, as lender, and the borrower. These notes permit daily changes in
the amounts borrowed. The lender has the right to increase the amount under
the note at any time up to the full amount provided by the note agreement, or
to decrease the amount, and the borrower may prepay up to the full amount of
the note without penalty. Because variable amount master demand notes are
direct lending arrangements between the lender and borrower, it is not
generally contemplated that such instruments will be traded and there is no
secondary market for these notes. However, they are redeemable (and thus
immediately repayable by the borrower) at face value, plus accrued interest,
at any time. In connection with master demand note arrangements, the Adviser
or Portfolio Manager will monitor, on an ongoing basis, the earning power,
cash flow, and other liquidity ratios of the borrower and its ability to pay
principal and interest on demand. The Adviser or Portfolio Manager also will
consider the extent to which the variable amount master demand notes are
backed by bank letters of credit. These notes generally are not rated by
Moody's or S&P; a Portfolio, other than the Money Market Portfolio, may invest

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in them only if the Adviser or Portfolio Manager believes that at the time of
investment the notes are of comparable quality to the other commercial paper
in which the Portfolio may invest. With respect to the Money Market Portfolio,
determination of eligibility for the Portfolio will be in accordance with the
standards described in the discussion of the Portfolio in the Prospectus on
"Investment Objectives and Policies." Master demand notes are considered by
the Portfolio to have a maturity of one day unless the Adviser or Portfolio
Manager has reason to believe that the borrower could not make immediate
repayment upon demand. See the Appendix in the Prospectus for a description of
Moody's and S&P ratings applicable to commercial paper.

CONVERTIBLE SECURITIES

All Portfolios except the Money Market Portfolio may invest in convertible
securities. The convertible securities in the Portfolio's portfolios are
fixed-income securities which may be converted or exchanged at a stated
exchange ratio into underlying shares of common stock. The exchange ratio for
any particular convertible security may be adjusted from time to time due to
stock splits, dividends, spin-offs, other corporate distributions, or
scheduled changes in the exchange ratio. Convertible bonds and convertible
preferred stocks, until converted, have general characteristics similar to
both fixed-income and equity securities. Although to a lesser extent than with
fixed-income securities generally, the market value of convertible securities
tends to decline as interest rates increase and, conversely, tends to increase
as interest rates decline. In addition, because of the conversion or exchange
feature, the market value of convertible securities tends to vary with
fluctuations in the market value of the underlying common stocks, and,
therefore, also will react to variations in the general market for equity
securities. A unique feature of convertible securities is that as the market
price of the underlying common stock declines, convertible securities tend to
trade increasingly on a yield basis, and so may not experience market value
declines to the same extent as the underlying common stock. When the market
price of the underlying common stock increases, the prices of the convertible
securities tend to rise as a reflection of the value of the underlying common
stock. While no securities investments are without risk, investments in
convertible securities generally entail less risk than investments in common
stock of the same issuer.

As fixed-income securities, convertible securities are investments which
provide for a stable stream of income with generally higher yields than common
stocks. Of course, like all fixed-income securities, there can be no assurance
of current income because the issuers of the convertible securities may
default in their obligations. Convertible securities, however, generally offer
lower interest or dividend yields than non-convertible securities of similar
quality because of the potential for capital appreciation.

A convertible security, in addition to providing fixed-income, offers the
potential for capital appreciation through the conversion feature which
enables the holder to benefit from increases in the market price of the
underlying common stock. In selecting the securities for a Portfolio, the
Adviser or Portfolio Manager gives substantial consideration to the potential
for capital appreciation of the common stock underlying the convertible
securities. However, there can be no assurance of capital appreciation because
securities prices fluctuate.

Convertible securities generally are subordinated to other similar but
nonconvertible securities of the same issuer although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock, of the
same issuer. However, because of the subordination feature, convertible bonds
and convertible preferred stock typically have lower ratings than similar non-
convertible securities.

A "synthetic convertible" is created by combining distinct securities which
possess the two principal characteristics of a true convertible, i.e., fixed-
income ("fixed-income component") and the right to acquire equity securities
("convertibility component"). This combination is achieved by investing in
nonconvertible fixed-income securities (nonconvertible bonds and preferred
stocks) and in warrants, granting the holder the right to purchase a specified
quantity of securities within a specified period of time at a specified price.

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<PAGE>

two distinct securities, each with its own market value. Therefore, the
"market value" of a synthetic convertible is the sum of the values of its
fixed-income component and its convertibility component. For this reason, the
value of a synthetic convertible and a true convertible security will respond
differently to market fluctuations.

More flexibility is possible in the assembly of a synthetic convertible than
in the purchase of a convertible security in that its two components may be
purchased separately. For example, a Portfolio Manager may purchase a warrant
for inclusion in a synthetic convertible but temporarily hold short-term
investments while postponing purchase of a corresponding bond pending
development of more favorable market conditions.

A holder of a synthetic convertible faces the risk that the price of the
stock underlying the convertibility component will decline, causing a decline
in the value of the warrant; should the price of the stock fall below the
exercise price and remain there throughout the exercise period, the entire
amount paid for the warrant would be lost. Since a synthetic convertible
includes the fixed-income component as well, the holder of a synthetic
convertible also faces the risk that interest rates will rise, causing a
decline in the value of the fixed-income instrument.

REPURCHASE AGREEMENTS

All Portfolios may invest in repurchase agreements, which entail the
purchase of a portfolio eligible security from a bank or broker-dealer that
agrees to repurchase the security at the Portfolio's cost plus interest within
a specified time (normally one day). Repurchase agreements permit an investor
to maintain liquidity and earn income over periods of time as short as
overnight. If a Portfolio acquires securities from a bank or broker-dealer it
may simultaneously enter into a repurchase agreement with the seller wherein
the seller agrees at the time of sale to repurchase the security at a mutually
agreed upon time and price. The term of such an agreement is generally quite
short, possibly overnight or for a few days, although it may extend over a
number of months (up to one year) from the date of delivery. The resale price
is in excess of the purchase price by an amount which reflects an agreed upon
market rate of return, effective for the period of time the Portfolio is
invested in the security. This results in a fixed rate of return protected
from market fluctuations during the period of the agreement. This rate is not
tied to the coupon rate on the security subject to the repurchase agreement.

If the party agreeing to repurchase should default and if the value of the
securities held by a Portfolio should fall below the repurchase price, a loss
could be incurred. Repurchase agreements will be entered into only where the
underlying security is within the three highest credit categories assigned by
established rating agencies (Aaa, Aa, or A by Moody's or AAA, AA, or A by S&P)
or, if not rated by Moody's or S&P, are of equivalent investment quality as
determined by the Adviser or Portfolio Manager, except that the Money Market
Portfolio will enter into repurchase agreements only where the underlying
securities are of the quality that is eligible for the Portfolio as described
in the discussion of that Portfolio's investment objective and policies.

Under the Investment Company Act of 1940 (the "1940 Act"), repurchase
agreements are considered to be loans by the purchaser collateralized by the
underlying securities. The Adviser or Portfolio Manager to a Portfolio
monitors the value of the underlying securities at the time the repurchase
agreement is entered into and at all times during the term of the agreement to
ensure that its value always equals or exceeds the agreed upon repurchase
price to be paid to the Portfolio. The Adviser or Portfolio Manager, in
accordance with procedures established by the Board of Trustees, also
evaluates the creditworthiness and financial responsibility of the banks and
brokers or dealers with which the Portfolio enters into repurchase agreements.

A Portfolio may not enter into a repurchase agreement having more than seven
days remaining to maturity if, as a result, such agreements, together with any
other securities which are not readily marketable, would exceed 15% of the net
assets of the Portfolio (10% for the Money Market Portfolio). If the seller
should become bankrupt or default on its obligations to repurchase the
securities, a Portfolio may experience delay or difficulties in exercising its
rights to the securities held as collateral and might incur a loss if the
value of the securities should decline. A Portfolio also might incur
disposition costs in connection with liquidating the securities.

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BORROWING

Each Portfolio may borrow up to certain limits. A Portfolio may not borrow
if, as a result of such borrowing, the total amount of all money borrowed by
the Portfolio exceeds 33 1/3 of the value of its total assets (at the time of
such borrowing), including reverse repurchase agreements. This borrowing may
be unsecured. Borrowing may exaggerate the effect on net asset value of any
increase or decrease in the market value of a Portfolio. Money borrowed will
be subject to interest costs which may or may not be recovered by appreciation
of the securities purchased. A Portfolio also may be required to maintain
minimum average balances in connection with such borrowing or to pay a
commitment or other fee to maintain a line of credit; either of these
requirements would increase the cost of borrowing over the stated interest
rate. Reverse repurchase agreements will be included as borrowing subject to
the borrowing limitations described above.

REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS

Among the forms of borrowing in which the High Yield Bond, Managed Bond,
Government Securities, Aggressive Equity, Growth LT, Bond and Income, Equity
Index, and Emerging Markets Portfolios may engage and enter into reverse
repurchase agreements, which involves the sale of a debt security held by the
Portfolio, with an agreement by that Portfolio to repurchase the security at a
stated price, date and interest payment.

A Portfolio will use the proceeds of a reverse repurchase agreement to
purchase other money market instruments which either mature at a date
simultaneous with or prior to the expiration of the reverse repurchase
agreement or which are held under an agreement to resell maturing as of that
time. The use of reverse repurchase agreements by a Portfolio creates leverage
which increases a Portfolio's investment risk. If the income and gains on
securities purchased with the proceeds of reverse repurchase agreements exceed
the cost of the agreements, the Portfolio's earnings or net asset value will
increase faster than otherwise would be the case; conversely, if the income
and gains fail to exceed the costs, earnings or net asset value would decline
faster than otherwise would be the case. A Portfolio will enter into a reverse
repurchase agreement only when the interest income to be earned from the
investment of the proceeds of the transaction is greater than the interest
expense of the transaction. However, reverse repurchase agreements involve the
risk that the market value of securities retained by the Portfolio may decline
below the repurchase price of the securities sold by the Portfolio which it is
obligated to repurchase.

A Portfolio may enter into reverse repurchase agreements with banks or
broker-dealers. Entry into such agreements with broker-dealers requires the
creation and maintenance of a segregated account consisting of U.S. Government
securities, cash or liquid securities marked-to-market daily at least equal in
value to its obligations in respect of reverse repurchase agreements.

FIRM COMMITMENT AGREEMENTS AND WHEN-ISSUED SECURITIES

All Portfolios may enter into firm commitment agreements for the purchase of
securities at an agreed upon price on a specified future date. A Portfolio may
purchase new issues of securities on a "when-issued" basis, whereby the
payment obligation and interest rate on the instruments are fixed at the time
of the transaction. Such transactions might be entered into, for example, when
the Adviser or Portfolio Manager to a Portfolio anticipates a decline in the
yield of securities of a given issuer and is able to obtain a more
advantageous yield by committing currently to purchase securities to be issued
or delivered later.

A Portfolio will not enter into such a transaction for the purpose of
investment leverage. Liability for the purchase price--and all the rights and
risks of ownership of the securities--accrue to the Portfolio at the time it
becomes obligated to purchase such securities, although delivery and payment
occur at a later date. Accordingly, if the market price of the security should
decline, the effect of the agreement would be to obligate the Portfolio to
purchase the security at a price above the current market price on the date of
delivery and payment. During the time the Portfolio is obligated to purchase
such securities it will maintain in a segregated account U.S. Government
securities, cash or liquid securities marked-to-market daily of an aggregate
current value sufficient to make payment for the securities.

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LOANS OF PORTFOLIO SECURITIES

For the purpose of realizing additional income, each Portfolio, except the
Growth, Equity Income, Multi-Strategy, and Equity Index Portfolios, may make
secured loans of its portfolio securities to broker-dealers or U.S. banks
provided: (i) such loans are secured continuously by collateral consisting of
cash, cash equivalents, or U.S. Government securities maintained on a daily
marked-to-market basis in an amount or at a market value at least equal to the
current market value of the securities loaned; (ii) the Portfolio may at any
time call such loans and obtain the securities loaned; (iii) the Portfolio
will receive an amount in cash at least equal to the interest or dividends
paid on the loaned securities; and (iv) the aggregate market value of
securities loaned will not at any time exceed 25% of the total assets of the
Portfolio. In addition, it is anticipated that the Portfolio may share with
the borrower some of the income received on the collateral for the loan or
that it will be paid a premium for the loan. It should be noted that in
connection with the lending of its portfolio securities, the Portfolio is
exposed to the risk of delay in recovery of the securities loaned or possible
loss of rights in the collateral should the borrower become insolvent. In
determining whether to lend securities, the Adviser or Portfolio Manager
considers all relevant facts and circumstances including the creditworthiness
of the borrower. Voting rights attached to the loaned securities may pass to
the borrower with the lending of portfolio securities. However, the Portfolio
intends to call loaned voting securities if important shareholder meetings are
imminent.

SHORT SALES AGAINST THE BOX

The Aggressive Equity and Equity Portfolios may enter into short sales
"against the box." A short sale is made by selling a security the Portfolio
does not own. A short sale is "against the box" when, at all times during
which a short position is open, the Portfolio owns an equal amount of such
securities, or owns securities giving it the right, without payment of future
consideration, to obtain an equal amount of securities sold short. No more
than 15% of the value of a Portfolio's net assets will be subject to such
short sales at any time.

RESTRICTED SECURITIES (PRIVATE PLACEMENTS)

All Portfolios except the Equity Index Portfolio may invest in restricted
securities (including privately placed securities) but a Portfolio will not
acquire such securities if they are illiquid and other securities that are
illiquid, such as repurchase agreements maturing in more than seven days, if
as a result they would comprise more than 15% of the value of the Portfolio's
net assets, and in the case of the Money Market Portfolio, 10% of the value of
its Portfolio assets. The privately placed securities in which these
Portfolios may invest are called restricted securities because there are
restrictions or conditions attached to their resale.

Restricted securities may be sold only in a public offering with respect to
which a registration statement is in effect under the Securities Act of 1933
or in a transaction exempt from such registration such as certain privately
negotiated transactions. Where registration is required, the Portfolio may be
obligated to pay all or part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and the time the
Portfolio may be permitted to sell a security under an effective registration
statement. If, during such a period, adverse market conditions were to
develop, the Portfolio might obtain a less favorable price than prevailed when
it decided to sell. Restricted securities will be priced at fair value as
determined in good faith under the direction of the Board of Trustees. If
through the appreciation of restricted securities or the depreciation of
unrestricted securities, the Portfolio should be in a position where more than
15% of the value of its net assets are invested in restricted securities that
are illiquid and other securities that are illiquid, the Portfolio Manager
will consider whether steps should be taken to assure liquidity.

Certain restricted securities may be purchased by certain "qualified
institutional buyers" without the necessity for registration of the
securities. A Portfolio may acquire such a security without the security being
treated as illiquid for purposes of the above-described limitation on
acquisition of illiquid assets if the Portfolio Manager determines that the
security is liquid under guidelines adopted by the Fund's Board of Trustees.
Investing in such restricted securities could have the effect of increasing
the level of the Portfolio's illiquidity to the extent that qualified
institutional buyers become, for a time, uninterested in purchasing these
securities.

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FOREIGN SECURITIES

The Money Market, High Yield Bond, Managed Bond, Government Securities,
Aggressive Equity, Growth LT, Multi-Strategy, Bond and Income, International,
and Emerging Markets Portfolios may invest directly in U.S. dollar-denominated
corporate debt securities of foreign issuers, certain foreign bank obligations
and U.S. dollar-denominated obligations of foreign governments, foreign
government agencies and international agencies. The Growth, Growth LT, Equity
Income, Multi-Strategy and Equity Index Portfolios may invest in equity
securities of foreign issuers if U.S. exchange listed or if otherwise included
in the S&P 500. The Growth LT Portfolio may invest up to 25% of its assets in
foreign securities denominated in a foreign currency and not publicly traded
in the United States. The Aggressive Equity Portfolio may invest in securities
of foreign issuers that are traded in U.S. securities markets and may invest
up to 20% of its assets in securities that are traded principally in
securities markets outside of the United States. The International and
Emerging Markets Portfolios may invest in equity securities of foreign
corporations, nonconvertible fixed income securities denominated in foreign
currencies, and in securities represented by European Depositary Receipts
("EDRs"), Global Depositary Receipts ("GDRs"), or other securities convertible
into equity securities of foreign issuers. The Growth LT Portfolio may also
invest in EDRs and GDRs and other types of receipts of shares evidencing
ownership of the underlying foreign securities. The Managed Bond and
Government Securities Portfolios may each invest up to 20% of their assets in
non-U.S. dollar-denominated debt securities of foreign issuers. The Multi-
Strategy and Bond and Income Portfolios may invest up to 10% of their assets
in non-U.S. dollar-denominated debt securities of foreign issuers. All
Portfolios, except the Equity Portfolio, may purchase American Depositary
Receipts ("ADRs") which are dollar-denominated receipts issued generally by
domestic banks and representing the deposit with the bank of a security of a
foreign issuer. ADRs are publicly-traded on exchanges or over-the-counter in
the United States.

Investing in the securities of foreign issuers involves special risks and
considerations not typically associated with investing in U.S. companies.
These risks are intensified with respect to investments in emerging market
countries. These include differences in accounting, auditing and financial
reporting standards, generally higher commission rates on foreign portfolio
transactions, the possibility of expropriation, nationalization, or
confiscatory taxation, adverse changes in investment or exchange control
regulations, trade restrictions, political instability (which can affect U.S.
investments in foreign countries), and potential restrictions on the flow of
international capital. It may be more difficult to obtain and enforce
judgments against foreign entities. Additionally, income (including dividends
and interest) from foreign securities may be subject to foreign taxes,
including foreign withholding taxes, and other foreign taxes may apply with
respect to securities transactions. Transactions on foreign exchanges or over-
the-counter markets may involve greater time from the trade date until
settlement than for domestic securities transactions and, if the securities
are held abroad, may involve the risk of possible losses through the holding
of securities in custodians and depositories in foreign countries. Foreign
securities often trade with less frequency and volume than domestic securities
and therefore may exhibit greater price volatility. Changes in foreign
exchange rates will affect the value of those securities which are denominated
or quoted in currencies other than the U.S. dollar. Investing in ADRs may
involve many of the same special risks associated with investing in securities
of foreign issuers other than liquidity risks.

There is generally less publicly available information about foreign
companies comparable to reports and ratings that are published about companies
in the United States. Foreign companies are also generally not subject to
uniform accounting and auditing and financial reporting standards, practices,
and requirements comparable to those applicable to U.S. companies.

It is contemplated that most foreign securities will be purchased in over-
the-counter markets or on stock exchanges located in the countries in which
the respective principal offices of the issuers of the various securities are
located, if that is the best available market. Foreign stock markets are
generally not as developed or efficient as those in the United States. While
growing in volume, they usually have substantially less volume than the New
York Stock Exchange, and securities of some foreign companies are less liquid
and more volatile than securities of comparable U.S. companies. Similarly,
volume and liquidity in most foreign bond markets is less than in the United
States and at times, volatility of price can be greater than in the United
States. Fixed

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commissions on foreign stock exchanges are generally higher than negotiated
commissions on U.S. exchanges, although the Portfolio will endeavor to achieve
the most favorable net results on its portfolio transactions. There is
generally less government supervision and regulation of stock exchanges,
brokers, and listed companies than in the United States.

With respect to certain foreign countries, there is the possibility of
adverse changes in investment or exchange control regulations,
nationalization, expropriation or confiscatory taxation, limitations on the
removal of funds or other assets of the Portfolio, political or social
instability, or diplomatic developments which could affect United States
investments in those countries. Moreover, individual foreign economies may
differ favorably or unfavorably from the United States' economy in such
respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency, and balance of payments position.

The dividends and interest payable on certain of the Portfolios' foreign
portfolio securities may be subject to foreign withholding taxes, thus
reducing the net amount of income available for distribution.

Investors should understand that the expense ratio of the International and
Emerging Markets Portfolios can be expected to be higher than investment
companies investing in domestic securities since the cost of maintaining the
custody of foreign securities and the rate of advisory fees paid by the
Portfolios are higher.

Investment in foreign securities also involves the risk of possible losses
through the holding of securities in custodian banks and securities
depositories in foreign countries. The Fund has entered into a Custody
Agreement with Investors Fiduciary Trust Company ("IFTC"), a trust company
chartered under the laws of Missouri, which has entered into a Subcustodial
Agreement with The Chase Manhattan Bank ("Chase") under which Chase, together
with certain of its foreign branches and agencies and foreign banks and
securities depositories acting as subcustodian to Chase, will maintain custody
of the securities and other assets of foreign issuers for the Fund. Under
these agreements, Chase and IFTC have agreed (i) to use reasonable care in the
safekeeping of these securities, (ii) to indemnify and hold harmless the Fund
from and against any loss which shall occur as a result of the failure of a
foreign bank or securities depository holding such securities and (iii) to
exercise reasonable care in the safekeeping of such securities to the same
extent as if the securities were held in New York. Pursuant to requirements of
the Securities and Exchange Commission ("SEC"), Chase is required to use
reasonable care in the selection of foreign subcustodians, and to consider the
financial strength of the foreign subcustodian, its general reputation and
standing (for depository, its operating history and number of participants),
its ability to provide efficiently the custodial services required, its
relative costs for the services to be rendered, and the Fund's ability to
obtain jurisdiction over the foreign subcustodian to enforce judgments. No
assurance can be given that expropriation, nationalization, freezes, or
confiscation of assets, which would impact assets of the Portfolio, will not
occur, and shareholders bear the risk of losses arising from these or other
events.

The International and Emerging Markets Portfolios may invest in shares of
investment companies organized to invest in foreign countries. Under the 1940
Act, the Portfolio may not own more than 3% of the outstanding voting stock of
an investment company, invest more than 5% of the Portfolio's total assets in
any one investment company, or invest more than 10% of the Portfolio's total
assets in the securities of investment companies.

The International and Emerging Markets Portfolios' foreign investments will
be allocated to at least three countries at all times. In addition, each
Portfolio may not invest more than 50% of its assets in any one second tier
country or more than 25% of its assets in any one third tier country. First
tier countries are: Germany, the United Kingdom, Japan, the United States,
France, Canada, and Australia. Second tier countries are all countries not in
the first or third tier. Third tier countries are countries identified as
"emerging" or "developing" by the International Bank for Reconstruction and
Development ("World Bank") or International Finance Corporation. The
Portfolios are not subject to any limit upon investment in issuers domiciled
or primarily traded in the United States. Less diversification among countries
may create an opportunity for higher returns, but may also result in higher
risk of loss because of greater exposure to a market decline in a single
country.

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FOREIGN CURRENCY TRANSACTIONS

Generally, the foreign exchange transactions of the Managed Bond, Government
Securities, Aggressive Equity, Growth LT, Multi-Strategy, Bond and Income,
International, and Emerging Markets Portfolios will be conducted on a spot,
i.e., cash, basis at the spot rate for purchasing or selling currency
prevailing in the foreign exchange market. This rate, under normal market
conditions, differs from the prevailing exchange rate in an amount generally
less than 0.15 of 1% due to the costs of converting from one currency to
another. However, the Managed Bond, Government Securities, Aggressive Equity,
Growth LT, Multi-Strategy, Bond and Income, International, and Emerging
Markets Portfolios have authority to deal in forward foreign exchange as a
hedge against possible fluctuations in foreign exchange rates. This is
accomplished through contractual agreements to purchase or sell a specified
currency at a specified future date and price set at the time of the contract.
A Portfolio's dealings in forward foreign exchange will be limited to hedging
involving either specific transactions or portfolio positions. Transaction
hedging is the purchase or sale of forward foreign currency contracts with
respect to specific receivables or payables of a Portfolio arising from the
purchase and sale of portfolio securities, the sale and redemption of shares
of a Portfolio, or the payment of dividends and distributions by a Portfolio.
Position hedging is the sale of forward foreign currency contracts with
respect to portfolio security positions denominated or quoted in a foreign
currency. In connection with either of these types of hedging, a Portfolio may
also engage in proxy hedging. Proxy hedging entails entering into a forward
contract to buy or sell a currency whose changes in value are generally
considered to be moving in correlation with a currency or currencies in which
portfolio securities are or are expected to be denominated. Proxy hedging is
often used when a currency in which portfolio securities are denominated is
difficult to hedge. The precise matching of a currency with a proxy currency
will not generally be possible and there may be some additional currency risk
in connection with such hedging transactions. The Portfolios will not
speculate in forward foreign exchange.

Forward Foreign Currency Contracts. The Managed Bond, Government Securities,
Aggressive Equity, Growth LT, Multi-Strategy, Bond and Income, International,
and Emerging Markets Portfolios may enter into forward foreign currency
contracts only under the following circumstances. First, when a Portfolio
enters into a contract for the purchase or sale of a security denominated in a
foreign currency, it may desire to "lock in" the U.S. dollar price of the
security. By entering into a forward contract for the purchase or sale of the
amount of foreign currency involved in the underlying security transactions
(or a proxy currency considered to move in correlation with that currency) for
a fixed amount of dollars, a Portfolio may be able to protect itself against a
possible loss resulting from an adverse change in the relationship between the
U.S. dollar and the subject foreign currency during the period between the
date the security is purchased or sold and the date on which payment in made
or received.

Second, when the Portfolio Manager of a Portfolio believes that the currency
of a particular foreign country may suffer a substantial movement against
another currency, it may enter into a forward contract to sell or buy the
amount of the former foreign currency (or a proxy currency considered to move
in correlation with that currency), approximating the value of some or all of
the Portfolio's portfolio securities denominated in such foreign currency. The
precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible since the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward
contract is entered into and the date it matures. The projection of short-term
currency market movements is extremely difficult and the successful execution
of a short-term hedging strategy is highly uncertain. In no event will a
Portfolio enter into forward contracts under this second circumstance, or
maintain a net exposure to such contracts, where the consummation of the
contracts would obligate the Portfolio to deliver an amount of foreign
currency in excess of the value of that Portfolio's portfolio securities or
other assets denominated in that foreign currency (or a proxy currency
considered to move in correlation with that currency). In addition, a
Portfolio will not enter into forward contracts under this second
circumstance, if, as a result, the Portfolio will have more than 25% of the
value of its total assets committed to the consummation of such contracts.
Under normal circumstances, consideration of the prospect for currency
parities will be incorporated into the longer term investment decisions made
with regard to overall diversification strategies. The Portfolios will cover
outstanding forward currency contracts by maintaining liquid portfolio
securities denominated in the currency underlying the forward contract or the
currency being

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hedged. To the extent that a Portfolio is not able to cover its forward
currency positions with underlying portfolio securities, the Portfolio's
custodian bank will place cash or liquid equity or debt securities in a
separate account of the Portfolio in an amount equal to the value of the
Portfolio's total assets committed to the consummation of forward foreign
currency exchange contracts. If the value of the securities used to cover a
position or the value of assets placed in the separate account declines, a
Portfolio will find alternative cover or additional cash or securities will be
placed in the account on a daily basis so that the value of the segregated
assets will equal the amount of the Portfolio's commitments with respect to
such contracts.

When a Portfolio Manager of a Portfolio believes that the currency of a
particular foreign country may suffer a decline against the U.S. dollar, that
Portfolio may enter into a forward contract to sell the amount of foreign
currency approximating the value of some or all of the Portfolio's holdings
denominated in such foreign currency. At the maturity of the forward contract
to sell, the Portfolio may either sell the portfolio security and make
delivery of the foreign currency or it may retain the security and terminate
its contractual obligation to deliver the foreign currency by purchasing an
"offsetting" contract with the same currency trader obligating the Portfolio
to purchase, on the same maturity date, the same amount of the foreign
currency.

It is impossible to forecast with absolute precision the market value of
portfolio securities at the expiration of the contract. Accordingly, it may be
necessary for a Portfolio to purchase additional foreign currency on the spot
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency the Portfolio is
obligated to deliver and if a decision is made to sell the security and make
delivery of the foreign currency. Conversely, it may be necessary to sell on
the spot market some of the foreign currency received upon the sale of the
portfolio security if its market value exceeds the amount of foreign currency
the Portfolio is obligated to deliver.

If a Portfolio retains the portfolio security and engages in an offsetting
transaction, the Portfolio will incur a gain or a loss (as described below) to
the extent that there has been movement in forward contract prices. If the
Portfolio engages in an offsetting transaction, it may subsequently enter into
a new forward contract to sell the foreign currency. Should forward prices
decline during the period between the Portfolio's entering into a forward
contract for the sale of a foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the Portfolio
will realize a gain to the extent the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should
forward prices increase, the Portfolio will suffer a loss to the extent the
price of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell.

A Portfolio's dealings in forward foreign currency exchange contracts will
be limited to the transactions described above. Of course, a Portfolio is not
required to enter into such transactions with regard to their foreign currency
denominated securities and will not do so unless deemed appropriate by its
Portfolio Manager. It also should be realized that this method of protecting
the value of a Portfolio's holdings in securities against a decline in the
value of a currency does not eliminate fluctuations in the underlying prices
of the securities. It simply establishes a rate of exchange which one can
achieve at some future point in time. Additionally, although such contracts
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 which might
result from the value of such currency increase.

Although a Portfolio values its shares in terms of U.S. dollars, it does not
intend to convert its holdings of foreign currencies into U.S. dollars on a
daily basis. It will do so from time to time, and investors should be aware of
the costs of currency conversion. Although foreign exchange dealers do not
charge a fee for conversion, they do realize a profit based on the difference
(the "spread") between the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to a Portfolio
at one rate, while offering a lesser rate of exchange should the Portfolio
desire to resell that currency to the dealer.

The Managed Bond, Government Securities, Aggressive Equity, Growth LT, Bond
and Income, International, and Emerging Markets Portfolios may also purchase
and write options on foreign currencies, invest in foreign currency futures
contracts, and purchase and write options thereon, as described below.

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OPTIONS

In pursuing their investment objectives, the High Yield Bond, Managed Bond,
Government Securities, Aggressive Equity, Growth LT, Equity Income, Multi-
Strategy, Equity, Bond and Income, and Emerging Markets Portfolios may engage
in the purchase and writing of put and call options on securities. In pursuing
their investment objectives, the Aggressive Equity, Growth LT, Equity Income,
Multi-Strategy, Equity, Bond and Income, Equity Index, and Emerging Markets
Portfolios may purchase put and call options on stock indexes.

Purchasing and Writing Options on Securities. The High Yield Bond, Managed
Bond, Government Securities, Aggressive Equity, Growth LT, Equity Income,
Multi-Strategy, Equity, Bond and Income, and Emerging Markets Portfolios may
purchase and write put and call options on securities. A Portfolio may
purchase and sell (write) (i) both put and call options on debt or other
securities in standardized contracts traded on national securities exchanges,
boards of trade, similar entities, or for which an established over-the-
counter market exists; and (ii) agreements, sometimes called cash puts, which
may accompany the purchase of a new issue of bonds from a dealer.

An option on a security is a contract that gives the holder of the option,
in return for a premium, the right to buy from (in the case of a call) or sell
to (in the case of a put) the writer of the option the security underlying the
option at a specified exercise price at any time during the term of the
option. The writer of an option on a security has the obligation upon exercise
of the option to deliver the underlying security upon payment of the exercise
price or to pay the exercise price upon delivery of the underlying security. A
Portfolio may purchase put options on securities to protect holdings in an
underlying or related security against a substantial decline in market value.
Securities are considered related if their price movements generally correlate
to one another. For example, the purchase of put options on debt securities
held in a Portfolio will enable a Portfolio to protect, at least partially, an
unrealized gain in an appreciated security without actually selling the
security. In addition, the Portfolio will continue to receive interest income
on such security.

A Portfolio may purchase call options on securities to protect against
substantial increases in prices of securities the Portfolio intends to
purchase pending its ability to invest in such securities in an orderly
manner. A Portfolio may sell put or call options it has previously purchased,
which could result in a net gain or loss depending on whether the amount
realized on the sale is more or less than the premium and other transaction
costs paid on the put or call option which is sold. A Portfolio may also allow
options to expire unexercised.

In order to earn additional income on its portfolio securities or to protect
partially against declines in the value of such securities, a Portfolio may
write covered call options. The exercise price of a call option may be below,
equal to, or above the current market value of the underlying security at the
time the option is written. During the option period, a covered call option
writer may be assigned an exercise notice by the broker-dealer through whom
such call option was sold requiring the writer to deliver the underlying
security against payment of the exercise price. This obligation is terminated
upon the expiration of the option period or at such earlier time in which the
writer effects a closing purchase transaction. Closing purchase transactions
will ordinarily be effected to realize a profit on an outstanding call option,
to prevent an underlying security from being called, to permit the sale of the
underlying security, or to enable the Portfolio to write another call option
on the underlying security with either a different exercise price or
expiration date or both.

In order to earn additional income or to facilitate its ability to purchase
a security at a price lower than the current market price of such security, a
Portfolio may write secured put options. During the option period, the writer
of a put option may be assigned an exercise notice by the broker-dealer
through whom the option was sold requiring the writer to purchase the
underlying security at the exercise price.

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<PAGE>

custodian) upon conversion or exchange of other securities held by the
Portfolio, or, if the Portfolio has a call on the same security if the
exercise price of the call held (i) is equal to or less than the exercise
price of the call written or (ii) is greater than the exercise price of the
call written, if the difference is maintained by the Portfolio in cash, U.S.
Government securities or liquid securities marked-to-market daily in a
segregated account with the Fund's custodian. A put is secured if the
Portfolio maintains cash, U.S. Government securities or liquid securities
marked-to-market daily with a value equal to the exercise price in a
segregated account or holds a put on the same underlying security at an equal
or greater exercise price.

In the case of options on certain U.S. Government securities, the Portfolio
will maintain, in a segregated account with the Fund's Custodian, cash, U.S.
Government securities or liquid securities marked-to-market daily with a value
sufficient to meet its obligations under the call, or by other means which
would permit immediate satisfaction of the Portfolio's obligation as writer of
the option.

Prior to the earlier of exercise or expiration, an option may be closed out
by an offsetting purchase or sale of an option of the same series (type,
exchange, underlying security, exercise price, and expiration). There can be
no assurance, however, that a closing purchase or sale transaction can be
effected when the Portfolio desires.

A Portfolio will realize a capital gain from a closing purchase transaction
if the cost of the closing option is less than the premium received from
writing the option, or, if it is more, the Portfolio will realize a capital
loss. If the premium received from a closing sale transaction is more than the
premium paid to purchase the option, the Portfolio will realize a capital gain
or, if it is less, the Portfolio will realize a capital loss. The principal
factors affecting the market value of a put or a call option include supply
and demand, interest rates, the current market price of the underlying
security in relation to the exercise price of the option, the volatility of
the underlying security, and the time remaining until the expiration date.

The premium paid for a put or call option purchased by a Portfolio is an
asset of the Portfolio. The premium received for an option written by a
Portfolio is recorded as a deferred credit. The value of an option purchased
or written is marked-to-market daily and is valued at the closing price on the
exchange on which it is traded or, if not traded on an exchange or no closing
price is available, at the mean between the last bid and asked prices.

Purchasing Options on Stock Indexes. The Aggressive Equity, Growth LT,
Equity Income, Multi-Strategy, Equity, Bond and Income, Equity Index and
Emerging Markets Portfolios may purchase put and call options on stock indexes
which are standardized and traded on a U.S. exchange or board of trade, or for
which an established over-the-counter market exists. The Aggressive Equity and
Emerging Markets Portfolios may sell put and call options on securities
indexes that are exchange traded or traded on over-the-counter markets. Like
other options listed on United States securities exchanges, index options are
issued by the Options Clearing Corporation ("OCC").

A stock index is a method of reflecting in a single number the market values
of many different stocks or, in the case of value weighted indices that take
into account prices of component stocks and the number of shares outstanding,
the market values of many different companies. Stock indexes are compiled and
published by various sources, including securities exchanges. An index may be
designed to be representative of the stock market as a whole, of a broad
market sector (e.g., industrials), or of a particular industry (e.g.,
electronics). An index may be based on the prices of all, or only a sample, of
the stocks whose value it is intended to represent.

A stock index is ordinarily expressed in relation to a "base" established
when the index was originated. The base may be adjusted from time to time to
reflect, for example, capitalization changes affecting component stocks. In
addition, stocks may from time to time be dropped from or added to an index
group. These changes are within the discretion of the publisher of the index.

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<PAGE>

multiplied by the number of shares outstanding. Because of this method of
calculation, changes in the stock prices of larger corporations will generally
have a greater influence on the level of a value weighted (or sometimes
referred to as a capitalization weighted) index than price changes affecting
smaller corporations.

In general, index options are very similar to stock options, and are
basically traded in the same manner. However, when an index option is
exercised, the exercise is settled by the payment of cash--not by the delivery
of stock. The assigned writer of a stock option is obligated to pay the
exercising holder cash in an amount equal to the difference (expressed in
dollars) between the closing level of the underlying index on the exercise
date and the exercise price of the option, multiplied by a specified index
"multiplier." A multiplier of 100, for example, means that a one-point
difference will yield $100.

Gains or losses on the Portfolios' transactions in securities index options
depend primarily on price movements in the stock market generally (or, for
narrow market indexes, in a particular industry or segment of the market)
rather than the price movements of individual securities held by a Portfolio
of the Fund. A Portfolio may sell securities index options prior to expiration
in order to close out its positions in stock index options which it has
purchased. A Portfolio may also allow options to expire unexercised.

Risks of Options Transactions. There are several risks associated with
transactions in options. For example, there are significant differences
between the securities and options markets that could result in an imperfect
correlation between these markets, causing a given transaction not to achieve
its objectives. A decision as to whether, when, and how to use options
involves the exercise of skill and judgment, and even a well-conceived
transaction may be unsuccessful to some degree because of market behavior or
unexpected events.

There can be no assurance that a liquid market will exist when a Portfolio
seeks to close out an option position. If a Portfolio were unable to close out
an option it had purchased on a security, it would have to exercise the option
to realize any profit or the option may expire worthless. If a Portfolio were
unable to close out a covered call option it had written on a security, it
would not be able to sell the underlying security unless the option expired
without exercise. As the writer of a covered call option, a Portfolio forgoes,
during the option's life, the opportunity to profit from increases in the
market value of the security covering the call option above the sum of the
premium and the exercise price of the call.

If trading were suspended in an option purchased by a Portfolio, the
Portfolio would not be able to close out the option. If restrictions on
exercise were imposed, the Portfolio might be unable to exercise an option it
has purchased.

With respect to index options, current index levels will ordinarily continue
to be reported even when trading is interrupted in some or all of the stocks
in an index group. In that event, the reported index levels will be based on
the current market prices of those stocks that are still being traded (if any)
and the last reported prices for those stocks that are not currently trading.
As a result, reported index levels may at times be based on non-current price
information with respect to some or even all of the stocks in an index group.
Exchange rules permit (and in some instances require) the trading of index
options to be halted when the current value of the underlying index is
unavailable or when trading is halted in stocks that account for more than a
specified percentage of the value of the underlying index. In addition, as
with other types of options, an exchange may halt the trading of index options
whenever it considers such action to be appropriate in the interests of
maintaining a fair and orderly market and protecting investors. If a trading
halt occurs, whether for these or for other reasons, holders of index options
may be unable to close out their positions and the options may expire
worthless.

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<PAGE>

for the spread transaction and any transaction costs. The sale of a spread
transaction obligates a Portfolio to purchase or deliver a security or a cash
payment with respect to an index at a fixed dollar spread or fixed yield
spread in relationship to another security or index which is used as a
benchmark. In addition, there is no assurance that closing transactions will
be available. The purchase and sale of spread transactions will be used in
furtherance of a Portfolio's objectives and to protect a Portfolio against
adverse changes in prevailing credit quality spreads, i.e., the yield spread
between high quality and lower quality securities. Such protection is only
provided during the life of the spread transaction. The Fund does not consider
a security covered by a spread transaction to be "pledged" as that term is
used in the Fund's policy limiting the pledging or mortgaging of its assets.
The sale of spread transactions will be "covered" or "secured" as described in
the "Options", "Options on Foreign Currencies", "Futures Contracts and Options
on Futures Contracts", and "Swap Agreements and Options on Swap Agreements"
sections.

OPTIONS ON FOREIGN CURRENCIES

The Managed Bond, Government Securities, Aggressive Equity, Growth LT, Bond
and Income, International, and Emerging Markets Portfolios may purchase and
sell options on foreign currencies for hedging purposes in a manner similar to
that in which futures or forward contracts on foreign currencies will be
utilized. For example, a decline in the U.S. dollar value of a foreign
currency in which portfolio securities are denominated will reduce the U.S.
dollar value of such securities, even if their value in the foreign currency
remains constant. In order to protect against such diminutions in the value of
portfolio securities, a Portfolio may buy put options on the foreign currency.
If the value of the currency declines, the Portfolio will have the right to
sell such currency for a fixed amount in U.S. dollars and will offset, in
whole or in part, the adverse effect on its portfolio.

Conversely, when a rise in the U.S. dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, a Portfolio may buy call options thereon. The
purchase of such options could offset, at least partially, the effects of the
adverse movements in exchange rates. As in the case of other types of options,
however, the benefit to the Portfolio from purchases of foreign currency
options will be reduced by the amount of the premium and related transaction
costs. In addition, if currency exchange rates do not move in the direction or
to the extent desired, the Portfolio could sustain losses on transactions in
foreign currency options that would require the Portfolio to forgo a portion
or all of the benefits of advantageous changes in those rates.

A Portfolio may write options on foreign currencies for hedging purposes.
For example, to hedge against a potential decline in the U.S. dollar value of
foreign currency denominated securities due to adverse fluctuations in
exchange rates, the Portfolio could, instead of purchasing a put option, write
a call option on the relevant currency. If the expected decline occurs, the
option will most likely not be executed and the diminution in value of
portfolio securities will be offset by the amount of the premium received.

Similarly, instead of purchasing a call option to hedge against a potential
increase in the U.S. dollar cost of securities to be acquired, the Portfolio
could write a put option on the relevant currency which, if rates move in the
manner projected, will expire unexercised and allow the Portfolio to hedge the
increased cost up to the amount of the premium. As in the case of other types
of options, however, the writing of a foreign currency option will constitute
only a partial hedge up to the amount of the premium. If exchange rates do not
move in the expected direction, the option may be exercised and the Portfolio
would be required to buy or sell the underlying currency at a loss which may
not be offset by the amount of the premium. Through the writing of options on
foreign currencies, the Portfolio also may lose all or a portion of the
benefits which might otherwise have been obtained from favorable movements in
exchange rates.

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<PAGE>

consideration (or for additional cash consideration held in a segregated
account by its custodian) upon conversion or exchange of other foreign
currency held in its portfolio; (iii) has a call on the same foreign currency
and in the same principal amount as the call written if the exercise price of
the call held (a) is equal to or less than the exercise price of the call
written, or (b) is greater than the exercise price of the call written, if the
difference is maintained by the Portfolio in government securities, cash or
liquid securities marked-to-market daily of that foreign currency, and/or
cash, U.S. Government securities, or liquid securities marked-to-market daily
in a segregated account with the Fund's custodian; or (iv) cross-hedges the
call option by segregating and marking-to-market cash or liquid assets equal
to the value of the underlying foreign currency. A put option written on a
foreign currency by a Portfolio is "covered" if the option is secured by (i)
government securities, cash or liquid securities marked-to-market daily of
that foreign currency, and/or U.S. Government securities, cash or liquid
securities marked-to-market daily at least equal to the exercise price in a
segregated account, or (ii) a put on the same underlying currency at an equal
or greater exercise price.

A Portfolio also may write call options on foreign currencies for cross-
hedging purposes that would not be deemed to be covered. A call option on a
foreign currency is for cross-hedging purposes if it is not covered but is
designed to provide a hedge against a decline due to an adverse change in the
exchange rate in the U.S. dollar value of a security which the Portfolio owns
or has the right to acquire and which is denominated in the currency
underlying the option. In such circumstances, the Portfolio collateralizes the
option by maintaining, in a segregated account with the Fund's custodian,
cash, U.S. Government Securities, or liquid securities marked-to-market daily
in an amount not less than the value of the underlying foreign currency in
U.S. dollars marked-to-market daily.

Foreign currency options are subject to the risks of the availability of a
liquid secondary market described above, as well as the risks regarding
adverse market movements, margining of options written, the nature of the
foreign currency market, possible intervention by governmental authorities and
the effects of other political and economic events. In addition, exchange-
traded options on foreign currencies involve certain risks not presented by
the over-the-counter market. For example, exercise and settlement of such
options must be made exclusively through the OCC, which has established
banking relationships in applicable foreign countries for this purpose. As a
result, the OCC may, if it determines that foreign governmental restrictions
or taxes would prevent the orderly settlement of foreign currency option
exercises, or would result in undue burdens on the OCC or its clearing member,
impose special procedures on exercise and settlement, such as technical
changes in the mechanics of delivery of currency, the fixing of dollar
settlement prices or prohibitions on exercise.

In addition, options on foreign currencies may be traded on foreign
exchanges and over-the-counter in foreign countries. Such transactions are
subject to the risk of governmental actions affecting trading in or the prices
of foreign currencies or securities. The value of such positions also could be
adversely affected by (i) other complex foreign political and economic
factors, (ii) lesser availability than in the United States of data on which
to make trading decisions, (iii) delays in a Portfolio's ability to act upon
economic events occurring in foreign markets during non-business hours in the
United States, (iv) the imposition of different exercise and settlement terms
and procedures and margin requirements than in the United States, and (v) low
trading volume.

INVESTMENTS IN SPDRS

Under the 1940 Act, a Portfolio may not own more than 3% of the outstanding
voting stock of an investment company, invest more than 5% of its total assets
in any one investment company, or invest more than 10% of its total assets in
the securities of investment companies.

The Equity Portfolio may also invest in Standard & Poor's Depository
Receipts ("SPDRs") in compliance with the 1940 Act. SPDRs are interests in a
unit investment trust ("UIT") that may be obtained from the UIT or purchased
in the secondary market (SPDRs are listed on the American Stock Exchange). The
UIT has been established to accumulate and hold a portfolio of common stocks
that is intended to track the price performance and dividend yields of the
Standard & Poor's Composite Stock Price Index ("S&P 500").

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<PAGE>

Individual investments in SPDRs are not redeemable, except upon termination
of the UIT. However, large quantities of SPDRs known as "Creation Units" are
redeemable from the sponsor of the UIT. The liquidity of small holdings of
SPDRs, therefore, will depend upon the existence of a secondary market.

The price of SPDRs is derived from and based upon the securities held by the
UIT. Accordingly, the level of risk involved in the purchase or sale of a SPDR
is similar to the risk involved in the purchase or sale of traditional common
stock, with the exception that the pricing mechanism for SPDRs is based on a
basket of stocks. Disruptions in the markets for the securities underlying
SPDRs purchased or sold by the Equity Portfolio could result in losses on
SPDRs. Trading in SPDRs involves risks similar to those risks, described under
"Risks of Options Transactions."

FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS

The High Yield Bond, Managed Bond, Government Securities, Growth LT, Multi-
Strategy, Bond and Income, and International Portfolios may invest in interest
rate futures and options thereon. The Aggressive Equity, Growth LT, Equity
Income, Multi-Strategy, Equity, Equity Index, International, and Emerging
Markets Portfolios may invest in stock index futures and options thereon.

Interest Rate Futures. (The High Yield Bond, Managed Bond, Government
Securities, Growth LT, Multi-Strategy, Bond and Income, and International
Portfolios.) An interest rate futures contract is an agreement between two
parties (buyer and seller) to take or make delivery of a specified quantity of
financial instruments (such as GNMA certificates or Treasury bonds) at a
specified price at a future date. In the case of futures contracts traded on
U.S. exchanges, the exchange itself or an affiliated clearing corporation
assumes the opposite side of each transaction (i.e., as buyer or seller). A
futures contract may be satisfied or closed out by delivery or purchase, as
the case may be, of the financial instrument or by payment of the change in
the cash value of the index. Frequently, using futures to effect a particular
strategy instead of using the underlying or related security will result in
lower transaction costs being incurred. A public market exists in futures
contracts covering various financial instruments including U.S. Treasury
bonds, U.S. Treasury notes, GNMA certificates, three month U.S. Treasury
bills, 90 day commercial paper, bank certificates of deposit, and Eurodollar
certificates of deposit.

As a hedging strategy a Portfolio might employ, a Portfolio would purchase
an interest rate futures contract when it is not fully invested in long-term
debt securities but wishes to defer their purchase for some time until it can
orderly invest in such securities or because short-term yields are higher than
long-term yields. Such purchase would enable the Portfolio to earn the income
on a short-term security while at the same time minimizing the effect of all
or part of an increase in the market price of the long-term debt security
which the Portfolio intended to purchase in the future. A rise in the price of
the long-term debt security prior to its purchase either would be offset by an
increase in the value of the futures contract purchased by the Portfolio or
avoided by taking delivery of the debt securities under the futures contract.

A Portfolio would sell an interest rate futures contract in order to
continue to receive the income from a long-term debt security, while
endeavoring to avoid part or all of the decline in market value of that
security which would accompany an increase in interest rates. If interest
rates did rise, a decline in the value of the debt security held by the
Portfolio would be substantially offset by the ability of the Portfolio to
repurchase at a lower price the interest rate futures contract previously
sold. While the Portfolio could sell the long-term debt security and invest in
a short-term security, ordinarily the Portfolio would give up income on its
investment, since long-term rates normally exceed short-term rates.

Stock Index Futures. (The Aggressive Equity, Growth LT, Equity Income,
Multi-Strategy, Equity, Equity Index, International, and Emerging Markets
Portfolios.) A stock index is a method of reflecting in a single number the
market values of many different stocks or, in the case of capitalization
weighted indices that take into account both stock prices and the number of
shares outstanding, many different companies. An index fluctuates generally
with changes in the market values of the common stocks so included. A stock
index futures

24
<PAGE>

contract is a bilateral agreement pursuant to which two parties agree to take
or make delivery of an amount of cash equal to a specified dollar amount
multiplied by the difference between the stock index value at the close of the
last trading day of the contract and the price at which the futures contract
is originally purchased or sold. No physical delivery of the underlying stocks
in the index is made.

A Portfolio may purchase and sell stock index futures contracts to hedge its
securities portfolio. A Portfolio may engage in transactions in futures
contracts only in an effort to protect it against a decline in the value of
the Portfolio's portfolio securities or an increase in the price of securities
that the Portfolio intends to acquire. For example, a Portfolio may sell stock
index futures to protect against a market decline in an attempt to offset
partially or wholly a decrease in the market value of securities that the
Portfolio intends to sell. Similarly, to protect against a market advance when
the Portfolio is not fully invested in the securities market, the Portfolio
may purchase stock index futures that may partly or entirely offset increases
in the cost of securities that the Portfolio intends to purchase.

Futures Options. The High Yield Bond, Managed Bond, Government Securities,
Growth LT, Multi-Strategy, Bond and Income, and International Portfolios may
purchase and sell (write) call and put options on interest rate futures.
Futures options possess many of the same characteristics as options on
securities. A futures option gives the holder the right, in return for the
premium paid, to assume a long position (call) or short position (put) in a
futures contract at a specified exercise price at any time during the period
of the option. Upon exercise of a call option, the holder acquires a long
position in the futures contract and the writer is assigned the opposite short
position. In the case of a put option, the opposite is true.

The Aggressive Equity, Growth LT, Equity Income, Multi-Strategy, Equity,
Equity Index, International, and Emerging Markets Portfolios may purchase put
and call options on stock index futures. Options on stock index futures
contracts give the purchaser the right, in return for the premium paid, to
assume a position in a stock index futures contract (a long position if the
option is a call and a short position if the option is a put) at a specified
exercise price at any time during the period of the option. Upon exercise of
the option, the delivery of the futures position by the writer of the option
to the holder of the option will be accompanied by delivery of the accumulated
balance in the writer's futures margin account which represents the amount by
which the market price of the stock index futures contract, at exercise,
exceeds (in the case of a call) or is less than (in the case of a put) the
exercise price of the option on the stock index futures contract. If an option
is exercised on the last trading day prior to the expiration date of the
option, the settlement will be made entirely in cash equal to the difference
between the exercise price of the option and the closing level of the index on
which the futures contract is based on the expiration date. Purchasers of
options who fail to exercise their options prior to the exercise date suffer a
loss of the premium paid.

The High Yield Bond, Multi-Strategy, Equity Income, Equity, and Equity Index
Portfolios will only enter into futures contracts and futures options which
are standardized and traded on a U.S. exchange, board of trade, or similar
entity, or in the case of futures options, for which an established over-the-
counter market exists.

If a purchase or sale of a futures contract is made by a Portfolio, the
Portfolio is required to deposit with its custodian (or broker, if legally
permitted) a specified amount of cash or U.S. Government securities ("initial
margin"). The margin required for a futures contract is set by the exchange on
which the contract is traded and may be modified during the term of the
contract. The initial margin is in the nature of a performance bond or good
faith deposit on the futures contract which is returned to the Portfolio upon
termination of the contract, assuming all contractual obligations have been
satisfied. Each investing Portfolio expects to earn interest income on its
initial margin deposits. A futures contract held by a Portfolio is valued
daily at the official settlement price of the exchange on which it is traded.
Each day the Portfolio pays or receives cash, called "variation margin," equal
to the daily change in value of the futures contract. This process is known as
"marking-to-market." Variation margin does not represent a borrowing or loan
by a Portfolio but is instead settlement between the Portfolio and the broker
of the amount one would owe the other if the futures contract expired. In
computing daily net asset value, each Portfolio will mark-to-market its open
futures positions.

25
<PAGE>

A Portfolio is also required to deposit and maintain margin with respect to
put and call options on futures contracts written by it. Such margin deposits
will vary depending on the nature of the underlying futures contract (and the
related initial margin requirements), the current market value of the option,
and other futures positions held by the Portfolio.

Although some futures contracts call for making or taking delivery of the
underlying securities, generally these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts (same
exchange, underlying security, and delivery month). If an offsetting purchase
price is less than the original sale price, the Portfolio realizes a capital
gain, or if it is more, the Portfolio realizes a capital loss. Conversely, if
an offsetting sale price is more than the original purchase price, the
Portfolio realizes a capital gain, or if it is less, the Portfolio realizes a
capital loss. The transaction costs must also be included in these
calculations.

Limitations. The Fund will comply with certain regulations of the Commodity
Futures Trading Commission ("CFTC") under which an investment company may
engage in futures transactions and qualify for an exclusion from being a
"commodity pool." Under these regulations, a Portfolio may only enter into a
futures contract or purchase an option thereon (1) for bona fide hedging
purposes and (2) for other purposes if, immediately thereafter, the initial
margin deposits for futures contracts held by that Portfolio plus premiums
paid by it for open futures option positions, less the amount by which any
such positions are "in-the-money," would not exceed 5% of the Portfolio's
total assets. A call option is "in-the-money" if the value of the futures
contract that is the subject of the option exceeds the exercise price. A put
option is "in-the-money" if the exercise price exceeds the value of the
futures contract that is the subject of the option.

When purchasing a futures contract, a Portfolio must maintain with its
custodian in a segregated account (or broker, if legally permitted) cash, U.S.
Government securities or other liquid securities marked-to-market daily
(including any margin) equal to the market value of such contract. When
writing a call option on a futures contract, the Portfolio similarly will
maintain with its custodian government securities, cash or liquid securities
marked-to-market daily of that foreign currency, and/or, U.S. Government
securities, cash, or other liquid securities marked-to-market daily (including
any margin) equal to the amount such option is in-the-money until the option
expires or is closed out by the Portfolio. When selling a futures contract or
selling a put option on a futures contract, the Portfolio is required to
maintain with its custodian government securities, cash or liquid securities
marked-to-market daily of that foreign currency, and/or U.S. Government
securities, cash, or other liquid securities marked-to-market daily (including
any margin) equal to the market value of such contract or exercise price of
such option, or to otherwise cover the position.

A Portfolio may not maintain open short positions in futures contracts or
call options written on futures contracts if, in the aggregate, the market
value of all such open positions exceeds the current value of its portfolio
securities, plus or minus unrealized gains and losses on the open positions,
adjusted for the historical relative volatility of the relationship between
the Portfolio and the positions. For this purpose, to the extent the Portfolio
has written call options on specific securities it owns, the value of those
securities will be deducted from the current market value of the securities
portfolio.

The Fund reserves the right to engage in other types of futures transactions
in the future and to use futures and related options for other than hedging
purposes to the extent permitted by regulatory authorities. If other types of
options, futures contracts, or futures options are traded in the future, a
Portfolio may also use such investment techniques, provided that the Board of
Trustees determines that their use is consistent with the Portfolio's
investment objective.

26
<PAGE>

and the instruments underlying the hedging vehicle in such respects as
interest rate levels, maturities, conditions affecting particular industries,
and creditworthiness of issuers. A decision as to whether, when, and how to
hedge involves the exercise of skill and judgment and even a well-conceived
hedge may be unsuccessful to some degree because of market behavior or
unexpected interest rate trends.

The price of futures contracts may not correlate perfectly with movement in
the underlying security or stock index, due to certain market distortions.
This might result from decisions by a significant number of market
participants holding stock index futures positions to close out their futures
contracts through offsetting transactions rather than to make additional
margin deposits. Also, increased participation by speculators in the futures
market may cause temporary price distortions. These factors may increase the
difficulty of effecting a fully successful hedging transaction, particularly
over a short time frame. With respect to a stock index futures contract, the
price of stock index futures might increase, reflecting a general advance in
the market price of the index's component securities, while some or all of the
portfolio securities might decline. If a Portfolio had hedged its portfolio
against a possible decline in the market with a position in futures contracts
on an index, it might experience a loss on its futures position until it could
be closed out, while not experiencing an increase in the value of its
portfolio securities. If a hedging transaction is not successful, the
Portfolio might experience losses which it would not have incurred if it had
not established futures positions. Similar risk considerations apply to the
use of interest rate and other futures contracts.

Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of the
current trading session. Once the daily limit has been reached in a futures
contract subject to the limit, no more trades may be made on that day at a
price beyond that limit. The daily limit governs only price movements during a
particular trading day and therefore does not limit potential losses because
the limit may work to prevent the liquidation of unfavorable positions. For
example, futures prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of positions and subjecting some holders of futures contracts to
substantial losses.

The Managed Bond, Government Securities, Aggressive Equity, Growth LT, Bond
and Income, International, and Emerging Markets Portfolios may trade futures
contracts and options on futures contracts not only on U.S. domestic markets,
but also on exchanges located outside of the United States. Foreign markets
may offer advantages such as trading in indices that are not currently traded
in the United States. Foreign markets, however, may have greater risk
potential than domestic markets. Unlike trading on domestic commodity
exchanges, trading on foreign commodity exchanges is not regulated by the CFTC
and may be subject to greater risk than trading on domestic exchanges. For
example, some foreign exchanges are principal markets so that no common
clearing facility exists and a trader may look only to the broker for
performance of the contract. Trading in foreign futures or foreign options
contracts may not be afforded certain of the protective measures provided by
the Commodity Exchange Act, the CFTC's regulations, and the rules of the
National Futures Association and any domestic exchange, including the right to
use reparations proceedings before the CFTC and arbitration proceedings
provided by the National Futures Association or any domestic futures exchange.
Amounts received for foreign futures or foreign options transactions may not
be provided the same protection as funds received in respect of transactions
on United States futures exchanges. In addition, any profits that the
Portfolio might realize in trading could be eliminated by adverse changes in
the exchange rate of the currency in which the transaction is denominated, or
the Portfolio could incur losses as a result of changes in the exchange rate.
Transactions on foreign exchanges may include both commodities that are traded
on domestic exchanges or boards of trade and those that are not.

There can be no assurance that a liquid market will exist at a time when a
Portfolio seeks to close out a futures or a futures option position, and that
Portfolio would remain obligated to meet margin requirements until the
position is closed. In addition, many of the contracts discussed above are
relatively new instruments without a significant trading history. As a result,
there can be no assurance that an active secondary market will develop or
continue to exist.

27
<PAGE>

FOREIGN CURRENCY FUTURES AND OPTIONS THEREON

The Managed Bond, Government Securities, Aggressive Equity, Growth LT, Bond
and Income, International, and Emerging Markets Portfolios may enter into
contracts for the purchase or sale for future delivery of foreign currencies
("foreign currency futures") and may purchase and write options on foreign
currency futures. In addition, a Portfolio may engage in cross-hedging
activities, which involve the sale of a futures contract on one foreign
currency to hedge against changes in exchange rates for a different ("proxy")
currency if there is an established historical pattern of correlation between
the two currencies. These investment techniques will be used only to hedge
against anticipated future changes in exchange rates which otherwise might
adversely affect the value of the Portfolio's securities or adversely affect
the prices of securities that the Portfolio has purchased or intends to
purchase at a later date. The successful use of foreign currency futures will
usually depend on the Portfolio Manager's ability to forecast currency
exchange rate movements correctly. Should exchange rates move in an unexpected
manner, the Portfolio may not achieve the anticipated benefits of foreign
currency futures or may realize losses.

SWAP AGREEMENTS AND OPTIONS ON SWAP AGREEMENTS

The Emerging Markets Portfolio may enter into equity index swap agreements.
The Managed Bond and Government Securities Portfolios may enter into interest
rate, interest rate index, and currency exchange rate swap agreements, and may
purchase and sell options thereon. A Portfolio's current obligations (or
rights) under a swap agreement will generally be equal only to the net amount
to be paid or received under the agreement based on the relative values of the
positions held by each party to the agreement (the "net amount"). A
Portfolio's current obligations under a swap agreement will be accrued daily
(offset against any amounts owing to the Portfolio) and any accrued but unpaid
net amounts owed to a swap counterparty will be covered by the maintenance of
a segregated account consisting of cash, U.S. Government securities, and/or
liquid securities marked-to-market daily, to avoid any potential leveraging of
a Portfolio. The Bond and Income Portfolio may invest in the following types
of swap agreements: (1) "interest rate caps," under which, in return for a
premium, one party agrees to make payments to the other to the extent that
interest rates exceed a specified rate, or "cap"; (2) "interest rate floors,"
under which, in return for a premium, one party agrees to make payments to the
other to the extent that interest rates fall below a certain level, or
"floor"; (3) "interest rate collars," under which one party sells a cap and
purchases a floor or vice-versa in an attempt to protect itself against
interest rate movements exceeding given minimum or maximum levels; and (4)
"currency exchange rate swap agreements."

Generally, the swap agreement transactions in which a Portfolio will engage
are not regulated as futures or commodity option transactions under the
Commodity Exchange Act or by the Commodity Futures Trading Commission.

STRUCTURED NOTES

The Bond and Income Portfolio may invest in structured notes. The value of
the principal of and/or interest on such securities is determined by reference
to changes in the value of specific currencies, interest rates, commodities,
indices, or other financial indicators (the "Reference") or the relative
change in two or more References. The interest rate or the principal amount
payable upon maturity or redemption may be increased or decreased depending
upon changes in the applicable Reference. The terms of the structured notes
may provide that in certain circumstances no principal is due at maturity and,
therefore, result in the loss of a Portfolio's investment. Structured notes
may be positively or negatively indexed, so that appreciation of the Reference
may produce an increase or decrease in the interest rate or value of the
security at maturity. In addition, changes in the interest rates or the value
of the security at maturity may be a multiple of changes in the value of the
Reference. Consequently, structured securities may entail a greater degree of
market risk than other types of fixed-income securities. Structured notes may
also be more volatile, less liquid and more difficult to accurately price than
less complex securities.

WARRANTS AND RIGHTS

28
<PAGE>

purchase), and in the case of the Equity Portfolio 5%, may be invested in
warrants other than warrants acquired in units or attached to other
securities. The Aggressive Equity and Emerging Markets Portfolios each may
invest up to 5% of its net assets in warrants or rights (valued at the lower
of cost or market) to purchase securities, provided that no more than 2% of
its net assets are invested in warrants not listed on the New York or American
Stock Exchanges. Each of these Portfolios may invest in warrants or rights
acquired as part of a unit or attached to securities at the time of purchase
without limitation. Warrants may be considered speculative in that they have
no voting rights, pay no dividends, and have no rights with respect to the
assets of the corporation issuing them. Warrants basically are options to
purchase equity securities at a specific price valid for a specific period of
time. They do not represent ownership of the securities, but only the right to
buy them. Warrants differ from call options in that warrants are issued by the
issuer of the security which may be purchased on their exercise, whereas call
options may be written or issued by anyone. The prices of warrants do not
necessarily move parallel to the prices of the underlying securities.

DURATION

Duration is a measure of average life of a bond on a present value basis,
which was developed to incorporate a bond's yield, coupons, final maturity and
call features into one measure. Duration is one of the fundamental tools that
may be used by the Adviser or Portfolio Manager in fixed income security
selection. In this discussion, the term "bond" is generally used to connote
any type of debt instrument.

Most notes and bonds have provided interest ("coupon") payments in addition
to a final ("par") payment at maturity. Some obligations also feature call
provisions. Depending on the relative magnitude of these payments, debt
obligations may respond differently to changes in the level and structure of
interest rates. Traditionally, a debt security's "term to maturity" has been
used as a proxy for the sensitivity of the security's price to changes in
interest rates (which is the "interest rate risk" or "volatility" of the
security). However, "term to maturity" measures only the time until a debt
security provides its final payment, taking no account of the pattern of the
security's payments prior to maturity.

Duration is a measure of the average life of a fixed-income security on a
present value basis. Duration takes the length of the time intervals between
the present time and the time that the interest and principal payments are
scheduled or, in the case of a callable bond, expected to be received, and
weights them by the present values of the cash to be received at each future
point in time. For any fixed-income security with interest payments occurring
prior to the payment of principal, duration is always less than maturity. In
general, all other things being the same, the lower the stated or coupon rate
of interest of a fixed-income security, the longer the duration of the
security; conversely, the higher the stated or coupon rate of interest of a
fixed-income security, the shorter the duration of the security.

Although frequently used, the "term of maturity" of a bond is not a useful
measure of the longevity of a bond's cash flow because it refers only to the
time remaining to the repayment of principal or corpus and disregards earlier
coupon payments. Thus, for example, three bonds with the same maturity may not
have the same investment characteristics (such as risk or repayment time). One
bond may have large coupon payments early in its life, whereas another may
have payments distributed evenly throughout its life. Some bonds (such as zero
coupon bonds) make no coupon payments until maturity. Clearly, an investor
contemplating investing in these bonds should consider not only the final
payment or sum of payments on the bond, but also the timing and magnitude of
payments in order to make an accurate assessment of each bond. Maturity, or
the term to maturity, does not provide a prospective investor with a clear
understanding of the time profile of cash flows over the life of a bond.

29
<PAGE>

the amount of time which must pass before it is paid, a better method might be
to weight each year by the present value of the dollars paid that year. This
calculation puts the weights on a comparable basis and creates a definition of
longevity which is known as duration.

A bond's duration depends upon three variables: (i) the maturity of the
bond; (ii) the coupon payments attached to the bond; and (iii) the bond's
yield to maturity. Yield to maturity, or investment return as used here,
represents the approximate return an investor purchasing a bond may expect if
he holds that bond to maturity. In essence, yield to maturity is the rate of
interest which, if applied to the purchase price of a bond, would be capable
of exactly reproducing the entire time schedule of future interest and
principal payments.

Increasing the size of the coupon payments on a bond, while leaving the
maturity and yield unchanged, will reduce the duration of the bond. This
follows from the fact that because bonds with higher coupon payments pay
relatively more of their cash flows sooner, they have shorter durations.
Increasing the yield to maturity on a bond (e.g., by reducing its purchase
price), while leaving the terms to maturity and coupon payments unchanged,
also reduces the duration of the bond. Because a higher yield leads to lower
present values for more distant payments relative to earlier payments, and, to
relatively lower weights attached to the years remaining to those payments,
the duration of the bond is reduced.

There are some situations where even the standard duration calculation does
not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or
more years; however, their interest rate exposure corresponds to the frequency
of the coupon reset. Another example where the interest rate exposure is not
properly captured by duration is mortgage pass-throughs. The stated final
maturity is generally 30 years but current prepayment rates are more critical
in determining the securities' interest rate exposure. In these and other
similar situations, the Adviser or Portfolio Manager to a Portfolio will use
more sophisticated analytical techniques which incorporate the economic life
of a security into the determination of its interest rate exposure.

Futures, options, and options on futures have durations which, in general,
are closely related to the duration of the securities which underlie them.
Holding long futures or call option positions (backed by a segregated account
of cash and cash equivalents) will lengthen the portfolio duration if interest
rates go down and bond prices go up by approximately the same amount that
holding an equivalent amount of the underlying securities would.

Short futures or put option positions have durations roughly equal to the
negative duration of the securities that underlie those positions, and have
the effect of reducing portfolio duration if interest rates go up and bond
prices go down by approximately the same amount that selling an equivalent
amount of the underlying securities would.

INVESTMENT RESTRICTIONS

FUNDAMENTAL INVESTMENT RESTRICTIONS

Each Portfolio's investment objective as set forth under "Investment
Objectives and Policies," and the investment restrictions as set forth below,
are fundamental policies of each Portfolio and may not be changed with respect
to any Portfolio without the approval of a majority of the outstanding voting
shares of that Portfolio. The vote of a majority of the outstanding voting
securities of a Portfolio means the vote, at an annual or special meeting of
(a) 67% or more of the voting securities present at such meeting, if the
holders of more than 50% of the outstanding voting securities of such
Portfolio are present or represented by proxy; or (b) more than 50% of the
outstanding voting securities of such Portfolio, whichever is the less. Under
these restrictions, a Portfolio may not:

(i) invest in a security if, as a result of such investment, more than 25%
of its total assets (taken at market value at the time of such investment)
would be invested in the securities of issuers in any particular industry,
except that this restriction does not apply to securities issued or guaranteed
by the U.S. Government or its agencies or instrumentalities (or repurchase
agreements with respect thereto);

30
<PAGE>

(ii) with respect to 75% of its total assets, invest in a security if, as a
result of such investment, more than 5% of its total assets (taken at market
value at the time of such investment) would be invested in the securities of
any one issuer, except that this restriction does not apply to securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities;

(iii) invest in a security if, as a result of such investment, it would hold
more than 10% (taken at the time of such investment) of the outstanding voting
securities of any one issuer;

(iv) purchase or sell real estate (although it may purchase securities
secured by real estate or interests therein, or securities issued by companies
which invest in real estate, or interests therein);

(v) borrow money or pledge, mortgage or hypothecate its assets, except that
a Portfolio may: (a) borrow from banks but only if immediately after each
borrowing and continuing thereafter there is asset coverage of 300%; and (b)
enter into reverse repurchase agreements and transactions in options, futures,
and options on futures as described in the Prospectus and in the Statement of
Additional Information (the deposit of assets in escrow in connection with the
writing of covered put and call options and the purchase of securities on a
"when-issued" or delayed delivery basis and collateral arrangements with
respect to initial or variation margin deposits for futures contracts will not
be deemed to be pledges of a Portfolio's assets);

(vi) lend any funds or other assets, except that a Portfolio may, consistent
with its investment objective and policies: (a) invest in debt obligations
including bonds, debentures or other debt securities, bankers' acceptances,
and commercial paper, even though the purchase of such obligations may be
deemed to be the making of loans; (b) enter into repurchase agreements and
reverse repurchase agreements; and (c) lend its portfolio securities in an
amount not to exceed 25% of the value of its total assets, provided such loans
are made in accordance with applicable guidelines established by the
Securities and Exchange Commission and the Fund's Trustees;

(vii) act as an underwriter of securities of other issuers, except, when in
connection with the disposition of portfolio securities, it may be deemed to
be an underwriter under the federal securities laws; and

In addition, with respect to the Money Market, High Yield Bond, Managed
Bond, Government Securities, Growth, Growth LT, Equity Income, Multi-Strategy,
Equity Index and International Portfolios, unless otherwise indicated, such
Portfolios may not:

(viii) purchase or sell commodities or commodities contracts, except that,
subject to restrictions described in the Prospectus and in the Statement of
Additional Information (a) the Managed Bond, Equity Index, Government
Securities, High Yield Bond, Growth LT, Equity Income, Multi-Strategy, and
International Portfolios may engage in futures contracts and options on
futures contracts, (b) all Portfolios may enter into foreign forward currency
contracts; and (c) the Equity Index Portfolio may purchase and sell stock
index futures, purchase options on stock indexes, and purchase options on
stock index futures;

(ix) except the Growth LT Portfolio, purchase securities on margin (except
for use of short-term credit necessary for clearance of purchases and sales of
portfolio securities) but it may make margin deposits in connection with
transactions in options, futures, and options on futures;

(x) except the Growth LT Portfolio, maintain a short position, or purchase,
write, or sell puts, calls, straddles, spreads, or combinations thereof,
except as set forth in the Prospectus and in the SAI for transactions in
options, futures, and options on futures.

NONFUNDAMENTAL INVESTMENT RESTRICTIONS

Each Portfolio is also subject to the following restrictions and policies
(which are not fundamental and may therefore be changed without shareholder
approval) relating to the investment of its assets and activities. Unless
otherwise indicated, a Portfolio may not:

(i) invest for the purpose of exercising control or management;

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<PAGE>

(ii) sell securities or property short, except short sales against the box;

(iii) purchase warrants if immediately after and as a result of such
purchase more than 10% of the market value of the total assets of the
Portfolio would be invested in such warrants;

(iv) purchase securities on margin (except for use of short-term credit
necessary for clearance of purchases and sales of portfolio securities) but it
may make margin deposits in connection with transactions in options, futures,
and options on futures;

(v) maintain a short position, or purchase, write, or sell puts, calls,
straddles, spreads, or combinations thereof, except as set forth in the
Prospectus and in the SAI for transactions in options, futures, and options on
futures;

(vi) invest in securities that are illiquid, or in repurchase agreements
maturing in more than seven days, if as a result of such investment, more than
15% of the net assets of the Portfolio (taken at market value at the time of
such investment) would be invested in such securities, and with respect to the
Money Market Portfolio, more than 10% of the total assets of the Portfolio
(taken at market value at the time of such investment) would be invested in
such securities; and

(vii) purchase or sell commodities or commodities contracts, except, (a)
futures contracts and options on futures contracts, (b) forward foreign
currency contracts and (c) stock index futures, options on stock indexes, and
options on stock index futures; subject to any applicable restrictions
described in the Prospectus and in the SAI.

Unless otherwise indicated, as in the restriction for borrowing or
hypothecating assets of a Portfolio, for example, all percentage limitations
listed above apply to each Portfolio only at the time into which a transaction
is entered. Accordingly, if a percentage restriction is adhered to at the time
of investment, a later increase or decrease in the percentage which results
from a relative change in values or from a change in a Portfolio's net assets
will not be considered a violation. For purposes of fundamental restriction
(v) and nonfundamental restriction (vii) as set forth above, an option on a
foreign currency shall not be considered a commodity or commodity contract.
For purposes of nonfundamental restriction (v), a short sale "against the box"
shall not be considered a short position.

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<PAGE>

MANAGEMENT OF THE FUND

TRUSTEES AND OFFICERS

The Trustees and Executive Officers of the Fund, their business address, and
principal occupations during the past five years are:

<TABLE>
<CAPTION>
BUSINESS AFFILIATES AND
NAME AND ADDRESS POSITION WITH THE FUND PRINCIPAL OCCUPATIONS
---------------- ---------------------- -----------------------
<C> <C> <S>
Thomas C. Sutton* Chairman of the Chairman of the Board,
700 Newport Center Drive Board, Trustee Director and Chief Executive
Newport Beach, CA 92660 and President Officer of Pacific Life,
Age 55 Pacific Mutual Holding
Company and Pacific
LifeCorp; Former Equity
Board Member of PIMCO
Advisors L.P.; and similar
positions with other
subsidiaries of Pacific
Life; Director of Newhall
Land & Farming; Director of
The Irvine Company; Director
of Edison International.
Glenn S. Schafer* Trustee President and Director of
700 Newport Center Drive Pacific Life, Pacific Mutual
Newport Beach, CA 92660 Holding Company and Pacific
Age 48 LifeCorp and similar
positions with other
subsidiaries and affiliates
of Pacific Life.
Richard L. Nelson Trustee Business Consultant; retired
8 Cherry Hills Lane Partner with Ernst & Young;
Newport Beach, CA 92660 Director of Wynn's
Age 68 International, Inc.
Lyman W. Porter Trustee Professor of Management in
University of California the Graduate School of
at Irvine Management at the University
Irvine, CA 92717 of California, Irvine;
Age 68 Member of the Academic
Advisory Board of the
Czechoslovak Management
Center; and member of the
Board of Trustees of the
American University of
Armenia.
Alan Richards Trustee President of Alan Richards
7381 Elegans Place Consulting, Inc.; Chairman
Carlsbad, CA 92009 of IBIS Capital, LLC; Former
Age 68 Chairman of Advisory Board,
DCG Corporation; Former
Director of Western National
Corporation.
Brian D. Klemens Vice President Assistant Vice President,
700 Newport Center Drive and Treasurer Accounting and Assistant
Newport Beach, CA 92660 Controller, Corporate
Age 41 Finance of Pacific Life.
Diane N. Ledger Vice President Vice President, Variable
700 Newport Center Drive and Assistant Regulatory Compliance,
Newport Beach, CA 92660 Secretary Corporate Law of Pacific
Age 58 Life.
Sharon A. Cheever Vice President Vice President and
700 Newport Center Drive and General Investment Counsel of
Newport Beach, CA 92660 Counsel Pacific Life.
Age 42
Audrey L. Milfs Secretary Vice President, Director and
700 Newport Center Drive Corporate Secretary of
Newport Beach, CA 92660 Pacific Life; and similar
Age 52 positions with other
subsidiaries of Pacific
Life.
</TABLE>
- --------
* Mr. Sutton and Mr. Schafer are "interested persons" of the Fund (as that
term is defined in the Investment Company Act) because of their positions
with Pacific Life as shown above.

33
<PAGE>

Trustees other than those affiliated with Pacific Life Insurance Company
("Pacific Life" or the "Adviser", formerly known as Pacific Mutual Life
Insurance Company) or a Portfolio Manager, currently receive an annual fee of
$15,000 and $1,500 for each Board of Trustees meeting attended, including each
Audit, Policy, or Nominating Committee meeting attended, plus reimbursement of
related expenses. In addition, the Chairman of the Fund's Audit Committee and
Policy Committee each receives an additional annual fee of $2,000. The
following table summarizes the aggregate compensation paid by the Fund to each
Trustee who was not affiliated with Pacific Life or a Portfolio Manager in
1997. The table also shows total compensation paid to these Trustees in 1997
by the Fund and PIMCO Funds: Multi-Manager Series (formerly Equity Advisors
Series), an investment company managed by an affiliate of Pacific Life for
which Messrs. Nelson, Porter, and Richards (but not Mr. Sutton or Mr. Schafer)
also serve as trustees (collectively, "Fund Complex").

<TABLE>
<CAPTION>
PENSION OR
RETIREMENT TOTAL
BENEFITS ESTIMATE COMPENSATION
ACCRUED ANNUAL FROM FUND
AGGREGATE AS PART OF BENEFITS COMPLEX
COMPENSATION FUND UPON PAID TO
NAME OF TRUSTEE FROM FUND EXPENSES RETIREMENT TRUSTEES
- --------------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
Richard L. Nelson............... $28,500 0 0 $59,500
Lyman W. Porter................. $27,000 0 0 $57,500
Alan Richards................... $28,500 0 0 $64,500
</TABLE>

None of the Trustees or Officers directly own shares of the Fund. As of
February 27, 1998, the Trustees and Officers as a group owned Variable
Contracts that entitled them to give voting instructions with respect to less
than 1% of the outstanding shares of the Fund.

INVESTMENT ADVISER

Pacific Life serves as Investment Adviser to the Fund pursuant to an
Investment Advisory Agreement ("Advisory Contract") between Pacific Life and
the Fund. Pacific Life is responsible for administering the affairs of and
supervising the investment program for the Fund. Pacific Life also furnishes
to the Board of Trustees, which has overall responsibility for the business
and affairs of the Fund, periodic reports on the investment performance of
each Portfolio.

Under the terms of the Advisory Contract, Pacific Life is obligated to
manage the Fund's Portfolios in accordance with applicable laws and
regulations.

The Advisory Contract will continue in effect until December 31, 1998, and
from year to year thereafter, provided such continuance is approved annually
by (i) the holders of a majority of the outstanding voting securities of the
Fund or by the Board of Trustees, and (ii) a majority of the Trustees who are
not parties to such Advisory Contract or "interested persons", as defined in
the Investment Company Act of 1940 (the "1940 Act"), of any such party. The
Advisory Contract was originally approved by the Board of Trustees, including
a majority of the Trustees who are not parties to the Advisory Contract, or
interested persons of such parties, at its meeting held on July 21, 1987, and
by the shareholders of the Fund at a Meeting of Shareholders held on
October 28, 1988. The Advisory Contract was also approved by the shareholders
of the Equity Index Portfolio of the Fund at a Meeting of Shareholders of the
Equity Index Portfolio held on April 21, 1992. An Addendum to the Advisory
Contract was approved by the Board of Trustees, including a majority of the
Trustees who are not parties to the Contract, or interested persons of such
parties, at a meeting held on October 28, 1988. An Addendum to the Advisory
Contract which increased the advisory fee schedule with respect to the High
Yield Bond, Managed Bond, Government Securities, Growth, Equity Income, Multi-
Strategy, and International Portfolios, and which included the Growth LT
Portfolio as a Portfolio to which the Adviser will perform services under the
Advisory Contract, was approved by the Board of Trustees, including a majority
of the Trustees who are not parties to the Contract, or interested persons of
such parties, at a meeting held on September 29, 1993, and was approved by
shareholders of the High Yield Bond, Managed Bond, Government Securities,
Growth, Equity Income, Multi-

34
<PAGE>

Strategy, and International Portfolios at a Special Meeting of Shareholders on
December 13, 1993. An Addendum to the Advisory Contract for the Equity
Portfolio and Bond and Income Portfolio was approved by the Board of Trustees,
including a majority of the Trustees who are not parties to the Advisory
Contract or interested persons of such parties, at a meeting held on August
12, 1994, and by the sole shareholder of those Portfolios on September 6,
1994. An Addendum to the Advisory Contract for the Aggressive Equity Portfolio
and Emerging Markets Portfolio was approved by the Board of Trustees,
including a majority of the Trustees who are not parties to the Advisory
Contract or interested persons of such parties, at a meeting held on November
17, 1995, and by the sole shareholder of those Portfolios on January 30, 1996.
The Advisory Contract may be terminated without penalty by vote of the
Trustees or the shareholders of the Fund, or by the Adviser, on 60 days'
written notice by either party to the Advisory Contract and will terminate
automatically if assigned.

The Fund pays the Adviser, for its services under the Agreement, a fee based
on an annual percentage of the average daily net assets of each Portfolio. For
the Money Market Portfolio, the Fund will pay to the Adviser a fee at an
annual rate of .40% of the first $250 million of the average daily net assets
of the Portfolio, .35% of the next $250 million of the average daily net
assets of the Portfolio, and .30% of the average daily net assets of the
Portfolio in excess of $500 million. For the High Yield Bond, Managed Bond,
Government Securities, and Bond and Income Portfolios, the Fund will pay .60%
of the average daily net assets of each of the Portfolios. For the Growth,
Equity Income, Multi-Strategy, and Equity Portfolios, the Fund will pay .65%
of the average daily net assets of each of the Portfolios. For the Aggressive
Equity Portfolio, the Fund pays to the Adviser a fee at an annual rate of .80%
of the average daily net assets of the Portfolio. For the Growth LT Portfolio,
the Fund will pay .75% of the average daily net assets of the Portfolio. For
the Equity Index Portfolio, the Fund will pay .25% of the first $100 million
of the average daily net assets of the Portfolio, .20% of the next $100
million of the average daily net assets of the Portfolio, and .15% of the
average daily net assets of the Portfolio in excess of $200 million. For the
International Portfolio, the Fund will pay .85% of the average daily net
assets of the Portfolio. For the Emerging Markets Portfolio, the Fund pays to
the Adviser a fee at an annual rate of 1.10% of the average daily net assets
of the Portfolio. The fee shall be computed and accrued daily and paid
monthly.

Pacific Life has agreed, until at least December 31, 1999, to waive its fees
or otherwise reimburse each Portfolio for its operating expenses to the extent
that such expenses, exclusive of advisory fees, additional custodial charges
associated with holding foreign securities, foreign taxes on dividends,
interest, or gains, and extraordinary expenses, exceed 0.25% of the
Portfolio's average daily net assets. Pacific Life began this expense
reimbursement policy in April 1989. There can be no assurance that this policy
will be continued beyond December 31, 1999.

Net advisory fees paid or owed to Pacific Life for 1997 were as follows:
Money Market Portfolio--$1,521,271, High Yield Bond Portfolio--$1,466,135,
Managed Bond Portfolio--$2,055,929, Government Securities Portfolio--$645,820,
Growth Portfolio--$1,355,092, Aggressive Equity Portfolio--$684,226, Growth LT
Portfolio--$4,193,552, Equity Income Portfolio--$4,062,587, Multi-Strategy
Portfolio--$1,866,445, Equity Portfolio--$1,818,664, Bond and Income
Portfolio--$568,647, Equity Index Portfolio--$1,080,856, International
Portfolio--$5,353,459, and Emerging Markets Portfolio--$868,075.

Net advisory fees paid or owed to Pacific Life for 1996 were as follows:
Money Market Portfolio--$625,727, High Yield Bond Portfolio--$783,894, Managed
Bond Portfolio--$1,071,851, Government Securities Portfolio--$483,849, Growth
Portfolio--$962,573, Aggressive Equity Portfolio--$153,495, Growth LT
Portfolio--$2,367,481, Equity Income Portfolio--$1,977,164, Multi-Strategy
Portfolio--$1,107,889, Equity Portfolio--$1,049,649, Bond and Income
Portfolio--$411,129, Equity Index Portfolio--$511,324, International
Portfolio--$2,586,397, and Emerging Markets Portfolio--$203,399.

Net advisory fees paid or owed to Pacific Life for 1995 were as follows:
Money Market Portfolio--$386,292, High Yield Bond Portfolio--$318,918, Managed
Bond Portfolio--$519,084, Government Securities Portfolio--$226,533, Growth
Portfolio--$708,702, Growth LT Portfolio--$845,391, Equity Income Portfolio--
$840,710, Multi-Strategy Portfolio--$650,409, Equity Portfolio--$564,917, Bond
and Income Portfolio--$255,233, Equity Index Portfolio--$194,604, and
International Portfolio--$1,030,744.

35
<PAGE>

The Fund paid Pacific Life $165,000 for its services under the Agreement for
Support Services during 1997 and $108,000 during 1996, representing 0.004% and
0.005%, respectively, of the Fund's average daily net assets and anticipates
that fees to be paid for 1998 under said Agreement will be approximately
0.003% of the Fund's average daily net assets.

PORTFOLIO MANAGEMENT AGREEMENTS

Pursuant to a Portfolio Management Agreement between the Fund, the Adviser,
and Pacific Investment Management Company ("PIMCO"), 840 Newport Center Drive,
Suite 360, Post Office Box 6430, Newport Beach, California 92658-6430, PIMCO
is the Portfolio Manager and provides investment advice and makes and
implements investment decisions with respect to the Managed Bond Portfolio and
Government Securities Portfolio. For the services provided, for the years 1996
and 1995, Pacific Life paid PIMCO a fee based on a percentage of each
Portfolio's average daily net assets according to the following schedule:

MANAGED BOND AND GOVERNMENT SECURITIES PORTFOLIOS

<TABLE>
<CAPTION>
RATE % BREAK POINT (ASSETS)
------ --------------------
<S> <C>
.50% On first $25 million
.375% On next $25 million
.25% On excess
</TABLE>

PIMCO is registered as an investment adviser with the SEC and a commodity
trading adviser with the CFTC. Such registration does not involve supervision
by the SEC over investment advice or supervision by the CFTC over commodities
trading. PIMCO is currently providing investment advisory services to the
PIMCO Funds Pacific Investment Manager Series, PIMCO Commercial Mortgage
Securities Trust, Inc., PIMCO Funds: Multi-Manager Series (formerly Equity
Advisors Series), the Harbor Bond Fund of the Harbor Fund, The Total Return
Bond and the Intermediate-Term Bond Portfolios of the Target Portfolio Trust,
the Fixed Income I Fund, Diversified Bond Fund, Fixed Income III Fund, and
Multi-Strategy Bond Fund of the Frank Russell Investment Management Company,
the PIMCO Total Return Bond Portfolio of the American Skandia Trust, the Total
Return Fund of Fremont Mutual Funds, Inc., CitiSelect Foreign Bond Portfolio
of the Landmark Funds I, CitiSelect VIP Folio 200, 300, 400 and 500 of the
Variable Annuity Portfolios, the Core Bond Fund of the Russell Insurance
Funds, the Low Duration U.S. Government Income Fund of the PaineWebber Bond
Funds, the Strategic Fixed Income Portfolio of the PaineWebber Series Trust,
the PACE Government Securities Fixed Income Investments and PACE Strategic
Fixed Income Investments of the PaineWebber PACE Select Advisors Trust, as
well as to managed accounts consisting of proceeds from pension and profit
sharing plans. Net fees paid or owed by Pacific Life to PIMCO in 1997 were
$929,041 for the Managed Bond Portfolio and $292,079 for the Government
Securities Portfolio, in 1996 were $541,256 for the Managed Bond Portfolio and
$295,607 for the Government Securities Portfolio, and in 1995 were $310,529
for the Managed Bond Portfolio and $171,814 for the Government Securities
Portfolio.

Pursuant to a Portfolio Management Agreement between the Fund, the Adviser,
and Capital Guardian Trust Company ("Capital Guardian"), a wholly-owned
subsidiary of The Capital Group, Inc. ("CG"), 333 South Hope Street, Los
Angeles, California 90071, Capital Guardian is the Portfolio Manager and
provides investment advisory services to the Growth Portfolio. For the
services provided, for the years 1996 and 1995, Pacific Life paid Capital
Guardian a fee based on a percentage of the average daily net assets of the
Growth Portfolio according to the following schedule:

GROWTH PORTFOLIO

<TABLE>
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- --------------------
<S> <C>
.50% On first $30 million
.40% On next $30 million
.30% On excess
</TABLE>

Capital Guardian is a California state chartered trust company organized in
1968 which provides fiduciary and investment management services to a limited
number of large accounts such as employee benefit plans, college endowment
funds, foundations, and individuals. Accounts managed by Capital Guardian had
combined assets, as of

36
<PAGE>

December 31, 1997, in excess of $66 billion. Capital Guardian's research
activities are conducted by a wholly-owned subsidiary, Capital Guardian
Research Company, and other affiliates that have research facilities in Los
Angeles, San Francisco, New York, Washington, D.C., Atlanta, London, Geneva,
Hong Kong, Singapore, and Tokyo.

CG, 333 South Hope Street, Los Angeles, CA 90071, is the parent of Capital
Guardian because it owns all of its outstanding shares of common stock. David
I. Fisher, Jon B. Lovelace, James F. Rothenberg and R. Michael Shanahan are
each beneficial owners of shares representing more than 5% but less than 10%
of the voting rights of CG.

Capital Research and Management Company ("CRMC"), another wholly-owned
subsidiary of CG, provides investment advisory services to the following
mutual funds, which are known collectively as the American Funds Group: AMCAP
Fund, Inc., American Balanced Fund, Inc. American High Income Trust, American
Mutual Fund, Inc., The Bond Fund of America, Inc. , Intermediate Bond Fund of
America, The Cash Management Trust of America, Capital Income Builder, Inc.,
Capital World Bond Fund, Inc., EuroPacific Growth Fund, Fundamental Investors,
Inc., The Growth Fund of America, Inc., The Income Fund of America, Inc., The
Investment Company of America, High-Income Municipal Bond Fund, Inc., Limited
Term Tax-Exempt Bond Fund of America, The New Economy Fund, The New
Perspective Fund, SMALLCAP World Fund, Inc., The Tax-Exempt Bond Fund of
America, Inc., The Tax-Exempt Fund of California, The Tax-Exempt Fund of
Maryland, The Tax-Exempt Fund of Virginia, The Tax-Exempt Money Fund of
America, U.S. Government Securities Fund, The U.S. Treasury Money Fund of
America, Washington Mutual Investors Fund, Inc., and Capital World Growth and
Income Fund, Inc. CRMC also provides investment advisory services to American
Variable Insurance Series and Anchor Pathway Fund, which are used exclusively
as underlying investment vehicles for variable insurance contracts and
policies, and to Endowments, Inc. and Bond Portfolio for Endowments, Inc.,
whose shares may be owned only by tax-exempt organizations. Capital
International Inc., an indirect wholly-owned subsidiary of CG, provides
investment advisory services to Emerging Market Growth Fund, Inc. which is a
closed-end investment company.

Net fees paid or owed by Pacific Life to Capital Guardian for the Growth
Portfolio in 1997 were $716,070, in 1996 were $534,580, and in 1995 were
$417,483.

From April 1, 1996 through April 30, 1998, pursuant to a Portfolio
Management Agreement between the Fund, the Adviser and Columbus Circle
Investors ("Columbus Circle Investors"), Metro Center, One Station Place, 8th
Floor, Stamford, Connecticut 06902, Columbus Circle Investors was the
Portfolio Manager and provided investment advisory services to the Aggressive
Equity Portfolio. For the services provided for the year 1997, Pacific Life
paid a fee to Columbus Circle Investors based on a percentage of the average
daily net assets according to the following schedule:

AGGRESSIVE EQUITY PORTFOLIO

<TABLE>
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- ---------------------
<S> <C>
.55% On first $100 million
.50% On next $150 million
.45% On next $250 million
.40% On excess
</TABLE>

For the services provided, for the year 1996, Pacific Life paid a fee to
Columbus Circle Investors based on a percentage of the Portfolio's average
daily net assets according to the following fee schedule:

AGGRESSIVE EQUITY PORTFOLIO

<TABLE>
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- ---------------------
<S> <C>
.55% On first $100 million
.50% On next $250 million
.45% On excess
</TABLE>

37
<PAGE>

Net fees paid or owed by Pacific Life to Columbus Circle Investors in 1997
were $468,441 and from April 1, 1996 (date of commencement of operations) to
December 31, 1996 were $106,272 for the Aggressive Equity Portfolio.

Pursuant to a Portfolio Management Agreement between the Fund, the Adviser,
and Janus Capital Corporation ("Janus"), 100 Fillmore Street, Denver, Colorado
80206-4928, Janus is the Portfolio Manager and provides investment advisory
services to the Growth LT Portfolio. For the services provided, for the years
1996 and 1995 Pacific Life paid Janus a fee based on a percentage of the
average daily net assets of the Growth LT Portfolio according to the following
schedule:

GROWTH LT PORTFOLIO

<TABLE>
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- ---------------------
<S> <C>
.60% On first $100 million
.55% On excess

Janus serves as investment adviser to the Janus Funds, as well as other
mutual funds and individual, corporate, charitable, and retirement accounts.
Kansas City Southern Industries, Inc. ("KCSI") owns approximately 83% of the
outstanding voting stock of Janus. KCSI is a publicly traded holding company
whose primary subsidiaries are engaged in transportation and financial
services. Net fees paid or owed by Pacific Life to Janus for the Growth LT
Portfolio in 1997 were $2,813,259, in 1996 were $1,789,724, and in 1995 were
$664,739.

Pursuant to a Portfolio Management Agreement between the Fund, the Adviser,
and J.P. Morgan Investment Management Inc. ("J.P. Morgan Investment"), 522
Fifth Avenue, New York, New York 10036, J.P. Morgan Investment is the Portfolio
Manager and provides investment advisory services to the Equity Income
Portfolio and the Multi-Strategy Portfolio. For the services provided, for the
years 1996 and 1995, Pacific Life paid J.P. Morgan Investment a fee based on a
percentage of the combined average daily net assets of these two Portfolios
according to the following schedule:

EQUITY INCOME AND MULTI-STRATEGY PORTFOLIOS

<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- ---------------------
<S> <C>
.45% On first $100 million
.40% On next $100 million
.35% On next $200 million
.30% On excess
</TABLE>

J.P. Morgan Investment is an investment manager for corporate, public, and
union employee benefit funds, foundations, endowments, insurance companies,
government agencies and the accounts of other institutional investors. A
wholly-owned subsidiary of J.P. Morgan & Co. Incorporated ("Morgan"), J.P.
Morgan Investment was incorporated in the state of Delaware on February 7,
1984 and commenced operations on July 2, 1984. It was formed from the
Institutional Investment Group of Morgan Guaranty Trust Company of New York,
also a subsidiary of Morgan.

Morgan acquired its first tax-exempt client in 1913 and its first pension
account in 1940. As of December 31, 1997, Morgan, through J.P. Morgan
Investment and its other subsidiaries, has assets under management of
approximately $255 billion. With offices around the globe, J.P. Morgan
Investment draws from a worldwide resources base to provide comprehensive
service to an international group of clients.

Net fees paid or owed by Pacific Life to J.P. Morgan Investment in 1997 were
$1,998,776 for the Equity Income Portfolio and $920,564 for the Multi-Strategy
Portfolio, in 1996 were $1,135,557 for the Equity Income Portfolio and
$637,384 for the Multi-Strategy Portfolio, and in 1995 were $537,832 for the
Equity Income Portfolio and $417,904 for the Multi-Strategy Portfolio.

38
<PAGE>

From January 1, 1995 through April 30, 1998, pursuant to a Portfolio
Management Agreement between the Fund, the Adviser, and Greenwich Street
Advisors Division of Smith Barney Mutual Funds Management Inc. ("Greenwich
Street Advisors"), 388 Greenwich Street, 23rd Floor, New York, New York 10048,
Greenwich Street Advisors was the Portfolio Manager and provided investment
advisory service to the Equity Portfolio and Bond and Income Portfolio. For
the services provided, for the year 1997, Pacific Life paid a fee to Greenwich
Street Advisors based on a percentage of the combined average daily net assets
of the Equity and Bond and Income Portfolios according to the following
schedule:

EQUITY AND BOND AND INCOME PORTFOLIOS

<TABLE>
<CAPTION>
RATE(%) BREAK POINT (ASSETS)
------- ---------------------
<S> <C>
.45% On first $100 million
.40% On next $100 million
.35% On next $200 million
.30% On next $600 million
.20% On excess
</TABLE>

For the services provided, for the years 1996 and 1995, Pacific Life paid a
fee to Greenwich Street Advisors based on a percentage of each Portfolio's
average daily net assets according to the following fee schedules:

EQUITY PORTFOLIO

<TABLE>
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- ---------------------
<S> <C>
.50% On first $500 million
.45% On next $500 million
.40% On excess

BOND AND INCOME PORTFOLIO

<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- ---------------------
<S> <C>
.40% On first $500 million
.35% On next $500 million
.30% On excess
</TABLE>

Net fees paid or owed by Pacific Life to Greenwich Street Advisors in 1997
were $1,088,097 for the Equity Portfolio and $368,846 for the Bond and Income
Portfolio, in 1996 were $808,784 for the Equity Portfolio and $274,358 for the
Bond and Income Portfolio, and in 1995 were $435,730 for the Equity Portfolio
and $170,779 for the Bond and Income Portfolio.

Pursuant to a Portfolio Management Agreement between the Fund, the Adviser
and Bankers Trust Company ("BTCo"), a wholly-owned subsidiary of Bankers Trust
New York Corporation, 130 Liberty Street, New York, New York 10006, BTCo is
the Portfolio Manager and provides investment advisory services to the Equity
Index Portfolio. For the services provided, for the years 1996 and 1995,
Pacific Life paid a quarterly fee in advance to BTCo, based on the net assets
of the Equity Index Portfolio at the beginning of each calendar quarter in
accordance with the following schedule:

EQUITY INDEX PORTFOLIO

<TABLE>
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- ---------------------
<S> <C>
.07% On first $100 million
.03% On next $100 million
.01% On excess
</TABLE>

This fee is subject to a minimum annual fee of $100,000 for the calendar
year 1996 and each year thereafter. For the calendar year 1995, the fee was
subject to a minimum annual fee of $75,000.

39
<PAGE>

BTCo is a wholly-owned subsidiary of Bankers Trust New York Corporation, the
seventh largest bank holding company in the United States. BTCo is responsible
for the management of the Equity Index Portfolio. As of December 31, 1997,
BTCo managed assets approximating $317.8 billion. BTCo is the investment
manager to the following registered investment companies: Short-Intermediate
Fixed-Income Portfolio of Accessor Funds, Inc.; MidCap Index, Stock Index and
Small Cap Index Funds of American General Series Portfolio ("VALIC"); Equity
and Fixed Income Portfolios of the Bank Fiduciary Funds; Tax Free Money, NY
Tax Free Money, Cash Management, Treasury Money, Lifecycle Short-Range,
Lifecycle Mid-Range, Lifecycle Long-Range, Intermediate Tax Free, Global High
Yield Securities, International Equity, Capital Appreciation, Pacific Basin
Equity, Latin American Equity and Small Cap Portfolios of the BT Investment
Trust; Money Market, Limited Term U.S. Government Securities, Equity 500
Index, Equity Appreciation (Investment Class), Institutional Asset Management
and PreservationPlus (Investment and Institutional Classes) Portfolios of the
BT Pyramid Mutual Funds Trust; Equity 500 Index, Cash Management, Treasury
Money, Cash Reserves, Liquid Assets, Treasury Assets, Daily Assets and
International Equity (Classes I and II) Portfolios of the BT Institutional
Trust; Advisor and Institutional Classes of the EAFE Equity Index, Small Cap
Index and U.S. Bond Index Portfolios of the BT Advisor Trust; Small Cap,
International Equity, U.S. Bond Index, EAFE Equity Index, Equity 500 Index,
Small Cap Index and Managed Assets Funds of the BT Insurance Funds Trust; BT
Equity 500 Index, BT Small Company Index and BT International Equity Index
Portfolios of the EQ Advisors Trust; Spartan US Equity Index, Spartan Extended
Market Index, Spartan Market Index, Spartan Total Market Index, Spartan
International Index and VIP Index 500 Funds of the Fidelity Funds; Scudder
AARP US Stock Index Portfolio; and USAA S&P Index 500 Fund.

Net fees paid or owed by Pacific Life to BTCo in 1997 were $135,863, in 1996
were $100,000, and in 1995 were $75,000.

From January 1, 1995 through May 31, 1997, pursuant to a Portfolio
Management Agreement between the Fund, the Adviser, and Templeton Investment
Counsel, Inc. ("Templeton"), Broward Financial Centre, Suite 2100, Fort
Lauderdale, Florida 33394-3091, Templeton was the Portfolio Manager and
provided investment advice with respect to the International Portfolio. For
the services provided, for the period January 1, 1997 through May 31, 1997 and
for the years 1996 and 1995, Pacific Life paid a fee to Templeton based on a
percentage of the Portfolio's average daily net assets according to the
following fee schedule:

INTERNATIONAL PORTFOLIO

<TABLE>
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- --------------------
<S> <C>
.70% On first $25 million
.55% On next $25 million
.50% On next $50 million
.40% On excess
</TABLE>

Net fees paid or owed by Pacific Life to Templeton for the International
Portfolio from January 1, 1997 to May 31, 1997 were $945,379, in 1996 were
$1,382,217, and in 1995 were $643,941.

Pursuant to a Portfolio Management Agreement between the Fund, the Adviser
and Morgan Stanley Asset Management Inc. ("Morgan Stanley"), 1221 Avenue of
the Americas, New York, New York 10020, Morgan Stanley serves as the Portfolio
Manager and provides investment advisory services to the International
Portfolio. For the services provided, for the period June 1, 1997 to December
31, 1997, Pacific Life paid a fee at an annual rate of .35% to Morgan Stanley
based on the Portfolio's average daily net assets.

Net fees paid or owed by Pacific Life to Morgan Stanley from June 1, 1997 to
December 31, 1997 were $1,478,065 for the International Portfolio.

40
<PAGE>

the Portfolio Manager and provides investment advisory services to the
Emerging Markets Portfolio. For the services provided, for the year 1996,
Pacific Life paid a fee to Blairlogie based on a percentage of the Portfolio's
average daily net assets according to the following fee schedule:

EMERGING MARKETS PORTFOLIO

<TABLE>
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- --------------------
<S> <C>
.85% On first $50 million
.75% On next $50 million
.70% On next $50 million
.65% On excess
</TABLE>

Blairlogie is a subsidiary partnership of PIMCO Advisors, L.P. an affiliate
of Pacific Life. Blairlogie is a U.K. limited partnership with two general
partners and one limited partner. PIMCO Advisors L.P., the supervising general
partner of Blairlogie, has agreed to acquire one-fifth of Blairlogie's limited
partner's interest annually, beginning December 31, 1998.

Blairlogie manages a limited number of large accounts, such as employee
benefit plans, college endowment funds and foundations, as well as two funds
in the PIMCO Funds: Equity Advisors Series (formerly PIMCO Advisors
Institutional Funds). As of December 31, 1997, Blairlogie managed
approximately $647 million of assets, including approximately $320.8 million
of mutual fund assets.

Net fees paid or owed by Pacific Life to Blairlogie in 1997 were $642,976,
and from April 1, 1996 (date of commencement of operations) to December 31,
1996 were $158,193 for the Emerging Markets Portfolio.

The Portfolio Management Agreements are not exclusive, and PIMCO, Capital
Guardian, Alliance Capital Management L.P., Janus, J.P. Morgan Investment,
BTC, Goldman Sachs Asset Management, Morgan Stanley, and Blairlogie may
provide and currently are providing investment advisory services to other
clients, including other investment companies.

DISTRIBUTION OF FUND SHARES

Pacific Mutual Distributors, Inc. ("PMD") serves as the Fund's Distributor
pursuant to a Distribution Contract (the "Distribution Contract") with the
Fund. The Distributor is not obligated to sell any specific amount of Fund
shares. PMD bears all expenses of providing services pursuant to the
Distribution Contract including the costs of sales presentations, mailings,
advertising, and any other marketing efforts by PMD in connection with the
distribution or sale of the shares.

The expenses incurred by the Fund with respect to each Portfolio in
connection with the Fund's organization, its registration with the SEC and any
states where registered, and the public offering of its shares were advanced
on behalf of the Fund by the Adviser. These organizational expenses were
deferred and amortized by the Fund's Portfolios over a period of 60 months.
Similarly, the organizational expenses of Portfolios of the Fund that have
been organized after the Fund commenced operations have been advanced on
behalf of the Fund by the Adviser, and are deferred and amortized by the
pertinent Portfolio over a period of 60 months from the commencement of
operations of the Portfolio. See "Financial Statements."

As of April 24, 1998, Pacific Life beneficially owned 0% of the outstanding
shares of the Portfolios of the Fund. Pacific Life would exercise voting
rights attributable to any shares of the Fund owned by it in accordance with
voting instructions received by Owners of the Policies issued by Pacific Life.
To this extent, as of April 24, 1998, Pacific Life did not exercise control
over any Portfolio.

PURCHASES AND REDEMPTIONS

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(ii) when the SEC determines that a state of emergency exists which may make
payment or transfer not reasonably practicable; (iii) as the SEC may by order
permit for the protection of the security holders of the Fund; or (iv) at any
other time when the Fund may, under applicable laws and regulations, suspend
payment on the redemption of its shares. If the Board of Trustees should
determine that it would be detrimental to the best interests of the remaining
shareholders of a Portfolio to make payment wholly or partly in cash, the
Portfolio may pay the redemption price in whole or in part by a distribution
in kind of securities from the portfolio of the Portfolio, in lieu of cash, in
conformity with applicable rules of the SEC. If shares are redeemed in kind,
the redeeming shareholder might incur brokerage costs in converting the assets
into cash. Under the 1940 Act, the Fund is obligated to redeem shares solely
in cash up to the lesser of $250,000 or 1 percent of its net assets during any
90-day period for any one shareholder.

PORTFOLIO TRANSACTIONS AND BROKERAGE

INVESTMENT DECISIONS

Investment decisions for the Fund and for the other investment advisory
clients of the Adviser, or applicable Portfolio Manager, are made with a view
to achieving their respective investment objectives. Investment decisions are
the product of many factors in addition to basic suitability for the
particular client involved (including the Fund). Thus, a particular security
may be bought or sold for certain clients even though it could have been
bought or sold for other clients at the same time. It also sometimes happens
that two or more clients simultaneously purchase or sell the same security, in
which event each day's transactions in such security are, insofar as possible,
averaged as to price and allocated between such clients in a manner which in
the opinion of the Adviser or Portfolio Manager is equitable to each and in
accordance with the amount being purchased or sold by each. There may be
circumstances when purchases or sales of portfolio securities for one or more
clients will have an adverse effect on other clients.

BROKERAGE AND RESEARCH SERVICES

There is generally no stated commission in the case of fixed-income
securities, which are traded in the over-the-counter markets, but the price
paid by the Fund usually includes an undisclosed dealer commission or mark-up.
In underwritten offerings, the price paid by the Fund includes a disclosed,
fixed commission or discount retained by the underwriter or dealer.
Transactions on U.S. stock exchanges and other agency transactions involve the
payment by the Fund of negotiated brokerage commissions. Such commissions vary
among different brokers. Also, a particular broker may charge different
commissions according to such factors as the difficulty and size of the
transaction. In the case of securities traded on some foreign stock exchanges,
brokerage commissions may be fixed and the Adviser or Portfolio Manager may be
unable to negotiate commission rates for these transactions.

The Adviser or Portfolio Manager for a Portfolio places all orders for the
purchase and sale of portfolio securities, options, and futures contracts and
other investments for a Portfolio through a substantial number of brokers and
dealers or futures commission merchants. In executing transactions, the
Adviser or Portfolio Manager will attempt to obtain the best net results for a
Portfolio taking into account such factors as price (including the applicable
brokerage commission or dollar spread), size of order, the nature of the
market for the security, the timing of the transaction, the reputation,
experience and financial stability of the broker-dealer involved, the quality
of the service, the difficulty of execution and operational facilities of the
firms involved, and the firm's risk in positioning a block of securities. In
transactions on stock exchanges in the United States, payments of brokerage
commissions are negotiated. In effecting purchases and sales of portfolio
securities in transactions on United States stock exchanges for the account of
the Fund, the Adviser or Portfolio Manager may pay higher commission rates
than the lowest available when the Adviser or Portfolio Manager believes it is
reasonable to do so in light of the value of the brokerage and research
services provided by the broker effecting the transaction, as described below.
In the case of securities traded on some foreign stock exchanges, brokerage
commissions may be fixed and the Adviser or Portfolio Manager may be unable to
negotiate commission rates

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<PAGE>

for these transactions. In the case of securities traded on the over-the-
counter markets, there is generally no stated commission, but the price
includes an undisclosed commission or markup. Consistent with the above policy
of obtaining the best net results, a portion of a Portfolio's brokerage and
futures transactions may be conducted through an affiliated broker. The
brokerage commissions paid to an affiliated broker will not exceed 25% of the
brokerage commission incurred per year by the Portfolio.

Some securities considered for investment by the Fund's Portfolios may also
be appropriate for other clients served by the Adviser or Portfolio Manager.
If a purchase or sale of securities consistent with the investment policies of
a Portfolio and one or more of these clients served by the Adviser or
Portfolio Manager is considered at or about the same time, transactions in
such securities will be allocated among the Portfolio and clients in a manner
deemed fair and reasonable by the Adviser or Portfolio Manager. Although there
is no specified formula for allocating such transactions, the various
allocation methods used by the Adviser or Portfolio Manager, and the results
of such allocations, are subject to periodic review by the Fund's Adviser and
Board of Trustees.

It has for many years been a common practice in the investment advisory
business for advisers of investment companies and other institutional
investors to receive research services from broker-dealers which execute
portfolio transactions for the clients of such advisers. Consistent with this
practice, the Adviser or Portfolio Manager for a Portfolio may receive
research services from many broker-dealers with which the Adviser or Portfolio
Manager places the Portfolio's portfolio transactions. These services, which
in some cases may also be purchased for cash, include such matters as general
economic and security market reviews, industry and company reviews,
evaluations of securities and recommendations as to the purchase and sale of
securities. Some of these services may be of value to the Adviser or Portfolio
Manager in advising its various clients (including the Portfolio), although
not all of these services are necessarily useful and of value in managing a
Portfolio. The advisory fee paid by the Portfolio is not reduced because the
Adviser or Portfolio Manager and its affiliates receive such services.

As permitted by Section 28(e) of the Securities Exchange Act of 1934, the
Adviser or Portfolio Manager may cause a Portfolio to pay a broker-dealer,
which provides "brokerage and research services" (as defined in the Act) to
the Adviser or Portfolio Manager, an amount of disclosed commission for
effecting a securities transaction for the Portfolio in excess of the
commission which another broker-dealer would have charged for effecting that
transaction.

During the years 1997, 1996 and 1995, respectively, the following Portfolios
incurred brokerage commissions as follows: the High Yield Bond Portfolio--
$2,500, $1,700 and $0, the Managed Bond Portfolio--$41,315, $33,718 and
$21,987, the Government Securities Portfolio--$21,349, $16,819 and $11,874,
the Growth Portfolio--$225,232, $242,837 and $167,561, the Aggressive Equity
Portfolio--$296,940 and $59,113, the Growth LT Portfolio--$1,057,621, $559,163
and $325,340, the Equity Income Portfolio--$1,162,083, $746,412 and $314,236,
the Multi-Strategy Portfolio--$283,791, $231,844 and $129,476, the Equity
Portfolio--$706,250, $286,596 and $335,550 of which $61,512 (8.71%), $60,498
(21.11%), and $68,472 (20.41%) was paid to Smith Barney Inc. and $23,700
(3.36%), $11,100 (3.87%), and $22,500 (6.71%) was paid to Robinson Humphrey
Co., Inc., affiliates of Greenwich Street Advisors, the Bond and Income
Portfolio--$0, $0 and $0, the Equity Index Portfolio--$157,624, $137,980 and
$43,415, the International Portfolio--$1,606,247, $883,241 and $376,660 of
which $39,617 (2.47%) was paid to Morgan Stanley & Co. during the period June
1, 1997 to December 31, 1997, an affiliate of Morgan Stanley Asset Management
Inc., and the Emerging Markets Portfolio--$712,505 and $302,384. The
Aggressive Equity and Emerging Markets Portfolios had not commenced operations
as of December 31, 1995.

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<PAGE>

each of which is a broker or dealer regularly used for brokerage transactions
by that Portfolio. On December 31, 1995, the Managed Bond Portfolio held
securities of Merrill Lynch & Co. and Salomon Brothers Inc. valued at $501,195
and $2,798,794, respectively; and the Equity Index Portfolio held securities
of American Express, Merrill Lynch & Co. and Salomon Brothers Inc. valued at
$542,012, $249,900 and $99,400, respectively, each of which is a broker or
dealer regularly used for brokerage transactions by that Portfolio.

PORTFOLIO TURNOVER

For reporting purposes, each Portfolio's portfolio turnover rate is
calculated by dividing the value of the lesser of purchases or sales of
portfolio securities for the fiscal year by the monthly average of the value
of portfolio securities owned by the Portfolio during the fiscal year. In
determining such portfolio turnover, long-term U.S. Government securities are
included. Short-term U.S. Government securities and all other securities whose
maturities at the time of acquisition were one year or less are excluded. A
100% portfolio turnover rate would occur, for example, if all of the
securities in the portfolio (other than short-term securities) were replaced
once during the fiscal year. The portfolio turnover rate for each of the
Portfolios will vary from year to year, depending on market conditions.

The portfolio turnover rates are not expected to exceed: 0% for the Money
Market Portfolio; 400% for the Managed Bond and Government Securities
Portfolios; and 150% for all other Portfolios. For the Portfolios other than
the Money Market Portfolio, portfolio turnover could be greater in periods of
unusual market movement and volatility. For the years 1997, 1996 and 1995,
respectively, the portfolio turnover rate for each of the Portfolios was as
follows: Money Market Portfolio--0%, 0% and 0%, High Yield Bond Portfolio--
103%, 120% and 127%, Managed Bond Portfolio--231%, 386% and 191%, Government
Securities Portfolio--203%, 307% and 299%, Growth Portfolio--52%, 70% and 47%,
Aggressive Equity Portfolio--189% and 80%, Growth LT Portfolio--145%, 147% and
166%, Equity Income Portfolio--106%, 95% and 86%, Multi-Strategy Portfolio--
72%, 133% and 176%, Equity Portfolio--160%, 91% and 226%, Bond and Income
Portfolio--15%, 27% and 52%, Equity Index Portfolio--3%, 20% and 8%,
International Portfolio--84%, 21% and 16% and Emerging Markets Portfolio--70%
and 48%. The 1996 portfolio turnover rate for the Aggressive Equity and
Emerging Markets Portfolios is based on the period from April 1, 1996
(commencement of operations) to December 31, 1996.

NET ASSET VALUE

As indicated under "Net Asset Value" in the Prospectus, the Fund's net asset
value per share for the purpose of pricing purchase and redemption orders is
determined usually at or about 4:00 P.M., New York City time, on each day the
New York Stock Exchange is open for trading. The New York Stock Exchange and
other exchanges usually close for trading at 4:00 p.m., New York City time. In
the event that the New York Stock Exchange or other exchanges close early, the
Fund normally will deem the closing price of each Portfolio's assets to be the
price of those assets at 4:00 p.m., New York City time. Net asset value will
not be determined on the following holidays: New Year's Day, Martin Luther
King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day, and Christmas Day. With respect to the Portfolios
that invest in foreign securities, the value of foreign securities that are
traded on stock exchanges outside the United States are based upon the price
on the exchange as of the close of business of the exchange immediately
preceding the time of valuation. Securities traded in over-the-counter markets
outside the United States are valued at the last available price in the over-
the-counter market prior to the time of valuation. Trading in securities on
exchanges and over-the-counter markets in European and Pacific Basin countries
is normally completed well before 4:00 P.M., New York City time. In addition,
European and Pacific Basin securities trading may not take place on all
business days in New York. Furthermore, trading takes place in Japanese
markets on certain Saturdays and in various foreign markets on days which are
not business days in New York and on which the Fund's net asset value is not
calculated. Quotations of foreign securities in foreign currencies are
converted to U.S. dollar equivalents using the foreign exchange quotation in
effect at the time net asset value is computed. The calculation of the net
asset value of the Managed Bond, Government Securities, Aggressive Equity,
Growth

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<PAGE>

LT, Multi-Strategy, International, and Emerging Markets Portfolios may not
take place contemporaneously with the determination of the prices of portfolio
securities of foreign issuers used in such calculation. Further, under the
Fund's procedures, the prices of foreign securities are determined using
information derived from pricing services and other sources every day that the
Fund values its shares. Prices derived under these procedures will be used in
determining net asset value. Information that becomes known to the Fund or its
agents after the time that net asset value is calculated on any business day
(which may be after 4:00 p.m. New York City time) may be assessed in
determining net asset value per share after the time of receipt of the
information, but will not be used to retroactively adjust the price of the
security so determined earlier or on a prior day. Events affecting the values
of portfolio securities that occur between the time their prices are
determined and the time a Portfolio's net asset value is determined may not be
reflected in the calculation of net asset value. If events materially
affecting net asset value occur during such period, the securities would be
valued at fair market value as determined by the management and approved in
good faith by the Board of Trustees of the Fund. In determining the fair value
of securities, the Fund may consider available information including
information that becomes known after 4:00 p.m. New York City time, and the
values that are determined will be deemed to be the price at 4:00 p.m. New
York City time.

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

The Commission's regulations require the Money Market Portfolio to adhere to
certain conditions. The Portfolio is required to maintain a dollar-weighted
average portfolio maturity of 90 days or less, to limit its investments to
instruments having remaining maturities of 13 months or less (except
securities held subject to repurchase agreements having 13 months or less to
maturity) and to invest only in securities that meet specified quality and
credit criteria.

All other Portfolios are valued as follows:

Portfolio securities for which market quotations are readily available are
stated at market value. Market value is determined on the basis of last
reported sales price, or, if no sales are reported, the mean between
representative bid and asked quotations obtained from a quotation reporting
system or from established market makers. In other cases, securities are
valued at their fair value as determined in good faith by the Board of
Trustees of the Fund, although the actual calculations may be made by persons
acting under the direction of the Board. Money market instruments are valued
at market value, except that instruments maturing in sixty days or less are
valued using the amortized cost method of valuation.

The value of a foreign security is determined in its national currency based
upon the price on the foreign exchange as of its close of business immediately
preceding the time of valuation. Securities traded in over-the-counter markets
outside the United States are valued at the last available price in the over-
the-counter market prior to the time of valuation.

Debt securities, including those to be purchased under firm commitment
agreements (other than obligations having a maturity of sixty days or less at
their date of acquisition), are normally valued on the basis of quotes
obtained from brokers and dealers or pricing services, which take into account
appropriate factors such as institutional-size trading in similar groups of
securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics, and other market data. Debt obligations having a maturity of
sixty days or less are generally valued at amortized cost unless the amortized
cost value does not approximate market value. Certain debt securities for
which daily market quotations are not readily available may be valued,
pursuant to guidelines

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<PAGE>

established by the Board of Trustees, with reference to debt securities whose
prices are more readily obtainable and whose durations are comparable to the
securities being valued.

When a Portfolio writes a put or call option, the amount of the premium is
included in the Portfolio's assets and an equal amount is included in its
liabilities. The liability thereafter is adjusted to the current market value
of the option. The premium paid for an option purchased by the Portfolio is
recorded as an asset and subsequently adjusted to market value. The values of
futures contracts are based on market prices. Quotations of foreign securities
in foreign currency are converted to U.S. dollar equivalents at the prevailing
market rates quoted by the custodian on the morning of valuation.

PERFORMANCE INFORMATION

The Fund may, from time to time, include the yield and effective yield of
its Money Market Portfolio, the yield of the remaining Portfolios, and the
total return of all Portfolios in advertisements, sales literature, or reports
to shareholders or prospective investors. Total return information for the
Fund will not be advertised or included in sales literature unless accompanied
by comparable performance information for a Separate Account to which the Fund
offers its shares.

Current yield for the Money Market Portfolio will be based on the change in
the value of a hypothetical investment (exclusive of capital charges) over a
particular 7-day period, less a pro-rata share of Portfolio expenses accrued
over that period (the "base period"), and stated as a percentage of the
investment at the start of the base period (the "base period return"). The
base period return is then annualized by multiplying by 365/7, with the
resulting yield figure carried to at least the nearest hundredth of one
percent. "Effective yield" for the Money Market Portfolio assumes that all
dividends received during an annual period have been reinvested. Calculation
of "effective yield" begins with the same "base period return" used in the
calculation of yield, which is then annualized to reflect weekly compounding
pursuant to the following formula:

Effective Yield = [(Base Period Return + 1) (To the power of 365/7)]-1

For the 7-day period ending December 31, 1997, the current yield of the
Money Market Portfolio was 5.54% and the effective yield of the Portfolio was
5.69%.

Quotations of yield for the remaining Portfolios will be based on all
investment income per share earned during a particular 30-day period
(including dividends and interest), less expenses accrued during the period
("net investment income"), and are computed by dividing net investment income
by the maximum offering price per share on the last day of the period,
according to the following formula:

2{[([(a-b)/c*d] + 1 (To the power of 6)] -1}

where

a = dividends and interest earned during the period,

b = expenses accrued for the period (net of reimbursements),

c = the average daily number of shares outstanding during the period
that were entitled to receive dividends, and

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

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<PAGE>

for the Multi-Strategy Portfolio, 0.89% for the Equity Portfolio, 6.47% for
the Bond and Income Portfolio, 1.62% for the Equity Index Portfolio, 1.74% for
the International Portfolio, and 0.70% for the Emerging Markets Portfolio.

Quotations of average annual total return for a Portfolio will be expressed
in terms of the average annual compounded rate of return of a hypothetical
investment in the Portfolio over certain periods that will include a period of
one year (or, if less, up to the life of the Portfolio), calculated pursuant
to the following formula: P (1 + T) (To the power of n) = ERV (where P = a
hypothetical initial payment of $1,000, T = the total return for the period, n =
the number of periods, and ERV = the ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the period). Quotations of total return
may also be shown for other periods. All total return figures reflect the
deduction of a proportional share of Portfolio expenses on an annual basis, and
assume that all dividends and distributions are reinvested when paid.

For the one year period ended December 31, 1997, the total return for each
Portfolio that had commenced operations on or before that date was as follows:
5.28% for the Money Market Portfolio, 9.44% for the High Yield Bond Portfolio,
9.92% for the Managed Bond Portfolio, 9.48% for the Government Securities
Portfolio, 30.27% for the Growth Portfolio, 3.78% for the Aggressive Equity
Portfolio, 10.96% for the Growth LT Portfolio, 28.60% for the Equity Income
Portfolio, 19.62% for the Multi-Strategy Portfolio, 18.18% for the Equity
Portfolio, 16.32% for the Bond and Income Portfolio, 32.96% for the Equity
Index Portfolio, 9.28% for the International Portfolio, and (1.69)% for the
Emerging Markets Portfolio.

For the five year period ended December 31, 1997, the average annual total
return for each Portfolio that had commenced operations on or before that date
was as follows: 4.44% for the Money Market Portfolio, 11.40% for the High
Yield Bond Portfolio, 7.81% for the Managed Bond Portfolio, 7.08% for the
Government Securities Portfolio, 17.18% for the Growth Portfolio, 16.90% for
the Equity Income Portfolio, 12.66% for the Multi-Strategy Portfolio, 16.12%
for the Equity Portfolio, 11.04% for the Bond and Income Portfolio, 19.74% for
the Equity Index Portfolio and 14.55% for the International Portfolio. The
Growth LT Portfolio did not begin operations until January 4, 1994. The
Aggressive Equity and Emerging Markets Portfolios did not begin operations
until April 1, 1996.

For the ten year period ended December 31, 1997, the average annual total
returns for the Equity Portfolio and Bond and Income Portfolio were 14.76% and
11.30%, respectively.

Based upon the period from the commencement of Fund operations on January 4,
1988 until December 31, 1997, the average annual total return for each
Portfolio, except the Growth LT, Aggressive Equity, Equity, Bond and Income,
Equity Index and Emerging Markets Portfolios, was as follows: 5.35% for the
Money Market Portfolio, 11.13% for the High Yield Bond Portfolio, 9.47% for
the Managed Bond Portfolio, 8.83% for the Government Securities Portfolio,
16.91% for the Growth Portfolio, 14.61% for the Equity Income Portfolio,
11.93% for the Multi-Strategy Portfolio, and 9.25% for the International
Portfolio. Based upon the period from the commencement of operations of the
Growth LT Portfolio on January 4, 1994 until December 31, 1997, the average
annual total return for the Growth LT Portfolio was 19.31%. Based upon the
period from the commencement of the first full year of operations of the
Equity Portfolio and Bond and Income Portfolio on January 1, 1984, the average
annual total return for each of these Portfolios was 15.01% and 12.48%,
respectively. Based upon the period from the commencement of the Equity Index
Portfolio operations on January 30, 1991 until December 31, 1997, the average
annual total return for the Equity Index Portfolio was 18.75%. Based upon the
period from the commencement of operations of the Aggressive Equity and
Emerging Markets Portfolios on April 1, 1996 until December 31, 1997, the
average annual total return for each of these Portfolios was 6.64% and
(2.80)%, respectively.

The performance results for the Equity Income, Multi-Strategy, and
International Portfolios occurred when these Portfolios were advised by
different Portfolio Managers. J.P. Morgan Investment began serving as
Portfolio Manager to the Equity Income Portfolio and the Multi-Strategy
Portfolio on January 1, 1994 and Morgan Stanley began serving as Portfolio
Manager to the International Portfolio on June 1, 1997. The performance
results for the Equity Portfolio and Bond and Income Portfolio are based, in
part, on the performance results of the predecessor series of Pacific
Corinthian Variable Fund, the assets of which were acquired by the Fund on
December 31, 1994.

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<PAGE>

Performance information for a Portfolio may be compared, in advertisements,
sales literature, and reports to shareholders to: (i) the Standard & Poor's
500 Stock Index ("S&P 500"); the Dow Jones Industrial Average ("DJIA"); for
the Money Market Portfolio, the Donoghue Money Market Institutional Averages;
for the Growth Portfolio, the Russell 2000 Index; for the Aggressive Equity
Portfolio, the Russell 2000 Index and the Russell MidCap Index; for the Growth
LT Portfolio, the Russell 2500 Index; for the Equity Portfolio, the Russell
1000 Growth Index; for those Portfolios with investments in fixed income
securities, the Lehman Brothers Government/Corporate Bond Index; for the
Government Securities Portfolio, the Lehman Brothers Government Bond Index;
for the High Yield Bond Portfolio, the First Boston High Yield Bond Index; for
the Multi-Strategy Portfolio, the Lehman Brothers Aggregate Bond Index; for
the Bond and Income Portfolio, the Lehman Brothers Long Term
Government/Corporate Bond Index and the Lehman Brothers Aggregate Bond Index
for the International Portfolio, Morgan Stanley Capital International's EAFE
Index, which represents the stock markets of Europe, Australia, and the Far
East; for the Emerging Markets Portfolio, the Morgan Stanley Capital
International Emerging Markets Free Index; or other unmanaged indexes, so that
investors may compare a Portfolio's results with those of a group of unmanaged
securities widely regarded by investors as representative of the securities
markets in general; (ii) other groups of mutual funds tracked by Lipper
Analytical Services, a widely used independent research firm which ranks
mutual funds by overall performance, investment objectives, and assets, or
tracked by other services, companies, publications, or persons who rank mutual
funds on overall performance or other criteria; and (iii) the Consumer Price
Index (measure for inflation) to assess the real rate of return from an
investment in the Portfolio. Unmanaged indexes may assume the reinvestment of
dividends but generally do not reflect deductions for administrative and
management costs and expenses.

Quotations of yield or total return for the Fund will not take into account
charges and deductions against any Separate Accounts to which the Fund shares
are sold or charges and deductions against the Contracts issued or
administered by Pacific Life. The Portfolio's yield and total return should
not be compared with mutual funds that sell their shares directly to the
public since the figures provided do not reflect charges against the Separate
Accounts or the Contracts. Performance information for any Portfolio reflects
only the performance of a hypothetical investment in the Portfolio during the
particular time period on which the calculations are based. Performance
information should be considered in light of the Portfolio's investment
objectives and policies, characteristics and quality of the portfolios and the
market conditions during the given time period, and should not be considered
as a representation of what may be achieved in the future.

TAXATION

Each Portfolio intends to qualify annually and to elect to be treated as a
regulated investment company under the Internal Revenue Code of 1986 (the
"Code").

To qualify as a regulated investment company, each Portfolio generally must,
among other things: (i) derive in each taxable year at least 90% of its gross
income from dividends, interest, payments with respect to securities loans,
and gains from the sale or other disposition of stock, securities or foreign
currencies, or other income derived with respect to its business of investing
in such stock, securities or currencies; (ii) diversify its holdings so that,
at the end of each quarter of the taxable year, (a) at least 50% of the market
value of the Portfolio's assets is represented by cash, U.S. Government
securities, the securities of other regulated investment companies and other
securities, with such other securities of any one issuer limited for the
purposes of this calculation to an amount not greater than 5% of the value of
the Portfolio's total assets and 10% of the outstanding voting securities of
such issuer, and (b) 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
(iii) distribute at least 90% of its investment company taxable income (which
includes, among other items, dividends, interest, and net short-term capital
gains in excess of any net long-term capital losses) each taxable year.

48
<PAGE>

shareholders. Each Portfolio intends to distribute to its shareholders, at
least annually, substantially all of its investment company taxable income and
any net capital gains. In addition, amounts not distributed by a Portfolio on
a timely basis in accordance with a calendar year distribution requirement are
subject to a nondeductible 4% excise tax. To avoid the tax, a Portfolio must
distribute (or be deemed to have distributed) during each calendar year, (i)
at least 98% of its ordinary income (not taking into account any capital gains
or losses) for the calendar year, (ii) at least 98% of its capital gains in
excess of its capital losses for the twelve month period ending on October 31
of the calendar year (adjusted for certain ordinary losses), and (iii) all
ordinary income and capital gains for previous years that were not distributed
during such years. To avoid application of the excise tax, each Portfolio
intends to make its distributions in accordance with the calendar year
distribution requirement. A distribution will be treated as paid on December
31 of the calendar year if it is declared by a Portfolio during October,
November, or December of that year to shareholders of record on a date in such
a month and paid by the Portfolio during January of the following calendar
year. Such distributions will be taxable to shareholders (the Separate
Accounts) for the calendar year in which the distributions are declared,
rather than the calendar year in which the distributions are received.

If a Portfolio invests in shares of a foreign investment company, the
Portfolio may be subject to U.S. federal income tax on a portion of an "excess
distribution" from, or of the gain from the sale of part or all of the shares
in, such company. In addition, an interest charge may be imposed with respect
to deferred taxes arising from such distributions or gains. The Portfolio may
be eligible to elect alternative tax treatment that would mitigate the effects
of owning foreign investment company stock.

Under the Code, gains or losses attributable to fluctuations in exchange
rates which occur between the time a Portfolio accrues income or other
receivables or accrues expenses or other liabilities denominated in a foreign
currency and the time that Portfolio actually collects such receivables or
pays such liabilities generally are treated as ordinary income or ordinary
loss. Similarly, on disposition of debt securities denominated in a foreign
currency and on disposition of certain futures contracts, forward contracts,
and options, gains or losses attributable to fluctuations in the value of
foreign currency between the date of acquisition of the security or contract
and the date of disposition also are treated as ordinary gain or loss. These
gains or losses, referred to under the Code as "Section 988" gains or losses,
may increase or decrease the amount of a Portfolio's investment company
taxable income to be distributed to its shareholders as ordinary income.

The Treasury Department announced that it would issue future regulations or
rulings addressing the circumstances in which a variable contract owner's
control of the investments of a separate account may cause the contract owner,
rather than the insurance company, to be treated as the owner of the assets
held by the separate account. If the contract owner is considered the owner of
the securities underlying the separate account, income and gains produced by
those securities would be included currently in the contract owner's gross
income. It is not known what standards will be set forth in the regulations or
rulings.

In the event that the rules or regulations are adopted there can be no
assurance that the Portfolios will be able to operate as currently described
in the Prospectus, or that the Trust will not have to change any Portfolio's
investment objective or investment policies. While each Portfolio's investment
objective is fundamental and may be changed only by a vote of a majority of
its outstanding shares, the Trustees have reserved the right to modify the
investment policies of the Portfolios as necessary to prevent any such
prospective rules and regulations from causing the contract owners to be
considered the owners of the shares of the Portfolios underlying the Separate
Accounts.

DISTRIBUTIONS

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<PAGE>

additional Portfolio shares, will generally be treated by a Separate Account
as either "20% Rate Gain" or "28% Rate Gain," depending upon the Portfolio's
holding period for the assets sold, regardless of the length of time a
Separate Account has held Portfolio shares.

HEDGING TRANSACTIONS

The diversification requirements applicable to a Portfolio's assets may
limit the extent to which a Portfolio will be able to engage in transactions
in options, futures contracts, or forward contracts.

OTHER INFORMATION

CONCENTRATION POLICY

Under each Portfolio's investment restrictions, a Portfolio may not invest
in a security if, as a result of such investment, more than 25% of its total
assets (taken at market value at the time of such investment) would be
invested in the securities of issuers in any particular industry, except
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities (or repurchase agreements with respect thereto). Mortgage-
related securities, including CMOs, that are issued or guaranteed by the U.S.
Government, its agencies or instrumentalities ("government issued") are
considered government securities. The Portfolios take the position that
mortgage-related securities, whether government issued or privately issued, do
not represent interests in any particular "industry" or group of industries,
and therefore, the concentration restriction noted above does not apply to
such securities. For purposes of complying with this restriction, the Fund, in
consultation with its Portfolio Managers, utilizes its own industry
classifications.

CAPITALIZATION

The Fund is a Massachusetts business trust established under a Declaration
of Trust dated May 4, 1987. The capitalization of the Fund consists solely of
an unlimited number of shares of beneficial interest with a par value of
$0.001 each. The Board of Trustees may establish additional Portfolios (with
different investment objectives and fundamental policies) at any time in the
future. Establishment and offering of additional Portfolios will not alter the
rights of the Fund's shareholders. When issued, shares are fully paid,
redeemable, freely transferable, and non-assessable by the Fund. Shares do not
have preemptive rights or subscription rights. In liquidation of a Portfolio
of the Fund, each shareholder is entitled to receive his pro rata share of the
net assets of that Portfolio.

Expenses incurred by the Aggressive Equity, Growth LT, and Emerging Markets
Portfolios in connection with the Fund's organization and establishment of
those Portfolios and the public offering of the shares of those Portfolios,
aggregated approximately $23,410, $3,952, and $23,410, respectively. These
costs have been deferred by the Aggressive Equity, Growth LT, and Emerging
Markets Portfolios and are being amortized by them over a period of five years
from the beginning of operations of each of those Portfolios.

VOTING RIGHTS

Shareholders of the Fund are given certain voting rights. Each share of each
Portfolio will be given one vote, unless a different allocation of voting
rights is required under applicable law for a mutual fund that is an
investment medium for variable insurance products.

Under the Declaration of Trust, the Fund is not required to hold annual
meetings of Fund shareholders to elect Trustees or for other purposes. It is
not anticipated that the Fund will hold shareholders' meetings unless required
by law or the Declaration of Trust. In this regard, the Fund will be required
to hold a meeting to elect Trustees to fill any existing vacancies on the
Board if, at any time, fewer than a majority of the Trustees have been elected
by the shareholders of the Fund. In addition, the Declaration of Trust
provides that the holders of not less than two-thirds of the outstanding
shares or other voting interests of the Fund may remove a person serving as
Trustee either by declaration in writing or at a meeting called for such
purpose. The Trustees are required to call a meeting for the purpose of
considering the removal of a person serving as Trustee, if requested

50
<PAGE>

in writing to do so by the holders of not less than 10% of the outstanding
shares or other voting interests of the Fund. The Fund's shares do not have
cumulative voting rights.

CUSTODIAN AND TRANSFER AGENCY AND DIVIDEND DISBURSING SERVICES

Investors Fiduciary Trust Company ("IFTC") serves as Custodian for assets of
the Fund. Pursuant to a sub-custody agreement between IFTC and The Chase
Manhattan Bank ("Chase"), Chase serves as subcustodian of the Fund for the
custody of the foreign securities acquired by the Fund. Under the agreement,
and in accordance with applicable regulations, Chase may hold the foreign
securities at its principal office at 270 Park Avenue, New York, New York
10081, at Chase's branches, at a foreign branch of a qualified U.S. bank, an
eligible foreign subcustodian, or an eligible foreign securities depository.
Pursuant to rules or other exemptions under the 1940 Act, the Fund may
maintain foreign securities and cash for the Fund in the custody of certain
eligible foreign banks and securities depositories.

Pacific Life provides dividend disbursing and transfer agency services to
the Fund.

FINANCIAL STATEMENTS

The financial statements of the Fund as of December 31, 1997, including the
notes thereto, are incorporated by reference in this Statement of Additional
Information from the Annual Report of the Fund dated as of December 31, 1997.
The financial statements have been audited by Deloitte & Touche LLP,
independent auditors, except for information for the Equity Portfolio and Bond
and Income Portfolio for years before 1994, which was audited by other
independent auditors.

INDEPENDENT AUDITORS

Deloitte & Touche LLP serves as the independent auditors for the Fund. The
address of Deloitte & Touche LLP is 695 Town Center Drive, Suite 1200, Costa
Mesa, California 92626.

COUNSEL

Dechert Price & Rhoads, 1775 Eye Street, N.W., Washington, D.C. 20006-2401,
passes upon certain legal matters in connection with the shares offered by the
Fund and also acts as outside counsel to the Fund.

REGISTRATION STATEMENT

This Statement of Additional Information and the Prospectus do not contain
all the information included in the Fund's Registration Statement filed with
the SEC under the Securities Act of 1933 with respect to the securities
offered hereby, certain portions of which have been omitted pursuant to the
rules and regulations of the SEC. The Registration Statement, including the
exhibits filed therewith, may be examined at the offices of the SEC in
Washington, D.C.

Statements contained herein and in the Prospectus as to the contents of any
contract or other documents referred to are not necessarily complete, and, in
each instance, reference is made to the copy of such contract or other
documents filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference.

51
<PAGE>

FORM NO. 15-17595-14
<PAGE>

[LOGO OF PACIFIC SELECT FUND]

PACIFIC SELECT FUND

STATEMENT OF ADDITIONAL INFORMATION

DATE: MAY 1, 1998

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

Pacific Select Fund (the "Fund") is an open-end diversified management
investment company currently offering separate investment Portfolios, thirteen
of which are described in the Prospectus and this Statement of Additional
Information ("SAI"): the Money Market Portfolio; the High Yield Bond
Portfolio; the Managed Bond Portfolio; the Government Securities Portfolio;
the Aggressive Equity Portfolio; the Growth LT Portfolio; the Equity Income
Portfolio; the Multi-Strategy Portfolio; the Equity Portfolio; the Bond and
Income Portfolio; the Equity Index Portfolio; the International Portfolio; and
the Emerging Markets Portfolio. The Fund's Adviser is Pacific Life Insurance
Company.

This SAI is intended to supplement the information provided to investors in
the Prospectus dated May 1, 1998, of the Fund and has been filed with the
Securities and Exchange Commission as part of the Fund's Registration
Statement. Investors should note, however, that this SAI is not itself a
prospectus and should be read carefully in conjunction with the Fund's
Prospectus and retained for future reference. The contents of this SAI are
incorporated by reference in the Prospectus in their entirety. A copy of the
Prospectus may be obtained free of charge from the Fund at the address and
telephone numbers listed below.

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

Distributor:

Pacific Mutual Distributors, Inc.
700 Newport Center Drive
P.O. Box 9000
Newport Beach, CA 92660
(800) 800-7681

Adviser:

Pacific Life Insurance Company
700 Newport Center Drive
P.O. Box 9000
Newport Beach, CA 92660
(800) 800-7681
<PAGE>

TABLE OF CONTENTS

<TABLE>
<S> <C>
INTRODUCTION................................................................ 1

INVESTMENT POLICIES FOR MONEY MARKET PORTFOLIO.............................. 1

SECURITIES AND INVESTMENT TECHNIQUES........................................ 1
U.S. Government Securities................................................ 1
Mortgage-Related Securities............................................... 2
Mortgage Pass-Through Securities........................................ 2
GNMA Certificates....................................................... 2
FNMA and FHLMC Mortgage-Backed Obligations.............................. 3
Collateralized Mortgage Obligations (CMOs).............................. 3
FHLMC Collateralized Mortgage Obligations............................... 4
Other Mortgage-Related Securities....................................... 4
CMO Residuals........................................................... 5
Stripped Mortgage-Backed Securities..................................... 5
Mortgage Dollar Rolls................................................... 6
Other Asset-Backed Securities............................................. 6
High Yield Bonds.......................................................... 6
Bank Obligations.......................................................... 7
Municipal Securities...................................................... 9
Corporate Debt Securities................................................. 9
Variable and Floating Rate Securities..................................... 10
Commercial Paper.......................................................... 10
Convertible Securities.................................................... 11
Repurchase Agreements..................................................... 12
Borrowing................................................................. 13
Reverse Repurchase Agreements and Other Borrowings........................ 13
Firm Commitment Agreements and When-Issued Securities..................... 13
Loans of Portfolio Securities............................................. 14
Short Sales Against the Box............................................... 14
Restricted Securities (Private Placements)................................ 14
Foreign Securities........................................................ 15
Foreign Currency Transactions............................................. 17
Forward Foreign Currency Contracts...................................... 17
Options................................................................... 19
Purchasing and Writing Options on Securities............................ 19
Purchasing Options on Stock Indexes..................................... 20
Risks of Options Transactions........................................... 21
Spread Transactions..................................................... 21
Options on Foreign Currencies............................................. 22
Investments in SPDRs...................................................... 23
Futures Contracts and Options on Futures Contracts........................ 24
Interest Rate Futures................................................... 24
Stock Index Futures..................................................... 24
Futures Options......................................................... 25
Limitations............................................................. 26
Risks Associated with Futures and Futures Options....................... 26
Foreign Currency Futures and Options Thereon.............................. 28
Swap Agreements and Options on Swap Agreements............................ 28
Structured Notes.......................................................... 28
Warrants and Rights....................................................... 29
Duration.................................................................. 29
</TABLE>

i
<PAGE>

<TABLE>
<S> <C>
INVESTMENT RESTRICTIONS..................................................... 31
Fundamental Investment Restrictions....................................... 31
Nonfundamental Investment Restrictions.................................... 32
MANAGEMENT OF THE FUND...................................................... 33
Trustees and Officers..................................................... 33
Investment Adviser........................................................ 34
Portfolio Management Agreements........................................... 36
Distribution of Fund Shares............................................... 40
Purchases and Redemptions................................................. 41
PORTFOLIO TRANSACTIONS AND BROKERAGE........................................ 41
Investment Decisions...................................................... 41
Brokerage and Research Services........................................... 41
Portfolio Turnover........................................................ 43
NET ASSET VALUE............................................................. 43
PERFORMANCE INFORMATION..................................................... 45
TAXATION.................................................................... 48
Distributions............................................................. 49
Hedging Transactions...................................................... 49
OTHER INFORMATION........................................................... 49
Concentration Policy...................................................... 49
Capitalization............................................................ 49
Voting Rights............................................................. 50
Custodian and Transfer Agency and Dividend Disbursing Services............ 50
Financial Statements...................................................... 50
Independent Auditors...................................................... 50
Counsel................................................................... 51
Registration Statement.................................................... 51
</TABLE>

ii
<PAGE>

INTRODUCTION

INVESTMENT POLICIES FOR MONEY MARKET PORTFOLIO

The investment objective and investment policies of the Money Market
Portfolio are described in the Prospectus. The following description presents
more detailed information on investment policies that apply to the Portfolio
and is intended to supplement the information provided in the Prospectus. A
money market instrument will be considered to be highest quality (1) if the
instrument (or other comparable short-term instrument of the same issuer) is
rated in the highest rating category, (i.e., Aaa or Prime-1 by Moody's
Investors Service, Inc. ("Moody's"), AAA or A-1 by Standard & Poor's Rating
Services ("S&P")) by (i) any two nationally recognized statistical rating
organizations ("NRSROs") or, (ii) if rated by only one NRSRO, by that NRSRO;
(2) an unrated security that is of comparable quality to a security in the
highest rating category as determined by the Adviser; or (3) a U.S. Government
Security. With respect to 5% of its total assets, measured at the time of
investment, the Portfolio may also invest in money market instruments that are
in the second-highest rating category for short-term debt obligations (i.e.,
rated Aa or Prime-2 by Moody's or AA or A-2 by S&P). A money market instrument
will be considered to be in the second-highest rating category under the
criteria described above with respect to instruments considered highest
quality, as applied to instruments in the second-highest rating category. The
quality of securities subject to guarantees may be determined based solely on
the quality of the guarantee. Additional eligibility restrictions apply with
respect to guarantees and demand features.

SECURITIES AND INVESTMENT TECHNIQUES

U.S. GOVERNMENT SECURITIES

1
<PAGE>

market value due to fluctuations in interest rates, but, if held to maturity,
the U.S. Government is obligated to or guarantees to pay them in full.

MORTGAGE-RELATED SECURITIES

2
<PAGE>

(including prepayments) on the underlying mortgage loans are passed through to
the holder of the certificate, GNMA certificates are called "pass-through"
securities.

3
<PAGE>

semiannually. CMOs may be collateralized by whole mortgage loans but are more
typically collateralized by portfolios of mortgage pass-through securities
guaranteed by GNMA, FHLMC, or FNMA, and their income streams.

Criteria for the mortgage loans in the pool backing the CMOs are identical
to those of FHLMC PCs. FHLMC has the right to substitute collateral in the
event of delinquencies and/or defaults.

4
<PAGE>

related security meets a Portfolio's investment quality standards. There can
be no assurance that the private insurers or guarantors can meet their
obligations under the insurance policies or guarantee arrangements. A
Portfolio may buy mortgage-related securities without insurance or guarantees,
if, in an examination of the loan experience and practices of the
originator/servicers and poolers, the Adviser or Portfolio Manager determines
that the securities meet a Portfolio's quality standards. Although the market
for such securities is becoming increasingly liquid, securities issued by
certain private organizations may not be readily marketable. A Portfolio will
not purchase mortgage-related securities or any other assets which in the
opinion of the Adviser or Portfolio Manager are illiquid if, as a result, more
than 15% of the value of a Portfolio's net assets (10% for the Money Market
Portfolio) will be illiquid. It is expected that governmental, government-
related, or private entities may create mortgage loan pools and other
mortgage-related securities offering mortgage pass-through and mortgage
collateralized investments in addition to those described above. As new types
of mortgage-related securities are developed and offered to investors, the
Adviser or Portfolio Manager will, consistent with a Portfolio's investment
objectives, policies, and quality standards, consider making investments in
such new types of mortgage-related securities.

5
<PAGE>

class), while the other class will receive all of the principal (the
principal-only or "PO" class). The yield to maturity on an IO class is
extremely sensitive to the rate of principal payments (including prepayments)
on the related underlying mortgage assets, and a rapid rate of principal
payments may have a material adverse effect on the Portfolio's yield to
maturity from these securities. If the underlying mortgage assets experience
greater than anticipated prepayments of principal, a Portfolio may fail to
fully recoup its initial investment in these securities even if the security
is in one of the highest rating categories.

OTHER ASSET-BACKED SECURITIES

HIGH YIELD BONDS

6
<PAGE>

rated lower than Baa or BBB, or, if not rated by Moody's or S&P, of equivalent
quality (although the Managed Bond Portfolio may not invest in securities
rated lower than B) ("high yield bonds," which are commonly referred to as
"junk bonds").

BANK OBLIGATIONS

7
<PAGE>

a bank, meaning, in effect, that the bank unconditionally agrees to pay the
face value of the instrument on maturity. Fixed time deposits are bank
obligations payable at a stated maturity date and bearing interest at a fixed
rate. Fixed time deposits may be withdrawn on demand by the investor, but may
be subject to early withdrawal penalties which vary depending upon market
conditions and the remaining maturity of the obligation. There are no
contractual restrictions on the right to transfer a beneficial interest in a
fixed time deposit to a third party, although there is no market for such
deposits. A Portfolio will not invest in fixed time deposits which (i) are not
subject to prepayment, or (ii) incur withdrawal penalties upon prepayment
(other than overnight deposits) if, in the aggregate, more than 15% of its net
assets (10% for the Money Market Portfolio) would be invested in such
deposits, repurchase agreements maturing in more than seven days, and other
illiquid assets.

8
<PAGE>

information concerning foreign banks or the accounting, auditing, and
financial reporting standards, practices and requirements applicable to
foreign banks may differ from those applicable to U.S. banks. Foreign banks
are not generally subject to examination by any U.S. Government agency or
instrumentality.

MUNICIPAL SECURITIES

CORPORATE DEBT SECURITIES

All Portfolios may invest in U.S. dollar-denominated corporate debt
securities of domestic issuers and the Money Market, High Yield Bond, Managed
Bond, Government Securities, Aggressive Equity, Growth LT, Multi-Strategy,
Bond and Income, International and Emerging Markets Portfolios may invest in
U.S. dollar-denominated debt securities of foreign issuers. The Aggressive
Equity, Growth LT, International and Emerging Markets Portfolios, and, to the
extent of 20% of their assets, the Managed Bond and Government Securities
Portfolios, and to the extent of 10% of their assets, the Multi-Strategy and
Bond and Income Portfolios, may also invest in debt securities of foreign
issuers denominated in foreign currencies. The debt securities in which any
Portfolio other than the Money Market Portfolio may invest are limited to
corporate debt securities (corporate bonds, debentures, notes, and other
similar corporate debt instruments) which meet the minimum ratings criteria
set forth for that particular Portfolio, or, if not so rated, are, in the
Portfolio Manager's opinion, comparable in quality to corporate debt
securities in which a Portfolio may invest. The debt securities in which the
Money Market Portfolio may invest are described in the discussion of the
investment objective and policies of that Portfolio.

9
<PAGE>

The High Yield Bond, Managed Bond, Aggressive Equity, Growth LT, Equity
Income, Multi-Strategy, Bond and Income, International, and Emerging Markets
Portfolios may invest in corporate debt securities rated Baa (Moody's) or BBB
(S&P), or, if not rated by Moody's or S&P, of equivalent quality. Such
securities are considered medium grade, and do not have economic
characteristics that provide the high degree of security with respect to
payment of principal and interest associated with higher rated bonds, and
generally have some speculative characteristics. A bond will be placed in this
rating category where interest payments and principal security appear adequate
for the present, but economic characteristics that provide longer term
protection may be lacking.

The High Yield Bond, Equity Income, and Multi-Strategy Portfolios and, to
the extent of 10% of their assets, the Managed Bond and Growth LT Portfolios,
and, to the extent of 20% of its assets, the Bond and Income Portfolio and to
the extent of 5% of its assets, the International Portfolio, may invest in
debt securities rated lower than Baa or BBB (although the Managed Bond
Portfolio may not invest in securities rated lower than B), or, if not rated
by Moody's or S&P, of equivalent quality. Such securities are not considered
to be investment grade, and are regarded as predominately speculative with
respect to the issuer's continuing ability to meet principal and interest
payments. For more information on the risks of such securities, see the
discussion of "High Yield Bonds" above.

VARIABLE AND FLOATING RATE SECURITIES

COMMERCIAL PAPER

All of the Portfolios may invest in commercial paper (including variable
amount master demand notes). Each Portfolio, other than the Money Market and
Equity Portfolios may invest in commercial paper denominated in U.S. dollars,
issued by U.S. corporations or foreign corporations and (1) rated at the date
of investment Prime-1 or Prime-2 by Moody's or A-1 or A-2 by S&P or (2) if not
rated by either Moody's or S&P, issued by a corporation having an outstanding
debt issue rated Aa or better by Moody's or AA or better by S&P or (3) if not
rated, are determined to be of an investment quality comparable to rated
commercial paper in which a Portfolio may invest. If issued by a foreign
corporation, such commercial paper is U.S. dollar-denominated and not subject
at the time of purchase to foreign tax withholding. The Aggressive Equity,
International, and Emerging Markets Portfolios may, however, invest in
commercial paper denominated in foreign currencies. The Money Market Portfolio
may invest in commercial paper that meets the standards for money market
securities that that Portfolio may acquire as described in the Prospectus in
the section "Investment Objectives and Policies." The Equity Portfolio may
invest in commercial paper (1) rated at the time of purchase Prime-1 by
Moody's or A-1 by S&P or (2) if not rated by either Moody's or S&P, issued by
a corporation having an outstanding debt issue rated Aa or better by Moody's
or AA or better by S&P.

10
<PAGE>

borrower and its ability to pay principal and interest on demand. The Adviser
or Portfolio Manager also will consider the extent to which the variable
amount master demand notes are backed by bank letters of credit. These notes
generally are not rated by Moody's or S&P; a Portfolio, other than the Money
Market Portfolio, may invest in them only if the Adviser or Portfolio Manager
believes that at the time of investment the notes are of comparable quality to
the other commercial paper in which the Portfolio may invest. With respect to
the Money Market Portfolio, determination of eligibility for the Portfolio
will be in accordance with the standards described in the discussion of the
Portfolio in the Prospectus on "Investment Objectives and Policies." Master
demand notes are considered by the Portfolio to have a maturity of one day
unless the Adviser or Portfolio Manager has reason to believe that the
borrower could not make immediate repayment upon demand. See the Appendix in
the Prospectus for a description of Moody's and S&P ratings applicable to
commercial paper.

CONVERTIBLE SECURITIES

11
<PAGE>

However, the synthetic convertible differs from the true convertible
security in several respects. Unlike a true convertible, which is a single
security having a unitary market value, a synthetic convertible is comprised
of two distinct securities, each with its own market value. Therefore, the
"market value" of a synthetic convertible is the sum of the values of its
fixed-income component and its convertibility component. For this reason, the
value of a synthetic convertible and a true convertible security will respond
differently to market fluctuations.

REPURCHASE AGREEMENTS

12
<PAGE>

in exercising its rights to the securities held as collateral and might incur
a loss if the value of the securities should decline. A Portfolio also might
incur disposition costs in connection with liquidating the securities.

BORROWING

Each Portfolio may borrow up to certain limits. A Portfolio may not borrow
if, as a result of such borrowing, the total amount of all money borrowed by
the Portfolio exceeds 33 1/3% of the value of its total assets (at the time of
such borrowing), including reverse repurchase agreements. This borrowing may
be unsecured. Borrowing may exaggerate the effect on net asset value of any
increase or decrease in the market value of a Portfolio. Money borrowed will
be subject to interest costs which may or may not be recovered by appreciation
of the securities purchased. A Portfolio also may be required to maintain
minimum average balances in connection with such borrowing or to pay a
commitment or other fee to maintain a line of credit; either of these
requirements would increase the cost of borrowing over the stated interest
rate. Reverse repurchase agreements will be included as borrowing subject to
the borrowing limitations described above.

REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS

FIRM COMMITMENT AGREEMENTS AND WHEN-ISSUED SECURITIES

13
<PAGE>

to purchase the security at a price above the current market price on the date
of delivery and payment. During the time the Portfolio is obligated to
purchase such securities it will maintain in a segregated account U.S.
Government securities, cash or liquid securities marked-to-market daily of an
aggregate current value sufficient to make payment for the securities.

LOANS OF PORTFOLIO SECURITIES

For the purpose of realizing additional income, each Portfolio, except the
Equity Income, Multi-Strategy, and Equity Index Portfolios, may make secured
loans of its portfolio securities to broker-dealers or U.S. banks provided:
(i) such loans are secured continuously by collateral consisting of cash, cash
equivalents, or U.S. Government securities maintained on a daily marked-to-
market basis in an amount or at a market value at least equal to the current
market value of the securities loaned; (ii) the Portfolio may at any time call
such loans and obtain the securities loaned; (iii) the Portfolio will receive
an amount in cash at least equal to the interest or dividends paid on the
loaned securities; and (iv) the aggregate market value of securities loaned
will not at any time exceed 25% of the total assets of the Portfolio. In
addition, it is anticipated that the Portfolio may share with the borrower
some of the income received on the collateral for the loan or that it will be
paid a premium for the loan. It should be noted that in connection with the
lending of its portfolio securities, the Portfolio is exposed to the risk of
delay in recovery of the securities loaned or possible loss of rights in the
collateral should the borrower become insolvent. In determining whether to
lend securities, the Adviser or Portfolio Manager considers all relevant facts
and circumstances including the creditworthiness of the borrower. Voting
rights attached to the loaned securities may pass to the borrower with the
lending of portfolio securities. However, the Portfolio intends to call loaned
voting securities if important shareholder meetings are imminent.

SHORT SALES AGAINST THE BOX

RESTRICTED SECURITIES (PRIVATE PLACEMENTS)

14
<PAGE>

treated as illiquid for purposes of the above-described limitation on
acquisition of illiquid assets if the Portfolio Manager determines that the
security is liquid under guidelines adopted by the Fund's Board of Trustees.
Investing in such restricted securities could have the effect of increasing
the level of the Portfolio's illiquidity to the extent that qualified
institutional buyers become, for a time, uninterested in purchasing these
securities.

FOREIGN SECURITIES

The Money Market, High Yield Bond, Managed Bond, Government Securities,
Aggressive Equity, Growth LT, Multi-Strategy, Bond and Income, International,
and Emerging Markets Portfolios may invest directly in U.S. dollar-denominated
corporate debt securities of foreign issuers, certain foreign bank obligations
and U.S. dollar-denominated obligations of foreign governments, foreign
government agencies and international agencies. The Growth LT, Equity Income,
Multi-Strategy and Equity Index Portfolios may invest in equity securities of
foreign issuers if U.S. exchange listed or if otherwise included in the S&P
500. The Growth LT Portfolio may invest up to 25% of its assets in foreign
securities denominated in a foreign currency and not publicly traded in the
United States. The Aggressive Equity Portfolio may invest in securities of
foreign issuers that are traded in U.S. securities markets and may invest up
to 20% of its assets in securities that are traded principally in securities
markets outside of the United States. The International and Emerging Markets
Portfolios may invest in equity securities of foreign corporations,
nonconvertible fixed income securities denominated in foreign currencies, and
in securities represented by European Depositary Receipts ("EDRs"), Global
Depositary Receipts ("GDRs"), or other securities convertible into equity
securities of foreign issuers. The Growth LT Portfolio may also invest in EDRs
and GDRs and other types of receipts of shares evidencing ownership of the
underlying foreign securities. The Managed Bond and Government Securities
Portfolios may each invest up to 20% of their assets in non-U.S. dollar-
denominated debt securities of foreign issuers. The Multi-Strategy and Bond
and Income Portfolios may invest up to 10% of their assets in non-U.S. dollar-
denominated debt securities of foreign issuers. All Portfolios, except the
Equity Portfolio, may purchase American Depositary Receipts ("ADRs") which are
dollar-denominated receipts issued generally by domestic banks and
representing the deposit with the bank of a security of a foreign issuer. ADRs
are publicly-traded on exchanges or over-the-counter in the United States.

15
<PAGE>

as those in the United States. While growing in volume, they usually have
substantially less volume than the New York Stock Exchange, and securities of
some foreign companies are less liquid and more volatile than securities of
comparable U.S. companies. Similarly, volume and liquidity in most foreign
bond markets is less than in the United States and at times, volatility of
price can be greater than in the United States. Fixed commissions on foreign
stock exchanges are generally higher than negotiated commissions on U.S.
exchanges, although the Portfolio will endeavor to achieve the most favorable
net results on its portfolio transactions. There is generally less government
supervision and regulation of stock exchanges, brokers, and listed companies
than in the United States.

Investment in foreign securities also involves the risk of possible losses
through the holding of securities in custodian banks and securities
depositories in foreign countries. The Fund has entered into a Custody
Agreement with Investors Fiduciary Trust Company ("IFTC"), a trust company
chartered under the laws of Missouri, which has entered into a Subcustodial
Agreement with The Chase Manhattan Bank ("Chase") under which Chase, together
with certain of its foreign branches and agencies and foreign banks and
securities depositories acting as subcustodian to Chase, will maintain custody
of the securities and other assets of foreign issuers for the Fund. Under
these agreements, Chase and IFTC have agreed (i) to use reasonable care in the
safekeeping of these securities, (ii) to indemnify and hold harmless the Fund
from and against any loss which shall occur as a result of the failure of a
foreign bank or securities depository holding such securities and (iii) to
exercise reasonable care in the safekeeping of such securities to the same
extent as if the securities were held in New York. Pursuant to requirements of
the Securities and Exchange Commission ("SEC"), Chase is required to use
reasonable care in the selection of foreign subcustodians, and to consider the
financial strength of the foreign subcustodian, its general reputation and
standing (for a depository, its operating history and number of participants),
its ability to provide efficiently the custodial services required, its
relative costs for the services to be rendered, and the Fund's ability to
obtain jurisdiction over the foreign subcustodian to enforce judgments. No
assurance can be given that expropriation, nationalization, freezes, or
confiscation of assets, which would impact assets of the Portfolio, will not
occur, and shareholders bear the risk of losses arising from these or other
events.

The International and Emerging Markets Portfolios' may invest in shares of
investment companies organized to invest in foreign countries. Under the 1940
Act, the Portfolio may not own more than 3% of the outstanding voting stock of
an investment company, invest more than 5% of the Portfolio's total assets in
any one investment company, or invest more than 10% of the Portfolio's total
assets in the securities of investment companies.

The International and Emerging Markets Portfolios foreign investments will
be allocated to at least three countries at all times. In addition, each
Portfolio may not invest more than 50% of its assets in any one second tier
country or more than 25% of its assets in any one third tier country. First
tier countries are: Germany, the United Kingdom, Japan, the United States,
France, Canada, and Australia. Second tier countries are all countries not in
the first or third tier. Third tier countries are countries identified as
"emerging" or "developing" by the International Bank for Reconstruction and
Development ("World Bank") or International Finance Corporation.

16
<PAGE>

The Portfolios are not subject to any limit upon investment in issuers
domiciled or primarily traded in the United States. Less diversification among
countries may create an opportunity for higher returns, but may also result in
higher risk of loss because of greater exposure to a market decline in a
single country.

FOREIGN CURRENCY TRANSACTIONS

17
<PAGE>

not enter into forward contracts under this second circumstance, if, as a
result, the Portfolio will have more than 25% of the value of its total assets
committed to the consummation of such contracts. Under normal circumstances,
consideration of the prospect for currency parities will be incorporated into
the longer term investment decisions made with regard to overall
diversification strategies. The Portfolios will cover outstanding forward
currency contracts by maintaining liquid portfolio securities denominated in
the currency underlying the forward contract or the currency being hedged. To
the extent that a Portfolio is not able to cover its forward currency
positions with underlying portfolio securities, the Portfolio's custodian bank
will place cash or liquid equity or debt securities in a separate account of
the Portfolio in an amount equal to the value of the Portfolio's total assets
committed to the consummation of forward foreign currency exchange contracts.
If the value of the securities used to cover a position or the value of assets
placed in the separate account declines, a Portfolio will find alternative
cover or additional cash or securities will be placed in the account on a
daily basis so that the value of the segregated assets will equal the amount
of the Portfolio's commitments with respect to such contracts.

18
<PAGE>

selling various currencies. Thus, a dealer may offer to sell a foreign
currency to a Portfolio at one rate, while offering a lesser rate of exchange
should the Portfolio desire to resell that currency to the dealer.

The Managed Bond, Government Securities, Aggressive Equity, Growth LT, Bond
and Income, International and Emerging Markets Portfolios may also purchase
and write options on foreign currencies, invest in foreign currency futures
contracts, and purchase and write options thereon, as described below.

OPTIONS

Purchasing and Writing Options on Securities. The High Yield Bond, Managed
Bond, Government Securities, Aggressive Equity, Growth LT, Equity Income,
Multi-Strategy, Equity, Bond and Income and Emerging Markets Portfolios may
purchase and write put and call options on securities. A Portfolio may
purchase and sell (write) (i) both put and call options on debt or other
securities in standardized contracts traded on national securities exchanges,
boards of trade, similar entities, or for which an established over-the-
counter market exists; and (ii) agreements, sometimes called cash puts, which
may accompany the purchase of a new issue of bonds from a dealer.

19
<PAGE>

A Portfolio may write call options and put options only if they are
"covered" or "secured." In the case of a call option on a security, the option
is "covered" if the Portfolio owns the security underlying the call or has an
absolute and immediate right to acquire that security without additional cash
consideration (or, if additional cash consideration is required, cash or cash
equivalents in such amount are placed in a segregated account by its
custodian) upon conversion or exchange of other securities held by the
Portfolio, or, if the Portfolio has a call on the same security if the
exercise price of the call held (i) is equal to or less than the exercise
price of the call written or (ii) is greater than the exercise price of the
call written, if the difference is maintained by the Portfolio in cash, U.S.
Government securities or liquid securities marked-to-market daily in a
segregated account with the Fund's custodian. A put is secured if the
Portfolio maintains cash, U.S. Government securities or liquid securities
marked-to-market daily with a value equal to the exercise price in a
segregated account or holds a put on the same underlying security at an equal
or greater exercise price.

20
<PAGE>

stocks. In addition, stocks may from time to time be dropped from or added to
an index group. These changes are within the discretion of the publisher of
the index.

Different stock indexes are calculated in different ways. Often the market
prices of the stocks in the index group are "value weighted;" that is, in
calculating the index level, the market price of each component stock is
multiplied by the number of shares outstanding. Because of this method of
calculation, changes in the stock prices of larger corporations will generally
have a greater influence on the level of a value weighted (or sometimes
referred to as a capitalization weighted) index than price changes affecting
smaller corporations.

21
<PAGE>

or traded. Spread transactions may occur in the form of options, futures,
forwards or swap transactions. The purchase of a spread transaction gives a
Portfolio the right to sell or receive a security or a cash payment with
respect to an index at a fixed dollar spread or fixed yield spread in
relationship to another security or index which is used as a benchmark. The
risk to a Portfolio in purchasing spread transactions is the cost of the
premium paid for the spread transaction and any transaction costs. The sale of
a spread transaction obligates a Portfolio to purchase or deliver a security
or a cash payment with respect to an index at a fixed dollar spread or fixed
yield spread in relationship to another security or index which is used as a
benchmark. In addition, there is no assurance that closing transactions will
be available. The purchase and sale of spread transactions will be used in
furtherance of a Portfolio's objectives and to protect a Portfolio against
adverse changes in prevailing credit quality spreads, i.e., the yield spread
between high quality and lower quality securities. Such protection is only
provided during the life of the spread transaction. The Fund does not consider
a security covered by a spread transaction to be "pledged" as that term is
used in the Fund's policy limiting the pledging or mortgaging of its assets.
The sale of spread transactions will be "covered" or "secured" as described in
the "Options", "Options on Foreign Currencies", "Futures Contracts and Options
on Futures Contracts", and "Swap Agreements and Options on Swap Agreements"
sections.

OPTIONS ON FOREIGN CURRENCIES

22
<PAGE>

A Portfolio may write covered call and put options on foreign currencies. A
call option written on a foreign currency by the Portfolio is "covered" if the
Portfolio (i) owns the underlying foreign currency covered by the call; (ii)
has an absolute and immediate right to acquire that foreign currency without
additional cash consideration (or for additional cash consideration held in a
segregated account by its custodian) upon conversion or exchange of other
foreign currency held in its portfolio; (iii) has a call on the same foreign
currency and in the same principal amount as the call written if the exercise
price of the call held (a) is equal to or less than the exercise price of the
call written, or (b) is greater than the exercise price of the call written,
if the difference is maintained by the Portfolio in government securities,
cash or liquid securities marked-to-market daily of that foreign currency,
and/or cash or U.S. Government Securities or liquid securities marked-to-
market daily in a segregated account with the Fund's custodian or; (iv) cross-
hedges the call option by segregating and marking-to-market cash or liquid
assets equal to the value of the underlying foreign currency. A put option
written on a foreign currency by a Portfolio is "covered" if the option is
secured by (i) government securities, cash or liquid securities marked-to-
market daily of that foreign currency, and/or U.S. Government securities, cash
or liquid securities marked-to-market daily at least equal to the exercise
price in a segregated account, or (ii) a put on the same underlying currency
at an equal or greater exercise price.

INVESTMENTS IN SPDRS

23
<PAGE>

established to accumulate and hold a portfolio of common stocks that is
intended to track the price performance and dividend yields of the Standard &
Poor's Composite Stock Price Index ("S&P 500").

FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS

The High Yield Bond, Managed Bond, Government Securities, Growth LT, Multi-
Strategy, Bond and Income and International Portfolios may invest in interest
rate futures and options thereon. The Aggressive Equity, Growth LT, Equity
Income, Multi-Strategy, Equity, Equity Index, International, and Emerging
Markets Portfolios may invest in stock index futures and options thereon.

Interest Rate Futures. (The High Yield Bond, Managed Bond, Government
Securities, Growth LT, Multi-Strategy, Equity, Bond and Income and
International Portfolios.) An interest rate futures contract is an agreement
between two parties (buyer and seller) to take or make delivery of a specified
quantity of financial instruments (such as GNMA certificates or Treasury
bonds) at a specified price at a future date. In the case of futures contracts
traded on U.S. exchanges, the exchange itself or an affiliated clearing
corporation assumes the opposite side of each transaction (i.e., as buyer or
seller). A futures contract may be satisfied or closed out by delivery or
purchase, as the case may be, of the financial instrument or by payment of the
change in the cash value of the index. Frequently, using futures to effect a
particular strategy instead of using the underlying or related security will
result in lower transaction costs being incurred. A public market exists in
futures contracts covering various financial instruments including U.S.
Treasury bonds, U.S. Treasury notes, GNMA certificates, three month U.S.
Treasury bills, 90 day commercial paper, bank certificates of deposit, and
Eurodollar certificates of deposit.

24
<PAGE>

into account both stock prices and the number of shares outstanding, many
different companies. An index fluctuates generally with changes in the market
values of the common stocks so included. A stock index futures contract is a
bilateral agreement pursuant to which two parties agree to take or make
delivery of an amount of cash equal to a specified dollar amount multiplied by
the difference between the stock index value at the close of the last trading
day of the contract and the price at which the futures contract is originally
purchased or sold. No physical delivery of the underlying stocks in the index
is made.

25
<PAGE>

Portfolio and the broker of the amount one would owe the other if the futures
contract expired. In computing daily net asset value, each Portfolio will
mark-to-market its open futures positions.

When purchasing a futures contract, a Portfolio must maintain with its
custodian in a segregated account (or broker, if legally permitted) cash, U.S.
Government securities or other liquid securities marked-to-market daily
(including any margin) equal to the market value of such contract. When
writing a call option on a futures contract, the Portfolio similarly will
maintain with its custodian government securities, cash or liquid securities
marked-to-market daily of that foreign currency, and/or, U.S. Government
securities, cash or other liquid securities marked-to-market daily (including
any margin) equal to the amount such option is in-the-money until the option
expires or is closed out by the Portfolio. When selling a futures contract or
selling a put option on a futures contract, the Portfolio is required to
maintain with its custodian government securities, cash or liquid securities
marked-to-market daily of that foreign currency, and/or U.S. Government
securities, cash, or other liquid securities marked-to-market daily (including
any margin) equal to the market value of such contract or exercise price of
such option, or to otherwise cover the position.

26
<PAGE>

given hedge not to achieve its objectives. The degree of imperfection of
correlation depends on circumstances such as variations in speculative market
demand for futures and futures options on securities, including technical
influences in futures trading and futures options, and differences between the
portfolio securities being hedged and the instruments underlying the hedging
vehicle in such respects as interest rate levels, maturities, conditions
affecting particular industries, and creditworthiness of issuers. A decision
as to whether, when, and how to hedge involves the exercise of skill and
judgment and even a well-conceived hedge may be unsuccessful to some degree
because of market behavior or unexpected interest rate trends.

27
<PAGE>

the position is closed. In addition, many of the contracts discussed above are
relatively new instruments without a significant trading history. As a result,
there can be no assurance that an active secondary market will develop or
continue to exist.

FOREIGN CURRENCY FUTURES AND OPTIONS THEREON

SWAP AGREEMENTS AND OPTIONS ON SWAP AGREEMENTS

The Emerging Markets Portfolio may enter into equity index swap agreements.
The Managed Bond and Government Securities Portfolios may enter into interest
rate, interest rate index, and currency exchange rate swap agreements, and may
purchase and sell options thereon. A Portfolio's current obligations (or
rights) under a swap agreement will generally be equal only to the net amount
to be paid or received under the agreement based on the relative values of the
positions held by each party to the agreement (the "net amount"). A
Portfolio's current obligations under a swap agreement will be accrued daily
(offset against any amounts owing to the Portfolio) and any accrued but unpaid
net amounts owed to a swap counterparty will be covered by the maintenance of
a segregated account consisting of cash, U.S. Government securities, and/or
liquid securities marked-to-market daily, to avoid any potential leveraging of
a Portfolio. The Bond and Income Portfolio may invest in the following types
of swap agreements: (1) "interest rate caps," under which, in return for a
premium, one party agrees to make payments to the other to the extent that
interest rates exceed a specified rate, or "cap", (2) "interest rate floors,"
under which, in return for a premium, one party agrees to make payments to the
other to the extent that interest rates fall below a certain level, or
"floor"; (3) "interest rate collars," under which one party sells a cap and
purchases a floor or vice-versa in an attempt to protect itself against
interest rate movements exceeding given minimum or maximum levels; and (4)
"currency exchange rate swap agreements."

STRUCTURED NOTES

The Bond and Income Portfolio may invest in structured notes. The value of
the principal of and/or interest on such securities is determined by reference
to changes in the value of specific currencies, interest rates, commodities,
indices or other financial indicators (the "Reference") or the relative change
in two or more References. The interest rate or the principal amount payable
upon maturity or redemption may be increased or decreased depending upon
changes in the applicable Reference. The terms of the structured notes may
provide that in certain circumstances no principal is due at maturity and,
therefore, result in the loss of a Portfolio's investment. Structured notes
may be positively or negatively indexed, so that appreciation of the Reference
may produce an increase or decrease in the interest rate or value of the
security at maturity. In addition, changes in the interest rates or the value
of the security at maturity may be a multiple of changes in the value of the
Reference. Consequently, structured securities may entail a greater degree of
market risk than other types of fixed-income securities. Structured notes may
also be more volatile, less liquid and more difficult to accurately price than
less complex securities.

28
<PAGE>

WARRANTS AND RIGHTS

The High Yield Bond, Growth LT, Equity Income, Multi-Strategy, Equity, and
Bond and Income Portfolios may invest in warrants; however, not more than 10%
of the market value of a Portfolio's assets (at the time of purchase), and in
the case of the Equity Portfolio 5%, may be invested in warrants other than
warrants acquired in units or attached to other securities. The Aggressive
Equity and Emerging Markets Portfolios each may invest up to 5% of its net
assets in warrants or rights (valued at the lower of cost or market) to
purchase securities, provided that no more than 2% of its net assets are
invested in warrants not listed on the New York or American Stock Exchanges.
Each of these Portfolios may invest in warrants or rights acquired as part of
a unit or attached to securities at the time of purchase without limitation.
Warrants may be considered speculative in that they have no voting rights, pay
no dividends, and have no rights with respect to the assets of the corporation
issuing them. Warrants basically are options to purchase equity securities at
a specific price valid for a specific period of time. They do not represent
ownership of the securities, but only the right to buy them. Warrants differ
from call options in that warrants are issued by the issuer of the security
which may be purchased on their exercise, whereas call options may be written
or issued by anyone. The prices of warrants do not necessarily move parallel
to the prices of the underlying securities.

DURATION

29
<PAGE>

the "dollar-weighted mean waiting time," indicating that it is a measure of
the average time to payment of a bond's cash flow. The critical shortcoming of
this approach is that it assigns equal weight to each dollar paid over the
life of a bond, regardless of when the dollar is paid. Since the present value
of a dollar decreases with the amount of time which must pass before it is
paid, a better method might be to weight each year by the present value of the
dollars paid that year. This calculation puts the weights on a comparable
basis and creates a definition of longevity which is known as duration.

30
<PAGE>

INVESTMENT RESTRICTIONS

FUNDAMENTAL INVESTMENT RESTRICTIONS

(iii) invest in a security if, as a result of such investment, it would hold
more than 10% (taken at the time of such investment) of the outstanding voting
securities of any one issuer;

In addition, with respect to the Money Market, High Yield Bond, Managed
Bond, Government Securities, Growth LT, Equity Income, Multi-Strategy, Equity
Index and International Portfolios, unless otherwise indicated, such
Portfolios may not:

31
<PAGE>

Portfolios may engage in futures contracts and options on futures contracts,
(b) all Portfolios may enter into foreign forward currency contracts; and (c)
the Equity Index Portfolio may purchase and sell stock index futures, purchase
options on stock indexes, and purchase options on stock index futures;

NONFUNDAMENTAL INVESTMENT RESTRICTIONS

(i) invest for the purpose of exercising control or management;

(ii) sell securities or property short, except short sales against the box;

(iii) purchase warrants if immediately after and as a result of such
purchase more than 10% of the market value of the total assets of the
Portfolio would be invested in such warrants;

32
<PAGE>

MANAGEMENT OF THE FUND

TRUSTEES AND OFFICERS

The Trustees and Executive Officers of the Fund, their business address, and
principal occupations during the past five years are:

<TABLE>
<CAPTION>
BUSINESS AFFILIATES AND
NAME AND ADDRESS POSITION WITH THE FUND PRINCIPAL OCCUPATIONS
---------------- ---------------------- -----------------------
<C> <C> <S>
Thomas C. Sutton* Chairman of the Chairman of the Board,
700 Newport Center Drive Board, Trustee Director and Chief Executive
Newport Beach, CA 92660 and President Officer of Pacific Life,
Age 55 Pacific Mutual Holding
Company and Pacific Life
Corp.; Former Equity Board
Member of PIMCO Advisors
L.P.; and similar positions
with other subsidiaries of
Pacific Life; Director of
Newhall Land & Farming;
Director of The Irvine
Company; Director of Edison
International.
Glenn S. Schafer* Trustee President and Director of
700 Newport Center Drive Pacific Life, Pacific Mutual
Newport Beach, CA 92660 Holding Company and Pacific
Age 48 LifeCorp and similar
positions with other
subsidiaries and affiliates
of Pacific Life.
Richard L. Nelson Trustee Business Consultant; retired
8 Cherry Hills Lane Partner with Ernst & Young;
Newport Beach, CA 92660 Director of Wynn's
Age 68 International, Inc.
Lyman W. Porter Trustee Professor of Management in
University of California the Graduate School of
at Irvine Management at the University
Irvine, CA 92717 of California, Irvine;
Age 68 Member of the Academy
Advisory Board of the
Czechoslovakia Management
Center; and Member of the
Board of Trustees of the
American University of
Armenia.
Alan Richards Trustee President of Alan Richards
7381 Elegans Place Consulting, Inc.; Chairman
Carlsbad, CA 92009 of IBIS Capital, LLC; Former
Age 68 Chairman of Advisory Board,
DCG Corporation; Former
Director of Western National
Corporation.
Brian D. Klemens Vice President Assistant Vice President,
700 Newport Center Drive and Treasurer Accounting and Assistant
Newport Beach, CA 92660 Controller, Corporate
Age 41 Finance of Pacific Life.
Diane N. Ledger Vice President Vice President, Variable
700 Newport Center Drive and Assistant Regulatory Compliance,
Newport Beach, CA 92660 Secretary Corporate Law of Pacific
Age 58 Life.
Sharon A. Cheever Vice President Vice President and
700 Newport Center Drive and General Investment Counsel of
Newport Beach, CA 92660 Counsel Pacific Life.
Age 42
Audrey L. Milfs Secretary Vice President, Director and
700 Newport Center Drive Corporate Secretary of
Newport Beach, CA 92660 Pacific Life; and similar
Age 52 positions with other
subsidiaries and affiliates
of Pacific Life.
</TABLE>
- --------
* Mr. Sutton and Mr. Schafer are "interested persons" of the Fund (as that
term is defined in the Investment Company Act) because of their positions
with Pacific Life as shown above.

33
<PAGE>

Trustees other than those affiliated with Pacific Life Insurance Company
("Pacific Life " or the "Adviser", formerly known as Pacific Mutual Life
Insurance Company) or a Portfolio Manager, currently receive an annual fee of
$15,000 and $1,500 for each Board of Trustees meeting attended, including each
Audit, Policy, or Nominating Committee meeting attended, plus reimbursement of
related expenses. In addition, the Chairman of the Fund's Audit Committee and
Policy Committee each receives an additional annual fee of $2,000. The
following table summarizes the aggregate compensation paid by the Fund to each
Trustee who was not affiliated with Pacific Life or a Portfolio Manager in
1997. The table also shows total compensation paid to these Trustees in 1997
by the Fund and PIMCO Funds: Multi-Manager Series (formerly Equity Advisors
Series), an investment company managed by an affiliate of Pacific Life for
which Messrs. Nelson, Porter, and Richards (but not Mr. Sutton or Mr. Schafer)
also serve as trustees (collectively, "Fund Complex").

INVESTMENT ADVISER

Under the terms of the Advisory Contract, Pacific Life is obligated to
manage the Fund's Portfolios in accordance with applicable laws and
regulations.

The Advisory Contract will continue in effect until December 31, 1998, and
from year to year thereafter, provided such continuance is approved annually
by (i) the holders of a majority of the outstanding voting securities of the
Fund or by the Board of Trustees, and (ii) a majority of the Trustees who are
not parties to such Advisory Contract or "interested persons", as defined in
the Investment Company Act of 1940 (the "1940 Act"), of any such party. The
Advisory Contract was originally approved by the Board of Trustees, including
a majority of the Trustees who are not parties to the Advisory Contract, or
interested persons of such parties, at its meeting held on July 21, 1987, and
by the shareholders of the Fund at a Meeting of Shareholders held on October
28, 1988. The Advisory Contract was also approved by the shareholders of the
Equity Index Portfolio of the Fund at a Meeting of Shareholders of the Equity
Index Portfolio held on April 21, 1992. An Addendum to the Advisory Contract
was approved by the Board of Trustees, including a majority of the Trustees
who are not parties to the Contract, or interested persons of such parties, at
a meeting held on October 28, 1988. An Addendum to the Advisory Contract which
increased the advisory fee schedule with respect to the High Yield Bond,
Managed Bond, Government Securities, Equity Income, Multi-Strategy, and
International Portfolios, and which included the Growth LT Portfolio as a
Portfolio to which the Adviser will perform services under the Advisory
Contract, was approved by the Board of Trustees, including a majority of the
Trustees who are not parties to the Contract, or interested persons of such
parties, at a meeting held on September 29, 1993, and was approved by
shareholders of the High Yield Bond, Managed Bond, Government Securities,
Equity Income, Multi-Strategy, and International Portfolios at a Special
Meeting of Shareholders on December 13, 1993. An

34
<PAGE>

Addendum to the Advisory Contract for the Equity Portfolio and Bond and Income
Portfolio was approved by the Board of Trustees, including a majority of the
Trustees who are not parties to the Advisory Contract or interested persons of
such parties, at a meeting held on August 12, 1994, and by the sole
shareholder of those Portfolios on September 6, 1994. An Addendum to the
Advisory Contract for the Aggressive Equity Portfolio and Emerging Markets
Portfolio was approved by the Board of Trustees, including a majority of the
Trustees who are not parties to the Advisory Contract or interested persons of
such parties, at a meeting held on November 17, 1995, and by the sole
shareholder of those Portfolios on January 30, 1996. The Advisory Contract may
be terminated without penalty by vote of the Trustees or the shareholders of
the Fund, or by the Adviser, on 60 days' written notice by either party to the
Advisory Contract and will terminate automatically if assigned.

The Fund pays the Adviser, for its services under the Agreement, a fee based
on an annual percentage of the average daily net assets of each Portfolio. For
the Money Market Portfolio, the Fund will pay to the Adviser a fee at an
annual rate of .40% of the first $250 million of the average daily net assets
of the Portfolio, .35% of the next $250 million of the average daily net
assets of the Portfolio, and .30% of the average daily net assets of the
Portfolio in excess of $500 million. For the High Yield Bond, Managed Bond,
Government Securities, and Bond and Income Portfolios, the Fund will pay .60%
of the average daily net assets of each of the Portfolios. For the Equity
Income, Multi-Strategy, and Equity Portfolios, the Fund will pay .65% of the
average daily net assets of each of the Portfolios. For the Aggressive Equity
Portfolio, the Fund pays to the Adviser a fee at an annual rate of .80% of the
average daily net assets of the Portfolio. For the Growth LT Portfolio, the
Fund will pay .75% of the average daily net assets of the Portfolio. For the
Equity Index Portfolio, the Fund will pay .25% of the first $100 million of
the average daily net assets of the Portfolio, .20% of the next $100 million
of the average daily net assets of the Portfolio, and .15% of the average
daily net assets of the Portfolio in excess of $200 million. For the
International Portfolio, the Fund will pay .85% of the average daily net
assets of the Portfolio. For the Emerging Markets Portfolio, the Fund pays to
the Adviser a fee at an annual rate of 1.10% of the average daily net assets
of the Portfolio. The fee shall be computed and accrued daily and paid
monthly.

Net advisory fees paid or owed to Pacific Life for 1997 were as follows:
Money Market Portfolio--$1,521,271, High Yield Bond Portfolio--$1,466,135,
Managed Bond Portfolio--$2,055,929, Government Securities Portfolio--$645,820,
Aggressive Equity Portfolio--$684,226, Growth LT Portfolio--$4,193,552, Equity
Income Portfolio--$4,062,587, Multi-Strategy Portfolio--$1,866,445, Equity
Portfolio--$1,818,664, Bond and Income Portfolio--$568,647, Equity Index
Portfolio--$1,080,856, International Portfolio--$5,353,459, and Emerging
Markets Portfolio--$868,075.

Net advisory fees paid or owed to Pacific Life for 1996 were as follows:
Money Market Portfolio--$625,727, High Yield Bond Portfolio--$783,894, Managed
Bond Portfolio--$1,071,851, Government Securities Portfolio--$483,849,
Aggressive Equity Portfolio--$153,495, Growth LT Portfolio--$2,367,481, Equity
Income Portfolio--$1,977,164, Multi-Strategy Portfolio--$1,107,889, Equity
Portfolio--$1,049,649, Bond and Income Portfolio--$411,129, Equity Index
Portfolio--$511,324, International Portfolio--$2,586,397, and Emerging Markets
Portfolio--$203,399.

Net advisory fees paid or owed to Pacific Life for 1995 were as follows:
Money Market Portfolio--$386,292, High Yield Bond Portfolio--$318,918, Managed
Bond Portfolio--$519,084, Government Securities Portfolio--$226,533, Growth LT
Portfolio--$845,391, Equity Income Portfolio--$840,710, Multi-Strategy
Portfolio--$650,409, Equity Portfolio--$564,917, Bond and Income Portfolio--
$255,233, Equity Index Portfolio--$194,604 and International Portfolio--
$1,030,744.

35
<PAGE>

The Fund paid Pacific Life $165,000 for its services under the Agreement for
Support Services during 1997, and $108,000 during 1996, representing 0.004%
and 0.005% respectively of the Fund's average daily net assets and anticipates
that fees to be paid for 1998 under said Agreement will be approximately
0.003% of the Fund's average daily net assets.

PORTFOLIO MANAGEMENT AGREEMENTS

MANAGED BOND AND GOVERNMENT SECURITIES PORTFOLIOS

<TABLE>
<CAPTION>
RATE % BREAK POINT (ASSETS)
------ --------------------
<S> <C>
.50% On first $25 million
.375% On next $25 million
.25% On excess
</TABLE>

PIMCO is registered as an investment adviser with the SEC and a commodity
trading adviser with the CFTC. Such registration does not involve supervision
by the SEC over investment advice or supervision by the CFTC over commodities
trading. PIMCO is currently providing investment advisory services to the
PIMCO Funds, Pacific Investment Manager Series, PIMCO Commercial Mortgage
Securities Trust, Inc., PIMCO Funds, Multi-Manager Series (formerly Equity
Advisors Series), the Harbor Bond Fund of the Harbor Fund, The Total Return
Bond and the Intermediate-Term Bond Portfolios of the Target Portfolio Trust,
the Fixed Income I Fund, Diversified Bond Fund, Fixed Income III Fund, and
Multi-Strategy Bond Fund of the Frank Russell Investment Management Company,
the PIMCO Total Return Bond Portfolio of the American Skandia Trust, the Total
Return Fund of Fremont Mutual Funds, Inc., CitiSelect Foreign Bond Portfolio
of the Landmark Funds I, CitiSelect VIP Folio 200, 300, 400 and 500 of the
Variable Annuity Portfolios, the Core Bond Fund of the Russell Insurance
Funds, the Low Duration U.S. Government Income Fund of the PaineWebber Bond
Funds, the Strategic Fixed Income Portfolio of the PaineWebber Series Trust,
the PACE Government Securities Fixed Income Investments and PACE Strategic
Fixed Income Investments of the PaineWebber PACE Select Advisors Trust, as
well as to managed accounts consisting of proceeds from pension and profit
sharing plans. Net fees paid or owed by Pacific Life to PIMCO in 1997 were
$929,041 for the Managed Bond Portfolio and $292,079 for the Government
Securities Portfolio, in 1996 were $541,246 for the Managed Bond Portfolio and
$295,607 for the Government Securities Portfolio and in 1995 were $310,529 for
the Managed Bond Portfolio and $171,814 for the Government Securities
Portfolio.

From April 1, 1996 through April 30, 1998, pursuant to a Portfolio
Management Agreement between the Fund, the Adviser and Columbus Circle
Investors ("Columbus Circle Investors"), Metro Center, One Station Place, 8th
Floor, Stamford, Connecticut 06902, Columbus Circle Investors was the
Portfolio Manager and provided investment advisory services to the Aggressive
Equity Portfolio. For the services provided, for the year 1997, Pacific Life
paid a fee to Columbus Circle Investors based on a percentage of the average
daily net assets according to the following schedule:

AGGRESSIVE EQUITY PORTFOLIO

<TABLE>
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- ---------------------
<S> <C>
.55% On first $100 million
.50% On next $150 million
.45% On next $250 million
.40% On excess
</TABLE>

36
<PAGE>

AGGRESSIVE EQUITY PORTFOLIO

<TABLE>
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- ---------------------
<S> <C>
.55% On first $100 million
.50% On next $250 million
.45% On excess
</TABLE>

Pursuant to a Portfolio Management Agreement between the Fund, the Adviser,
and Janus Capital Corporation ("Janus"), 100 Fillmore Street, Denver, Colorado
80206-4928, Janus is the Portfolio Manager and provides investment advisory
services to the Growth LT Portfolio. For the services provided, for the years
1996 and 1995, Pacific Life paid Janus a fee based on a percentage of the
average daily net assets of the Growth LT Portfolio according to the following
schedule:

GROWTH LT PORTFOLIO

<TABLE>
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- ---------------------
<S> <C>
.60% On first $100 million
.55% On excess
</TABLE>

Pursuant to a Portfolio Management Agreement between the Fund, the Adviser,
and J.P. Morgan Investment Management Inc. ("J.P. Morgan Investment"), 522
Fifth Avenue, New York, New York 10036, J.P. Morgan Investment is the
Portfolio Manager and provides investment advisory services to the Equity
Income Portfolio and the Multi-Strategy Portfolio. For the services provided,
for the years 1996 and 1995, Pacific Life paid J.P. Morgan Investment a fee
based on a percentage of the combined average daily net assets of these two
Portfolios according to the following schedule:

EQUITY INCOME AND MULTI-STRATEGY PORTFOLIOS

<TABLE>
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- ---------------------
<S> <C>
.45% On first $100 million
.40% On next $100 million
.35% On next $200 million
.30% On excess
</TABLE>

37
<PAGE>

Net fees paid or owed by Pacific Life to J.P. Morgan Investment in 1997 were
$1,998,776 for the Equity Income Portfolio and $920,564 for the Multi-Strategy
Portfolio, in 1996 were $1,135,557 for the Equity Income Portfolio and
$637,384 for the Multi-Strategy Portfolio and in 1995 were $537,832 for the
Equity Income Portfolio and $417,904 for the Multi-Strategy Portfolio.

EQUITY AND BOND AND INCOME PORTFOLIOS

<TABLE>
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- ---------------------
<S> <C>
.45% On first $100 million
.40% On next $100 million
.35% On next $200 million
.30% On next $600 million
.20% On excess
</TABLE>

EQUITY PORTFOLIO

<TABLE>
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- ---------------------
<S> <C>
.50% On first $500 million
.45% On next $500 million
.40% On excess

BOND AND INCOME PORTFOLIO

<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- ---------------------
<S> <C>
.40% On first $500 million
.35% On next $500 million
.30% On excess
</TABLE>

Net fees paid or owed by Pacific Life to Greenwich Street Advisors in 1997
were $1,088,097 for the Equity Portfolio and $368,846 for the Bond and Income
Portfolio, in 1996 were $808,784 for the Equity Portfolio and $274,358 for the
Bond and Income Portfolio and in 1995 were $435,730 for the Equity Portfolio
and $170,779 for the Bond and Income Portfolio.

38
<PAGE>

BTCo, based on the net assets of the Equity Index Portfolio at the beginning
of each calendar quarter in accordance with the following schedule:

EQUITY INDEX PORTFOLIO

<TABLE>
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- ---------------------
<S> <C>
.07% On first $100 million
.03% On next $100 million
.01% On excess
</TABLE>

This fee is subject to a minimum annual fee of $100,000 for the calendar
year 1996 and each year thereafter. For the calendar year 1995, the fee was
subject to a minimum annual fee of $75,000.

BTCo is a wholly-owned subsidiary of Bankers Trust New York Corporation, the
seventh largest bank holding company in the United States. BTCo is responsible
for the management of the Equity Index Portfolio, as of December 31, 1997,
BTCo managed assets approximating $317.8 billion. BTCo is the investment
manager to the following registered investment companies: Short-Intermediate
Fixed-Income Portfolio of Accessor Funds, Inc.; MidCap Index, Stock Index and
Small Cap Index Funds of American General Series Portfolio ("VALIC"); Equity
and Fixed Income Portfolios of the Bank Fiduciary Funds; Tax Free Money, NY
Tax Free Money, Cash Management, Treasury Money, Lifecycyle Short-Range,
Lifecycle Mid-Range, Lifecycle Long-Range, Intermediate Tax-Free, Global High
Yield Securities, International Equity, Capital Appreciation, Pacific Basin
Equity, Latin American Equity and Small Cap Portfolios of the BT Investment
Trust; Money Market, Limited Term U.S. Government Securities, Equity 500
Index, Equity Appreciation (Investment Class), Institutional Asset Management
and PreservationPlus (Investment and Institutional Classes) Portfolios of the
BT Pyramid Mutual Funds Trust; Equity 500 Index, Cash Management, Treasury
Money, Cash Reserves, Liquid Assets, Treasury Assets, Daily Assets and
International Equity (Classes I and II) Portfolios of the BT Institutional
Trust; Advisor and Institutional Classes of the EAFE Equity Index, Small Cap
Index and U.S. Bond Index Portfolios of the BT Advisor Trust; Small Cap,
International Equity, U.S. Bond Index, EAFE Equity Index, Equity 500 Index,
Small Cap Index and Managed Assets Funds of the BT Insurance Funds Trust; BT
Equity 500 Index, BT Small Company Index and BT International Equity Index
Portfolios of the EQ Advisors Trust; Spartan US Equity Index, Spartan Extended
Market Index, Spartan Market Index, Spartan Total Market Index, Spartan
International Index and VIP Index 500 Funds of the Fidelity Funds; Scudder
AARP US Stock Index Portfolio; and USAA S&P Index 500 Fund.

Net fees paid or owed by Pacific Life to BTCo in 1997 were $135,863, in 1996
were $100,000, and in 1995 were $75,000.

INTERNATIONAL PORTFOLIO

<TABLE>
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- --------------------
<S> <C>
.70% On first $25 million
.55% On next $ 25 million
.50% On next $ 50 million
.40% On excess
</TABLE>

39
<PAGE>

Net fees paid or owed by Pacific Life to Templeton for the International
Portfolio from January 1, 1997 to May 31, 1997 were $945,379, in 1996 were
$1,382,217, and in 1995 were $643,941.

Net fees paid or owed by Pacific Life to Morgan Stanley from June 1, 1997 to
December 31, 1997 were $1,478,065 for the International Portfolio.

Pursuant to a Portfolio Management Agreement between the Fund, the Adviser
and Blairlogie Capital Management ("Blairlogie"), 4th Floor, 125 Princes
Street, Edinburgh EH2 4AD, Scotland, Blairlogie serves as the Portfolio
Manager and provides investment advisory services to the Emerging Markets
Portfolio. For the services provided, for the year 1996, Pacific Life paid a
fee to Blairlogie based on a percentage of the Portfolio's average daily net
assets according to the following fee schedule:

EMERGING MARKETS PORTFOLIO

<TABLE>
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- --------------------
<S> <C>
.85% On first $50 million
.75% On next $50 million
.70% On next $50 million
.65% On excess
</TABLE>

The Portfolio Management Agreements are not exclusive, and PIMCO, Alliance
Capital Management L.P., Janus, J.P. Morgan Investment, BTC, Goldman Sachs
Asset Management, Morgan Stanley, and Blairlogie may provide and currently are
providing investment advisory services to other clients, including other
investment companies.

DISTRIBUTION OF FUND SHARES

40
<PAGE>

were advanced on behalf of the Fund by the Adviser. These organizational
expenses were deferred and amortized by the Fund's Portfolios over a period of
60 months. Similarly, the organizational expenses of Portfolios of the Fund
that have been organized after the Fund commenced operations have been
advanced on behalf of the Fund by the Adviser, and are deferred and amortized
by the pertinent Portfolio over a period of 60 months from the commencement of
operations of the Portfolio. See "Financial Statements."

PURCHASES AND REDEMPTIONS

For information on purchase and redemption of shares, see "More on the
Fund's Shares" in the Fund's Prospectus. The Fund may suspend the right of
redemption of shares of any Portfolio and may postpone payment for more than
seven days for any period: (i) during which the New York Stock Exchange is
closed other than customary weekend and holiday closings or during which
trading on the New York Stock Exchange is restricted; (ii) when the SEC
determines that a state of emergency exists which may make payment or transfer
not reasonably practicable; (iii) as the SEC may by order permit for the
protection of the security holders of the Fund; or (iv) at any other time when
the Fund may, under applicable laws and regulations, suspend payment on the
redemption of its shares. If the Board of Trustees should determine that it
would be detrimental to the best interests of the remaining shareholders of a
Portfolio to make payment wholly or partly in cash, the Portfolio may pay the
redemption price in whole or in part by a distribution in kind of securities
from the portfolio of the Portfolio, in lieu of cash, in conformity with
applicable rules of the SEC. If shares are redeemed in kind, the redeeming
shareholder might incur brokerage costs in converting the assets into cash.
Under the 1940 Act, the Fund is obligated to redeem shares solely in cash up
to the lesser of $250,000 or 1 percent of its net assets during any 90-day
period for any one shareholder.

PORTFOLIO TRANSACTIONS AND BROKERAGE

INVESTMENT DECISIONS

BROKERAGE AND RESEARCH SERVICES

41
<PAGE>

commissions may be fixed and the Adviser or Portfolio Manager may be unable to
negotiate commission rates for these transactions.

42
<PAGE>

$325,340, the Equity Income Portfolio--$1,162,083, $746,412 and $314,236, the
Multi-Strategy Portfolio--$283,791, $231,844 and $129,476, the Equity
Portfolio--$706,250, $286,596 and $335,550 of which $61,512 (8.71%), $60,498
(21.11%) and $68,472 (20.41%) was paid to Smith Barney Inc. and $23,700
(3.36%), $11,100 (3.87%) and $22,500 (6.71%) was paid to Robinson Humphrey
Co., Inc., affiliates of Greenwich Street Advisors, the Bond and Income
Portfolio--$0, $0 and $0, the Equity Index Portfolio--$157,624, $137,980 and
$43,415, the International Portfolio--$1,606,247, $883,241 and $376,660 of
which $39,617 (2.47%) was paid to Morgan Stanley & Co. during the period June
1, 1997 to December 31, 1997, an affiliate of Morgan Stanley Asset Management
Inc., and the Emerging Markets Portfolio--$712,505 and $302,384. The
Aggressive Equity and Emerging Markets Portfolio had not commenced operations
as of December 31, 1995.

On December 31, 1997, the Managed Bond Portfolio held securities of Salomon
Brothers Inc. and Goldman Sachs & Co. valued at $10,146,828 and $8,000,664,
respectively; the Growth LT Portfolio held securities of Charles Schwab & Co.
valued at $7,580,203; and the Equity Index Portfolio held securities of
Merrill Lynch & Co. valued at $2,786,212, each of which is a broker or dealer
regularly used for brokerage transactions by that Portfolio. On December 31,
1996, the Managed Bond Portfolio held securities of Lehman Brothers Holdings
and PaineWebber Group valued at $4,029,960 and $1,556,678, respectively; and
the Equity Index Portfolio held securities of Merrill Lynch & Co. and Salomon
Brothers Inc. valued at $839,450 and $358,150, respectively, each of which is
a broker or dealer regularly used for brokerage transactions by that
Portfolio. On December 31, 1995, the Managed Bond Portfolio held securities of
Merrill Lynch & Co. and Salomon Brothers Inc. valued at $501,195 and
$2,798,794, respectively; and the Equity Index Portfolio held securities of
American Express, Merrill Lynch & Co. and Salomon Brothers Inc. valued at
$542,012, $249,900 and $99,400, respectively, each of which is a broker or
dealer regularly used for brokerage transactions by that Portfolio.

PORTFOLIO TURNOVER

The portfolio turnover rates are not expected to exceed: 0% for the Money
Market Portfolio; 400% for the Managed Bond and Government Securities
Portfolios; and 150% for all other Portfolios. For the Portfolios other than
the Money Market Portfolio, portfolio turnover could be greater in periods of
unusual market movement and volatility. For the years 1997, 1996, and 1995,
respectively, the portfolio turnover rate for each of the Portfolios was as
follows: Money Market Portfolio--0%, 0%, and 0%, High Yield Bond Portfolio--
103%, 120%, and 127%, Managed Bond Portfolio--231%, 386%, and 191%, Government
Securities Portfolio--203%, 307%, and 299%, Aggressive Equity Portfolio--189%
and 80%, Growth LT Portfolio--145%, 147%, and 166%, Equity Income Portfolio--
106%, 95%, and 86%, Multi-Strategy Portfolio--72%, 133%, and 176%, Equity
Portfolio--160%, 91%, and 226%, Bond and Income Portfolio--15%, 27%, and 52%,
Equity Index Portfolio-- 3%, 20%, and 8%, International Portfolio--84%, 21%,
and 16%, and Emerging Markets Portfolio--70% and 48%. The 1996 Portfolio
turnover rate for the Aggressive Equity and Emerging Markets Portfolios is
based on the period from April 1, 1996 (commencement of operations) to
December 31, 1996.

NET ASSET VALUE

43
<PAGE>

exchanges usually close for trading at 4:00 p.m. New York City time. In the
event that the New York Stock Exchange or other exchanges close early, the
Fund normally will deem the closing price of each Portfolio's assets to be the
price of those assets at 4:00 p.m., New York City time. Net asset value will
not be determined on the following holidays: New Year's Day, Martin Luther
King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day, and Christmas Day. With respect to the Portfolios
that invest in foreign securities, the value of foreign securities that are
traded on stock exchanges outside the United States are based upon the price
on the exchange as of the close of business of the exchange immediately
preceding the time of valuation. Securities traded in over-the-counter markets
outside the United States are valued at the last available price in the over-
the-counter market prior to the time of valuation. Trading in securities on
exchanges and over-the-counter markets in European and Pacific Basin countries
is normally completed well before 4:00 p.m. New York City time. In addition,
European and Pacific Basin securities trading may not take place on all
business days in New York. Furthermore, trading takes place in Japanese
markets on certain Saturdays and in various foreign markets on days which are
not business days in New York and on which the Fund's net asset value is not
calculated. Quotations of foreign securities in foreign currencies are
converted to U.S. dollar equivalents using the foreign exchange quotation in
effect at the time net asset value is computed. The calculation of the net
asset value of the Managed Bond, Government Securities, Aggressive Equity,
Growth LT, Multi-Strategy, International, and Emerging Markets Portfolios may
not take place contemporaneously with the determination of the prices of
portfolio securities of foreign issuers used in such calculation. Further,
under the Fund's procedures, the prices of foreign securities are determined
using information derived from pricing services and other sources every day
that the Fund values its shares. Prices derived under these procedures will be
used in determining net asset value. Information that becomes known to the
Fund or its agents after the time that net asset value is calculated on any
business day (which may be after 4:00 p.m. New York City time) may be assessed
in determining net asset value per share after the time of receipt of the
information, but will not be used to retroactively adjust the price of the
security so determined earlier or on a prior day. Events affecting the values
of portfolio securities that occur between the time their prices are
determined and the time a Portfolio's net asset value is determined may not be
reflected in the calculation of net asset value. If events materially
affecting net asset value occur during such period, the securities would be
valued at fair market value as determined by the management and approved in
good faith by the Board of Trustees of the Fund. In determining the fair value
of securities, the Fund may consider available information including
information that becomes known after 4:00 p.m. New York City time, and the
values that are determined will be deemed to be the price at 4:00 p.m. New
York City time.

All other Portfolios are valued as follows:

44
<PAGE>

Trustees of the Fund, although the actual calculations may be made by persons
acting under the direction of the Board. Money market instruments are valued
at market value, except that instruments maturing in sixty days or less are
valued using the amortized cost method of valuation.

PERFORMANCE INFORMATION

Effective Yield = [(Base Period Return + 1) (To the power of 365/7)]-1

For the 7-day period ending December 31, 1997, the current yield of the
Money Market Portfolio was 5.54% and the effective yield of the Portfolio was
5.69%.

45
<PAGE>

("net investment income"), and are computed by dividing net investment income
by the maximum offering price per share on the last day of the period,
according to the following formula:

2{[([(a-b)/c*d] +1 (To the power of 6)]-1]

where

a = dividends and interest earned during the period,

b = expenses accrued for the period (net of reimbursements),

c = the average daily number of shares outstanding during the period
that were entitled to receive dividends, and

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

For the 30 day period ended December 31, 1997, the yield of the remaining
Portfolios that had commenced operations on or before that date was as
follows: 8.40% for the High Yield Bond Portfolio, 5.76% for the Managed Bond
Portfolio, 5.44% for the Government Securities Portfolio, 0.28% for the
Aggressive Equity Portfolio, 0.37% for the Growth LT Portfolio, 3.37% for the
Multi-Strategy Portfolio, 1.08% for the Equity Income Portfolio, 0.89% for the
Equity Portfolio, 6.47% for the Bond and Income Portfolio, 1.62% for the
Equity Index Portfolio, 1.74% for the International Portfolio, and 0.70% for
the Emerging Markets Portfolio.

Quotations of average annual total return for a Portfolio will be expressed
in terms of the average annual compounded rate of return of a hypothetical
investment in the Portfolio over certain periods that will include a period of
one year (or, if less, up to the life of the Portfolio), calculated pursuant to
the following formula: P (1 + T) (To the power of n) = ERV (where P = a
hypothetical initial payment of $1,000, T = the total return for the period, n
= the number of periods, and ERV = the ending redeemable value of a
hypothetical $1,000 payment made at the beginning of the period). Quotations of
total return may also be shown for other periods. All total return figures
reflect the deduction of a proportional share of Portfolio expenses on an
annual basis, and assume that all dividends and distributions are reinvested
when paid.

For the one year period ended December 31, 1997, the total return for each
Portfolio that had commenced operations on or before that date was as follows:
5.28% for the Money Market Portfolio, 9.44% for the High Yield Bond Portfolio,
9.92% for the Managed Bond Portfolio, 9.48% for the Government Securities
Portfolio, 3.78% for the Aggressive Equity Portfolio, 10.96% for the Growth LT
Portfolio, 28.60% for the Equity Income Portfolio, 19.62% for the Multi-
Strategy Portfolio, 18.18% for the Equity Portfolio, 16.32% for the Bond and
Income Portfolio, 32.96% for the Equity Index Portfolio, 9.28% for the
International Portfolio, and (1.69)% for the Emerging Markets Portfolio.

For the five year period ended December 31, 1997, the average annual total
return for each Portfolio that had commenced operations on or before that date
was as follows: 4.44% for the Money Market Portfolio, 11.40% for the High
Yield Bond Portfolio, 7.81% for the Managed Bond Portfolio, 7.08% for the
Government Securities Portfolio, 16.90% for the Equity Income Portfolio,
12.66% for the Multi-Strategy Portfolio, 16.12% for the Equity Portfolio,
11.04% for the Bond and Income Portfolio, 19.74% for the Equity Index
Portfolio, and 14.55% for the International Portfolio. The Growth LT Portfolio
did not begin operations until January 4, 1994. The Aggressive Equity and
Emerging Markets Portfolios did not begin operations until April 1, 1996.

For the ten year period ended December 31, 1997, the average annual total
returns for the Equity Portfolio and Bond and Income Portfolio were 14.76% and
11.30%, respectively.

46
<PAGE>

Government Securities Portfolio, 14.61% for the Equity Income Portfolio,
11.93% for the Multi-Strategy Portfolio, and 9.25% for the International
Portfolio. Based upon the period from the commencement of operations of the
Growth LT Portfolio on January 4, 1994 until December 31, 1997, the average
annual total return for the Growth LT Portfolio was 19.31%. Based upon the
period from the commencement of the first full year of operations of the
Equity Portfolio and Bond and Income Portfolio on January 1, 1984, the average
annual total return for each of these Portfolios was 15.01% and 12.48%,
respectively. Based upon the period from the commencement of the Equity Index
Portfolio operations on January 30, 1991 until December 31, 1997, the average
annual total return for the Equity Index Portfolio was 18.75%. Based upon the
period from the commencement of operations of the Aggressive Equity and
Emerging Markets Portfolios on April 1, 1996 until December 31, 1997, the
average annual total return for each of these Portfolios was 6.64% and
(2.80)%, respectively.

Performance information for a Portfolio may be compared, in advertisements,
sales literature, and reports to shareholders to: (i) the Standard & Poor's
500 Stock Index ("S&P 500"); the Dow Jones Industrial Average ("DJIA"); for
the Money Market Portfolio, the Donoghue Money Market Institutional Averages;
for the Aggressive Equity Portfolio, the Russell 2000 Index and the Russell
MidCap Index; for the Growth LT Portfolio, the Russell 2500 Index; for the
Equity Portfolio, the Russell 1000 Growth Index; for those Portfolios with
investments in fixed income securities, the Lehman Brothers
Government/Corporate Bond Index; for the Government Securities Portfolio, the
Lehman Brothers Government Bond Index; for the High Yield Bond Portfolio, the
First Boston High Yield Bond Index; for the Multi-Strategy Portfolio, the
Lehman Brothers Aggregate Bond Index; for the Bond and Income Portfolio, the
Lehman Brothers Long Term Government/Corporate Bond Index and the Lehman
Brothers Aggregate Bond Index; for the International Portfolio, Morgan Stanley
Capital International's EAFE Index, which represents the stock markets of
Europe, Australia, and the Far East; for the Emerging Markets Portfolio, the
Morgan Stanley Capital International Emerging Markets Free Index; or other
unmanaged indexes, so that investors may compare a Portfolio's results with
those of a group of unmanaged securities widely regarded by investors as
representative of the securities markets in general; (ii) other groups of
mutual funds tracked by Lipper Analytical Services, a widely used independent
research firm which ranks mutual funds by overall performance, investment
objectives, and assets, or tracked by other services, companies, publications,
or persons who rank mutual funds on overall performance or other criteria; and
(iii) the Consumer Price Index (measure for inflation) to assess the real rate
of return from an investment in the Portfolio. Unmanaged indexes may assume
the reinvestment of dividends but generally do not reflect deductions for
administrative and management costs and expenses.

47
<PAGE>

TAXATION

Each Portfolio intends to qualify annually and to elect to be treated as a
regulated investment company under the Internal Revenue Code of 1986 (the
"Code").

To qualify as a regulated investment company, each Portfolio generally must,
among other things:(i) derive in each taxable year at least 90% of its gross
income from dividends, interest, payments with respect to securities loans,
and gains from the sale or other disposition of stock, securities or foreign
currencies, or other income derived with respect to its business of investing
in such stock, securities or currencies; (ii) diversify its holdings so that,
at the end of each quarter of the taxable year, (a) at least 50% of the market
value of the Portfolio's assets is represented by cash, U.S. Government
securities, the securities of other regulated investment companies and other
securities, with such other securities of any one issuer limited for the
purposes of this calculation to an amount not greater than 5% of the value of
the Portfolio's total assets and 10% of the outstanding voting securities of
such issuer, and (b) 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
(iii) distribute at least 90% of its investment company taxable income (which
includes, among other items, dividends, interest, and net short-term capital
gains in excess of any net long-term capital losses) each taxable year.

As a regulated investment company, a Portfolio generally will not be subject
to U.S. federal income tax on its investment company taxable income and net
capital gains (any net long-term capital gains in excess of the sum of net
short-term capital losses and capital loss carryovers from prior years), if
any, that it distributes to shareholders. Each Portfolio intends to distribute
to its shareholders, at least annually, substantially all of its investment
company taxable income and any net capital gains. In addition, amounts not
distributed by a Portfolio on a timely basis in accordance with a calendar
year distribution requirement are subject to a nondeductible 4% excise tax. To
avoid the tax, a Portfolio must distribute (or be deemed to have distributed)
during each calendar year, (i) at least 98% of its ordinary income (not taking
into account any capital gains or losses) for the calendar year, (ii) at least
98% of its capital gains in excess of its capital losses for the twelve month
period ending on October 31 of the calendar year (adjusted for certain
ordinary losses), and (iii) all ordinary income and capital gains for previous
years that were not distributed during such years. To avoid application of the
excise tax, each Portfolio intends to make its distributions in accordance
with the calendar year distribution requirement. A distribution will be
treated as paid on December 31 of the calendar year if it is declared by a
Portfolio during October, November, or December of that year to shareholders
of record on a date in such a month and paid by the Portfolio during January
of the following calendar year. Such distributions will be taxable to
shareholders (the Separate Accounts) for the calendar year in which the
distributions are declared, rather than the calendar year in which the
distributions are received.

48
<PAGE>

DISTRIBUTIONS

Distributions by a Portfolio of any investment company taxable income (which
includes, among other items, dividends, interest, and any net realized short-
term capital gains in excess of net realized long-term capital losses),
whether received in cash or reinvested in additional Portfolio shares, will be
treated as ordinary income for tax purposes in the hands of a shareholder (a
Separate Account). Distribution of net capital gains (the excess of any net
long-term capital gains over net short-term capital losses), whether received
in cash or reinvested in additional Portfolio shares, will generally be
treated by a Separate Account as either "20% Rate Gain" or "28% Rate Gain",
depending upon the Portfolio's holding period for the assets sold, regardless
of the length of time a Separate Account has held Portfolio shares.

HEDGING TRANSACTIONS

OTHER INFORMATION

CONCENTRATION POLICY

CAPITALIZATION

49
<PAGE>

will not alter the rights of the Fund's shareholders. When issued, shares are
fully paid, redeemable, freely transferable, and non-assessable by the Fund.
Shares do not have preemptive rights or subscription rights. In liquidation of
a Portfolio of the Fund, each shareholder is entitled to receive his pro rata
share of the net assets of that Portfolio.

VOTING RIGHTS

CUSTODIAN AND TRANSFER AGENCY AND DIVIDEND DISBURSING SERVICES

Pacific Life provides dividend disbursing and transfer agency services to
the Fund.

FINANCIAL STATEMENTS

INDEPENDENT AUDITORS

Deloitte & Touche LLP serves as the independent auditors for the Fund. The
address of Deloitte & Touche LLP is 695 Town Center Drive, Suite 1200, Costa
Mesa, California 92626.

50
<PAGE>

COUNSEL

REGISTRATION STATEMENT

51
<PAGE>

FORM NO. 288-8A
<PAGE>

[LOGO OF PACIFIC SELECT FUND]

PACIFIC SELECT FUND

STATEMENT OF ADDITIONAL INFORMATION

DATE: MAY 1, 1998

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

Pacific Select Fund (the "Fund") is an open-end diversified management
investment company currently offering separate investment Portfolios, eleven
of which are described in the Prospectus and this Statement of Additional
Information ("SAI"): the Money Market Portfolio; the High Yield Bond
Portfolio; the Managed Bond Portfolio; the Government Securities Portfolio;
the Growth LT Portfolio; the Equity Income Portfolio; the Multi-Strategy
Portfolio; the Equity Portfolio; the Bond and Income Portfolio; the Equity
Index Portfolio; and the International Portfolio. The Fund's Adviser is
Pacific Life Insurance Company.

This SAI is intended to supplement the information provided to investors in
the Prospectus dated May 1, 1998 of the Fund and has been filed with the
Securities and Exchange Commission as part of the Fund's Registration
Statement. Investors should note, however, that this SAI is not itself a
prospectus and should be read carefully in conjunction with the Fund's
Prospectus and retained for future reference. The contents of this SAI are
incorporated by reference in the Prospectus in their entirety. A copy of the
Prospectus may be obtained free of charge from the Fund at the address and
telephone numbers listed below.

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

Distributor:

Pacific Mutual Distributors, Inc.
700 Newport Center Drive
P.O. Box 9000
Newport Beach, CA 92660
(800) 800-7681

Adviser:

Pacific Life Insurance Company
700 Newport Center Drive
P.O. Box 9000
Newport Beach, CA 92660
(800) 800-7681
<PAGE>

TABLE OF CONTENTS

<TABLE>
<S> <C>
INTRODUCTION................................................................ 1
INVESTMENT POLICIES FOR MONEY MARKET PORTFOLIO.............................. 1
SECURITIES AND INVESTMENT TECHNIQUES........................................ 1
U.S. Government Securities................................................ 1
Mortgage-Related Securities............................................... 2
Mortgage Pass-Through Securities........................................ 2
GNMA Certificates....................................................... 2
FNMA and FHLMC Mortgage-Backed Obligations.............................. 3
Collateralized Mortgage Obligations (CMOs).............................. 3
FHLMC Collateralized Mortgage Obligations............................... 4
Other Mortgage-Related Securities....................................... 4
CMO Residuals........................................................... 5
Stripped Mortgage-Backed Securities..................................... 5
Mortgage Dollar Rolls................................................... 6
Other Asset-Backed Securities............................................. 6
High Yield Bonds.......................................................... 6
Bank Obligations.......................................................... 7
Municipal Securities...................................................... 9
Corporate Debt Securities................................................. 9
Variable and Floating Rate Securities..................................... 10
Commercial Paper.......................................................... 10
Convertible Securities.................................................... 11
Repurchase Agreements..................................................... 12
Borrowing................................................................. 12
Reverse Repurchase Agreements and Other Borrowings........................ 13
Firm Commitment Agreements and When-Issued Securities..................... 13
Loans of Portfolio Securities............................................. 14
Short Sales Against the Box............................................... 14
Restricted Securities (Private Placements)................................ 14
Foreign Securities........................................................ 15
Foreign Currency Transactions............................................. 17
Forward Foreign Currency Contracts...................................... 17
Options................................................................... 19
Purchasing and Writing Options on Securities............................ 19
Purchasing Options on Stock Indexes..................................... 20
Risks of Options Transactions........................................... 21
Spread Transactions..................................................... 21
Options on Foreign Currencies............................................. 22
Investments in SPDRs...................................................... 23
Futures Contracts and Options on Futures Contracts........................ 24
Interest Rate Futures................................................... 24
Stock Index Futures..................................................... 24
Futures Options......................................................... 25
Limitations............................................................. 26
Risks Associated with Futures and Futures Options....................... 26
Foreign Currency Futures and Options Thereon.............................. 27
Swap Agreements and Options on Swap Agreements............................ 28
Structured Notes.......................................................... 28
Warrants and Rights....................................................... 28
Duration.................................................................. 29
</TABLE>

i
<PAGE>

MANAGEMENT OF THE FUND...................................................... 33
Trustees and Officers..................................................... 33
Investment Adviser........................................................ 34
Portfolio Management Agreements........................................... 35
Distribution of Fund Shares............................................... 39
Purchases and Redemptions................................................. 40

PORTFOLIO TRANSACTIONS AND BROKERAGE........................................ 40
Investment Decisions...................................................... 40
Brokerage and Research Services........................................... 40
Portfolio Turnover........................................................ 42

NET ASSET VALUE............................................................. 42

PERFORMANCE INFORMATION..................................................... 44

TAXATION.................................................................... 46
Distributions............................................................. 47
Hedging Transactions...................................................... 48

OTHER INFORMATION........................................................... 48
Concentration Policy...................................................... 48
Capitalization............................................................ 48
Voting Rights............................................................. 48
Custodian and Transfer Agency and Dividend Disbursing Services............ 49
Financial Statements...................................................... 49
Independent Auditors...................................................... 49
Counsel................................................................... 49
Registration Statement.................................................... 49
</TABLE>

ii
<PAGE>

INTRODUCTION

INVESTMENT POLICIES FOR MONEY MARKET PORTFOLIO

The investment objective and investment policies of the Money Market
Portfolio are described in the Prospectus. The following description presents
more detailed information on investment policies that apply to the Portfolio
and is intended to supplement the information provided in the Prospectus. A
money market instrument will be considered to be highest quality (1) if the
instrument (or other comparable short-term instrument of the same issuer) is
rated in the highest rating category, (i.e., Aaa or Prime-1 by Moody's
Investors Service, Inc. ("Moody's"), AAA or A-1 by Standard & Poor's Rating
Services ("S&P")) by (i) any two nationally recognized statistical rating
organizations ("NRSROs") or, (ii) if rated by only one NRSRO, by that NRSRO;
(2) an unrated security that is of comparable quality to a security in the
highest rating category as determined by the Adviser; or (3) a U.S. Government
Security. With respect to 5% of its total assets, measured at the time of
investment, the Portfolio may also invest in money market instruments that are
in the second-highest rating category for short-term debt obligations (i.e.,
rated Aa or Prime-2 by Moody's or AA or A-2 by S&P). A money market instrument
will be considered to be in the second-highest rating category under the
criteria described above with respect to instruments considered highest
quality, as applied to instruments in the second-highest rating category. The
quality of securities subject to guarantees may be determined based solely on
the quality of the guarantee. Additional eligibility restrictions apply with
respect to guarantees and demand features.

SECURITIES AND INVESTMENT TECHNIQUES

U.S. GOVERNMENT SECURITIES

1
<PAGE>

market value due to fluctuations in interest rates, but, if held to maturity,
the U.S. Government is obligated to or guarantees to pay them in full.

MORTGAGE-RELATED SECURITIES

Mortgage-related securities are interests in pools of mortgage loans made to
residential home buyers, including mortgage loans made by savings and loan
institutions, mortgage banks, commercial banks, and others. Pools of mortgage
loans are assembled as securities for sale to investors by various
governmental, government-related, and private organizations. The High Yield
Bond, Managed Bond, Government Securities, Growth LT, Multi-Strategy, Equity,
and Bond and Income Portfolios, and the Money Market Portfolio, subject to its
investment policies, may invest in mortgage-related securities as well as debt
securities which are secured with collateral consisting of mortgage-related
securities, and in other types of mortgage-related securities. For information
concerning the characterization of mortgage-related securities (including
collateralized mortgage obligations) for various purposes including the Fund's
policies concerning diversification and concentration, see "Concentration
Policy" on page 48.

2
<PAGE>

(including prepayments) on the underlying mortgage loans are passed through to
the holder of the certificate, GNMA certificates are called "pass-through"
securities.

3
<PAGE>

Criteria for the mortgage loans in the pool backing the CMOs are identical
to those of FHLMC PCs. FHLMC has the right to substitute collateral in the
event of delinquencies and/or defaults.

4
<PAGE>

5
<PAGE>

class), while the other class will receive all of the principal (the principal-
only or "PO" class). The yield to maturity on an IO class is extremely
sensitive to the rate of principal payments (including prepayments) on the
related underlying mortgage assets, and a rapid rate of principal payments may
have a material adverse effect on the Portfolio's yield to maturity from these
securities. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, a Portfolio may fail to fully recoup its
initial investment in these securities even if the security is in one of the
highest rating categories.

Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently developed. As a result, established trading markets have not
yet developed and, accordingly, these securities may be deemed "illiquid" and
subject to a Portfolio's limitations on investment in illiquid securities.

Mortgage Dollar Rolls. The Bond and Income Portfolio may enter into mortgage
"dollar rolls" in which the Portfolio sells securities for delivery in the
current month and simultaneously contracts with the same counterparty to
repurchase substantially similar (same type, coupon and maturity) but not
identical securities on a specified future date. During the roll period, the
Portfolio loses the right to receive principal and interest paid on the
securities sold. However, the Portfolio would benefit to the extent of any
difference between the price received for the securities sold and the lower
forward price for the future purchase or fee income plus the interest earned on
the cash proceeds of the securities sold until the settlement date for the
forward purchase. Unless such benefits exceed the income, capital appreciation
and gain or loss due to mortgage prepayments that would have been realized on
the securities sold as part of the mortgage dollar roll, the use of this
technique will diminish the investment performance of the Portfolio. The
Portfolio will hold and maintain in a segregated account until the settlement
date cash or liquid assets in an amount equal to the forward purchase price.
For financial reporting and tax purposes, the Portfolio treats mortgage dollar
rolls as two separate transactions; one involving the purchase of a security
and a separate transaction involving a sale. The Portfolio does not currently
intend to enter into mortgage dollar rolls that are accounted for as a
financing.

OTHER ASSET-BACKED SECURITIES

In addition to mortgage-related securities, the High Yield Bond, Managed
Bond, Government Securities, Growth LT, Multi-Strategy, Equity, and Bond and
Income Portfolios, and the Money Market Portfolio, subject to its investment
policies, may invest in other asset-backed securities which are securities that
directly or indirectly represent a participation interest in, or are secured by
and payable from a stream of payments generated by particular assets such as
automobile loans or installment sales contracts, home equity loans, computer
and other leases, credit card receivables, or other assets. Generally, the
payments from the collateral are passed through to the security holder. Due to
the possibility that prepayments (on automobile loans and other collateral)
will alter cash flow on asset-backed securities, generally it is not possible
to determine in advance the actual final maturity date or average life of many
asset-backed securities. Faster prepayment will shorten the average life and
slower prepayments will lengthen it. However, it may be possible to determine
what the range of that movement could be and to calculate the effect that it
will have on the price of the security. Other risks relate to limited interests
in applicable collateral. For example, credit card debt 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 set off certain amounts on credit card debt thereby reducing the
balance due. Additionally, holders of asset-backed securities may also
experience delays in payments or losses if the full amounts due on underlying
sales contracts are not realized. Because asset-backed securities are
relatively new, the market experience in these securities is limited and the
market's ability to sustain liquidity through all phases of the market cycle
has not been tested.

HIGH YIELD BONDS

6
<PAGE>

rated lower than Baa or BBB, or, if not rated by Moody's or S&P, of equivalent
quality (although the Managed Bond Portfolio may not invest in securities rated
lower than B) ("high yield bonds," which are commonly referred to as "junk
bonds").

In general, high yield bonds are not considered to be investment grade, and
investors should consider the risks associated with high yield bonds before
investing in the pertinent Portfolio, and in particular the High Yield Bond and
Bond and Income Portfolios. Investment in such securities generally provides
greater income and increased opportunity for capital appreciation than
investments in higher quality securities, but they also typically entail
greater price volatility and principal and income risk.

Investment in high yield bonds involves special risks in addition to the
risks associated with investments in higher rated debt securities. High yield
bonds are regarded as predominately speculative with respect to the issuer's
continuing ability to meet principal and interest payments. The high yield bond
market is relatively new, and many of the outstanding high yield bonds have not
endured a lengthy business recession. A long-term track record on bond default
rates such as that for investment grade corporate bonds, does not exist for the
high yield market. Analysis of the creditworthiness of issuers of debt
securities that are high yield bonds may be more complex than for issuers of
higher quality debt securities, and the ability of a Portfolio to achieve its
investment objective may, to the extent of investment in high yield bonds, be
more dependent upon such creditworthiness analysis than would be the case if
the Portfolio were investing in higher quality bonds.

The secondary market on which high yield bonds are traded may be less liquid
than the market for higher grade bonds. Less liquidity in the secondary trading
market could adversely affect the price at which a Portfolio could sell a high
yield bond, and could adversely affect and cause large fluctuations in the
daily net asset value of the Portfolio's shares. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of high yield bonds, especially in a thinly-traded market.
When secondary markets for high yield bonds are less liquid than the market for
higher grade bonds, it may be more difficult to value the securities because
such valuation may require more research, and elements of judgment may play a
greater role in the valuation because there is less reliable, objective data
available.

BANK OBLIGATIONS

Bank obligations in which all Portfolios may invest include certificates of
deposit, bankers' acceptances, and fixed time deposits. Each Portfolio may also
hold funds on deposit with its sub-custodian bank in an interest-bearing
account for temporary purposes.

7
<PAGE>

a bank, meaning, in effect, that the bank unconditionally agrees to pay the
face value of the instrument on maturity. Fixed time deposits are bank
obligations payable at a stated maturity date and bearing interest at a fixed
rate. Fixed time deposits may be withdrawn on demand by the investor, but may
be subject to early withdrawal penalties which vary depending upon market
conditions and the remaining maturity of the obligation. There are no
contractual restrictions on the right to transfer a beneficial interest in a
fixed time deposit to a third party, although there is no market for such
deposits. A Portfolio will not invest in fixed time deposits which (i) are not
subject to prepayment, or (ii) incur withdrawal penalties upon prepayment
(other than overnight deposits) if, in the aggregate, more than 15% of its net
assets (10% for the Money Market Portfolio) would be invested in such deposits,
repurchase agreements maturing in more than seven days, and other illiquid
assets.

All Portfolios may invest in short-term debt obligations of savings and loan
associations provided that the savings and loan association issuing the
security : (i) has total assets of at least $1 billion (U.S. $500 million in
the case of the Equity Income Portfolio and U.S. $2 billion in the case of the
Bond and Income Portfolio), or, in the case of savings and loan associations
which do not have total assets of at least $1 billion, the aggregate investment
made in any one savings and loan association is insured in full, currently up
to $100,000, by the Savings Association Insurance Fund ("SAIF"); (ii) the
savings and loan association issuing the security is a member of the Federal
Home Loan Bank System; and (iii) the institution is insured by the SAIF.

A Portfolio will not purchase any security of a small bank or savings and
loan association which is not readily marketable if, as a result, more than 15%
of the value of its net assets (10% for the Money Market Portfolio) would be
invested in such securities, other illiquid securities, or securities without
readily available market quotations, such as restricted securities and
repurchase agreements maturing in more than seven days.

Obligations of foreign banks involve somewhat different investment risks than
those affecting obligations of U.S. banks, including: (i) the possibilities
that their liquidity could be impaired because of future political and economic
developments; (ii) their obligations may be less marketable than comparable
obligations of U.S. banks; (iii) a foreign jurisdiction might impose
withholding taxes on interest income payable on those obligations; (iv) foreign
deposits may be seized or nationalized; (v) foreign governmental restrictions,
such as exchange controls, may be adopted which might adversely affect the
payment of principal and interest on those obligations; and (vi) the selection
of those obligations may be more difficult because there may be less publicly
available information concerning foreign banks or the accounting, auditing, and
financial reporting standards, practices and requirements applicable to foreign
banks may differ from those applicable to U.S. banks. Foreign banks are not
generally subject to examination by any U.S. Government agency or
instrumentality.

8
<PAGE>

MUNICIPAL SECURITIES

The yields and market values of municipal securities are determined primarily
by the general level of interest rates, the creditworthiness of the issuers of
municipal securities and economic and political conditions affecting such
issuers. Due to their tax exempt status, the yields and market prices of
municipal securities may be adversely affected by changes in tax rates and
policies, which may have less effect on the market for taxable fixed income
securities. Moreover, certain types of municipal securities, such as housing
revenue bonds, involve prepayment risks which could affect the yield on such
securities.

Investments in municipal securities are subject to the risk that the issuer
could default on its obligations. Such a default could result from the
inadequacy of the sources or revenues from which interest and principal
payments are to be made or the assets collateralizing such obligations. Revenue
bonds, including private activity bonds, are backed only by specific assets or
revenue sources and not by the full faith and credit of the governmental
issuer.

CORPORATE DEBT SECURITIES

All Portfolios may invest in U.S. dollar-denominated corporate debt
securities of domestic issuers and the Money Market, High Yield Bond, Managed
Bond, Government Securities, Growth LT, Multi-Strategy, Bond and Income and
International Portfolios may invest in U.S. dollar-denominated debt securities
of foreign issuers. The Growth LT and International Portfolios, and, to the
extent of 20% of their assets, the Managed Bond and Government Securities
Portfolios, and to the extent of 10% of their assets, the Multi-Strategy and
Bond and Income Portfolios, may also invest in debt securities of foreign
issuers denominated in foreign currencies. The debt securities in which any
Portfolio other than the Money Market Portfolio may invest are limited to
corporate debt securities (corporate bonds, debentures, notes, and other
similar corporate debt instruments) which meet the minimum ratings criteria set
forth for that particular Portfolio, or, if not so rated, are, in the Portfolio
Manager's opinion, comparable in quality to corporate debt securities in which
a Portfolio may invest. The debt securities in which the Money Market Portfolio
may invest are described in the discussion of the investment objective and
policies of that Portfolio.

The investment return on corporate debt securities reflects interest earnings
and changes in the market value of the security. The market value of corporate
debt obligations may be expected to rise and fall inversely with interest rates
generally. There also exists the risk that the issuers of the securities may
not be able to meet their obligations on interest or principal payments at the
time called for by an instrument.

The High Yield Bond, Managed Bond, Growth LT, Equity Income, Multi-Strategy,
Bond and Income, and International Portfolios may invest in corporate debt
securities rated Baa (Moody's) or BBB (S&P), or, if not rated by Moody's or
S&P, of equivalent quality. Such securities are considered medium grade, and do
not have economic characteristics that provide the high degree of security with
respect to payment of principal and interest associated with higher rated
bonds, and generally have some speculative characteristics. A bond will be
placed

9
<PAGE>

in this rating category where interest payments and principal security appear
adequate for the present, but economic characteristics that provide longer term
protection may be lacking.

The High Yield Bond, Equity Income, and Multi-Strategy Portfolios and, to the
extent of 10% of their assets, the Managed Bond and Growth LT Portfolios, and,
to the extent of 20% of its assets, the Bond and Income Portfolio and to the
extent of 5% of its assets, the International Portfolio, may invest in debt
securities rated lower than Baa or BBB (although the Managed Bond Portfolio may
not invest in securities rated lower than B), or, if not rated by Moody's or
S&P, of equivalent quality. Such securities are not considered to be investment
grade, and are regarded as predominately speculative with respect to the
issuer's continuing ability to meet principal and interest payments. For more
information on the risks of such securities, see the discussion of "High Yield
Bonds" above.

VARIABLE AND FLOATING RATE SECURITIES

All Portfolios may invest in variable and floating rate securities which
provide for a periodic adjustment in the interest rate paid on obligations. The
terms of such obligations must provide that interest rates are adjusted
periodically based upon an appropriate interest rate adjustment index as
provided in the respective obligations. The adjustment intervals may be
regular, and range from daily to annually, or may be event based, such as based
on a change in the prime rate.

COMMERCIAL PAPER

All of the Portfolios may invest in commercial paper (including variable
amount master demand notes). Each Portfolio, other than the Money Market and
Equity Portfolios, may invest in commercial paper denominated in U.S. dollars,
issued by U.S. corporations or foreign corporations and (1) rated at the date
of investment Prime-1 or Prime-2 by Moody's or A-1 or A-2 by S&P or (2) if not
rated by either Moody's or S&P, issued by a corporation having an outstanding
debt issue rated Aa or better by Moody's or AA or better by S&P or (3) if not
rated, are determined to be of an investment quality comparable to rated
commercial paper in which a Portfolio may invest. If issued by a foreign
corporation, such commercial paper is U.S. dollar-denominated and not subject
at the time of purchase to foreign tax withholding. The International Portfolio
may, however, invest in commercial paper denominated in foreign currencies. The
Money Market Portfolio may invest in commercial paper that meets the standards
for money market securities that that Portfolio may acquire as described in the
Prospectus in the section "Investment Objectives and Policies." The Equity
Portfolio may invest in commercial paper (1) rated at the time of purchase
Prime-1 by Moody's or A-1 by S&P or (2) if not rated by either Moody's or S&P,
issued by a corporation having an outstanding debt issue rated Aa or better by
Moody's or AA or better by S&P.

Commercial paper obligations may include variable amount master demand notes.
These are obligations that permit the investment of fluctuating amounts at
varying rates of interest pursuant to direct arrangements between a Portfolio,
as lender, and the borrower. These notes permit daily changes in the amounts
borrowed. The lender has the right to increase the amount under the note at any
time up to the full amount provided by the note agreement, or to decrease the
amount, and the borrower may prepay up to the full amount of the note without
penalty. Because variable amount master demand notes are direct lending
arrangements between the lender and borrower, it is not generally contemplated
that such instruments will be traded and there is no secondary market for these
notes. However, they are redeemable (and thus immediately repayable by the
borrower) at face value, plus accrued interest, at any time. In connection with
master demand note arrangements, the Adviser or Portfolio Manager will monitor,
on an ongoing basis, the earning power, cash flow, and other liquidity ratios
of the borrower and its ability to pay principal and interest on demand. The
Adviser or Portfolio Manager also will consider the extent to which the
variable amount master demand notes are backed by bank letters of credit. These
notes generally are not rated by Moody's or S&P; a Portfolio, other than the
Money Market Portfolio, may invest in them only if the Adviser or Portfolio
Manager believes that at the time of investment the notes are of comparable
quality to the other commercial paper in which the Portfolio may invest. With
respect to the Money Market Portfolio, determination of eligibility for the
Portfolio will be in accordance with the standards described

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<PAGE>

in the discussion of the Portfolio in the Prospectus on "Investment Objectives
and Policies." Master demand notes are considered by the Portfolio to have a
maturity of one day unless the Adviser or Portfolio Manager has reason to
believe that the borrower could not make immediate repayment upon demand. See
the Appendix in the Prospectus for a description of Moody's and S&P ratings
applicable to commercial paper.

CONVERTIBLE SECURITIES

All Portfolios except the Money Market Portfolio may invest in convertible
securities. The convertible securities in the Portfolio's portfolios are fixed-
income securities which may be converted or exchanged at a stated exchange
ratio into underlying shares of common stock. The exchange ratio for any
particular convertible security may be adjusted from time to time due to stock
splits, dividends, spin-offs, other corporate distributions, or scheduled
changes in the exchange ratio. Convertible bonds and convertible preferred
stocks, until converted, have general characteristics similar to both fixed-
income and equity securities. Although to a lesser extent than with fixed-
income securities generally, the market value of convertible securities tends
to decline as interest rates increase and, conversely, tends to increase as
interest rates decline. In addition, because of the conversion or exchange
feature, the market value of convertible securities tends to vary with
fluctuations in the market value of the underlying common stocks, and,
therefore, also will react to variations in the general market for equity
securities. A unique feature of convertible securities is that as the market
price of the underlying common stock declines, convertible securities tend to
trade increasingly on a yield basis, and so may not experience market value
declines to the same extent as the underlying common stock. When the market
price of the underlying common stock increases, the prices of the convertible
securities tend to rise as a reflection of the value of the underlying common
stock. While no securities investments are without risk, investments in
convertible securities generally entail less risk than investments in common
stock of the same issuer.

As fixed-income securities, convertible securities are investments which
provide for a stable stream of income with generally higher yields than common
stocks. Of course, like all fixed-income securities, there can be no assurance
of current income because the issuers of the convertible securities may default
in their obligations. Convertible securities, however, generally offer lower
interest or dividend yields than non-convertible securities of similar quality
because of the potential for capital appreciation.

A convertible security, in addition to providing fixed-income, offers the
potential for capital appreciation through the conversion feature which enables
the holder to benefit from increases in the market price of the underlying
common stock. In selecting the securities for a Portfolio, the Adviser or
Portfolio Manager gives substantial consideration to the potential for capital
appreciation of the common stock underlying the convertible securities.
However, there can be no assurance of capital appreciation because securities
prices fluctuate.

However, the synthetic convertible differs from the true convertible security
in several respects. Unlike a true convertible, which is a single security
having a unitary market value, a synthetic convertible is comprised of two
distinct securities, each with its own market value. Therefore, the "market
value" of a synthetic convertible is the sum of the values of its fixed-income
component and its convertibility component. For this reason, the value of a
synthetic convertible and a true convertible security will respond differently
to market fluctuations.

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REPURCHASE AGREEMENTS

All Portfolios may invest in repurchase agreements, which entail the purchase
of a portfolio eligible security from a bank or broker-dealer that agrees to
repurchase the security at the Portfolio's cost plus interest within a
specified time (normally one day). Repurchase agreements permit an investor to
maintain liquidity and earn income over periods of time as short as overnight.
If a Portfolio acquires securities from a bank or broker-dealer it may
simultaneously enter into a repurchase agreement with the seller wherein the
seller agrees at the time of sale to repurchase the security at a mutually
agreed upon time and price. The term of such an agreement is generally quite
short, possibly overnight or for a few days, although it may extend over a
number of months (up to one year) from the date of delivery. The resale price
is in excess of the purchase price by an amount which reflects an agreed upon
market rate of return, effective for the period of time the Portfolio is
invested in the security. This results in a fixed rate of return protected from
market fluctuations during the period of the agreement. This rate is not tied
to the coupon rate on the security subject to the repurchase agreement.

Under the Investment Company Act of 1940 (the "1940 Act"), repurchase
agreements are considered to be loans by the purchaser collateralized by the
underlying securities. The Adviser or Portfolio Manager to a Portfolio monitors
the value of the underlying securities at the time the repurchase agreement is
entered into and at all times during the term of the agreement to ensure that
its value always equals or exceeds the agreed upon repurchase price to be paid
to the Portfolio. The Adviser or Portfolio Manager, in accordance with
procedures established by the Board of Trustees, also evaluates the
creditworthiness and financial responsibility of the banks and brokers or
dealers with which the Portfolio enters into repurchase agreements.

A Portfolio may not enter into a repurchase agreement having more than seven
days remaining to maturity if, as a result, such agreements, together with any
other securities which are not readily marketable, would exceed 15% of the net
assets of the Portfolio (10% for the Money Market Portfolio). If the seller
should become bankrupt or default on its obligations to repurchase the
securities, a Portfolio may experience delay or difficulties in exercising its
rights to the securities held as collateral and might incur a loss if the value
of the securities should decline. A Portfolio also might incur disposition
costs in connection with liquidating the securities.

BORROWING

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time of such borrowing), including reverse repurchase agreements. This
borrowing may be unsecured. Borrowing may exaggerate the effect on net asset
value of any increase or decrease in the market value of a Portfolio. Money
borrowed will be subject to interest costs which may or may not be recovered by
appreciation of the securities purchased. A Portfolio also may be required to
maintain minimum average balances in connection with such borrowing or to pay a
commitment or other fee to maintain a line of credit; either of these
requirements would increase the cost of borrowing over the stated interest
rate. Reverse repurchase agreements will be included as borrowing subject to
the borrowing limitations described above.

REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS

Among the forms of borrowing in which the High Yield Bond, Managed Bond,
Government Securities, Growth LT, Bond and Income, and Equity Index Portfolios
may engage and enter into reverse repurchase agreements, which involves the
sale of a debt security held by the Portfolio, with an agreement by that
Portfolio to repurchase the security at a stated price, date and interest
payment.

A Portfolio will use the proceeds of a reverse repurchase agreement to
purchase other money market instruments which either mature at a date
simultaneous with or prior to the expiration of the reverse repurchase
agreement or which are held under an agreement to resell maturing as of that
time. The use of reverse repurchase agreements by a Portfolio creates leverage
which increases a Portfolio's investment risk. If the income and gains on
securities purchased with the proceeds of reverse repurchase agreements exceed
the cost of the agreements, the Portfolio's earnings or net asset value will
increase faster than otherwise would be the case; conversely, if the income and
gains fail to exceed the costs, earnings or net asset value would decline
faster than otherwise would be the case. A Portfolio will enter into a reverse
repurchase agreement only when the interest income to be earned from the
investment of the proceeds of the transaction is greater than the interest
expense of the transaction. However, reverse repurchase agreements involve the
risk that the market value of securities retained by the Portfolio may decline
below the repurchase price of the securities sold by the Portfolio which it is
obligated to repurchase.

FIRM COMMITMENT AGREEMENTS AND WHEN-ISSUED SECURITIES

All Portfolios may enter into firm commitment agreements for the purchase of
securities at an agreed upon price on a specified future date. A Portfolio may
purchase new issues of securities on a "when-issued" basis, whereby the payment
obligation and interest rate on the instruments are fixed at the time of the
transaction. Such transactions might be entered into, for example, when the
Adviser or Portfolio Manager to a Portfolio anticipates a decline in the yield
of securities of a given issuer and is able to obtain a more advantageous yield
by committing currently to purchase securities to be issued or delivered later.

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LOANS OF PORTFOLIO SECURITIES

For the purpose of realizing additional income, each Portfolio, except the
Equity Income, Multi-Strategy, and Equity Index Portfolios, may make secured
loans of its portfolio securities to broker-dealers or U.S. banks provided: (i)
such loans are secured continuously by collateral consisting of cash, cash
equivalents, or U.S. Government securities maintained on a daily marked-to-
market basis in an amount or at a market value at least equal to the current
market value of the securities loaned; (ii) the Portfolio may at any time call
such loans and obtain the securities loaned; (iii) the Portfolio will receive
an amount in cash at least equal to the interest or dividends paid on the
loaned securities; and (iv) the aggregate market value of securities loaned
will not at any time exceed 25% of the total assets of the Portfolio. In
addition, it is anticipated that the Portfolio may share with the borrower some
of the income received on the collateral for the loan or that it will be paid a
premium for the loan. It should be noted that in connection with the lending of
its portfolio securities, the Portfolio is exposed to the risk of delay in
recovery of the securities loaned or possible loss of rights in the collateral
should the borrower become insolvent. In determining whether to lend
securities, the Adviser or Portfolio Manager considers all relevant facts and
circumstances including the creditworthiness of the borrower. Voting rights
attached to the loaned securities may pass to the borrower with the lending of
portfolio securities. However, the Portfolio intends to call loaned voting
securities if important shareholder meetings are imminent.

SHORT SALES AGAINST THE BOX

The Equity Portfolio may enter into short sales "against the box." A short
sale is made by selling a security the Portfolio does not own. A short sale is
"against the box" when, at all times during which a short position is open, the
Portfolio owns an equal amount of such securities, or owns securities giving it
the right, without payment of future consideration, to obtain an equal amount
of securities sold short. No more than 15% of the value of the Equity
Portfolio's net assets will be subject to such short sales at any time.

RESTRICTED SECURITIES (PRIVATE PLACEMENTS)

All Portfolios except the Equity Index Portfolio may invest in restricted
securities (including privately placed securities) but a Portfolio will not
acquire such securities if they are illiquid and other securities that are
illiquid, such as repurchase agreements maturing in more than seven days, if as
a result they would comprise more than 15% of the value of the Portfolio's net
assets, and in the case of the Money Market Portfolio, 10% of the value of its
Portfolio assets. The privately placed securities in which these Portfolios may
invest are called restricted securities because there are restrictions or
conditions attached to their resale.

Restricted securities may be sold only in a public offering with respect to
which a registration statement is in effect under the Securities Act of 1933 or
in a transaction exempt from such registration such as certain privately
negotiated transactions. Where registration is required, the Portfolio may be
obligated to pay all or part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and the time the
Portfolio may be permitted to sell a security under an effective registration
statement. If, during such a period, adverse market conditions were to develop,
the Portfolio might obtain a less favorable price than prevailed when it
decided to sell. Restricted securities will be priced at fair value as
determined in good faith under the direction of the Board of Trustees. If
through the appreciation of restricted securities or the depreciation of
unrestricted securities, the Portfolio should be in a position where more than
15% of the value of its net assets are invested in restricted securities that
are illiquid and other securities that are illiquid, the Portfolio Manager will
consider whether steps should be taken to assure liquidity.

Certain restricted securities may be purchased by certain "qualified
institutional buyers" without the necessity for registration of the securities.
A Portfolio may acquire such a security without the security being treated as
illiquid for purposes of the above-described limitation on acquisition of
illiquid assets if the Portfolio Manager determines that the security is liquid
under guidelines adopted by the Fund's Board of Trustees. Investing in such
restricted securities could have the effect of increasing the level of the
Portfolio's illiquidity to the extent that qualified institutional buyers
become, for a time, uninterested in purchasing these securities.

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FOREIGN SECURITIES

The Money Market, High Yield Bond, Managed Bond, Government Securities,
Growth LT, Multi-Strategy, Bond and Income, and International Portfolios may
invest directly in U.S. dollar-denominated corporate debt securities of foreign
issuers, certain foreign bank obligations and U.S. dollar-denominated
obligations of foreign governments, foreign government agencies and
international agencies. The Growth LT, Equity Income, Multi-Strategy and Equity
Index Portfolios may invest in equity securities of foreign issuers if U.S.
exchange listed or if otherwise included in the S&P 500. The Growth LT
Portfolio may invest up to 25% of its assets in foreign securities denominated
in a foreign currency and not publicly traded in the United States. The
International Portfolio may invest in equity securities of foreign
corporations, nonconvertible fixed income securities denominated in foreign
currencies, and in securities represented by European Depositary Receipts
("EDRs"), Global Depositary Receipts ("GDRs"), or other securities convertible
into equity securities of foreign issuers. The Growth LT Portfolio may also
invest in EDRs and GDRs and other types of receipts of shares evidencing
ownership of the underlying foreign securities. The Managed Bond and Government
Securities Portfolios may each invest up to 20% of their assets in non-U.S.
dollar-denominated debt securities of foreign issuers. The Multi-Strategy and
Bond and Income Portfolios may invest up to 10% of their assets in non-U.S.
dollar-denominated debt securities of foreign issuers. All Portfolios, except
the Equity Portfolio, may purchase American Depositary Receipts ("ADRs") which
are dollar-denominated receipts issued generally by domestic banks and
representing the deposit with the bank of a security of a foreign issuer. ADRs
are publicly-traded on exchanges or over-the-counter in the United States.

Investing in the securities of foreign issuers involves special risks and
considerations not typically associated with investing in U.S. companies. These
risks are intensified with respect to investments in emerging market countries.
These include differences in accounting, auditing and financial reporting
standards, generally higher commission rates on foreign portfolio transactions,
the possibility of expropriation, nationalization, or confiscatory taxation,
adverse changes in investment or exchange control regulations, trade
restrictions, political instability (which can affect U.S. investments in
foreign countries), and potential restrictions on the flow of international
capital. It may be more difficult to obtain and enforce judgments against
foreign entities. Additionally, income (including dividends and interest) from
foreign securities may be subject to foreign taxes, including foreign
withholding taxes, and other foreign taxes may apply with respect to securities
transactions. Transactions on foreign exchanges or over-the-counter markets may
involve greater time from the trade date until settlement than for domestic
securities transactions and, if the securities are held abroad, may involve the
risk of possible losses through the holding of securities in custodians and
depositories in foreign countries. Foreign securities often trade with less
frequency and volume than domestic securities and therefore may exhibit greater
price volatility. Changes in foreign exchange rates will affect the value of
those securities which are denominated or quoted in currencies other than the
U.S. dollar. Investing in ADRs may involve many of the same special risks
associated with investing in securities of foreign issuers other than liquidity
risks.

It is contemplated that most foreign securities will be purchased in over-
the-counter markets or on stock exchanges located in the countries in which the
respective principal offices of the issuers of the various securities are
located, if that is the best available market. Foreign stock markets are
generally not as developed or efficient as those in the United States. While
growing in volume, they usually have substantially less volume than the New
York Stock Exchange, and securities of some foreign companies are less liquid
and more volatile than securities of comparable U.S. companies. Similarly,
volume and liquidity in most foreign bond markets is less than in the United
States and at times, volatility of price can be greater than in the United
States. Fixed commissions on foreign stock exchanges are generally higher than
negotiated commissions on U.S. exchanges, although the Portfolio will endeavor
to achieve the most favorable net results on its portfolio transactions. There

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<PAGE>

is generally less government supervision and regulation of stock exchanges,
brokers, and listed companies than in the United States.

With respect to certain foreign countries, there is the possibility of
adverse changes in investment or exchange control regulations, nationalization,
expropriation or confiscatory taxation, limitations on the removal of funds or
other assets of the Portfolio, political or social instability, or diplomatic
developments which could affect United States investments in those countries.
Moreover, individual foreign economies may differ favorably or unfavorably from
the United States' economy in such respects as growth of gross national
product, rate of inflation, capital reinvestment, resource self-sufficiency,
and balance of payments position.

The dividends and interest payable on certain of the Portfolios' foreign
portfolio securities may be subject to foreign withholding taxes, thus reducing
the net amount of income available for distribution.

Investors should understand that the expense ratio of the International
Portfolio can be expected to be higher than investment companies investing in
domestic securities since the cost of maintaining the custody of foreign
securities and the rate of advisory fees paid by the Portfolio are higher.

Investment in foreign securities also involves the risk of possible losses
through the holding of securities in custodian banks and securities
depositories in foreign countries. The Fund has entered into a Custody
Agreement with Investors Fiduciary Trust Company ("IFTC"), a trust company
chartered under the laws of Missouri, which has entered into a Subcustodial
Agreement with The Chase Manhattan Bank ("Chase") under which Chase, together
with certain of its foreign branches and agencies and foreign banks and
securities depositories acting as subcustodian to Chase, will maintain custody
of the securities and other assets of foreign issuers for the Fund. Under these
agreements, Chase and IFTC have agreed (i) to use reasonable care in the
safekeeping of these securities, (ii) to indemnify and hold harmless the Fund
from and against any loss which shall occur as a result of the failure of a
foreign bank or securities depository holding such securities and (iii) to
exercise reasonable care in the safekeeping of such securities to the same
extent as if the securities were held in New York. Pursuant to requirements of
the Securities and Exchange Commission ("SEC"), Chase is required to use
reasonable care in the selection of foreign subcustodians, and to consider the
financial strength of the foreign subcustodian, its general reputation and
standing (for a depository, its operating history and number of participants),
its ability to provide efficiently the custodial services required, its
relative costs for the services to be rendered, and the Fund's ability to
obtain jurisdiction over the foreign subcustodian to enforce judgments. No
assurance can be given that expropriation, nationalization, freezes, or
confiscation of assets, which would impact assets of the Portfolio, will not
occur, and shareholders bear the risk of losses arising from these or other
events.

As indicated in the Prospectus, the International Portfolio may invest in
shares of investment companies organized to invest in foreign countries. Under
the 1940 Act, the Portfolio may not own more than 3% of the outstanding voting
stock of an investment company, invest more than 5% of the Portfolio's total
assets in any one investment company, or invest more than 10% of the
Portfolio's total assets in the securities of investment companies.

The International Portfolio's foreign investments will be allocated to at
least three countries at all times. In addition, the Portfolio may not invest
more than 50% of its assets in any one second tier country or more than 25% of
its assets in any one third tier country. First tier countries are: Germany,
the United Kingdom, Japan, the United States, France, Canada, and Australia.
Second tier countries are all countries not in the first or third tier. Third
tier countries are countries identified as "emerging" or "developing" by the
International Bank for Reconstruction and Development ("World Bank") or
International Finance Corporation. The Portfolio is not subject to any limit
upon investment in issuers domiciled or primarily traded in the United States.
Less diversification among countries may create an opportunity for higher
returns, but may also result in higher risk of loss because of greater exposure
to a market decline in a single country.

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FOREIGN CURRENCY TRANSACTIONS

Generally, the foreign exchange transactions of the Managed Bond, Government
Securities, Growth LT, Multi-Strategy, Bond and Income, and International
Portfolios will be conducted on a spot, i.e., cash, basis at the spot rate for
purchasing or selling currency prevailing in the foreign exchange market. This
rate, under normal market conditions, differs from the prevailing exchange rate
in an amount generally less than 0.15 of 1% due to the costs of converting from
one currency to another. However, the Managed Bond, Government Securities,
Growth LT, Multi-Strategy, Bond and Income, and International Portfolios have
authority to deal in forward foreign exchange as a hedge against possible
fluctuations in foreign exchange rates. This is accomplished through
contractual agreements to purchase or sell a specified currency at a specified
future date and price set at the time of the contract. A Portfolio's dealings
in forward foreign exchange will be limited to hedging involving either
specific transactions or portfolio positions. Transaction hedging is the
purchase or sale of forward foreign currency contracts with respect to specific
receivables or payables of a Portfolio arising from the purchase and sale of
portfolio securities, the sale and redemption of shares of a Portfolio, or the
payment of dividends and distributions by a Portfolio. Position hedging is the
sale of forward foreign currency contracts with respect to portfolio security
positions denominated or quoted in a foreign currency. In connection with
either of these types of hedging, a Portfolio may also engage in proxy hedging.
Proxy hedging entails entering into a forward contract to buy or sell a
currency whose changes in value are generally considered to be moving in
correlation with a currency or currencies in which portfolio securities are or
are expected to be denominated. Proxy hedging is often used when a currency in
which portfolio securities are denominated is difficult to hedge. The precise
matching of a currency with a proxy currency will not generally be possible and
there may be some additional currency risk in connection with such hedging
transactions. The Portfolios will not speculate in forward foreign exchange.

Forward Foreign Currency Contracts. The Managed Bond, Government Securities,
Growth LT, Multi-Strategy, Bond and Income, and International Portfolios may
enter into forward foreign currency contracts only under the following
circumstances. First, when a Portfolio enters into a contract for the purchase
or sale of a security denominated in a foreign currency, it may desire to "lock
in" the U.S. dollar price of the security. By entering into a forward contract
for the purchase or sale of the amount of foreign currency involved in the
underlying security transactions (or a proxy currency considered to move in
correlation with that currency) for a fixed amount of dollars, a Portfolio may
be able to protect itself against a possible loss resulting from an adverse
change in the relationship between the U.S. dollar and the subject foreign
currency during the period between the date the security is purchased or sold
and the date on which payment in made or received.

Second, when the Portfolio Manager of a Portfolio believes that the currency
of a particular foreign country may suffer a substantial movement against
another currency, it may enter into a forward contract to sell or buy the
amount of the former foreign currency (or a proxy currency considered to move
in correlation with that currency), approximating the value of some or all of
the Portfolio's portfolio securities denominated in such foreign currency. The
precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible since the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward
contract is entered into and the date it matures. The projection of short-term
currency market movements is extremely difficult and the successful execution
of a short-term hedging strategy is highly uncertain. In no event will a
Portfolio enter into forward contracts under this second circumstance, or
maintain a net exposure to such contracts, where the consummation of the
contracts would obligate the Portfolio to deliver an amount of foreign currency
in excess of the value of that Portfolio's portfolio securities or other assets
denominated in that foreign currency (or a proxy currency considered to move in
correlation with that currency). In addition, a Portfolio will not enter into
forward contracts under this second circumstance, if, as a result, the
Portfolio will have more than 25% of the value of its total assets committed to
the consummation of such contracts. Under normal circumstances, consideration
of the prospect for currency parities will be incorporated into the longer term
investment decisions made with regard to overall diversification strategies.
The Portfolios will cover outstanding forward currency contracts by maintaining
liquid portfolio securities denominated in the currency underlying the forward
contract or the currency being hedged. To the extent that a Portfolio is not
able to cover its forward currency positions with underlying portfolio
securities, the Portfolio's custodian bank will place cash or liquid

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<PAGE>

equity or debt securities in a separate account of the Portfolio in an amount
equal to the value of the Portfolio's total assets committed to the
consummation of forward foreign currency exchange contracts. If the value of
the securities used to cover a position or the value of asset placed in the
separate account declines, a Portfolio will find alternative cover or
additional cash or securities will be placed in the account on a daily basis so
that the value of the segregated assets will equal the amount of the
Portfolio's commitments with respect to such contracts.

When a Portfolio Manager of a Portfolio believes that the currency of a
particular foreign country may suffer a decline against the U.S. dollar, that
Portfolio may enter into a forward contract to sell the amount of foreign
currency approximating the value of some or all of the Portfolio's holdings
denominated in such foreign currency. At the maturity of the forward contract
to sell, the Portfolio may either sell the portfolio security and make delivery
of the foreign currency or it may retain the security and terminate its
contractual obligation to deliver the foreign currency by purchasing an
"offsetting" contract with the same currency trader obligating the Portfolio to
purchase, on the same maturity date, the same amount of the foreign currency.

It is impossible to forecast with absolute precision the market value of
portfolio securities at the expiration of the contract. Accordingly, it may be
necessary for a Portfolio to purchase additional foreign currency on the spot
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency the Portfolio is obligated
to deliver and if a decision is made to sell the security and make delivery of
the foreign currency. Conversely, it may be necessary to sell on the spot
market some of the foreign currency received upon the sale of the portfolio
security if its market value exceeds the amount of foreign currency the
Portfolio is obligated to deliver.

A Portfolio's dealings in forward foreign currency exchange contracts will be
limited to the transactions described above. Of course, a Portfolio is not
required to enter into such transactions with regard to their foreign currency
denominated securities and will not do so unless deemed appropriate by its
Portfolio Manager. It also should be realized that this method of protecting
the value of a Portfolio's holdings in securities against a decline in the
value of a currency does not eliminate fluctuations in the underlying prices of
the securities. It simply establishes a rate of exchange which one can achieve
at some future point in time. Additionally, although such contracts 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 which might result from
the value of such currency increase.

The Managed Bond, Government Securities, Growth LT, Bond and Income, and
International Portfolios may also purchase and write options on foreign
currencies, invest in foreign currency futures contracts, and purchase and
write options thereon, as described below.

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OPTIONS

In pursuing their investment objectives, the High Yield Bond, Managed Bond,
Government Securities, Growth LT, Equity Income, Multi-Strategy, Equity, and
Bond and Income Portfolios may engage in the purchase and writing of put and
call options on securities. In pursuing their investment objectives, the Growth
LT, Equity Income, Multi-Strategy, Equity, Bond and Income, and Equity Index
Portfolios may purchase put and call options on stock indexes.

Purchasing and Writing Options on Securities. The High Yield Bond, Managed
Bond, Government Securities, Growth LT, Equity Income, Multi-Strategy, Equity,
and Bond and Income Portfolios may purchase and write put and call options on
securities. A Portfolio may purchase and sell (write) (i) both put and call
options on debt or other securities in standardized contracts traded on
national securities exchanges, boards of trade, similar entities, or for which
an established over-the-counter market exists; and (ii) agreements, sometimes
called cash puts, which may accompany the purchase of a new issue of bonds from
a dealer.

An option on a security is a contract that gives the holder of the option, in
return for a premium, the right to buy from (in the case of a call) or sell to
(in the case of a put) the writer of the option the security underlying the
option at a specified exercise price at any time during the term of the option.
The writer of an option on a security has the obligation upon exercise of the
option to deliver the underlying security upon payment of the exercise price or
to pay the exercise price upon delivery of the underlying security. A Portfolio
may purchase put options on securities to protect holdings in an underlying or
related security against a substantial decline in market value. Securities are
considered related if their price movements generally correlate to one another.
For example, the purchase of put options on debt securities held in a Portfolio
will enable a Portfolio to protect, at least partially, an unrealized gain in
an appreciated security without actually selling the security. In addition, the
Portfolio will continue to receive interest income on such security.

A Portfolio may purchase call options on securities to protect against
substantial increases in prices of securities the Portfolio intends to purchase
pending its ability to invest in such securities in an orderly manner. A
Portfolio may sell put or call options it has previously purchased, which could
result in a net gain or loss depending on whether the amount realized on the
sale is more or less than the premium and other transaction costs paid on the
put or call option which is sold. A Portfolio may also allow options to expire
unexercised.

In order to earn additional income on its portfolio securities or to protect
partially against declines in the value of such securities, a Portfolio may
write covered call options. The exercise price of a call option may be below,
equal to, or above the current market value of the underlying security at the
time the option is written. During the option period, a covered call option
writer may be assigned an exercise notice by the broker-dealer through whom
such call option was sold requiring the writer to deliver the underlying
security against payment of the exercise price. This obligation is terminated
upon the expiration of the option period or at such earlier time in which the
writer effects a closing purchase transaction. Closing purchase transactions
will ordinarily be effected to realize a profit on an outstanding call option,
to prevent an underlying security from being called, to permit the sale of the
underlying security, or to enable the Portfolio to write another call option on
the underlying security with either a different exercise price or expiration
date or both.

In order to earn additional income or to facilitate its ability to purchase a
security at a price lower than the current market price of such security, a
Portfolio may write secured put options. During the option period, the writer
of a put option may be assigned an exercise notice by the broker-dealer through
whom the option was sold requiring the writer to purchase the underlying
security at the exercise price.

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<PAGE>

the same security if the exercise price of the call held (i) is equal to or
less than the exercise price of the call written or (ii) is greater than the
exercise price of the call written, if the difference is maintained by the
Portfolio in cash, U.S. Government securities or liquid securities marked-to-
market daily in a segregated account with the Fund's custodian. A put is
secured if the Portfolio maintains cash, U.S. Government securities or liquid
securities marked-to-market daily with a value equal to the exercise price in a
segregated account or holds a put on the same underlying security at an equal
or greater exercise price.

Prior to the earlier of exercise or expiration, an option may be closed out
by an offsetting purchase or sale of an option of the same series (type,
exchange, underlying security, exercise price, and expiration). There can be no
assurance, however, that a closing purchase or sale transaction can be effected
when the Portfolio desires.

A Portfolio will realize a capital gain from a closing purchase transaction
if the cost of the closing option is less than the premium received from
writing the option, or, if it is more, the Portfolio will realize a capital
loss. If the premium received from a closing sale transaction is more than the
premium paid to purchase the option, the Portfolio will realize a capital gain
or, if it is less, the Portfolio will realize a capital loss. The principal
factors affecting the market value of a put or a call option include supply and
demand, interest rates, the current market price of the underlying security in
relation to the exercise price of the option, the volatility of the underlying
security, and the time remaining until the expiration date.

The premium paid for a put or call option purchased by a Portfolio is an
asset of the Portfolio. The premium received for an option written by a
Portfolio is recorded as a deferred credit. The value of an option purchased or
written is marked-to-market daily and is valued at the closing price on the
exchange on which it is traded or, if not traded on an exchange or no closing
price is available, at the mean between the last bid and asked prices.

Purchasing Options on Stock Indexes. The Growth LT, Equity Income, Multi-
Strategy, Equity, Bond and Income and Equity Index Portfolios may purchase put
and call options on stock indexes which are standardized and traded on a U.S.
exchange or board of trade, or for which an established over-the-counter market
exists. Like other options listed on United States securities exchanges, index
options are issued by the Options Clearing Corporation ("OCC").

A stock index is a method of reflecting in a single number the market values
of many different stocks or, in the case of value weighted indices that take
into account prices of component stocks and the number of shares outstanding,
the market values of many different companies. Stock indexes are compiled and
published by various sources, including securities exchanges. An index may be
designed to be representative of the stock market as a whole, of a broad market
sector (e.g., industrials), or of a particular industry (e.g., electronics). An
index may be based on the prices of all, or only a sample, of the stocks whose
value it is intended to represent.

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In general, index options are very similar to stock options, and are
basically traded in the same manner. However, when an index option is
exercised, the exercise is settled by the payment of cash--not by the delivery
of stock. The assigned writer of a stock option is obligated to pay the
exercising holder cash in an amount equal to the difference (expressed in
dollars) between the closing level of the underlying index on the exercise date
and the exercise price of the option, multiplied by a specified index
"multiplier." A multiplier of 100, for example, means that a one-point
difference will yield $100.

Gains or losses on the Portfolios' transactions in securities index options
depend primarily on price movements in the stock market generally (or, for
narrow market indexes, in a particular industry or segment of the market)
rather than the price movements of individual securities held by a Portfolio of
the Fund. A Portfolio may sell securities index options prior to expiration in
order to close out its positions in stock index options which it has purchased.
A Portfolio may also allow options to expire unexercised.

Risks of Options Transactions. There are several risks associated with
transactions in options. For example, there are significant differences between
the securities and options markets that could result in an imperfect
correlation between these markets, causing a given transaction not to achieve
its objectives. A decision as to whether, when, and how to use options involves
the exercise of skill and judgment, and even a well-conceived transaction may
be unsuccessful to some degree because of market behavior or unexpected events.

With respect to index options, current index levels will ordinarily continue
to be reported even when trading is interrupted in some or all of the stocks in
an index group. In that event, the reported index levels will be based on the
current market prices of those stocks that are still being traded (if any) and
the last reported prices for those stocks that are not currently trading. As a
result, reported index levels may at times be based on non-current price
information with respect to some or even all of the stocks in an index group.
Exchange rules permit (and in some instances require) the trading of index
options to be halted when the current value of the underlying index is
unavailable or when trading is halted in stocks that account for more than a
specified percentage of the value of the underlying index. In addition, as with
other types of options, an exchange may halt the trading of index options
whenever it considers such action to be appropriate in the interests of
maintaining a fair and orderly market and protecting investors. If a trading
halt occurs, whether for these or for other reasons, holders of index options
may be unable to close out their positions and the options may expire
worthless.

Spread Transactions. The High Yield Bond, Managed Bond and Government
Securities Portfolios may enter into spread transactions with securities
dealers. Such spread transactions are not generally exchange listed or traded.
Spread transactions may occur in the form of options, futures, forwards or swap
transactions. The purchase of a spread transaction gives a Portfolio the right
to sell or receive a security or cash payment with respect to an index at a
fixed dollar spread or fixed yield spread in relationship to another security
or index which is used as a benchmark. The risk to a Portfolio in purchasing
spread transactions is the cost of the premium paid for the spread transaction
and any transaction costs. The sale of a spread transaction obligates a
Portfolio to purchase or deliver a security or a cash payment with respect to
an index at a fixed dollar spread or fixed yield spread in relationship to
another security or index which is used as a benchmark. In addition, there is
no assurance that closing transactions will be available. The purchase and sale
of spread transactions will be used in

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<PAGE>

furtherance of a Portfolio's objectives and to protect a Portfolio against
adverse changes in prevailing credit quality spreads, i.e., the yield spread
between high quality and lower quality securities. Such protection is only
provided during the life of the spread transaction. The Fund does not consider
a security covered by a spread transaction to be "pledged" as that term is used
in the Fund's policy limiting the pledging or mortgaging of its assets. The
sale of spread transactions will be "covered" or "secured" as described in the
"Options", "Options on Foreign Currencies", "Futures Contracts and Options on
Futures Contracts", and "Swap Agreements and Options on Swap Agreements"
sections.

OPTIONS ON FOREIGN CURRENCIES

The Managed Bond, Government Securities, Growth LT, Bond and Income, and
International Portfolios may purchase and sell options on foreign currencies
for hedging purposes in a manner similar to that in which futures or forward
contracts on foreign currencies will be utilized. For example, a decline in the
U.S. dollar value of a foreign currency in which portfolio securities are
denominated will reduce the U.S. dollar value of such securities, even if their
value in the foreign currency remains constant. In order to protect against
such diminutions in the value of portfolio securities, a Portfolio may buy put
options on the foreign currency. If the value of the currency declines, the
Portfolio will have the right to sell such currency for a fixed amount in U.S.
dollars and will offset, in whole or in part, the adverse effect on its
portfolio.

Conversely, when a rise in the U.S. dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, a Portfolio may buy call options thereon. The purchase
of such options could offset, at least partially, the effects of the adverse
movements in exchange rates. As in the case of other types of options, however,
the benefit to the Portfolio from purchases of foreign currency options will be
reduced by the amount of the premium and related transaction costs. In
addition, if currency exchange rates do not move in the direction or to the
extent desired, the Portfolio could sustain losses on transactions in foreign
currency options that would require the Portfolio to forgo a portion or all of
the benefits of advantageous changes in those rates.

A Portfolio may write options on foreign currencies for hedging purposes. For
example, to hedge against a potential decline in the U.S. dollar value of
foreign currency denominated securities due to adverse fluctuations in exchange
rates, the Portfolio could, instead of purchasing a put option, write a call
option on the relevant currency. If the expected decline occurs, the option
will most likely not be executed and the diminution in value of portfolio
securities will be offset by the amount of the premium received.

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<PAGE>

segregated account with the Fund's custodian or; (iv) cross-hedges the call
option by segregating and marking-to-market cash or liquid assets equal to the
value of the underlying foreign currency. A put option written on a foreign
currency by a Portfolio is "covered" if the option is secured by (i) government
securities, cash or liquid securities marked-to-market daily of that foreign
currency, and/or U.S. Government securities, cash or liquid securities marked-
to-market daily at least equal to the exercise price in a segregated account,
or (ii) a put on the same underlying currency at an equal or greater exercise
price.

A Portfolio also may write call options on foreign currencies for cross-
hedging purposes that would not be deemed to be covered. A call option on a
foreign currency is for cross-hedging purposes if it is not covered but is
designed to provide a hedge against a decline due to an adverse change in the
exchange rate in the U.S. dollar value of a security which the Portfolio owns
or has the right to acquire and which is denominated in the currency underlying
the option. In such circumstances, the Portfolio collateralizes the option by
maintaining, in a segregated account with the Fund's custodian, cash, U.S.
Government Securities, or liquid securities marked-to-market daily in an amount
not less than the value of the underlying foreign currency in U.S. dollars
marked-to-market daily.

Foreign currency options are subject to the risks of the availability of a
liquid secondary market described above, as well as the risks regarding adverse
market movements, margining of options written, the nature of the foreign
currency market, possible intervention by governmental authorities and the
effects of other political and economic events. In addition, exchange-traded
options on foreign currencies involve certain risks not presented by the over-
the-counter market. For example, exercise and settlement of such options must
be made exclusively through the OCC, which has established banking
relationships in applicable foreign countries for this purpose. As a result,
the OCC may, if it determines that foreign governmental restrictions or taxes
would prevent the orderly settlement of foreign currency option exercises, or
would result in undue burdens on the OCC or its clearing member, impose special
procedures on exercise and settlement, such as technical changes in the
mechanics of delivery of currency, the fixing of dollar settlement prices or
prohibitions on exercise.

In addition, options on foreign currencies may be traded on foreign exchanges
and over-the-counter in foreign countries. Such transactions are subject to the
risk of governmental actions affecting trading in or the prices of foreign
currencies or securities. The value of such positions also could be adversely
affected by (i) other complex foreign political and economic factors, (ii)
lesser availability than in the United States of data on which to make trading
decisions, (iii) delays in a Portfolio's ability to act upon economic events
occurring in foreign markets during non-business hours in the United States,
(iv) the imposition of different exercise and settlement terms and procedures
and margin requirements than in the United States, and (v) low trading volume.

INVESTMENTS IN SPDRS

The Equity Portfolio may also invest in Standard & Poor's Depository Receipts
("SPDRs") in compliance with the 1940 Act. SPDRs are interests in a unit
investment trust ("UIT") that may be obtained from the UIT or purchased in the
secondary market (SPDRs are listed on the American Stock Exchange). The UIT has
been established to accumulate and hold a portfolio of common stocks that is
intended to track the price performance and dividend yields of the Standard &
Poor's Composite Stock Price Index ("S&P 500").

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<PAGE>

traditional common stock, with the exception that the pricing mechanism for
SPDRs is based on a basket of stocks. Disruptions in the markets for the
securities underlying SPDRs purchased or sold by the Equity Portfolio could
result in losses on SPDRs. Trading in SPDRs involves risks similar to those
risks, described under "Risks of Options Transactions."

FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS

The High Yield Bond, Managed Bond, Government Securities, Growth LT, Multi-
Strategy, Bond and Income, and International Portfolios may invest in interest
rate futures and options thereon. The Growth LT, Equity Income, Multi-
Strategy, Equity, Equity Index, and International Portfolios may invest in
stock index futures and options thereon.

Stock Index Futures. (The Growth LT, Equity Income, Multi-Strategy, Equity,
Equity Index, and International Portfolios.) A stock index is a method of
reflecting in a single number the market values of many different stocks or,
in the case of capitalization weighted indices that take into account both
stock prices and the number of shares outstanding, many different companies.
An index fluctuates generally with changes in the market values of the common
stocks so included. A stock index futures contract is a bilateral agreement
pursuant to which two parties agree to take or make delivery of an amount of
cash equal to a specified dollar amount multiplied by the difference between
the stock index value at the close of the last trading day of the contract and
the price at which the futures contract is originally purchased or sold. No
physical delivery of the underlying stocks in the index is made.

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<PAGE>

Portfolio's portfolio securities or an increase in the price of securities that
the Portfolio intends to acquire. For example, a Portfolio may sell stock index
futures to protect against a market decline in an attempt to offset partially
or wholly a decrease in the market value of securities that the Portfolio
intends to sell. Similarly, to protect against a market advance when the
Portfolio is not fully invested in the securities market, the Portfolio may
purchase stock index futures that may partly or entirely offset increases in
the cost of securities that the Portfolio intends to purchase.

Futures Options. The High Yield Bond, Managed Bond, Government Securities,
Growth LT, Multi-Strategy, Bond and Income, and International Portfolios may
purchase and sell (write) call and put options on interest rate futures.
Futures options possess many of the same characteristics as options on
securities. A futures option gives the holder the right, in return for the
premium paid, to assume a long position (call) or short position (put) in a
futures contract at a specified exercise price at any time during the period of
the option. Upon exercise of a call option, the holder acquires a long position
in the futures contract and the writer is assigned the opposite short position.
In the case of a put option, the opposite is true.

The Growth LT, Equity Income, Multi-Strategy, Equity, Equity Index, and
International Portfolios may purchase put and call options on stock index
futures. Options on stock index futures contracts give the purchaser the right,
in return for the premium paid, to assume a position in a stock index futures
contract (a long position if the option is a call and a short position if the
option is a put) at a specified exercise price at any time during the period of
the option. Upon exercise of the option, the delivery of the futures position
by the writer of the option to the holder of the option will be accompanied by
delivery of the accumulated balance in the writer's futures margin account
which represents the amount by which the market price of the stock index
futures contract, at exercise, exceeds (in the case of a call) or is less than
(in the case of a put) the exercise price of the option on the stock index
futures contract. If an option is exercised on the last trading day prior to
the expiration date of the option, the settlement will be made entirely in cash
equal to the difference between the exercise price of the option and the
closing level of the index on which the futures contract is based on the
expiration date. Purchasers of options who fail to exercise their options prior
to the exercise date suffer a loss of the premium paid.

The High Yield Bond, Multi-Strategy, Equity Income, Equity, and Equity Index
Portfolios will only enter into futures contracts and futures options which are
standardized and traded on a U.S. exchange, board of trade, or similar entity,
or in the case of futures options, for which an established over-the-counter
market exists.

If a purchase or sale of a futures contract is made by a Portfolio, the
Portfolio is required to deposit with its custodian (or broker, if legally
permitted) a specified amount of cash or U.S. Government securities ("initial
margin"). The margin required for a futures contract is set by the exchange on
which the contract is traded and may be modified during the term of the
contract. The initial margin is in the nature of a performance bond or good
faith deposit on the futures contract which is returned to the Portfolio upon
termination of the contract, assuming all contractual obligations have been
satisfied. Each investing Portfolio expects to earn interest income on its
initial margin deposits. A futures contract held by a Portfolio is valued daily
at the official settlement price of the exchange on which it is traded. Each
day the Portfolio pays or receives cash, called "variation margin," equal to
the daily change in value of the futures contract. This process is known as
"marking-to-market." Variation margin does not represent a borrowing or loan by
a Portfolio but is instead settlement between the Portfolio and the broker of
the amount one would owe the other if the futures contract expired. In
computing daily net asset value, each Portfolio will mark-to-market its open
futures positions.

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<PAGE>

(same exchange, underlying security, and delivery month). If an offsetting
purchase price is less than the original sale price, the Portfolio realizes a
capital gain, or if it is more, the Portfolio realizes a capital loss.
Conversely, if an offsetting sale price is more than the original purchase
price, the Portfolio realizes a capital gain, or if it is less, the Portfolio
realizes a capital loss. The transaction costs must also be included in these
calculations.

Limitations. The Fund will comply with certain regulations of the Commodity
Futures Trading Commission ("CFTC") under which an investment company may
engage in futures transactions and qualify for an exclusion from being a
"commodity pool." Under these regulations, a Portfolio may only enter into a
futures contract or purchase an option thereon (1) for bona fide hedging
purposes and (2) for other purposes if, immediately thereafter, the initial
margin deposits for futures contracts held by that Portfolio plus premiums paid
by it for open futures option positions, less the amount by which any such
positions are "in-the-money," would not exceed 5% of the Portfolio's total
assets. A call option is "in-the-money" if the value of the futures contract
that is the subject of the option exceeds the exercise price. A put option is
"in-the-money" if the exercise price exceeds the value of the futures contract
that is the subject of the option.

When purchasing a futures contract, a Portfolio must maintain with its
custodian in a segregated account (or broker, if legally permitted) cash, U.S.
Government securities or other liquid securities marked-to-market daily
(including any margin) equal to the market value of such contract. When writing
a call option on a futures contract, the Portfolio similarly will maintain with
its custodian government securities, cash or liquid securities marked-to-market
daily of that foreign currency, and/or U.S. Government securities, cash or
other liquid securities marked-to-market daily (including any margin) equal to
the amount such option is in-the-money until the option expires or is closed
out by the Portfolio. When selling a futures contract or selling a put option
on a futures contract, the Portfolio is required to maintain with its custodian
government securities, cash or liquid securities marked-to-market daily of that
foreign currency, and/or U.S. Government securities, cash, or other liquid
securities marked-to-market daily (including any margin) equal to the market
value of such contract or exercise price of such option, or to otherwise cover
the position.

A Portfolio may not maintain open short positions in futures contracts or
call options written on futures contracts if, in the aggregate, the market
value of all such open positions exceeds the current value of its portfolio
securities, plus or minus unrealized gains and losses on the open positions,
adjusted for the historical relative volatility of the relationship between the
Portfolio and the positions. For this purpose, to the extent the Portfolio has
written call options on specific securities it owns, the value of those
securities will be deducted from the current market value of the securities
portfolio.

Risks Associated with Futures and Futures Options. There are several risks
associated with the use of futures contracts and futures options as hedging
techniques. A purchase or sale of a futures contract may result in losses in
excess of the amount invested in the futures contract. There can be significant
differences between the securities and futures markets that could result in an
imperfect correlation between the markets, causing a given hedge not to achieve
its objectives. The degree of imperfection of correlation depends on
circumstances such as variations in speculative market demand for futures and
futures options on securities, including technical influences in futures
trading and futures options, and differences between the portfolio securities
being hedged and the instruments underlying the hedging vehicle in such
respects as interest rate levels, maturities, conditions affecting particular
industries, and creditworthiness of issuers. A decision as to whether, when,
and how to hedge involves the exercise of skill and judgment and even a well-
conceived hedge may be unsuccessful to some degree because of market behavior
or unexpected interest rate trends.

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<PAGE>

The price of futures contracts may not correlate perfectly with movement in
the underlying security or stock index, due to certain market distortions. This
might result from decisions by a significant number of market participants
holding stock index futures positions to close out their futures contracts
through offsetting transactions rather than to make additional margin deposits.
Also, increased participation by speculators in the futures market may cause
temporary price distortions. These factors may increase the difficulty of
effecting a fully successful hedging transaction, particularly over a short
time frame. With respect to a stock index futures contract, the price of stock
index futures might increase, reflecting a general advance in the market price
of the index's component securities, while some or all of the portfolio
securities might decline. If a Portfolio had hedged its portfolio against a
possible decline in the market with a position in futures contracts on an
index, it might experience a loss on its futures position until it could be
closed out, while not experiencing an increase in the value of its portfolio
securities. If a hedging transaction is not successful, the Portfolio might
experience losses which it would not have incurred if it had not established
futures positions. Similar risk considerations apply to the use of interest
rate and other futures contracts.

The Managed Bond, Government Securities, Growth LT, Bond and Income, and
International Portfolios may trade futures contracts and options on futures
contracts not only on U.S. domestic markets, but also on exchanges located
outside of the United States. Foreign markets may offer advantages such as
trading in indices that are not currently traded in the United States. Foreign
markets, however, may have greater risk potential than domestic markets. Unlike
trading on domestic commodity exchanges, trading on foreign commodity exchanges
is not regulated by the CFTC and may be subject to greater risk than trading on
domestic exchanges. For example, some foreign exchanges are principal markets
so that no common clearing facility exists and a trader may look only to the
broker for performance of the contract. Trading in foreign futures or foreign
options contracts may not be afforded certain of the protective measures
provided by the Commodity Exchange Act, the CFTC's regulations, and the rules
of the National Futures Association and any domestic exchange, including the
right to use reparations proceedings before the CFTC and arbitration
proceedings provided by the National Futures Association or any domestic
futures exchange. Amounts received for foreign futures or foreign options
transactions may not be provided the same protection as funds received in
respect of transactions on United States futures exchanges. In addition, any
profits that the Portfolio might realize in trading could be eliminated by
adverse changes in the exchange rate of the currency in which the transaction
is denominated, or the Portfolio could incur losses as a result of changes in
the exchange rate. Transactions on foreign exchanges may include both
commodities that are traded on domestic exchanges or boards of trade and those
that are not.

There can be no assurance that a liquid market will exist at a time when a
Portfolio seeks to close out a futures or a futures option position, and that
Portfolio would remain obligated to meet margin requirements until the position
is closed. In addition, many of the contracts discussed above are relatively
new instruments without a significant trading history. As a result, there can
be no assurance that an active secondary market will develop or continue to
exist.

FOREIGN CURRENCY FUTURES AND OPTIONS THEREON

The Managed Bond, Government Securities, Growth LT, Bond and Income, and
International Portfolios may enter into contracts for the purchase or sale for
future delivery of foreign currencies ("foreign currency futures") and may
purchase and write options on foreign currency futures. In addition, a
Portfolio may engage

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<PAGE>

in cross-hedging activities, which involve the sale of a futures contract on
one foreign currency to hedge against changes in exchange rates for a different
("proxy") currency if there is an established historical pattern of correlation
between the two currencies. These investment techniques will be used only to
hedge against anticipated future changes in exchange rates which otherwise
might adversely affect the value of the Portfolio's securities or adversely
affect the prices of securities that the Portfolio has purchased or intends to
purchase at a later date. The successful use of foreign currency futures will
usually depend on the Portfolio Manager's ability to forecast currency exchange
rate movements correctly. Should exchange rates move in an unexpected manner,
the Portfolio may not achieve the anticipated benefits of foreign currency
futures or may realize losses.

SWAP AGREEMENTS AND OPTIONS ON SWAP AGREEMENTS

The Managed Bond and Government Securities Portfolios may enter into interest
rate, interest rate index, and currency exchange rate swap agreements, and may
purchase and sell options thereon. A Portfolio's current obligations (or
rights) under a swap agreement will generally be equal only to the net amount
to be paid or received under the agreement based on the relative values of the
positions held by each party to the agreement (the "net amount"). A Portfolio's
current obligations under a swap agreement will be accrued daily (offset again
any amounts owing to the Portfolio) and any accrued but unpaid net amounts owed
to a swap counterparty will be covered by the maintenance of a segregated
account consisting of cash, U.S. Government securities, and/or liquid
securities marked-to-market daily, to avoid any potential leveraging of a
Portfolio. The Bond and Income Portfolio may invest in the following types of
swap agreements: (1) "interest rate caps," under which, in return for a
premium, one party agrees to make payments to the other to the extent that
interest rates exceed a specified rate, or "cap"; (2) "interest rate floors,"
under which, in return for a premium, one party agrees to make payments to the
other to the extent that interest rates fall below a certain level, or "floor";
(3) "interest rate collars," under which one party sells a cap and purchases a
floor or vice-versa in an attempt to protect itself against interest rate
movements exceeding given minimum or maximum levels; and (4) "currency exchange
rate swap agreements."

STRUCTURED NOTES

The Bond and Income Portfolio may invest in structured notes. The value of
the principal of and/or interest on such securities is determined by reference
to changes in the value of specific currencies, interest rates, commodities,
indices or other financial indicators (the "Reference") or the relative change
in two or more References. The interest rate or the principal amount payable
upon maturity or redemption may be increased or decreased depending upon
changes in the applicable Reference. The terms of the structured notes may
provide that in certain circumstances no principal is due at maturity and,
therefore, result in the loss of a Portfolio's investment. Structured notes may
be positively or negatively indexed, so that appreciation of the Reference may
produce an increase or decrease in the interest rate or value of the security
at maturity. In addition, changes in the interest rates or the value of the
security at maturity may be a multiple of changes in the value of the
Reference. Consequently, structured securities may entail a greater degree of
market risk than other types of fixed-income securities. Structured notes may
also be more volatile, less liquid and more difficult to accurately price than
less complex securities.

WARRANTS AND RIGHTS

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<PAGE>

speculative in that they have no voting rights, pay no dividends, and have no
rights with respect to the assets of the corporation issuing them. Warrants
basically are options to purchase equity securities at a specific price valid
for a specific period of time. They do not represent ownership of the
securities, but only the right to buy them. Warrants differ from call options
in that warrants are issued by the issuer of the security which may be
purchased on their exercise, whereas call options may be written or issued by
anyone. The prices of warrants do not necessarily move parallel to the prices
of the underlying securities.

DURATION

Although frequently used, the "term of maturity" of a bond is not a useful
measure of the longevity of a bond's cash flow because it refers only to the
time remaining to the repayment of principal or corpus and disregards earlier
coupon payments. Thus, for example, three bonds with the same maturity may not
have the same investment characteristics (such as risk or repayment time). One
bond may have large coupon payments early in its life, whereas another may have
payments distributed evenly throughout its life. Some bonds (such as zero
coupon bonds) make no coupon payments until maturity. Clearly, an investor
contemplating investing in these bonds should consider not only the final
payment or sum of payments on the bond, but also the timing and magnitude of
payments in order to make an accurate assessment of each bond. Maturity, or the
term to maturity, does not provide a prospective investor with a clear
understanding of the time profile of cash flows over the life of a bond.

Another way of measuring the longevity of a bond's cash flow is to compute a
simple average time to payment, where each year is weighted by the number of
dollars the bond pays that year. This concept is termed the "dollar-weighted
mean waiting time," indicating that it is a measure of the average time to
payment of a bond's cash flow. The critical shortcoming of this approach is
that it assigns equal weight to each dollar paid over the life of a bond,
regardless of when the dollar is paid. Since the present value of a dollar
decreases with the amount of time which must pass before it is paid, a better
method might be to weight each year by the present value of the dollars paid
that year. This calculation puts the weights on a comparable basis and creates
a definition of longevity which is known as duration.

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<PAGE>

represents the approximate return an investor purchasing a bond may expect if
he holds that bond to maturity. In essence, yield to maturity is the rate of
interest which, if applied to the purchase price of a bond, would be capable
of exactly reproducing the entire time schedule of future interest and
principal payments.

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INVESTMENT RESTRICTIONS

FUNDAMENTAL INVESTMENT RESTRICTIONS

(iii) invest in a security if, as a result of such investment, it would hold
more than 10% (taken at the time of such investment) of the outstanding voting
securities of any one issuer;

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NONFUNDAMENTAL INVESTMENT RESTRICTIONS

(i) invest for the purpose of exercising control or management;

(ii) sell securities or property short, except short sales against the box;

(iii) purchase warrants if immediately after and as a result of such
purchase more than 10% of the market value of the total assets of the
Portfolio would be invested in such warrants;

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MANAGEMENT OF THE FUND

TRUSTEES AND OFFICERS

The Trustees and Executive Officers of the Fund, their business address, and
principal occupations during the past five years are:

Glenn S. Schafer* Trustee President and Director of
700 Newport Center Drive Pacific Life, Pacific Mutual
Newport Beach, CA 92660 Holding Company and Pacific
Age 48 LifeCorp and similar
positions with other
subsidiaries and affiliates
of Pacific Life.

Richard L. Nelson Trustee Business Consultant; retired
8 Cherry Hills Lane Partner with Ernst & Young;
Newport Beach, CA 92660 Director of Wynn's
Age 68 International, Inc.

Lyman W. Porter Trustee Professor of Management in
University of California the Graduate School of
at Irvine Management at the University
Irvine, CA 92717 of California, Irvine;
Age 68 Member of the Academic
Advisory Board of the
Czecholslovak Management
Center; and Member of the
Board of Trustees of the
American University of
Armenia.

Alan Richards Trustee President of Alan Richards
7381 Elegans Place Consulting, Inc.; Chairman
Carlsbad, CA 92009 of IBIS Capital, LLC; Former
Age 68 Chairman of Advisory Board,
DCG Corporation; Former
Director of Western National
Corporation.

Brian D. Klemens Vice President Assistant Vice President,
700 Newport Center Drive and Treasurer Accounting and Assistant
Newport Beach, CA 92660 Controller, Corporate
Age 41 Finance of Pacific Life.

Diane N. Ledger Vice President Vice President, Variable
700 Newport Center Drive and Assistant Regulatory Compliance,
Newport Beach, CA 92660 Secretary Corporate Law of Pacific
Age 58 Life.

Sharon A. Cheever Vice President Vice President and
700 Newport Center Drive and General Investment Counsel of
Newport Beach, CA 92660 Counsel Pacific Life.
Age 42

Audrey L. Milfs Secretary Vice President, Director and
700 Newport Center Drive Corporate Secretary of
Newport Beach, CA 92660 Pacific Life; and similar
Age 52 positions with other
subsidiaries and affiliates
of Pacific Life.
</TABLE>
- --------
* Mr. Sutton and Mr. Schafer are "interested persons" of the Fund (as that
term is defined in the Investment Company Act) because of their positions
with Pacific Life as shown above.

33
<PAGE>

Trustees other than those affiliated with Pacific Life Insurance Company
("Pacific Life" or the "Adviser", formerly known as Pacific Mutual Life
Insurance Company) or a Portfolio Manager, currently receive an annual fee of
$5,000 and $1,500 for each Board of Trustees meeting attended, including each
Audit, Policy, or Nominating Committee meeting attended, plus reimbursement of
related expenses. In addition, the Chairman of the Fund's Audit Committee and
Policy Committee each receives an additional annual fee of $2,000. The
following table summarizes the aggregate compensation paid by the Fund to each
Trustee who was not affiliated with Pacific Life or a Portfolio Manager in
1997. The table also shows total compensation paid to these Trustees in 1997
by the Fund and PIMCO Funds: Multi-Manager Series (formerly Equity Advisors
Series), an investment company managed by an affiliate of Pacific Life for
which Messrs. Nelson, Porter, and Richards (but not Mr. Sutton or Mr. Schafer)
also serve as trustees (collectively, "Fund Complex").

INVESTMENT ADVISER

Under the terms of the Advisory Contract, Pacific Life is obligated to
manage the Fund's Portfolios in accordance with applicable laws and
regulations.

The Advisory Contract will continue in effect until December 31, 1998, and
from year to year thereafter, provided such continuance is approved annually
by (i) the holders of a majority of the outstanding voting securities of the
Fund or by the Board of Trustees, and (ii) a majority of the Trustees who are
not parties to such Advisory Contract or "interested persons", as defined in
the Investment Company Act of 1940 (the "1940 Act"), of any such party. The
Advisory Contract was originally approved by the Board of Trustees, including
a majority of the Trustees who are not parties to the Advisory Contract, or
interested persons of such parties, at its meeting held on July 21, 1987, and
by the shareholders of the Fund at a Meeting of Shareholders held on
October 28, 1988. The Advisory Contract was also approved by the shareholders
of the Equity Index Portfolio of the Fund at a Meeting of Shareholders of the
Equity Index Portfolio held on April 21, 1992. An Addendum to the Advisory
Contract was approved by the Board of Trustees, including a majority of the
Trustees who are not parties to the Contract, or interested persons of such
parties, at a meeting held on October 28, 1988. An Addendum to the Advisory
Contract which increased the advisory fee schedule with respect to the High
Yield Bond, Managed Bond, Government Securities, Equity Income, Multi-
Strategy, and International Portfolios, and which included the Growth LT
Portfolio as a Portfolio to which the Adviser will perform services under the
Advisory Contract, was approved by the Board of Trustees, including a majority
of the Trustees who are not parties to the Contract, or interested persons of
such parties, at a meeting held on September 29, 1993, and was approved by
shareholders of the High Yield Bond, Managed Bond, Government Securities,
Equity Income, Multi-Strategy, and International Portfolios at a Special
Meeting of Shareholders on December 13, 1993. An

34
<PAGE>

The Fund pays the Adviser, for its services under the Agreement, a fee based
on an annual percentage of the average daily net assets of each Portfolio. For
the Money Market Portfolio, the Fund will pay to the Adviser a fee at an
annual rate of .40% of the first $250 million of the average daily net assets
of the Portfolio, .35% of the next $250 million of the average daily net
assets of the Portfolio, and .30% of the average daily net assets of the
Portfolio in excess of $500 million. For the High Yield Bond, Managed Bond,
Government Securities, and Bond and Income Portfolios, the Fund will pay .60%
of the average daily net assets of each of the Portfolios. For the Equity
Income, Multi-Strategy, and Equity Portfolios, the Fund will pay .65% of the
average daily net assets of each of the Portfolios. For the Growth LT
Portfolio, the Fund will pay .75% of the average daily net assets of the
Portfolio. For the Equity Index Portfolio, the Fund will pay .25% of the first
$100 million of the average daily net assets of the Portfolio, .20% of the
next $100 million of the average daily net assets of the Portfolio, and .15%
of the average daily net assets of the Portfolio in excess of $200 million.
For the International Portfolio, the Fund will pay .85% of the average daily
net assets of the Portfolio. The fee shall be computed and accrued daily and
paid monthly.

Net advisory fees paid or owed to Pacific Life for 1997 were as follows:
Money Market Portfolio--$1,521,271, High Yield Bond Portfolio--$1,466,135,
Managed Bond Portfolio--$2,055,929, Government Securities Portfolio--$645,820,
Growth LT Portfolio--$4,193,552, Equity Income Portfolio--$4,062,587, Multi-
Strategy Portfolio--$1,866,445, Equity Portfolio--$1,818,664, Bond and Income
Portfolio--$568,647, Equity Index Portfolio--$1,080,856, and International
Portfolio--$5,353,459.

Net advisory fees paid or owed to Pacific Life for 1996 were as follows:
Money Market Portfolio--$625,727, High Yield Bond Portfolio--$783,894, Managed
Bond Portfolio--$1,071,851, Government Securities Portfolio--$483,849, Growth
LT Portfolio--$2,367,481, Equity Income Portfolio--$1,977,164, Multi-Strategy
Portfolio--$1,107,889, Equity Portfolio--$1,049,649, Bond and Income
Portfolio--$411,129, Equity Index Portfolio--$511,324, and International
Portfolio--$2,586,397.

Net advisory fees paid or owed to Pacific Life for 1995 were as follows:
Money Market Portfolio--$386,292, High Yield Bond Portfolio--$318,918, Managed
Bond Portfolio--$519,084, Government Securities Portfolio--$226,533, Growth LT
Portfolio--$845,391, Equity Income Portfolio--$840,710, Multi-Strategy
Portfolio--$650,409, Equity Portfolio--$564,917, Bond and Income Portfolio--
$255,233, Equity Index Portfolio--$194,604 and International Portfolio--
$1,030,744.

The Fund paid Pacific Life $165,000 for its services under the Agreement for
Support Services during 1997, and $108,000 during 1996, representing 0.004%
and 0.005%, respectively, of the Fund's average daily net assets and
anticipates that fees to be paid for 1998 under said Agreement will be
approximately 0.003% of the Fund's average daily net assets.

PORTFOLIO MANAGEMENT AGREEMENTS

Pursuant to a Portfolio Management Agreement between the Fund, the Adviser,
and Pacific Investment Management Company ("PIMCO"), 840 Newport Center Drive,
Suite 360, Post Office Box 6430, Newport

35
<PAGE>

Beach, California 92658-6430, PIMCO is the Portfolio Manager and provides
investment advice and makes and implements investment decisions with respect
to the Managed Bond Portfolio and Government Securities Portfolio. For the
services provided, for the years 1996 and 1995, Pacific Life paid PIMCO a fee
based on a percentage of each Portfolio's average daily net assets according
to the following schedule:

MANAGED BOND AND GOVERNMENT SECURITIES PORTFOLIOS

<TABLE>
<CAPTION>
RATE % BREAK POINT (ASSETS)
------ --------------------
<S> <C>
.50% On first $25 million
.375% On next $25 million
.25% On excess
</TABLE>

PIMCO is registered as an investment adviser with the SEC and a commodity
trading adviser with the CFTC. Such registration does not involve supervision
by the SEC over investment advice or supervision by the CFTC over commodities
trading. PIMCO is currently providing investment advisory services to the
PIMCO Funds Pacific Investment Manager Series, PIMCO Commercial Mortgage
Securities Trust, Inc., PIMCO Funds: Multi-Manager Series (formerly Equity
Advisors Series), the Harbor Bond Fund of the Harbor Fund, The Total Return
Bond and the Intermediate-Term Bond Portfolios of the Target Portfolio Trust,
the Fixed Income I Fund, Diversified Bond Fund, Fixed Income III Fund, and
Multi-Strategy Bond Fund of the Frank Russell Investment Management Company,
the PIMCO Total Return Bond Portfolio of the American Skandia Trust, the Total
Return Fund of Fremont Mutual Funds, Inc., CitiSelect Foreign Bond Portfolio
of the Landmark Funds I, CitiSelect VIP Folio 200, 300, 400, and 500 of the
Variable Annuity Portfolios, the Core Bond Fund of the Russell Insurance
Funds, the Low Duration U.S. Government Income Fund of the PaineWebber Bond
Funds, the Strategic Fixed Income Portfolio of the PaineWebber Series Trust,
the PACE Government Securities Fixed Income Investments and PACE Strategic
Fixed Income Investments of the PaineWebber PACE Select Advisors Trust, as
well as to managed accounts consisting of proceeds from pension and profit
sharing plans. Net fees paid or owed by Pacific Life to PIMCO in 1997 were
$929,041 for the Managed Bond Portfolio and $292,079 for the Government
Securities Portfolio, in 1996 were $541,256 for the Managed Bond Portfolio and
$295,607 for the Government Securities Portfolio and in 1995 were $310,529 for
the Managed Bond Portfolio and $171,814 for the Government Securities
Portfolio.

Pursuant to a Portfolio Management Agreement between the Fund, the Adviser,
and Janus Capital Corporation ("Janus"), 100 Fillmore Street, Denver, Colorado
80206-4928, Janus is the Portfolio Manager and provides investment advisory
services to the Growth LT Portfolio. For the services provided, for the years
1996 and 1995, Pacific Life paid Janus a fee based on a percentage of the
average daily net assets of the Growth LT Portfolio according to the following
schedule:

GROWTH LT PORTFOLIO

<TABLE>
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- ---------------------
<S> <C>
.60% On first $100 million
.55% On excess
</TABLE>

36
<PAGE>

and the Multi-Strategy Portfolio. For the services provided, for the years
1996 and 1995, Pacific Life paid J.P. Morgan Investment a fee based on a
percentage of the combined average daily net assets of these two Portfolios
according to the following schedule:

EQUITY INCOME AND MULTI-STRATEGY PORTFOLIOS

<TABLE>
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- ---------------------
<S> <C>
.45% On first $100 million
.40% On next $100 million
.35% On next $200 million
.30% On excess
</TABLE>

Morgan acquired its first tax-exempt client in 1913 and its first pension
account in 1940. As of December 31, 1997, Morgan, through J.P. Morgan
Investment and its subsidiaries, has assets under management of approximately
$255 billion. With offices around the globe, J.P. Morgan Investment draws from
a worldwide resources base to provide comprehensive service to an
international group of clients.

Net fees paid or owed by Pacific Life to J.P. Morgan Investment in 1997 were
$1,998,776 for the Equity Income Portfolio and $920,564 for the Multi-Strategy
Portfolio, in 1996 were $1,135,557 for the Equity Income Portfolio and
$637,384 for the Multi-Strategy Portfolio and in 1995 were $537,832 for the
Equity Income Portfolio and $417,904 for the Multi-Strategy Portfolio.

EQUITY AND BOND AND INCOME PORTFOLIOS

37
<PAGE>

EQUITY PORTFOLIO

<TABLE>
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- ---------------------
<S> <C>
.50% On first $500 million
.45% On next $500 million
.40% On excess

BOND AND INCOME PORTFOLIO

<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- ---------------------
<S> <C>
.40% On first $500 million
.35% On next $ 500 million
.30% On excess
</TABLE>

EQUITY INDEX PORTFOLIO

<TABLE>
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- ---------------------
<S> <C>
.07% On first $100 million
.03% On next $ 100 million
.01% On excess
</TABLE>

This fee is subject to a minimum annual fee of $100,000 for the calendar
year 1996 and each year thereafter. For the calendar year 1995, the fee was
subject to a minimum annual fee of $75,000.

38
<PAGE>

Advisor Trust; Small Cap, International Equity, U.S., Bond Index, EAFE Equity
Index, Equity 500 Index, Small Cap Index and Managed Assets Funds of the BT
Insurance Funds Trust; BT Equity 500 Index, BT Small Company Index and BT
International Equity Index Portfolios of the EQ Advisors Trust; Spartan US
Equity Index, Spartan Extended Market Index, Spartan Market Index, Spartan
Total Market Index, Spartan International Index and VIP Index 500 Funds of the
Fidelity Funds; Scudder AARP US Stock Index Portfolio; and USAA S&P Index 500
Fund.

Net fees paid or owed by Pacific Life to BTCo in 1997 were $135,863, in 1996
were $100,000, and in 1995 were $75,000.

From January 1, 1995 through May 31, 1997 pursuant to a Portfolio Management
Agreement between the Fund, the Adviser, and Templeton Investment Counsel,
Inc. ("Templeton"), Broward Financial Centre, Suite 2100, Fort Lauderdale,
Florida 33394-3091, Templeton was the Portfolio Manager and provided
investment advice with respect to the International Portfolio. For the
services provided, for the period January 1, 1997 through May 31, 1997 and for
the years 1996 and 1995, Pacific Life paid a fee to Templeton based on a
percentage of the Portfolio's average daily net assets according to the
following fee schedule:

INTERNATIONAL PORTFOLIO

<TABLE>
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- --------------------
<S> <C>
.70% On first $25 million
.55% On next $ 25 million
.50% On next $ 50 million
.40% On excess
</TABLE>

Net fees paid or owed by Pacific Life to Templeton for the International
Portfolio from January 1, 1997 to May 31, 1997 were $945,379, in 1996 were
$1,382,217, and in 1995 were $643,941.

Net fees paid or owed by Pacific Life to Morgan Stanley from June 1, 1997 to
December 31, 1997 were $1,478,065 for the International Portfolio.

The Portfolio Management Agreements are not exclusive, and PIMCO, Janus,
J.P. Morgan Investment, BTC, Goldman Sachs Asset Management, and Morgan
Stanley may provide and currently are providing investment advisory services
to other clients, including other investment companies.

DISTRIBUTION OF FUND SHARES

39
<PAGE>

Fund that have been organized after the Fund commenced operations have been
advanced on behalf of the Fund by the Adviser, and are deferred and amortized
by the pertinent Portfolio over a period of 60 months from the commencement of
operations of the Portfolio. See "Financial Statements."

PURCHASES AND REDEMPTIONS

PORTFOLIO TRANSACTIONS AND BROKERAGE

INVESTMENT DECISIONS

BROKERAGE AND RESEARCH SERVICES

40
<PAGE>

During the years 1997, 1996 and 1995, respectively, the following Portfolios
incurred brokerage commissions as follow: the High Yield Bond Portfolio--
$2,500, $1,700 and $0, the Managed Bond Portfolio--$41,315, $33,718 and
$21,987, the Government Securities Portfolio--$21,349, $16,819 and $11,874,
the Growth LT Portfolio--$1,057,621, $559,163 and $325,340, the Equity Income
Portfolio--$1,162,083, $746,412 and $314,236, the Multi-Strategy Portfolio--
$283,791, $231,844 and $129,476, the Equity Portfolio--$706,250, $286,596 and
$335,550 of which $61,512 (8.71%), $60,498 (21.11%) and $68,472 (20.41%) was
paid to Smith Barney Inc. and $23,700 (3.36%), $11,100 (3.87%) and $22,500
(6.71%) was paid to Robinson Humphrey Co.,

41
<PAGE>

Inc., affiliates of Greenwich Street Advisors, the Bond and Income Portfolio--
$0, $0 and $0, the Equity Index Portfolio--$157,624, $137,980 and $43,415, the
International Portfolio--$1,606,247, $883,241 and $376,660 of which $39,617
(2.47%) was paid to Morgan Stanley & Co. during the period June 1, 1997 to
December 31, 1997, an affiliate of Morgan Stanley Asset Management Inc.

PORTFOLIO TURNOVER

The portfolio turnover rates are not expected to exceed: 0% for the Money
Market Portfolio; 400% for the Managed Bond and Government Securities
Portfolios; and 150% for all other Portfolios. For the Portfolios other than
the Money Market Portfolio, portfolio turnover could be greater in periods of
unusual market movement and volatility. For the years 1997, 1996, and 1995,
respectively, the portfolio turnover rate for each of the Portfolios was as
follows: Money Market Portfolio--0%, 0%, and 0%, High Yield Bond Portfolio--
103%, 120%, and 127%, Managed Bond Portfolio--231%, 386%, and 191%, Government
Securities Portfolio--203%, 307%, and 299%, Growth LT Portfolio--145%, 147%,
and 166%, Equity Income Portfolio--106%, 95%, and 86%, Multi-Strategy
Portfolio--72%, 133%, and 176%, Equity Portfolio--160%, 91%, and 226%, Bond
and Income Portfolio--15%, 27%, and 52%, Equity Index Portfolio--3%, 20%, and
8%, and International Portfolio--84%, 21%, and 16%.

NET ASSET VALUE

42
<PAGE>

preceding the time of valuation. Securities traded in over-the-counter markets
outside the United States are valued at the last available price in the over-
the-counter market prior to the time of valuation. Trading in securities on
exchanges and over-the-counter markets in European and Pacific Basin countries
is normally completed well before 4:00 p.m. New York City time. In addition,
European and Pacific Basin securities trading may not take place on all
business days in New York. Furthermore, trading takes place in Japanese
markets on certain Saturdays and in various foreign markets on days which are
not business days in New York and on which the Fund's net asset value is not
calculated. Quotations of foreign securities in foreign currencies are
converted to U.S. dollar equivalents using the foreign exchange quotation in
effect at the time net asset value is computed. The calculation of the net
asset value of the Managed Bond, Government Securities, Growth LT, Multi-
Strategy, and International Portfolios may not take place contemporaneously
with the determination of the prices of portfolio securities of foreign
issuers used in such calculation. Further, under the Fund's procedures, the
prices of foreign securities are determined using information derived from
pricing services and other sources every day that the Fund values its shares.
Prices derived under these procedures will be used in determining net asset
value. Information that becomes known to the Fund or its agents after the time
that net asset value is calculated on any business day (which may be after
4:00 p.m. New York City time) may be assessed in determining net asset value
per share after the time of receipt of the information, but will not be used
to retroactively adjust the price of the security so determined earlier or on
a prior day. Events affecting the values of portfolio securities that occur
between the time their prices are determined and the time a Portfolio's net
asset value is determined may not be reflected in the calculation of net asset
value. If events materially affecting net asset value occur during such
period, the securities would be valued at fair market value as determined by
the management and approved in good faith by the Board of Trustees of the
Fund. In determining the fair value of securities, the Fund may consider
available information including information that becomes known after 4:00 p.m.
New York City time, and the values that are determined will be deemed to be
the price at 4:00 p.m. New York City time.

All other Portfolios are valued as follows:

43
<PAGE>

PERFORMANCE INFORMATION

Effective Yield = [(Base Period Return + 1) (To the power of 365/7)]-1

For the 7-day period ending December 31, 1997, the current yield of the
Money Market Portfolio was 5.54% and the effective yield of the Portfolio was
5.69%.

2 {[([(a-b)/c*d] + 1 (To the power of 6)] - 1}

where

a = dividends and interest earned during the period,

b = expenses accrued for the period (net of reimbursements),

c = the average daily number of shares outstanding during the period
that were entitled to receive dividends, and

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

44
<PAGE>

For the 30 day period ended December 31, 1997, the yield of the remaining
Portfolios that had commenced operations on or before that date was as
follows: 8.40% for the High Yield Bond Portfolio, 5.76% for the Managed Bond
Portfolio, 5.44% for the Government Securities Portfolio, 0.37% for the Growth
LT Portfolio, 3.37% for the Multi-Strategy Portfolio, 1.08% for the Equity
Income Portfolio, 0.89% for the Equity Portfolio, 6.47% for the Bond and
Income Portfolio, 1.62% for the Equity Index Portfolio and 1.74% for the
International Portfolio.

Quotations of average annual total return for a Portfolio will be expressed
in terms of the average annual compounded rate of return of a hypothetical
investment in the Portfolio over certain periods that will include a period of
one year (or, if less, up to the life of the Portfolio), calculated pursuant
to the following formula: P (1 + T)(To the power of n) = ERV (where P = a
hypothetical initial payment of $1,000, T = the total return for the period, n =
the number of periods, and ERV = the ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the period). Quotations of total return
may also be shown for other periods. All total return figures reflect the
deduction of a proportional share of Portfolio expenses on an annual basis, and
assume that all dividends and distributions are reinvested when paid.

For the one year period ended December 31, 1997, the total return for each
Portfolio that had commenced operations on or before that date was as follows:
5.28% for the Money Market Portfolio, 9.44% for the High Yield Bond Portfolio,
9.92% for the Managed Bond Portfolio, 9.48% for the Government Securities
Portfolio, 10.96% for the Growth LT Portfolio, 28.60% for the Equity Income
Portfolio, 19.62% for the Multi-Strategy Portfolio, 18.18% for the Equity
Portfolio, 16.32% for the Bond and Income Portfolio, 32.96% for the Equity
Index Portfolio, and 9.28% for the International Portfolio.

For the five year period ended December 31, 1997, the average annual total
return for each Portfolio that had commenced operations on or before that date
was as follows: 4.44% for the Money Market Portfolio, 11.40% for the High
Yield Bond Portfolio, 7.81% for the Managed Bond Portfolio, 7.08% for the
Government Securities Portfolio, 16.90% for the Equity Income Portfolio,
12.66% for the Multi-Strategy Portfolio, 16.12% for the Equity Portfolio,
11.04% for the Bond and Income Portfolio, 19.74% for the Equity Index
Portfolio, and 14.55% for the International Portfolio. The Growth LT Portfolio
did not begin operations until January 4, 1994.

For the ten year period ended December 31, 1997, the average annual total
returns for the Equity Portfolio and Bond and Income Portfolio were 14.76% and
11.30%, respectively.

Based upon the period from the commencement of Fund operations on January 4,
1988 until December 31, 1997, the average annual total return for each
Portfolio, except the Growth LT, Equity, and Bond and Income and Equity Index
Portfolios, was as follows: 5.35% for the Money Market Portfolio, 11.13% for
the High Yield Bond Portfolio, 9.47% for the Managed Bond Portfolio, 8.83% for
the Government Securities Portfolio, 14.61% for the Equity Income Portfolio,
11.93% for the Multi-Strategy Portfolio, and 9.25% for the International
Portfolio. Based upon the period from the commencement of operations of the
Growth LT Portfolio on January 4, 1994 until December 31, 1997, the average
annual total return for the Growth LT Portfolio was 19.31%. Based upon the
period from the commencement of the first full year of operations of the
Equity Portfolio and Bond and Income Portfolio on January 1, 1984, the average
annual total return for each of these Portfolios was 15.01% and 12.48%,
respectively. Based upon the period from the commencement of the Equity Index
Portfolio operations on January 30, 1991 until December 31, 1997, the average
annual total return for the Equity Index Portfolio was 18.75%.

45
<PAGE>

Performance information for a Portfolio may be compared, in advertisements,
sales literature, and reports to shareholders to: (i) the Standard & Poor's
500 Stock Index ("S&P 500"); the Dow Jones Industrial Average ("DJIA"); for
the Money Market Portfolio, the Donoghue Money Market Institutional Averages;
for the Growth LT Portfolio, the Russell 2500 Index; for the Equity Portfolio,
the Russell 1000 Growth Index; for those Portfolios with investments in fixed
income securities, the Lehman Brothers Government/Corporate Bond Index; for
the Government Securities Portfolio, the Lehman Brothers Government Bond
Index; for the High Yield Bond Portfolio, the First Boston High Yield Bond
Index; for the Multi-Strategy Portfolio, the Lehman Brothers Aggregate Bond
Index; for the Bond and Income Portfolio, the Lehman Brothers Long Term
Government/Corporate Bond Index and the Lehman Brothers Aggregate Bond Index;
for the International Portfolio, Morgan Stanley Capital International's EAFE
Index, which represents the stock markets of Europe, Australia, and the Far
East; or other unmanaged indexes, so that investors may compare a Portfolio's
results with those of a group of unmanaged securities widely regarded by
investors as representative of the securities markets in general; (ii) other
groups of mutual funds tracked by Lipper Analytical Services, a widely used
independent research firm which ranks mutual funds by overall performance,
investment objectives, and assets, or tracked by other services, companies,
publications, or persons who rank mutual funds on overall performance or other
criteria; and (iii) the Consumer Price Index (measure for inflation) to assess
the real rate of return from an investment in the Portfolio. Unmanaged indexes
may assume the reinvestment of dividends but generally do not reflect
deductions for administrative and management costs and expenses.

TAXATION

Each Portfolio intends to qualify annually and to elect to be treated as a
regulated investment company under the Internal Revenue Code of 1986 (the
"Code").

To qualify as a regulated investment company, each Portfolio generally must,
among other things:(i) derive in each taxable year at least 90% of its gross
income from dividends, interest, payments with respect to securities loans,
and gains from the sale or other disposition of stock, securities or foreign
currencies, or other income derived with respect to its business of investing
in such stock, securities or currencies; (ii) diversify its holdings so that,
at the end of each quarter of the taxable year, (a) at least 50% of the market
value of the Portfolio's assets is represented by cash, U.S. Government
securities, the securities of other regulated investment companies and other
securities, with such other securities of any one issuer limited for the
purposes of this calculation to an amount not greater than 5% of the value of
the Portfolio's total assets and 10% of the outstanding voting securities of
such issuer, and (b) 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
(iii) distribute at least 90% of its investment company taxable income (which
includes, among other items, dividends, interest, and net short-term capital
gains in excess of any net long-term capital losses) each taxable year.

46
<PAGE>

investment company taxable income and any net capital gains. In addition,
amounts not distributed by a Portfolio on a timely basis in accordance with a
calendar year distribution requirement are subject to a nondeductible 4%
excise tax. To avoid the tax, a Portfolio must distribute (or be deemed to
have distributed) during each calendar year, (i) at least 98% of its ordinary
income (not taking into account any capital gains or losses) for the calendar
year, (ii) at least 98% of its capital gains in excess of its capital losses
for the twelve month period ending on October 31 of the calendar year
(adjusted for certain ordinary losses), and (iii) all ordinary income and
capital gains for previous years that were not distributed during such years.
To avoid application of the excise tax, each Portfolio intends to make its
distributions in accordance with the calendar year distribution requirement. A
distribution will be treated as paid on December 31 of the calendar year if it
is declared by a Portfolio during October, November, or December of that year
to shareholders of record on a date in such a month and paid by the Portfolio
during January of the following calendar year. Such distributions will be
taxable to shareholders (the Separate Accounts) for the calendar year in which
the distributions are declared, rather than the calendar year in which the
distributions are received.

DISTRIBUTIONS

Distributions by a Portfolio of any investment company taxable income (which
includes, among other items, dividends, interest, and any net realized short-
term capital gains in excess of net realized long-term capital losses),
whether received in cash or reinvested in additional Portfolio shares, will be
treated as ordinary income for tax purposes in the hands of a shareholder (a
Separate Account). Distributions of net capital gains (the excess of any net
long-term capital gains over net short-term capital losses), whether received
in cash or reinvested in additional Portfolio shares, will generally be
treated by a Separate Account as either "20% Rate Gain" or "28%

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Rate Gain", depending upon the Portfolio's holding period for the assets sold,
regardless of the length of time a Separate Account has held Portfolio shares.

HEDGING TRANSACTIONS

OTHER INFORMATION

CONCENTRATION POLICY

CAPITALIZATION

Expenses incurred by the Growth LT Portfolio in connection with the Fund's
organization and establishment of the Portfolio and the public offering of the
shares of the Portfolio, aggregated approximately $3,952. These costs have
been deferred by the Growth LT Portfolio and are being amortized by it over a
period of five years from the beginning of operations of the Portfolio.

VOTING RIGHTS

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in writing to do so by the holders of not less than 10% of the outstanding
shares or other voting interests of the Fund. The Fund's shares do not have
cumulative voting rights.

CUSTODIAN AND TRANSFER AGENCY AND DIVIDEND DISBURSING SERVICES

Pacific Life provides dividend disbursing and transfer agency services to
the Fund.

FINANCIAL STATEMENTS

INDEPENDENT AUDITORS

Deloitte & Touche LLP serves as the independent auditors for the Fund. The
address of Deloitte & Touche LLP is 695 Town Center Drive, Suite 1200, Costa
Mesa, California 92626.

COUNSEL

REGISTRATION STATEMENT

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FORM NO. 800-04