PACIFIC SELECT FUND, 497, 2000-10-04

PACIFIC SELECT FUND
497, 2000-10-04

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<PAGE>

SUPPLEMENT DATED OCTOBER 2, 2000 TO THE
PROSPECTUS FOR PACIFIC SELECT FUND DATED MAY 1, 2000

This supplement changes the fund's prospectus
effective October 2, 2000 to reflect the
information below. It also restates information
contained in a supplement dated August 28, 2000.

-----------------------------------------------------
The Fund is offering About the portfolios is amended by adding pages 2
two new portfolios through 5 of this supplement describing the
. Strategic Value Strategic Value Portfolio and the Focused 30
Portfolio Portfolio. References to the fund's 21 portfolios
. Focused 30 throughout the prospectus are changed to refer to
Portfolio 22 portfolios. The Bond and Income Portfolio is no
longer available and references to that portfolio
are deleted.

-----------------------------------------------------
Your guide to this The third sentence of Your guide to this prospectus
prospectus is amended is changed to read: The first section, An overview
of the Pacific Select Fund, contains a summary of
the objectives, holdings and risks of each of the
Pacific Select Fund's 22 portfolios.

The third sentence of the paragraph Performance of
comparable accounts is changed to read: Five
portfolios (Diversified Research, International
Large-Cap, I-Net Tollkeeper, Strategic Value, and
Focused 30) are so new that they have no past
performance to help you with your investment
decision.

-----------------------------------------------------
An overview of the The first sentence of An overview of the Pacific
Pacific Select Fund is Select Fund is changed to read: This table is a
amended summary of the goals, investments and risks of each
of the Pacific Select Fund's 22 portfolios.

The chart is amended to add the following:
<TABLE>
<CAPTION>
THE PORTFOLIO'S THE PORTFOLIO'S MAIN
PORTFOLIO AND MANAGER INVESTMENT GOAL INVESTMENTS THE PORTFOLIO'S MAIN RISKS
<S> <C> <C> <C>
Strategic Value Long-term growth of Common stocks with the Price volatility and other risks that
Portfolio capital. potential for long-term accompany an investment in equity
Janus Capital growth of capital. securities. Particularly sensitive to
Corporation price swings because the portfolio is
classified as "non-diversified"--it
may hold securities from a fewer number
of issuers than a diversified portfolio.

Focused 30 Portfolio Long-term growth of Common stocks selected Price volatility and other risks that
Janus Capital capital. for their growth accompany an investment in equity
Corporation potential. securities. Particularly sensitive to
price swings because the portfolio is
classified as "non-diversified"--it
may hold securities from a fewer
number of issuers than a diversified
portfolio.
</TABLE>

-----------------------------------------------------
Who manages the The information on Alden Stewart is replaced with
Aggressive Equity the following:
Portfolio is amended
Bruce K. Aronow, CFA, senior vice president of
[LOGO OF ALLIANCE Alliance Capital, is team leader of the Small-Cap
CAPITAL APPEARS HERE] Growth equity portfolio management team. He joined
Alliance Capital in 1999 as vice president and
The Aggressive Equity portfolio manager. Before joining Alliance Capital
Portfolio is managed he was responsible for research and portfolio
by Alliance Capital management of the small-cap consumer and auto-
Management L.P. transportation sectors at INVESCO. Bruce has 12
years of investment experience and a BA from
Colgate University.
<PAGE>

ABOUT THE PORTFOLIOS STRATEGIC VALUE PORTFOLIO

This portfolio is not available for:
. Pacific Corinthian variable annuity contracts
. Pacific Select variable life insurance policies.

---------------------------------------------------------
The portfolio's This Portfolio seeks long-term growth of capital.
investment goal

---------------------------------------------------------
What the portfolio The portfolio invests primarily in domestic and foreign
invests in equity securities, (which may include preferred stocks,
common stocks, warrants and securities convertible into
A P/E ratio is the common or preferred stocks) with the potential for
relationship long-term growth of capital using a "value" approach.
between the price
of a stock and its The approach emphasizes investments in companies that
earnings per share. the portfolio manager believes are undervalued relative
This figure is to their intrinsic worth. The portfolio manager
determined by measures value as a function of price/earnings (P/E)
dividing a stock's ratios and price/free cash flow.
market price by the
company's earnings The portfolio manager will typically seek attractively
per share amount. valued companies that are improving their free cash
Price/free cash flow and improving their returns on invested capital.
flow is the These companies may also include special situations
relationship companies that are experiencing management changes
between the price and/or are temporarily out of favor.
of the stock and
the company's The portfolio manager applies a "bottom-up" approach in
available cash from choosing investments. In other words, he looks for
operations minus companies with earnings growth potential that may not
capital be recognized by the market at large. If the portfolio
expenditures. manager is unable to find such investments, a
significant portion of the Portfolio's assets may be in
This portfolio cash or similar investments.
invests in high
yield or "junk" Foreign securities are generally selected on a stock-
bonds, which are by-stock basis without regard to any defined allocation
given a low credit among countries or geographic regions. However, certain
rating by Moody's factors such as expected levels of inflation,
(Ba and lower), or government policies influencing business conditions,
Standard & Poor's the outlook for currency relationships, and prospects
(BB and lower), or for economic growth among countries, regions or
have not been geographic areas may warrant greater consideration in
rated, but are of selecting foreign securities. There are no limitations
comparable quality. on the countries in which the Portfolio may invest and
High yield bonds the Portfolio may at times have significant foreign
are considered to exposure.
be mostly
speculative in The Portfolio may also invest in debt securities and
nature. indexed/structured securities, purchase securities on a
when-issued, delay delivery or forward commitment
basis, and purchase high-yield ("junk") bonds.

The portfolio manager may use options, futures and
other techniques to try to increase returns or to try
to hedge against changes in interest rates or market
declines. The manager may also use forward foreign
currency contracts or derivatives to hedge against
changes in currency exchange rates. The portfolio may
lend some of its assets, as long as the loans it makes
are secured.

---------------------------------------------------------
Risks you should be The Strategic Value Portfolio principally invests in
aware of equity securities, which may go up or down in value,
sometimes rapidly and unpredictably. While equities may
The portfolio is offer the potential for greater long-term growth than
considered to be most fixed income securities, they generally have
"non-diversified" higher volatility. The portfolio may also be affected
because it may by the following risks, among others:
invest in
securities of a . price volatility - the value of the portfolio changes
fewer number of as the prices of its investments go up or down. This
issuers than other portfolio may invest in small and medium-sized
portfolios. This companies, which may be more susceptible to greater
increases the risk price swings than larger companies because they may
that its value have fewer financial resources, limited product and
could go down market diversification and many are dependent on a
because of the poor few key managers.
performance of a
single investment
or small number of
investments.

2
<PAGE>

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Risks you should be . risks of foreign investing - foreign investments may
aware of be riskier than U.S. investments for many reasons,
(continued) including changes in currency exchange rates,
unstable political and economic conditions, a lack of
The Portfolio may adequate company information, differences in the way
invest without securities markets operate, less secure foreign banks
limit in foreign or securities depositories than those in the U.S.,
equity and debt and foreign controls on investment.
securities and up
to 35% of its . credit risk - the portfolio could lose money if the
assets in high- issuer of a fixed income security is unable to meet
yield or "junk" its financial obligations or goes bankrupt. This
bonds. portfolio may be subject to more credit risk than
certain other portfolios, because it invests in high
yield or "junk" bonds. The value of the portfolio may
fall when interest rates rise.

. changes in interest rates - the value of the
portfolio's investments may fall when interest rates
rise. This portfolio may be sensitive to changes in
interest rates because it may invest in fixed income
securities with intermediate and long terms to
maturity.

. inability to sell securities - high-yield/high-risk
bonds may be less liquid than higher quality
investments. The portfolio could lose money if it
cannot sell a security at the time and price that
would be most beneficial to the portfolio. A security
whose credit rating has been lowered may be
particularly difficult to sell.

. risks of using derivatives - this portfolio may use
options, futures contracts and other investment
techniques to help it achieve its investment goal.
There's always a risk that these techniques could
reduce returns or increase the portfolio's
volatility.

---------------------------------------------------------
Who manages the David Decker, CFA, vice president of Janus Capital
portfolio Corporation, joined Janus in 1992, and is portfolio
manager and executive vice president of Janus Special
[LOGO OF JANUS Situations Fund, Janus Strategic Value Fund and Janus
APPEARS HERE] Aspen Series Strategic Value Portfolio. He also manages
private accounts with a similar strategic value
The Strategic Value strategy as well as other institutional funds. David is
Portfolio is an assistant portfolio manager of Janus Fund and Janus
managed by Janus Aspen Series Growth Portfolio. He graduated cum laude
Capital from Tufts University with a bachelor's degree in
Corporation. economics and political science and obtained an MBA in
finance from the Fuqua School of Business at Duke
University.

3
<PAGE>

ABOUT THE PORTFOLIO FOCUSED 30 PORTFOLIO

This Portfolio is not available for:
. Pacific Corinthian variable annuity contracts
. Pacific Select variable life insurance policies.

---------------------------------------------------------
The portfolio's This Portfolio seeks long-term growth of capital.
investment goal

---------------------------------------------------------
What the portfolio The portfolio's principal investment strategy is to
invests in invest primarily in domestic and foreign equity
securities (including common stock, preferred stock,
warrants, and securities convertible into common or
This portfolio preferred stock) selected for their growth potential.
invests in high The Portfolio may invest in companies of any size, from
yield or "junk" larger, well-established companies to smaller, emerging
bonds, which are growth companies. Securities are generally selected on
given a low credit a stock-by-stock basis without regard to any defined
rating by Moody's allocation among countries or geographic regions. The
(Ba and lower), or portfolio normally concentrates its investments in a
Standard & Poor's core group of 20-30 common stocks.
(BB and lower), or
have not been The portfolio manager applies a "bottom up" approach in
rated, but are of choosing investments. In other words, he looks for
comparable quality. companies with earnings growth potential that may not
High yield bonds be recognized by the market at large. If the portfolio
are considered to manager is unable to find such investments, a
be mostly significant portion of the portfolio's assets may be in
speculative in cash or similar investments.
nature.
Realization of income is not a significant
consideration when choosing investments for the
portfolio. Income realized on the portfolio's
investments will be incidental to its objective.

Foreign securities are generally selected on a stock-
by-stock basis without regard to any defined allocation
among countries or geographic regions. However, certain
factors such as expected levels of inflation,
government policies influencing business conditions,
the outlook for currency relationships, and prospects
for economic growth among countries, regions or
geographic areas may warrant greater consideration in
selecting foreign securities. There are no limitations
on the countries in which the portfolio may invest and
the portfolio may at times have significant foreign
exposure.

The portfolio may also purchase securities on a when-
issued, delayed delivery or forward commitment basis,
and purchase high-yield (often called "junk" bonds).

---------------------------------------------------------
Risks you should be The Focused 30 Portfolio principally invests in equity
aware of securities, which may go up or down in value, sometimes
rapidly and unpredictably. While equities may offer the
The portfolio is potential for greater long-term growth than most fixed
considered to be income securities, they generally have higher
"non-diversified" volatility. The portfolio may also be affected by the
because it may following risks, among others:
invest in
securities of a . price volatility - the value of the portfolio changes
fewer number of as the prices of its investments go up or down. This
issuers than other portfolio invests in companies that the portfolio
portfolios. This manager believes have the potential for rapid growth,
increases the risk which may give the portfolio a higher risk of price
that its value volatility than a portfolio that invests in equities
could go down that are "undervalued," for example. This portfolio
because of the poor may invest in small and medium-sized companies, which
performance of a may be more susceptible to greater price swings than
single investment larger companies because they may have fewer
or small number of financial resources, limited product and market
investments. diversification and many are dependent on a few key
managers.

. risks of foreign investing - foreign investments may
be riskier than U.S. investments for many reasons,
including changes in currency exchange rates,
unstable political and economic conditions, a lack of
adequate company information, differences in the way
securities markets operate, less secure foreign banks
or securities depositories than those in the U.S.,
and foreign controls on investment.

4
<PAGE>

---------------------------------------------------------
Risks you should be . credit risk - the portfolio could lose money if the
aware of issuer of a fixed income security is unable to meet
(continued) its financial obligations or goes bankrupt. This
portfolio may be subject to more credit risk than
The portfolio may certain other portfolios, because it invests in high-
invest without yield or "junk" bonds. This is especially true during
limit in foreign periods of economic uncertainty or economic
equity and debt downturns.
securities and may
invest up to 35% of . changes in interest rates - the value of the
its assets in high- portfolio's investments may fall when interest rates
yield or "junk" rise. This portfolio may be sensitive to changes in
bonds. interest rates because it may invest in fixed income
securities. The value of the portfolio may fall when
interest rates rise.

. inability to sell securities - high yield bonds may
be less liquid than higher quality investments. The
portfolio could lose money if it cannot sell a
security at the time and price that would be most
beneficial to the portfolio. A security whose credit
rating has been lowered may be particularly difficult
to sell.

---------------------------------------------------------
Who manages the Ron Sachs, CFA, joined Janus in 1996, and is the
portfolio portfolio manager and executive vice president of Janus
Orion Fund, and assistant portfolio manager of Janus
[LOGO OF JANUS Enterprise Fund and Janus Aspen Series Aggressive
APPEARS HERE] Growth Portfolio. He also manages private accounts with
a similar aggressive growth strategy. He graduated cum
The Focused 30 laude from Princeton with a bachelor's degree in
Portfolio is economics and obtained his law degree from the
managed by Janus University of Michigan.
Capital
Corporation.

5
<PAGE>

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The table in Fees The fund pays Pacific Life an advisory fee for the
and expenses paid services it provides as investment adviser. It also
by the fund is pays for all of the costs of its operations, as well as
replaced with the for other services Pacific Life provides through a
following support services agreement.
information
The table below shows the advisory fee as an annual
percentage of each portfolio's average daily net
assets. Pacific Life uses part of this fee to pay for
the services of the portfolio managers.

The table also shows the fund expenses for each
portfolio based on expenses in 1999, adjusted to
reflect recently reduced custody fees. To help limit
fund expenses, effective July 1, 2000 Pacific Life has
contractually agreed to waive all or part of its
investment advisory fees or otherwise reimburse each
portfolio for operating expenses (including
organizational expenses, but not including advisory
fees, additional costs associated with foreign
investing and extraordinary expenses) that exceed an
annual rate of 0.10% of its average daily net assets.
Such waiver or reimbursement is subject to repayment to
Pacific Life to the extent such expenses fall below the
0.10% expense cap. For each portfolio, Pacific Life's
right to repayment is limited to amounts waived and/or
reimbursed that exceed the new 0.10% expense cap and,
except for the Strategic Value and Focused 30
portfolios, that do not exceed the previously
established 0.25% expense cap. Any amounts repaid to
Pacific Life will have the effect of increasing
expenses of the portfolio, but not above the 0.10%
expense cap. There is no guarantee that Pacific Life
will continue to cap expenses after December 31, 2001.
In 1999, Pacific Life reimbursed the Small-Cap Index
Portfolio $96,949.

<TABLE>
<CAPTION>
-----------------------------------------------------------------------
Less
Advisory Other Total adviser's Total net
Portfolio fee expenses expenses+ reimbursement expenses
-----------------------------------------------------------------------
As an annual % of average daily net assets
<S> <C> <C> <C> <C> <C>
Aggressive Equity 0.80 0.04 0.84 -- 0.84
Emerging Markets/1/ 1.10 0.19 1.29 -- 1.29
Diversified
Research/2/ 0.90 0.05 0.95 -- 0.95
Small-Cap Equity 0.65 0.04 0.69 -- 0.69
International
Large-Cap/2/ 1.05 0.10 1.15 -- 1.15
Equity 0.65 0.03 0.68 -- 0.68
I-Net Tollkeeper/2/ 1.50 0.14 1.64 (0.04) 1.60
Multi-Strategy 0.65 0.04 0.69 -- 0.69
Equity Income 0.65 0.04 0.69 -- 0.69
Strategic Value/2/ 0.95 0.08 1.03 -- 1.03
Growth LT 0.75 0.03 0.78 -- 0.78
Focused 30/2/ 0.95 0.08 1.03 -- 1.03
Mid-Cap Value 0.85 0.07 0.92 -- 0.92
Equity Index/3/ 0.25 0.04 0.29 -- 0.29
Small-Cap Index 0.50 0.30 0.80 (0.20) 0.60
REIT 1.10 0.15 1.25 (0.05) 1.20
International Value 0.85 0.09 0.94 -- 0.94
Government
Securities 0.60 0.05 0.65 -- 0.65
Managed Bond/1/ 0.60 0.05 0.65 -- 0.65
Money Market/1/ 0.35 0.04 0.39 -- 0.39
High Yield Bond/1/ 0.60 0.05 0.65 -- 0.65
Large-Cap Value 0.85 0.08 0.93 -- 0.93
-----------------------------------------------------------------------
</TABLE>
/1/ Total adjusted net expenses for these portfolios in
1999, after deduction of an offset for custodian
credits were: 1.28% for Emerging Markets Portfolio,
0.64% for Managed Bond Portfolio, 0.38% for Money
Market Portfolio, and 0.64% for High Yield Bond
Portfolio.
/2/ Expenses are estimated. There were no actual
advisory fees or expenses for these portfolios in
1999 because the portfolios started after December
31, 1999.
/3/ Total adjusted net expenses for the Equity Index
Portfolio in 1999, after deduction of an offset for
custodian credits, were 0.28%. The advisory fee for
the portfolio has also been adjusted to reflect the
advisory fee increase effective January 1, 2000.
The actual advisory fee and total adjusted net
expenses for this portfolio in 1999, after
deduction of an offset for custodian credits, were
0.16% and 0.19%, respectively.
+ The fund has adopted a brokerage enhancement 12b-1
plan, under which brokerage transactions may be
placed with broker-dealers in return for credits,
cash, or other compensation that may be used to
help promote distribution of fund shares. There are
no fees or charges to any portfolio under this
plan, although the fund's distributor may defray
expenses of up to approximately $300,000 for the
year 2000, which it might otherwise incur for
distribution. If such defrayed amount were
considered a fund expense, it would represent
approximately .0023% or less of any portfolio's
average daily net assets.

6
<PAGE>

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How the fund is The following sentence is added at the end of the third
organized is paragraph:
amended
Each Portfolio also intends to comply with
diversification regulations under section 817(h) of the
Code that apply to mutual funds underlying variable
contracts. You'll find more information about taxation
in the fund's statement of additional information.

7
<PAGE>

[LOGO OF PACIFIC SELECT FUND APPEARS HERE]

PACIFIC SELECT FUND

STATEMENT OF ADDITIONAL INFORMATION

Date: May 1, 2000 as Supplemented October 2, 2000

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

The Pacific Select Fund is an open-end investment management company
currently offering twenty-two investment portfolios. The following twenty of
those portfolios are classified as diversified: the Aggressive Equity
Portfolio; the Emerging Markets Portfolio; the Diversified Research Portfolio;
the Small-Cap Equity Portfolio; the International Large-Cap Portfolio; the
Equity Portfolio; the I-Net Tollkeeper PortfolioSM; the Multi-Strategy
Portfolio; the Equity Income Portfolio; the Growth LT Portfolio; the Mid-Cap
Value Portfolio; the Equity Index Portfolio; the Small-Cap Index Portfolio;
the International Value Portfolio; the Government Securities Portfolio; the
Managed Bond Portfolio; the Money Market Portfolio; the High Yield Bond
Portfolio; and the Large-Cap Value Portfolio. The Strategic Value Portfolio,
Focused 30 Portfolio and REIT Portfolio are classified as non-diversified. The
Fund's Adviser is Pacific Life Insurance Company. The Bond and Income
Portfolio is no longer available and references to that Portfolio are deleted.

This Statement of Additional Information ("SAI") is intended to supplement
the information provided to investors in the Prospectus dated May 1, 2000, and
any supplement thereto, and has been filed with the Securities and Exchange
Commission ("SEC") 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 Select Distributors, Inc.
(formerly 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
Annuities (800) 722-2333
Life Insurance (800) 800-7681
<PAGE>

TABLE OF CONTENTS

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

ADDITIONAL INVESTMENT POLICIES OF THE PORTFOLIOS............................ 1
Aggressive Equity Portfolio............................................... 1
Emerging Markets Portfolio................................................ 2
Diversified Research Portfolio............................................ 3
Small-Cap Equity Portfolio................................................ 3
International Large-Cap Portfolio......................................... 3
Bond and Income Portfolio................................................. 4
Equity Portfolio.......................................................... 4
I-Net Tollkeeper Portfolio................................................ 5
Multi-Strategy Portfolio.................................................. 6
Equity Income Portfolio................................................... 7
Strategic Value Portfolio................................................. 7
Growth LT Portfolio....................................................... 8
Focused 30 Portfolio...................................................... 8
Mid-Cap Value Portfolio................................................... 9
Equity Index Portfolio.................................................... 9
Small-Cap Index Portfolio................................................. 10
REIT Portfolio............................................................ 10
International Value Portfolio............................................. 11
Government Securities Portfolio........................................... 12
Managed Bond Portfolio.................................................... 12
Money Market Portfolio.................................................... 13
High Yield Bond Portfolio................................................. 13
Large-Cap Value Portfolio................................................. 14
Diversification Versus Non-Diversification................................ 14

SECURITIES AND INVESTMENT TECHNIQUES........................................ 15
U.S. Government Securities................................................ 15
Real Estate Investment Trusts............................................. 15
Mortgage-Related Securities............................................... 16
Mortgage Pass-Through Securities........................................ 16
GNMA Certificates....................................................... 16
FNMA and FHLMC Mortgage-Backed Obligations.............................. 17
Collateralized Mortgage Obligations (CMOs).............................. 18
FHLMC Collateralized Mortgage Obligations............................... 18
Other Mortgage-Related Securities....................................... 18
CMO Residuals........................................................... 19
Inverse Floaters and Planned Amortization Class Certificates............ 19
Stripped Mortgage-Backed Securities..................................... 20
Mortgage Dollar Rolls................................................... 20
Other Asset-Backed Securities............................................. 20
Zero Coupon, Step Coupon and Pay-In-Kind Securities....................... 21
High Yield Bonds.......................................................... 21
Bank Obligations.......................................................... 22
Municipal Securities...................................................... 23
Small Capitalization Stocks............................................... 24
Corporate Debt Securities................................................. 24
Tender Option Bonds..................................................... 24
</TABLE>

i
<PAGE>

<TABLE>
<S> <C>
Variable and Floating Rate Securities..................................... 24
Commercial Paper.......................................................... 25
Convertible Securities.................................................... 26
Repurchase Agreements..................................................... 27
Borrowing................................................................. 27
Reverse Repurchase Agreements and Other Borrowings........................ 28
Firm Commitment Agreements and When-Issued Securities..................... 28
Loans of Portfolio Securities............................................. 28
Short Sales............................................................... 29
Short Sales Against the Box............................................... 29
Illiquid and Restricted Securities (Private Placements)................... 29
Precious Metals-Related Securities........................................ 30
Foreign Securities........................................................ 30
Foreign Currency Transactions and Forward Foreign Currency Contracts...... 32
Options................................................................... 34
Purchasing and Writing Options on Securities............................ 34
Purchasing and Writing Options on Stock Indexes......................... 35
Risks of Options Transactions........................................... 36
Spread Transactions..................................................... 36
Options on Foreign Currencies............................................. 37
Investments in Other Investment Company Securities........................ 38
SPDRs................................................................... 38
OPALS................................................................... 39
I-Shares................................................................ 39
Futures Contracts and Options on Futures Contracts........................ 39
Futures on Securities................................................... 39
Interest Rate Futures................................................... 39
Stock Index Futures..................................................... 40
Futures Options......................................................... 40
Limitations............................................................. 41
Risks Associated with Futures and Futures Options....................... 42
Foreign Currency Futures and Options Thereon.............................. 43
Swap Agreements and Options on Swap Agreements............................ 43
Risks of Swap Agreements................................................ 44
Structured Notes.......................................................... 44
Warrants and Rights....................................................... 44
Duration.................................................................. 45

INVESTMENT RESTRICTIONS..................................................... 46
Fundamental Investment Restrictions....................................... 46
Nonfundamental Investment Restrictions.................................... 47

ORGANIZATION AND MANAGEMENT OF THE FUND..................................... 48
Trustees and Officers..................................................... 48
Investment Adviser........................................................ 50
Other Expenses of the Fund................................................ 52
Portfolio Management Agreements........................................... 53
Distribution of Fund Shares............................................... 61
Purchases and Redemptions................................................. 62
Exchanges Among the Portfolios............................................ 62

PORTFOLIO TRANSACTIONS AND BROKERAGE........................................ 63
Investment Decisions...................................................... 63
</TABLE>

ii
<PAGE>

<TABLE>
<S> <C>
Brokerage and Research Services........................................... 63
Portfolio Turnover........................................................ 65

NET ASSET VALUE............................................................. 65

PERFORMANCE INFORMATION..................................................... 67

TAXATION.................................................................... 69
Distributions............................................................. 71
Hedging Transactions...................................................... 71

OTHER INFORMATION........................................................... 71
Concentration Policy...................................................... 71
Brokerage Enhancement Plan................................................ 71
Capitalization............................................................ 72
Voting Rights............................................................. 72
Custodian and Transfer Agency and Dividend Disbursing Services............ 73
Financial Statements...................................................... 73
Independent Auditors...................................................... 73
Counsel................................................................... 73
Code of Ethics............................................................ 74
Registration Statement.................................................... 74

APPENDIX.................................................................... 75
Description of Bond Ratings............................................... 75
</TABLE>

iii
<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.

ADDITIONAL INVESTMENT POLICIES OF THE PORTFOLIOS

The investment objective and investment policies of each Portfolio are
described in the Prospectus. The following descriptions and the information in
the section "Investment Restrictions" provide more detailed information on
investment policies that apply to each Portfolio, and are intended to
supplement the information provided in the Prospectus. Any percentage
limitations noted are based on market value at time of investment.

Unless otherwise noted, a Portfolio may invest up to 5% of its net assets
(taken at market value at the time of such investment) in any type of security
or investment that the Investment Adviser or Portfolio Manager reasonably
believes is compatible with the investment objectives and policies of the
Portfolio.

Unless otherwise noted, a Portfolio may lend up to 33 1/3% of its total
assets to brokers/dealers and other financial institutions to earn income, may
borrow money for administrative or emergency purposes, may invest in
restricted securities, and may invest up to 15% of its net assets in illiquid
securities (up to 10% for the Money Market Portfolio).

Aggressive Equity Portfolio

In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may also invest a portion of its assets in: high-
quality money market instruments; mortgage-related and asset-backed
securities; convertible securities; repurchase agreements and reverse
repurchase agreements; small capitalization stocks; American Depositary
Receipts ("ADRs"); U.S. Government securities, its agencies or
instrumentalities; U.S. dollar-denominated obligations of foreign governments,
foreign government agencies and international agencies; variable and floating
rate securities; firm commitment agreements; when-issued securities may enter
into short sales against the box; and securities of foreign issuers traded in
the U.S. securities markets and outside the U.S. (including commercial paper),
provided that the Portfolio may not acquire a security of a foreign issuer
principally traded outside the U.S. if, at the time of such investment, more
than 20% of the Portfolio's total assets would be invested in such foreign
securities.

The Portfolio may also invest up to 5% of its net assets in warrants and
rights (valued at the lower of cost or market) provided that no more than 2%
of its net assets are invested in warrants not listed on the New York or
American Stock Exchanges; and may invest in U.S. dollar-denominated corporate
debt securities of domestic issuers (including U.S. dollar-denominated debt
securities of foreign issuers) and debt securities of foreign issuers
denominated in foreign currencies, rated Baa by Moody's Investor's Service,
Inc. ("Moody's") or BBB by Standard and Poor's Rating Services ("S&P"), or, if
not rated by Moody's or S&P, of equivalent quality. For more information on
the risks of such securities, see "Description of Bond Ratings" in the
Appendix.

Bank obligations of foreign banks (including U.S. branches of foreign banks)
in which the Portfolio may invest must, 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 be 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, be of an investment quality comparable to obligations of U.S. banks
in which the portfolio may invest.

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 also purchase and sell stock index futures
contracts and options thereon. To hedge against the risk of currency
fluctuation associated with investment in

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<PAGE>

foreign securities, the Portfolio may buy or sell foreign currencies on a spot
(cash) basis and enter into forward foreign currency contracts or purchase and
write options on foreign currencies or foreign currency futures contracts and
purchase and write options thereon. The Portfolio may trade futures contracts
and options on futures contracts not only on U.S. domestic markets, but also
on exchanges located outside of the U.S. The Portfolio may engage in "short
sales against the box," in which the Portfolio sells short a security it owns,
as long as no more than 15% of the Portfolio's net assets would be subject to
such short sales at any time.

Emerging Markets Portfolio

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."

In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may also invest up to 10% of its assets in U.S.
government securities, high quality debt securities, money market obligations,
and in cash to meet cash flow needs or if the U.S. Government ever imposes
restrictions on foreign investing. Such money market obligations may include
short-term corporate or U.S. government obligations and bank certificates of
deposit. The Portfolio may also invest in: nonconvertible fixed income
securities denominated in foreign currencies; small capitalization stocks;
equity index swap agreements; ADRs; Global Depositary Receipts ("GDRs");
European Depositary Receipts ("EDRs"), or other securities convertible into
equity securities of U.S. or foreign issuers; up to 5% of its net assets in
warrants and rights (valued at the lower of cost or market) provided that no
more than 2% of its net assets are invested in warrants not listed on the New
York or American Stock Exchanges; variable and floating rate securities;
warrants on securities that it is eligible to purchase; preferred stock;
repurchase agreements; reverse repurchase agreements; firm commitment
agreements; and when-issued securities. The Portfolio is also permitted to
invest in other investment company securities including Optimised Portfolios
as Listed Securities ("OPALS"). The debt securities (including commercial
paper, foreign government and international agencies) and money market
obligations in which the Portfolio invests may be issued by U.S. and foreign
issuers and may be denominated in U.S. dollars or foreign currencies. The
Portfolio 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. For more
information on the risks of such securities, see "Description of Bond Ratings"
in the Appendix.

The Portfolio may only invest in bank obligations of foreign banks
(including U.S. branches of foreign banks) which at the time of investment:
(i) had 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 portfolio may invest.

The Portfolio may engage in the purchase and writing of put and call options
on foreign currencies, securities, and stock indexes. The Portfolio may also
engage in futures contracts on securities and stock indexes, including foreign
exchange futures contracts, and may purchase and sell put and call options
thereon. The Portfolio may enter into forward foreign currency contracts,
foreign currency exchange transactions on a spot (i.e., cash) basis, cross-
hedge between two non-U.S. currencies, and use derivatives and other
management techniques to hedge and manage changes in currency exchange rates.
The Portfolio may trade futures contracts and options on futures contracts not
only on U.S. domestic markets, but also on exchanges located outside of the
U.S.

Investors should understand that the expense ratio of the 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 is higher.

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<PAGE>

Diversified Research Portfolio

In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may also invest in: U.S. dollar-denominated
corporate debt securities of domestic and foreign issuers; convertible
securities; U.S. government securities; equity REITs; bank obligations;
warrants; firm commitment agreements; when-issued securities; commercial
paper; repurchase agreements; and reverse repurchase agreements. The Portfolio
may also invest in foreign issuers whose principal markets are in the U.S.
(which include ADRs and foreign securities registered in the U.S.); and up to
15% of its total assets in companies domiciled outside the U.S. and not
included in the S&P 500. The Portfolio may engage in foreign currency
transactions; forward foreign currency contracts; and foreign currency futures
contracts. The Portfolio may also engage in the purchasing and writing of put
and call options on foreign currencies, foreign currency futures contracts,
and securities, and may purchase put and call options on stock indexes that
are exchange traded or traded on over-the-counter markets.

The Portfolio may not invest in variable and floating rate securities.

In addition to the risk factors described in the Prospectus, the Portfolio
may be affected by the following risk factors: The Portfolio's growth oriented
approach to stock selection may result in its securities being more sensitive
to changes in current or expected earnings than the prices of other stocks.
The price of growth stocks also is subject to the risk that the stock price of
one or more companies will fall or will fail to appreciate as anticipated by
the Portfolio Manager, regardless of performance of the securities markets.

Small-Cap Equity Portfolio

In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may invest in various foreign securities if listed
on a U.S. exchange or otherwise included in the S&P 500; commercial paper;
repurchase agreements; corporate debt securities; U.S. Government securities,
its agencies or instrumentalities; ADRs; bank obligations; variable and
floating rate securities; firm commitment agreements; when-issued securities;
and may hold a portion of its assets in cash.

The Portfolio may also invest up to 5% of its assets in convertible bonds
and other fixed income securities (other than money market instruments), which
will primarily, at the time of investment, be rated Baa or better by Moody's
or BBB or better by S&P, or, if not rated by Moody's or S&P, will be of
comparable quality as determined by the Portfolio Manager.

The Portfolio may not engage in futures contracts and options on futures
contracts.

International Large-Cap Portfolio

In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may also invest in: high quality debt securities
rated, at the time of purchase, within the top three quality categories by
Moody's or S&P (or unrated securities of equivalent quality); convertible
securities; U.S. government securities; warrants; equity REITs; bank
obligations; repurchase agreements; reverse repurchase agreements; and short-
term debt obligations (including commercial paper) denominated in U.S. dollars
(including U.S. dollar-denominated debt securities of foreign issuers) or
foreign currencies. The Portfolio may also engage in foreign currency
transactions and forward foreign currency contracts. The Portfolio may engage
in the purchase and writing of put and call options on foreign currencies,
foreign currency futures contracts, and securities, and may purchase put and
call options on stock indexes that are exchange traded or traded on over-the-
counter markets.

The Portfolio may not invest in variable and floating rate securities.

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<PAGE>

Bond and Income Portfolio

In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may invest in U.S. dollar-denominated corporate debt
securities of domestic issuers and U.S. dollar-denominated debt securities of
foreign issuers and up to 10% of its assets in non-U.S. dollar denominated
securities (including debt securities of foreign issuers denominated in
foreign currencies). The Portfolio 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. The Portfolio may also invest up to 20% of its assets in
debt securities rated lower than Baa or BBB or, if not rated, of equivalent
quality, 15% of which may consist of debt securities of foreign government or
their agencies located in emerging market countries. See "Description of Bond
Ratings" in the Appendix and the section titled "High Yield Bonds" for more
information on the risks of such securities.

The Portfolio may also invest in warrants; however, not more than 10% of the
market value of its assets (at the time of purchase) may be invested in
warrants other than warrants acquired in units or attached to other securities
and rights; ADRs; convertible securities; variable and floating rate
securities; mortgage dollar rolls; firm commitment agreements; when-issued
securities; repurchase agreements; and reverse repurchase agreements. High-
quality short-term instruments, in which the portfolio may invest include,
among others, commercial paper, bank obligations, certificates of deposit,
time deposits, loans or credit agreements and banker's acceptance issued by
U.S. and foreign banks with assets of at least U.S. $2 billion as of the end
of their most recent fiscal year; short-term debt obligations of savings and
loan institutions with assets of at least U.S. $2 billion as of the end of
their most recent fiscal year; and enter into repurchase agreements which the
Portfolio may, together with other registered investment companies managed by
Goldman Sachs Asset Management or its affiliates, transfer uninvested cash
balances into a single joint account, the daily aggregate balance of which
will be invested in one or more repurchase agreements; and preferred stock.
The Portfolio may invest up to 10% of its assets in the following types of
mortgage-related securities: inverse floaters, super floating rate
collateralized mortgage obligations ("Superfloater"), interest only ("IO's")
and principal-only ("PO's") tranches of stripped mortgage-backed securities
(including planned amortization class certificates) and inverse IO's and up to
5% of its net assets in municipal securities.

For hedging risk or adjusting interest rate exposure, the Portfolio may (but
is not obligated to) use several investment techniques. The Portfolio may
purchase and write put and call options on securities and on securities
indexes and enter into the following types of transactions: financial futures
contracts and options thereon; instruments such as interest rate caps, floors,
and collars; and interest rate swaps. To hedge against fluctuations in
currency exchange rates that affect non-U.S. dollar-denominated securities,
the Portfolio may 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 trade
futures contracts and options on futures contracts not only on U.S. domestic
markets, but also on exchanges located outside of the U.S. The Portfolio may
invest up to 5% of its assets in structured notes to hedge interest rate or
currency risk and 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, or, if not rated by Moody's or S&P, of equivalent quality.

Equity Portfolio

In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may also invest in: U.S. government securities;
small capitalization stocks; corporate bonds; convertible securities, money
market instruments; precious metals-related securities; mortgage-related and
asset-backed securities. The Portfolio may invest in warrants; however, not
more than 5% of the market value of its assets (at the time of purchase) may
be invested in warrants other than warrants acquired in units or attached to
other securities; and rights; bank obligations; variable and floating rate
securities; firm commitment agreements; when-issued securities; and enter in
repurchase agreements, which the Portfolio may, together with other registered
investment companies managed by Goldman Sach Asset Management or its
affiliates, transfer uninvested cash balances into a single joint account, the
daily aggregate balance of which will be invested in one or more repurchase
agreements. In addition, the Portfolio may invest in commercial paper (1)
rated at the time of purchase Prime-1 by Moody's or A-1 by S&P

4
<PAGE>

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. The Portfolio may engage in "short sales against the box," in which the
Portfolio sells short a security it owns, as long as no more than 15% of the
Portfolio's net assets would be subject to such short sales at any time.

The Portfolio may also purchase and write put and call options on securities
and stock indices and enter into stock index futures contracts and options
thereon. The Portfolio 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. The Portfolio may also purchase Standard & Poor's
Depository Receipts ("SPDRs"), which represent ownership interests in the SPDR
Trust, a long-term unit investment trust 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").

I-Net Tollkeeper Portfolio

In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may invest in preferred stocks; repurchase
agreements; U.S. government securities; bank obligations; interests in real
estate investment trusts (equity, mortgage, or hybrid); mortgage-related
securities, including real estate mortgage investment conduit ("REMIC")
certificates; asset-backed securities; commercial paper; short sales against
the box; firm commitment agreements; when-issued securities; high-yield bonds;
variable and floating rate securities; convertible securities; equity
interests in trusts; partnerships; joint ventures; limited liability companies
and similar enterprises; warrants and rights. The Portfolio may also invest up
to 10% of its assets in debt securities rated lower than Baa by Moody's or BBB
by S&P, or if not rated by Moody's or S&P, of equivalent quality. For more
information on the risks of such securities, see the "Description of Bond
Ratings" in the Appendix and the discussion under "High Yield Bonds". In
addition, the Portfolio may invest in obligations issued or guaranteed by U.S.
or foreign banks. The Portfolio also may invest in GDRs, EDRs or other similar
instruments representing securities of foreign issuers.

The Portfolio may purchase securities on margin. The Portfolio may enter
into forward currency contracts and foreign currency transactions and may
purchase and write put and call options on foreign currencies. The Portfolio
may also purchase and write covered put and call options on securities in
which it may invest and on any securities index consisting of securities in
which it may invest. The Portfolio may invest in futures contracts on
securities, stock indexes and interest rates, and options thereon. The
Portfolio may also 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. In addition, the Portfolio may invest in SPDRs and OPALS.

In addition to the risk factors described in the Prospectus, the Portfolio
may be affected by the following risk factors: First, investment in companies
that may be unseasoned, may have limited liquidity, which can result in their
being priced higher or lower than might otherwise be the case. Investments in
unseasoned companies are more speculative and entail greater risk than do
investments in companies with an established operating record.

Second, the legal obligations of online service providers is unclear under
both U.S. and foreign law with respect to freedom of expression, defamation,
libel, invasion of privacy, advertising, copyright or trademark infringement,
information security, or other areas based on the nature and content of the
materials disseminated through online service providers. Moreover, legislation
has been proposed that imposes liability for, or prohibits the transmission
over, the Internet of certain types of information. It is possible that now or
in the future, related claims could be made against online services companies.
These liability issues, as well as possibly other legal issues, could impact
the growth of Internet use.

For example, it is possible that laws and regulations may be adopted with
respect to the Internet or other online service providers with respect to the
imposition of sales tax collection obligations on Internet companies and the
use of personal user information. The nature of this governmental action and
the manner in which it may

5
<PAGE>

be interpreted and enforced cannot be predicted. Changes to existing laws or
the passage or proposed passage of new laws intended to address these and
other issues, could create uncertainty in the marketplace that could reduce
demand for the services of an Internet company or increase the costs of doing
business as a result of actual or anticipated litigation costs or increased
service delivery costs, or could in some other manner have a material adverse
effect on an Internet company's business, results of operations and financial
condition.

The success of many Internet companies depends, in large part, upon the
development and maintenance of the infrastructure of the World Wide Web
("Web") for providing reliable Web access and services. There can be no
assurances that the infrastructure or complementary products or services
necessary to make the Web a viable commercial marketplace for the long term
will be developed, or, if they are developed, that the Web will become a
viable commercial marketplace for services such as those offered by Internet
companies.

The market for the purchase of products and services over the Internet is a
new and emerging market. If acceptance and growth of Internet use does not
occur, an Internet company's business and financial performance may suffer.
Although there has been substantial interest in the commercial possibilities
for the Internet, many businesses and consumers have been slow to purchase
Internet access services for a number of reasons, including inconsistent
quality of service, lack of availability of cost-effective, high-speed
service, a limited number of local access points for corporate users,
inability to integrate business applications on the Internet, the need to deal
with multiple and frequently incompatible vendors, inadequate protection of
the confidentiality of stored data and information moving across the Internet
and a lack of tools to simplify Internet access and use. It is possible that a
sufficiently broad base of consumers may not adopt, or continue to use, the
Internet as a medium of commerce.

Despite the implementation of security measures, an Internet company's
networks may be vulnerable to unauthorized access, computer viruses and other
disruptive problems. Internet companies have in the past experienced, and may
in the future experience, interruptions in service as a result of the
accidental or intentional actions of Internet users, current and former
employees or others. Unauthorized access could also potentially jeopardize the
security of confidential information stored in the computer systems of a
company and its subscribers. These events may result in liability of the
company to its subscribers and also may deter potential subscribers.

Multi-Strategy Portfolio

In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may also invest in: equity securities of small
companies and foreign issuers if U.S. exchange listed or if otherwise included
in the S&P 500; high yield bonds; repurchase agreements; U.S. government
securities; ADRs; bank obligations; variable and floating rate securities; and
firm commitment agreements; and when-issued securities. The Portfolio may
invest in warrants; however, not more than 10% of the market value of its
assets (at the time of purchase) may be invested in warrants other than
warrants acquired in units or attached to other securities. The Portfolio's
equity securities may or may not pay dividends and may or may not carry voting
rights. The Portfolio may invest in U.S. dollar-denominated corporate debt
securities of domestic issuers, U.S. dollar-denominated debt securities of
foreign issuers (including foreign government and international agencies); and
up to 10% of its assets in debt securities of foreign issuers which may be
denominated in foreign currencies rated Baa (Moody's) or BBB (S&P), or, if not
rated by Moody's or S&P, of equivalent quality. The Portfolio may also invest
in debt securities rated lower than Baa by Moody's or BBB by S&P, or if not
rated by Moody's or S&P, of equivalent quality. For more information on the
risks of such securities, see the "Description of Bond Ratings" in the
Appendix and the discussion under "High Yield Bonds". Fixed income securities
in which the portfolio may invest include debentures, asset-backed securities,
mortgage-related securities, convertible securities and money market
instruments.

The Portfolio may purchase and sell put and call options on securities and
stock indexes and may purchase or sell interest rate and stock index futures
contracts and options thereon. The Portfolio will only enter into futures
contracts and futures options which are standardized and traded on a U.S.
exchange, board of trade, or

6
<PAGE>

similar entity. The Portfolio may also engage in forward currency contracts,
foreign currency transactions, 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.

Equity Income Portfolio

In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may also invest in ADRs and in foreign securities if
they are listed on a U.S. exchange or otherwise included in the S&P 500. To
invest temporary cash balances, to maintain liquidity to meet redemptions or
expenses, or for temporary defensive purposes, the Portfolio may 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 not rated by Moody's or S&P, determined to be of equal quality by the
Portfolio Manager; certificates of deposit; time deposits; loans or credit
agreements and banker's acceptances issued by U.S. and foreign banks with
assets of at least U.S. $500 million as of the end of their most recent fiscal
year; short-term debt obligations of savings and loan institutions with assets
of at least U.S. $500 million as of the end of their most recent fiscal year;
and commercial paper and corporate obligations, including variable and
floating rate securities 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 not
rated by Moody's or S&P, determined to be of equal quality by the Portfolio
Manager. The Portfolio may also invest in high yield and convertible bonds;
repurchase agreements; rights; firm commitment agreements; and when-issued
securities; and other fixed income securities including, but not limited to
high yield/high risk debt securities. The Portfolio may invest in warrants;
however, not more than 10% of the market value of its assets (at the time of
purchase) may be invested in warrants other than warrants acquired in units or
attached to other securities. The Portfolio is also permitted to invest in
U.S. dollar-denominated corporate debt securities of domestic issuers and debt
securities of foreign issuers denominated in foreign currencies, rated Baa
(Moody's) or BBB (S&P), or, if not rated by Moody's or S&P, of equivalent
quality. The Portfolio may also invest in debt securities rated lower than Baa
by Moody's or BBB by S&P, or if not rated by Moody's or S&P, of equivalent
quality. For more information on the risks of such securities, see
"Description of Bond Ratings" in the Appendix and the discussion under "High
Yield Bonds".

In addition to the derivatives described in the Prospectus, the Portfolio
may also purchase and write put and call options on securities and stock
indexes and may purchase or sell stock index futures contracts and options
thereon. The Portfolio 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.

Strategic Value Portfolio

The Portfolio is a "non-diversified" portfolio. The Portfolio reserves the
right to become a diversified portfolio by limiting the investments in which
more than 5% of its total assets are invested.

In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may also invest in commercial paper; certificates of
deposit; repurchase agreements; or other short-term debt obligations; pass-
through securities, such as mortgage-backed securities, asset-backed
securities and participation interests; municipal obligations; short sales
against the box; variable and floating rate securities; standby commitments;
tender option bonds; inverse floaters; strip bonds; reverse repurchase
agreements; up to 10% of its assets in zero coupon, pay-in-kind and step
coupon securities; and securities of other investment companies. The Portfolio
may also invest in money market funds, including those managed by Janus
Capital Corporation ("Janus") as a means of receiving a return on cash,
pursuant to an exemptive order received by Janus from the SEC. The Portfolio
is also permitted to invest without limit in foreign securities, including
ADRs, EDRs, and GDRs, and up to 35% of its assets in bonds rated lower than
Baa by Moody's or BBB by S&P, or if not rated by Moody's or S&P, of equivalent
quality.

7
<PAGE>

instruments. The Portfolio may also enter into interest rate swaps, caps and
floors on either an asset-based or a liability-based basis. The Portfolio may
engage in forward contracts, forward foreign currency contracts and foreign
currency transactions and purchase and write options on foreign currencies.
The Portfolio may also engage in the purchase and writing of put and call
options on securities that are traded on U.S. and foreign securities exchanges
and over-the-counter. The Portfolio may purchase and write options on the same
types of securities that the Portfolio may purchase directly.

Growth LT Portfolio

In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may also invest in warrants; however, not more than
10% of the market value of its assets (at the time of purchase) may be
invested in warrants other than warrants acquired in units or attached to
other securities; preferred stocks; certificates of deposit; mortgage-related
and asset-backed securities; commercial paper; U.S. government securities;
rights; bank obligations (including certain foreign bank obligations); U.S.
dollar-denominated obligations of foreign governments, foreign government
agencies and international agencies; convertible securities; variable and
floating rate securities; firm commitment agreements; when-issued securities;
repurchase agreements; and reverse repurchase agreements. The Portfolio may
also invest in small capitalization stocks; U.S. dollar-denominated corporate
debt securities of domestic issuers and debt securities of foreign issuers
denominated in foreign currencies, rated Baa (Moody's) or BBB (S&P), or, if
not rated by Moody's or S&P, of equivalent quality. The Portfolio may also
invest up to 10% of its assets in bonds rated lower than Baa by Moody's or BBB
by S&P, or if not rated by Moody's or S&P, of equivalent quality. For more
information on the risks of such securities, see the "Description of Bond
Ratings" in the Appendix and the discussion under "High Yield Bonds". The
Portfolio may also invest in money market funds, including those managed by
Janus as a means of receiving a return on cash, pursuant to an exemptive order
received by Janus from the SEC.

The Portfolio is also permitted to invest in equity securities of foreign
issuers if U.S. exchange listed or otherwise included in the S&P 500. The
Portfolio may invest up to 25% of its assets in foreign securities denominated
in a foreign currency and not publicly traded in the U.S. In addition, the
Portfolio may purchase ADRs, EDRs, and GDRs, and other types of receipts
evidencing ownership of the underlying foreign securities. The Portfolio may
purchase securities on margin and 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 and sell interest rate, stock index, and
foreign currency futures contracts and options thereon. The Portfolio may
trade futures contracts and options on futures contracts not only on U.S.
domestic markets, but also on exchanges located outside of the U.S. The
Portfolio may also engage in forward foreign currency contracts and foreign
currency transactions.

Focused 30 Portfolio

The Portfolio is a "non-diversified" portfolio. The Portfolio reserves the
right to become a diversified portfolio by limiting the investments in which
more than 5% of its total assets are invested.

In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may also invest in commercial paper; certificates of
deposit; repurchase agreements; or other short-term debt obligations; pass-
through securities, such as mortgage-backed securities, asset-backed
securities and participation interests; municipal obligations; short sales
against the box; variable and floating rate securities; standby commitments;
tender option bonds; inverse floaters; strip bonds; reverse repurchase
agreements; up to 10% of its assets in zero coupon, pay-in-kind and step
coupon securities; and securities of other investment companies. The Portfolio
may also invest in money market funds, including those managed by Janus as a
means of receiving a return on cash, pursuant to an exemptive order received
by Janus from the SEC. The Portfolio is also permitted to invest without limit
in foreign securities, including ADRs, EDRs, and GDRs, and up to 35% of its
assets in bonds rated lower than Baa by Moody's or BBB by S&P, or if not rated
by Moody's or S&P, of equivalent quality.

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<PAGE>

In addition to the derivatives described in the Prospectus, the Portfolio
may purchase and sell futures contracts on securities, interest rate, index,
and foreign currency, and options thereon, including Eurodollar instruments.
The Portfolio may also enter into interest rate swaps, caps and floors on
either an asset-based or a liability-based basis. The Portfolio may engage in
forward contracts, forward foreign currency contracts and foreign currency
transactions and purchase and write options on foreign currencies. The
Portfolio may also engage in the purchase and writing of put and call options
on securities that are traded on U.S. and foreign securities exchanges and
over-the-counter. The Portfolio may purchase and write options on the same
types of securities that the Portfolio may purchase directly.

Mid-Cap Value Portfolio

In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may also invest in: preferred stocks; securities
convertible into or exchangeable for common stocks; forward foreign currency
contracts; repurchase agreements; reverse repurchase agreements; ADRs; GDRs;
firm commitment agreements; and when-issued securities; and up to 5% of its
total assets in rights. The Portfolio may invest in warrants; however, not
more than 10% of the market value of its assets (at the time of purchase) may
be invested in warrants other than warrants acquired in units or attached to
other securities. The Portfolio may purchase securities on margin and may
invest a portion of its assets in investment grade debt securities, including:
U.S. Government Securities; commercial paper; mortgage-related securities;
variable and floating rate securities; other short-term bank obligations; and
U.S. dollar-denominated corporate debt securities (including U.S. dollar-
denominated debt securities of foreign issuers, certain foreign bank and
government obligations, foreign government and international agencies).

The Portfolio may borrow for investment purposes ("leveraging") to the
extent permitted under the 1940 Act, which permits an investment company to
engage in borrowing, provided that it maintains continuous asset coverage of
300% of the amount borrowed. If the required coverage should decline as a
result of market fluctuations or other reasons, the Portfolio may be required
to sell some of its portfolio securities within three days to reduce the
amount of its borrowings and to restore the 300% asset coverage, even though
it may be disadvantageous from an investment standpoint to sell securities at
that time. The Portfolio may also invest up to 15% of its total assets,
determined at the time of investment, in foreign equity or debt securities.
The Portfolio may engage in "short sales," in which the Portfolio sells a
security it does not own, and "short sales against the box," in which the
Portfolio sells short a security it owns, if, at the time of investment, the
total market value of all securities sold and held short would not exceed 25%
of the Portfolio's net assets.

The Portfolio may also purchase and write put and call options on
securities, stock indexes and foreign currencies and may purchase cash-settled
options on interest rate swaps and equity index swaps. The Portfolio may 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 futures contracts on securities, stock indexes, and
currency, and options thereon. The Portfolio may engage in foreign currency
transactions: (1) to fix in U.S. dollars the value of a security the Portfolio
has agreed to buy or sell between the trade and settlement dates; and (2) to
hedge the U.S. dollar value of securities the Portfolio already owns. The
Portfolio will enter into futures contracts and futures options which are
standardized and traded on a U.S. exchange, board of trade, or similar entity.
The Portfolio may also trade futures contracts and options on futures
contracts not only on U.S. domestic markets, but also on exchanges located
outside of the U.S. The Portfolio may also invest in equity real estate
investment trusts ("REITs"), although it currently intends to limit its
investments in REITs to no more than 5% of its assets.

Equity Index Portfolio

In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may purchase and sell stock index futures, purchase
options on stock indexes, and purchase and write 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 will enter into futures contracts and futures options which are

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<PAGE>

standardized and traded on a U.S. exchange, board of trade, or similar entity.
The Portfolio may also invest in foreign equity securities if U.S. exchange
listed or if otherwise included in the S&P 500; ADRs; convertible securities;
firm commitment agreements; when-issued securities; and reverse repurchase
agreements. The Portfolio may temporarily invest cash balances, maintained for
liquidity purposes or pending investment, in short-term high quality debt
instruments, including: commercial paper; variable and floating rate
securities; repurchase agreements; bank obligations; and U.S. Government
securities, its agencies and instrumentalities. Temporary investments are not
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.

The Portfolio may not invest in restricted securities (including privately
placed securities).

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 in the Prospectus and 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.

Small-Cap Index Portfolio

Under normal conditions, the Portfolio invests at least 80% of the value of
its total assets in the common stock of companies included in the Russell 2000
Small Stock Index ("Russell 2000"). The Portfolio will be managed in an
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 Russell 2000.

In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may purchase and sell stock index futures and
options thereon and options on stock indexes that are based on the Russell
2000 or other indexes of small capitalization companies. The Portfolio will
enter into futures contracts and futures options which are standardized and
traded on a U.S. exchange, board of trade, or similar entity. The Portfolio
may invest in foreign equity securities if U.S. exchange listed and if they
are included in the Russell 2000 and may invest in warrants; however, not more
than 10% of the market value of its assets (at the time of purchase) may be
invested in warrants other than warrants acquired in units or attached to
other securities. The Portfolio is also permitted to invest in ADRs;
repurchase agreements; rights; equity REITs; U.S. Government securities, its
agencies or instrumentalities; bank obligations; commercial paper; variable
and floating rate securities; firm commitment agreements; when-issued
securities; and securities that are convertible into common stock. The
Portfolio may maintain a portion of its assets in short-term debt securities
and money market instruments to meet redemption requests or pending investment
in the securities of the Russell 2000. These investments will not be made in
anticipation of a general decline in the market prices of stocks in which the
Portfolio invests.

REIT Portfolio

The Portfolio is a "non-diversified" portfolio. For purposes of the
Portfolio's investment policies, a company is principally engaged in the real
estate industry if: (1) it derives at least 50% of its revenues or profits
from the ownership, construction, management, financing or sale of
residential, commercial or industrial real estate; or (2) it has at least 50%
of the fair market value of its assets invested in residential, commercial, or
industrial real estate.

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<PAGE>

In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may invest in warrants; however, not more than 10%
of the market value of its assets (at the time of purchase) may be invested in
warrants other than warrants acquired in units or attached to other
securities; and up to 10% of its assets in foreign securities (which may
include EDRs and GDRs) including: U.S. dollar-denominated corporate debt
securities, certain foreign bank obligations, and foreign government and
international agencies. The Portfolio may buy and sell put and call options on
securities and may purchase and sell futures contracts on interest rates and
options thereon. The Portfolio may also invest in the following: ADRs; bank
obligations; U.S. Government securities; convertible securities; commercial
paper; variable and floating rate securities; firm commitment agreements;
when-issued securities; preferred stock; repurchase agreements; currency
exchange rate swap agreements; interest rate derivative products, such as
swaps (including interest rate index swaps), caps, collars and floors; and
structured notes.

International Value Portfolio

In addition to the investment policies and techniques described in the
Prospectus, 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. For more information on the risks of
such securities, see the "Description of Bond Ratings" in the Appendix and the
discussion under "High Yield Bonds". The Portfolio may also invest in: small
capitalization stocks; nonconvertible fixed income securities denominated in
foreign currencies; repurchase agreements; ADRs; EDRs; GDRs; or other
securities convertible into equity securities of foreign issuers; variable and
floating rate securities; U.S. government securities; bank obligations; firm
commitment agreements; when-issued securities; and commercial paper
denominated in foreign currencies. The Portfolio's investments in convertible
securities are not subject to the limitations described below or in the
section "Bank Obligations."

The Portfolio may also hold cash (in U.S. dollars or foreign currencies) or
short-term securities denominated in such currencies to provide for
redemptions; it is generally not expected that such reserve for redemptions
will exceed 10% of the Portfolio's assets. Securities which may be held for
defensive purposes include nonconvertible preferred stock, debt securities,
government securities issued by U.S. and foreign countries and money market
securities. 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."

The Portfolio may also 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
Portfolio may also purchase and sell financial futures contracts, stock index
futures contracts, and foreign currency futures contracts and options thereon.
The Portfolio may trade futures contracts and options on futures contracts not
only on U.S. domestic markets, but also on exchanges located outside of the
U.S. and may purchase and write put and call options on foreign currencies.
The Portfolio may purchase and write put and call options on stock indexes and
may invest in U.S. dollar-denominated corporate debt securities of domestic
issuers (including U.S. dollar-denominated debt securities of foreign issuers)
and debt securities of foreign issuers denominated in foreign currencies,
rated Baa (Moody's) or BBB (S&P), or, if not rated by Moody's or S&P, of
equivalent quality. For more information on the risks of such securities, see
"Description of Bond Ratings" in the Appendix. The Portfolio may also engage
in foreign currency transactions and forward foreign currency contracts in
anticipation of or to protect itself against fluctuations in currency exchange
rates.

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Government Securities Portfolio

In addition to its investments in U.S. government securities and related
investments, as described in the Prospectus, the Portfolio may invest up to
35% of its assets in the following: corporate debt securities of domestic
issuers (including U.S. dollar-denominated debt securities of foreign 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;
mortgage-related securities, including collateralized mortgage obligations and
mortgage-backed bonds; asset-backed securities; repurchase agreements and
reverse repurchase agreements; commercial paper; bank obligations; convertible
securities; variable and floating rate securities; firm commitment agreements;
when-issued securities; ADRs; and in cash or high quality money market
instruments.

The Portfolio may also: purchase and write put and call options on
securities; purchase and sell spread transactions with securities dealers;
enter into interest rate, interest rate index, and currency exchange rate swap
agreements, and purchase and sell options thereon; engage in forward currency
contracts, foreign currency transactions, options on foreign currencies, and
foreign currency futures and options thereon; and purchase and sell interest
rate futures contracts and options thereon. The Portfolio may trade futures
contracts and options on futures contracts not only on U.S. domestic markets,
but also on exchanges located outside of the U.S. In addition, the Portfolio
may invest up to 20% of its total assets in debt securities of foreign
issuers, which may be denominated in foreign currencies.

Managed Bond Portfolio

In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may also invest in: obligations issued or guaranteed
by the U.S. Government, its agencies, or instrumentalities; mortgage-related
securities; asset-backed securities; variable and floating rate debt
securities; bank obligations; commercial paper; convertible securities; firm
commitment agreements; when-issued securities; ADRs; U.S. dollar-denominated
obligations of international agencies (such as the International Bank for
Reconstruction and Development) and government agencies; and repurchase and
reverse repurchase agreements. The Portfolio may invest in U.S. dollar-
denominated debt securities of foreign issuers and up to 20% of its assets in
debt securities of foreign issuers denominated in foreign currencies.

The Portfolio may also invest up to 10% of its assets in debt securities
rated lower than Baa by Moody's or BBB by S&P (although it may not invest in
securities rated lower than B), or if not rated by Moody's or S&P, of
equivalent quality. The Portfolio, except as provided above, 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. In the event that a security owned by the Portfolio is downgraded to
below a B rating, the Portfolio may nonetheless retain the security. For more
information on the risks of such securities, see the "Description of Bond
Ratings" in the Appendix and the discussion under "High Yield Bonds". For the
year ended December 31, 1999, 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 6.09%. The asset
composition after this time may or may not be the same as shown in 1999.

In pursuing its investment objective, the Portfolio may purchase and write
put and call options on securities; purchase and sell spread transactions with
securities dealers; purchase and sell interest rate futures contracts and
options thereon; and enter into interest rate, interest rate index, and
currency exchange rate swap agreements, and purchase and sell options thereon.
The Portfolio may trade futures contracts and options on futures contracts not
only on U.S. domestic markets, but also on exchanges located outside of the
U.S.

Furthermore, the Portfolio may engage in foreign currency transactions and
forward currency contracts; options on foreign currencies; 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.

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Money Market Portfolio

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. The Portfolio may
invest only in U.S. dollar denominated securities 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
SEC rules for money market funds. In addition, the Portfolio is subject to
diversification standards applicable to money market funds under SEC rules.

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, AAA
or A-1 by 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. 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.

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 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.

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. 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. The Portfolio's investments are
limited to securities that mature within 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).

In addition to the securities and investment techniques described in the
Prospectus, the Portfolio may also invest in firm commitment agreements; when-
issued securities; short-term corporate debt securities (including U.S. dollar
denominated debt securities of foreign issuers and obligations of government
and international agencies); mortgage-related securities; asset-backed
securities; commercial paper; bank obligations; variable and floating rate
securities; savings and loan obligations; and repurchase agreements involving
these securities. The Portfolio may also invest in restricted securities and
up to 10% of its net assets in illiquid securities.

The Portfolio may not engage in futures contracts and options on futures
contracts.

High Yield Bond Portfolio

The Portfolio invests primarily in fixed-income securities (including
corporate debt securities) rated Baa or lower by Moody's, or BBB or lower by
S&P, or, if not rated by Moody's or S&P, of equivalent investment quality as
determined by the Adviser. For more information on the risks of such
securities, see the "Description

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<PAGE>

of Bond Ratings" in the Appendix and the discussion under "High Yield Bonds".
In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may also invest in: U.S. Government securities
(including securities of U.S. agencies and instrumentalities); bank
obligations; commercial paper; mortgage-related securities; asset-backed
securities; variable and floating rate debt securities; firm commitment
agreements; when-issued securities; convertible securities; ADRs; rights;
repurchase agreements; reverse repurchase agreements; U.S. dollar-denominated
debt securities of foreign issuers, foreign government and international
agencies 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 may also invest in warrants; however, not more
than 10% of the market value of its assets (at the time of purchase) may be
invested in warrants other than warrants acquired in units or attached to
other securities.

In seeking higher income or a reduction in principal volatility, the
Portfolio may purchase and sell put and call options on securities; purchase
or sell interest rate futures contracts and options thereon, and invest up to
5% of its 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 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.

In an effort to reduce credit risk, the Portfolio diversifies its holdings
among many issuers. As of December 31, 1999, the Portfolio held securities of
160 corporate issuers, excluding short-term obligations. As of December 31,
1999, the amount of the Portfolio's average total assets, measured on the
basis of month-end values, invested in bonds rated lower than Baa by Moody's
or BBB by S&P or, if not rated by Moody's or S&P, determined to be of
equivalent quality by Pacific Life, was approximately 94.64%. The asset
composition after this time may or may not be the same as shown in 1999.

Large-Cap Value Portfolio

In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may invest a portion of its assets in: short-term
fixed income securities, such as repurchase agreements, commercial paper,
U.S. Government securities, its agencies or instrumentalities, bank
obligations, and cash or cash equivalents, to meet operating expenses, to
serve as collateral in connection with certain investment techniques, or to
meet anticipated redemption requests. The Portfolio is also permitted to
invest in: mortgage-related securities; small-capitalization stocks; equity
REITS; ADRs; variable and floating rate securities; firm commitment
agreements; when-issued securities; and up to 20% of its net assets, measured
at the time of investment, in foreign companies (including U.S. dollar-
denominated corporate debt securities of foreign issuers, certain foreign bank
obligations, government obligations, foreign government and international
agencies). The Portfolio may invest without limit in high yield convertible
securities, and may, from time to time, invest up to 5% of its net assets in
high yield non-convertible debt securities. The Portfolio may also invest up
to 5% of its assets (no limit on below investment grade convertible
securities) in debt securities rated lower than Baa by Moody's or BBB by S&P,
or if not rated by Moody's or S&P, of equivalent quality. For more information
on the risks of such securities, see the "Description of Bond Ratings" in the
Appendix and the discussion under "High Yield Bonds".

The Portfolio may purchase put and call options on securities and securities
indexes and enter into the following: stock, index and currency futures
contracts (including foreign currency) and options thereon; and forward
currency contracts; foreign currency transactions; currency swaps; and options
on currencies. The Portfolio will enter into futures contracts and futures
options which are standardized and traded on a U.S. exchange, board of trade,
or similar entity. The Portfolio may also trade futures contracts and options
on futures contracts not only on U.S. domestic markets, but also on exchanges
located outside of the U.S.

Diversification Versus Non-Diversification

Each of the Portfolios, other than the Strategic Value Portfolio, Focused 30
Portfolio, and REIT Portfolio, are diversified, so that with respect to 75% of
each such Portfolio's assets (100% for the Money Market

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<PAGE>

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 Strategic
Value Portfolio and Focused 30 Portfolio reserve the right to become
diversified Portfolios by limiting the investments in which more than 5% of
each Portfolio's total assets are invested.

The Strategic Value Portfolio, Focused 30 Portfolio, and REIT Portfolio are
"non-diversified," which means that the proportion of the Portfolio's assets
that may be invested in the securities of a single issuer is not limited by
the Investment Company Act of 1940, as amended ("1940 Act"). However, to meet
Federal tax requirements, the Portfolios may not have more than 25% of its
total assets invested in any one issuer and, with respect to 50% of its total
assets, no more than 5% of its total assets invested in any one issuer, except
that this restriction does not apply to U.S. Government securities.
Nonetheless, because the Portfolios may invest in a smaller number of
companies than a diversified fund, an investment in this Portfolio may, under
certain circumstances, present greater risk to an investor than an investment
in a diversified fund. This risk includes greater exposure to potential poor
earnings or default of fewer issuers than would be the case for a more
diversified fund.

SECURITIES AND INVESTMENT TECHNIQUES

Unless otherwise stated in the prospectus, many investment techniques,
including various hedging techniques and techniques which may be used to help
add incremental income, are discretionary. That means Portfolio Managers may
elect to engage or not to engage in the various techniques at their sole
discretion. Hedging may not be cost-effective or Portfolio Managers may simply
elect not to engage in hedging and have the Portfolio assume full risk of the
investments. Investors should not assume that any Portfolio will be hedged at
all times or that it will be hedged at all; nor should investors assume that
any particular discretionary investment technique or strategy will be employed
at all times, or ever employed.

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.

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.

Real Estate Investment Trusts

Real estate investment trusts ("REITs") pool investors' funds for investment
primarily in income-producing real estate or in loans or interests related to
real estate. A REIT is not taxed on income distributed to

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<PAGE>

its shareholders or unitholders if it complies with a regulatory requirement
that it distributes to its shareholders or unitholders at least 95% of its
taxable income for each taxable year. Generally, REITs can be classified as
equity REITs, mortgage REITs or hybrid REITs. Equity REITs invest a majority
of their assets directly in real property and derive their income primarily
from rents and capital gains from appreciation realized through property
sales. Equity REITs are further categorized according to the types of real
estate securities they own, e.g., apartment properties, retail shopping
centers, office and industrial properties, hotels, health-care facilities,
manufactured housing and mixed-property types. Mortgage REITs invest a
majority of their assets in real estate mortgages and derive their income
primarily from income payments. Hybrid REITs combine the characteristics of
both equity and mortgage REITs.

REITs depend generally on their ability to generate cash flow to make
distributions to shareholders or unitholders, and may be subject to changes in
the value of their underlying properties, defaults by borrowers, and to self-
liquidations. Some REITs may have limited diversification and may be subject
to risks inherent in investments in a limited number of properties, in a
narrow geographic area, or in a single property type. Equity REITs may be
affected by changes in underlying property values. Mortgage REITs may be
affected by the quality of the credit extended. REITs are dependent upon
specialized management skills and incur management expenses. In addition, the
performance of a REIT may be affected by its failure to qualify for tax-free
pass-through of income under the Internal Revenue Code of 1986, as amended, or
its failure to maintain an exemption from registration under the 1940 Act.
REITs also involve risks such as refinancing, changes in property values,
general or specific economic risk on the real estate industry, dependency on
management skills, and other risks similar to small company investing.

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. Subject to its
investment policies, a portfolio 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".

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 (such as securities guaranteed by the Government National
Mortgage Association, or "GNMAs"); other securities may be 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") and are not backed by the full faith and credit of the
U.S. Government. 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

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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.

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 and the U.S. Treasury. 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
federally chartered and privately-owned corporation, was created by Congress
in 1970 for the purpose of increasing the availability of mortgage credit for
residential housing. 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

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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.

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

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<PAGE>

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 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. 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. 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.

Inverse floaters and planned amortization class certificates
("PAC"). Planned amortization class 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

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<PAGE>

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, generally one or more
tranches 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 prepayment
speeds.

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 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. Mortgage "dollar rolls" are contracts in which a
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, a Portfolio
loses the right to receive principal and interest paid on the securities sold.
However, a 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 a Portfolio. A 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, a Portfolio treats mortgage dollar rolls as two separate
transactions; one involving the purchase of a security and a separate
transaction involving a sale. Portfolios do not currently intend to enter into
mortgage dollar rolls that are accounted for as a financing.

Other Asset-Backed Securities

Other asset-backed securities 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

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<PAGE>

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 prepayment 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. The
securities market for asset-backed securities may not, at times, offer the
same degree of liquidity as markets for other types of securities with greater
trading volume.

Zero Coupon, Step Coupon and Pay-In-Kind Securities

Zero coupon bonds are issued and traded at a discount from their face value.
They do not entitle the holder to any periodic payment of interest prior to
maturity. Step coupon bonds trade at a discount from their face value and pay
coupon interest. The coupon rate is low for an initial period and then
increases to a higher coupon rate thereafter. The discount from the face
amount or par value depends on the time remaining until cash payments begin,
prevailing interest rates, liquidity of the security and the perceived credit
quality of the issuer. Pay-in-kind bonds normally give the issuer an option to
pay cash at a coupon payment date or give the holder of the security a similar
bond with the same coupon rate and a face value equal to the amount of the
coupon payment that would have been made.

A Portfolio must distribute its investment company taxable income, including
the original issue discount accrued on zero coupon or step coupon bonds.
Because a Portfolio will not receive cash payments on a current basis in
respect of accrued original-issue discount on zero coupon bonds or step coupon
bonds during the period before interest payments begin, in some years a
Portfolio may have to distribute cash obtained from other sources in order to
satisfy the distribution requirements under the Internal Revenue Code of 1986
and the regulations thereunder. A Portfolio may obtain such cash from selling
other portfolio holdings which may cause a Portfolio to incur capital gains or
losses on the sale.

High Yield Bonds

High Yield Bonds are high risk debt securities rated lower than Baa or BBB,
or, if not rated by Moody's or S&P, of equivalent quality ("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. 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. A severe economic
downturn or increase in interest rates might increase defaults in high yield
securities issued by highly leveraged companies. An increase in the number of
defaults could adversely affect the value of all outstanding high yield
securities, thus disrupting the market for such securities. 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.

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

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<PAGE>

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 relatively
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.

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.

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.

The portfolio may purchase defaulted securities only when the portfolio
manager believes, based upon analysis of the financial condition, results of
operations and economic outlook of an issuer, that there is potential for
resumption of income payments and the securities offer an unusual opportunity
for capital appreciation. Notwithstanding the portfolio manager's belief about
the resumption of income, however, the purchase of any security on which
payment of interest or dividends is suspended involves a high degree of risk.

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 include certificates of deposit, bankers' acceptances,
fixed time deposits, and loans or credit agreements. 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

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<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.

The Portfolio may purchase loans or participation interests in loans made by
U.S. banks and other financial institutions to large corporate customers.
Loans are made by a contract called a credit agreement. Loans are typically
secured by assets pledged by the borrower, but there is no guarantee that the
value of the collateral will be sufficient to cover the loan, particularly in
the case of a decline in value of the collateral. Loans may be floating rate
or amortizing. See "Variable and Floating Rate Securities" below for more
information. Some loans may be traded in the secondary market among banks,
loan funds, and other institutional investors.

Unless otherwise noted, a Portfolio will not invest in any security or bank
loan/credit agreement issued by a commercial bank unless: (i) the bank has
total assets of at least U.S. $1 billion, 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.

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.

Unless otherwise noted, a Portfolio 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, 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.

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,

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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.

Small Capitalization Stocks

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 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.

Corporate Debt Securities

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
Prospectus and in the discussion of the investment objective and policies of
that Portfolio above.

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.

Tender Option Bonds. Tender option bonds are generally long-term securities
that are coupled with the option to tender the securities to a bank, broker-
dealer or other financial institution at periodic intervals and receive the
face value of the bond. This type of security is commonly used as a means of
enhancing the security's liquidity.

Variable and Floating Rate Securities

Variable and floating rate securities 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

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<PAGE>

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.

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.

A super floating rate collateralized mortgage obligation ("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.

Commercial Paper

Each Portfolio, other than the Money Market Portfolio, 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 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 and in the discussion of the investment
objective and policies of that Portfolio above.

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 in the discussion of the Portfolio in the Prospectus and
in "Additional Investment Policies of the

25
<PAGE>

Portfolios" above. 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 for a description of Moody's and S&P ratings applicable to
commercial paper.

Convertible Securities

Convertible securities 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.

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.

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

26
<PAGE>

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

Repurchase agreements 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 Prospectus and in the discussion of that Portfolio's investment
objective and policies above.

Under 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

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

27
<PAGE>

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

Reverse repurchase agreements, among the forms of borrowing, involve 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 segregated assets 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

Firm commitment agreements are 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.

Except for the Mid-Cap Value Portfolio, 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
segregate assets consisting of 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 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 (subject to notice provisions in the loan agreement) and
obtain the

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<PAGE>

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 33
1/3% 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. If the
borrower fails to deliver the loaned securities on a timely basis (as defined
in the loan agreement), the Portfolio could use the collateral to replace the
securities while holding the borrower liable for any excess of replacement
cost over collateral. 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. The Fund has authorized State Street
Bank & Trust Company and The Chase Manhattan Bank ("Chase") (collectively, the
"Lending Agents") to engage in securities lending. In determining whether to
lend securities, the Lending Agents consider 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. The Portfolio may recall securities if the Portfolio
Manager wishes to vote on matters put before shareholders.

Short Sales

A short sale is a transaction in which a Portfolio sells a security it does
not own in anticipation of a decline in the market price. Even during normal
or favorable market conditions, the Portfolio may make short sales in an
attempt to maintain portfolio flexibility and facilitate the rapid
implementation of investment strategies if the Portfolio Manager believes that
the price of a particular security or group of securities is likely to
decline.

When the Portfolio makes a short sale, the Portfolio must arrange through a
broker to borrow the security to deliver to the buyer; and, in so doing, the
Portfolio becomes obligated to replace the security borrowed at its market
price at the time of replacement, whatever that price may be. The Portfolio
may have to pay a premium to borrow the security. The Portfolio must also pay
any dividends or interest payable on the security until the Portfolio replaces
the security.

The Portfolio's obligation to replace the security borrowed in connection
with the short sale will be secured by collateral deposited with the broker,
consisting of cash, U.S. Government securities or other securities acceptable
to the broker. In addition, with respect to any short sale, other than short
sales against the box, the Portfolio will be required to maintain cash or
liquid securities, marked-to-market daily, in segregation in an amount such
that the value of the sum of both collateral deposits is at all times equal to
at least 100% of the current market value of the securities sold short.

Short Sales Against the Box

A short sale is "against the box" when a Portfolio enters into a transaction
to sell a security short as described above, while at all times during which a
short position is open, maintaining an equal amount of such securities, or
owning securities giving it the right, without payment of future
consideration, to obtain an equal amount of securities sold short. The
Portfolio's obligation to replace the securities sold short is then completed
by purchasing the securities at their market price at time of replacement.

Illiquid and Restricted Securities (Private Placements)

Generally, a security is considered illiquid if it cannot be disposed of
within seven days. Its illiquidity might prevent the sale of such 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.

A Portfolio will not acquire restricted securities (including privately
placed securities) if they are illiquid and other securities that are
illiquid, such as repurchase agreements maturing in more than seven days, if
as a

29
<PAGE>

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.

Precious Metals-Related 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

American Depositary Receipts ("ADRs") 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. European Depositary Receipts ("EDRs") and
global Depositary Receipts ("GDRs") are receipts evidencing an arrangement
with a non-U.S. bank similar to that for ADRs and are designed for use in the
non-U.S. securities markets. EDRs and GDRs are not necessarily quoted in the
same currency as the underlying security.

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,

30
<PAGE>

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, EDRs
and GDRs 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 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.

Each of the emerging countries, including Asia and Eastern Europe, may be
subject to a substantially greater degree of economic, political and social
instability and disruption than is the case in the United States, Japan and
most Western European countries. This instability may result from, among other
things, the following: (i) authoritarian governments or military involvement
in political and economic decision making, including changes or attempted
changes in governments through extra-constitutional means; (ii) popular unrest
associated with demands for improved political, economic or social conditions;
(iii) internal insurgencies; (iv) hostile relations with neighboring
countries; (v) ethnic, religious and racial disaffection or conflict; and (vi)
the absence of developed legal structures governing foreign private
investments and private property. Such economic, political and social
instability could disrupt the principal financial markets in which the
Portfolios may invest and adversely affect the value of the Portfolios'
assets. A Portfolio's investments could in the future be adversely affected by
any increase in taxes or by political, economic or diplomatic developments.
Investment opportunities within former "east bloc" countries in Eastern Europe
may be considered "not readily marketable" for purposes of the limitation on
illiquid securities set forth above.

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. (See "Custodian and Transfer Agency and
Dividend Disbursing Services" for more information concerning the Fund's
custodian and foreign sub-custodian.)

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<PAGE>

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.

Foreign investments of any Portfolio whose principal investment strategy is
to invest in companies located outside of the U.S. 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.

Furthermore, there are greater risks involved in investing in emerging
market countries and/or their securities markets, such as less diverse and
less mature economic structures, less stable political systems, more
restrictive foreign investment policies, smaller-sized securities markets and
low trading volumes. Such risks can make investments illiquid and more
volatile than investments in developed countries and such securities may be
subject to abrupt and severe price declines.

Foreign Currency Transactions and Forward Foreign Currency Contracts

Generally, foreign exchange transactions 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 Portfolios have authority to deal in forward foreign exchange
transactions to hedge and manage currency exposure 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. When entering into such
contracts, a Portfolio assumes the credit risk of the counterparty.

Dealings in forward foreign exchange transactions may include hedging
involving either specific transactions or portfolio positions. A Portfolio may
purchase and sell forward foreign currency contracts in combination with other
transactions in order to gain exposure to an investment in lieu of actually
purchasing such investment. 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 in or exposed to 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. In addition to the above, a portfolio may also cross-hedge
between two non-U.S. currencies, which involves moving a security from one
currency into a second currency that is not the currency that account
performance is based upon. The Portfolios will not speculate in forward
foreign exchange.

A Portfolio 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 or exposed to 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

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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 is 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 or exposed to 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 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 holdings denominated in or exposed to that
foreign currency (or a proxy currency considered to move in correlation with
that currency), or exposed to a particular securities market, or futures
contracts, options or other derivatives on such holdings. In addition, in no
event will a Portfolio 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. The
Portfolios will cover outstanding forward currency contracts by maintaining
liquid portfolio securities or other assets denominated in or exposed to 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, cash or liquid equity or debt securities
will be segregated 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 segregated assets declines, a Portfolio will find alternative cover
or additional cash or securities will be segregated 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 or exposed to 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.

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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.

Options

Purchasing and Writing 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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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 segregated) 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 segregated cash, U.S. Government securities or liquid securities
marked-to-market daily. 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 on a segregated basis, sells short the security
underlying the put option at an equal or greater exercise price, 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 and Writing Options on Stock Indexes. 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.

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.

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

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example, means that a one-point difference will yield $100. Like other options
listed on United States securities exchanges, index options are issued by the
Options Clearing Corporation ("OCC").

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.

Spread Transactions. 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
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.

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Options on Foreign Currencies

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.

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
segregation) 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 segregated government securities, cash or
liquid securities marked-to-market daily, and/or cash, U.S. Government
securities, or liquid securities marked-to-market daily; or (iv) segregates
and marks-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) segregated government securities,
cash or liquid securities marked-to-market daily of that foreign currency,
and/or segregated U.S. Government securities, cash or liquid securities
marked-to-market daily at least equal to the exercise price, (ii) sells short
the security underlying the put option at an equal or greater exercise price,
or (iii) 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 written call option
on a foreign currency is for cross-hedging purposes if it is not

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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 segregating cash, U.S. Government Securities,
and/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 Other Investment Company Securities

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. In some instances, a Portfolio may
invest in an investment company, including an unregistered investment company,
in excess of these limits. This may occur, for instance, when a Portfolio
invests collateral it receives from loaning its portfolio securities. As the
shareholder of another investment company, a Portfolio would bear, along with
other shareholders, its pro rata portion of the other investment company's
expenses, including advisory fees. Such expenses are in addition to the
expenses a Portfolio pays in connection with its own operations.

Among the types of investment companies in which a Portfolio may invest are
Portfolio Depositary Receipts ("PDRs") and Index Fund Shares (PDRs and Index
Fund Shares are collectively referred to as "Exchange Traded Funds" or
"ETFs"). PDRs represent interests in an unit investment trust holding a
portfolio of securities("UIT") that may be obtained from the UIT or purchased
in the secondary market. Each PDR is
intended to track the underlying securities portfolio, trade like a share of
common stock, and pay to PDR holders periodic dividends proportionate to those
paid with respect to the underlying portfolio of securities, less certain
expenses. Index Fund Shares are shares issued by an open-end management
investment company that seeks to provide investment results that correspond
generally to the price and yield performance of specified foreign or domestic
equity index ("Index Fund"). ETFs include, among others, Standard & Poor's
Depository Receipts ("SPDRs"), Optimized Portfolios as Listed Securities
("OPALS") and I-Shares.

SPDRs. SPDRs track the performance of a basket of stocks intended to track
the price performance and dividend yields of the S&P 500 until a specified
maturity date. SPDRs are listed on the American Stock Exchange. Holders of
SPDRs are entitled to receive quarterly distributions corresponding to
dividends received on shares contained in the underlying basket of stocks net
of expenses. On the maturity date of the SPDRs' UIT, the holders will receive
the value of the underlying basket of stocks.

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OPALS. OPALS track the performance of adjustable baskets of stocks until a
specified maturity date. Holders of OPALS are entitled to receive semi-annual
distributions corresponding to dividends received on shares contained in the
underlying basket of stocks, net of expenses. On the maturity date of the
OPALS' UIT, the holders will receive the physical securities comprising the
underlying baskets.

I-Shares. I-Shares track the performance of specified equity market indexes,
including the S&P 500. I-Shares are listed on the American Stock Exchange and
the Chicago Board Option Exchange. Holders of I-Shares are entitled to receive
distributions not less frequently than annually corresponding to dividends and
other distributions received on shares contained in the underlying basket of
stocks net of expenses. I-Shares are Index Fund Shares.

Individual investments in PDRs generally are not redeemable, except upon
termination of the UIT. Similarly, individual investments in Index Fund Shares
generally are not redeemable. However, large quantities of PDRs known as
"Creation Units" are redeemable from the sponsor of the UIT. Similarly, block
sizes of Index Fund Shares, also known as "Creation Units", are redeemable
from the issuing Index Fund. The liquidity of small holdings of ETFs,
therefore, will depend upon the existence of a secondary market.

The price of ETFs is derived from and based upon the securities held by the
UIT or Index Fund. Accordingly, the level of risk involved in the purchase or
sale of an ETF is similar to the risk involved in the purchase or sale of
traditional common stock, with the exception that the pricing mechanism for an
ETF is based on a basket of stocks. Disruptions in the markets for the
securities underlying ETFs purchased or sold by a Portfolio could result in
losses on ETFs. ETFs represent an unsecured obligation and therefore carry
with them the risk that the counterparty will default and the Portfolio may
not be able to recover the current value of its investment.

Investments in ETFs will be limited to the percentage restrictions set forth
above for investments in investment company securities.

Futures Contracts and Options on Futures Contracts

There are several risks associated with the use of futures and futures
options. While a Portfolio hedging transactions may protect the Portfolio
against adverse movements in the general level of interest rates or stock or
currency prices, such transactions could also preclude the opportunity to
benefit from favorable movements in the level of interest rates or stock or
currency prices. A 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.

Futures on securities. A futures contract on a security is an agreement
between two parties (buyer and seller) to take or make delivery of a specified
quantity of a security at a specified price at a future date.

If a fund buys a futures contract to gain exposure to securities, the fund
is exposed to the risk of change in the value of the futures contract, which
may be caused by a change in the value of the underlying securities.

Interest Rate Futures. 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

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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. 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.

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. 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.

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

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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. During the option period, the covered call writer
(seller) has given up the opportunity to profit from a price increase in the
underlying securities above the exercise price. The writer of an option has no
control over the time when it may be required to fulfill its obligation as a
writer of the option.

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.

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 segregate cash, U.S.
Government securities and/or other liquid securities marked-to-market daily
(including any margin) equal to the price of such contract or will "cover" its
position by holding a put option permitting the Portfolio to sell the same
futures contract with a strike price equal to or higher than the price of the
futures contract held. When writing a call option on a futures contract, the
Portfolio similarly will segregate government securities, cash and/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

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(including any margin) equal to the value of the futures contract or will
"cover" its position by (1) owning the same futures contract at a price equal
to or lower than the strike price of the call option, or (2) owning the
commodity (financial or otherwise) underlying the futures contract, or (3)
holding a call option permitting the Portfolio to purchase the same futures
contract at a price equal to or lower than the strike price of the call option
sold by the Portfolio. When selling a futures contract or selling a put option
on a futures contract, the Portfolio is required to segregate government
securities, cash and/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 "cover" its
position, when selling a futures contract, by (1) owning the commodity
(financial or otherwise) underlying the futures contract or (2) holding a call
option permitting the Portfolio to purchase the same futures contract at a
price equal to or lower than the price at which the short position was
established, and, when selling a put option on the futures contract, by (1)
selling the futures contract underlying the put option at the same or higher
price than the strike price of the put option or (2) purchasing a put option,
if the strike price of the purchased option is the same or higher than the
strike price of the put option sold by the Portfolio.

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.

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.

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.

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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.

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

Foreign Currency Futures are contracts for the purchase or sale for future
delivery of foreign currencies ("foreign currency futures") which may also be
engaged in for cross-hedging purposes. Cross-hedging involves 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

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 segregated cash, U.S. Government securities, and/or liquid
securities

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marked-to-market daily, to avoid any potential leveraging of a Portfolio. Swap
agreements may include: (1) "currency exchange rate", which involve the
exchange by a Portfolio with another party of their respective rights to make
or receive payments is specified currencies; (2) "interest rate", which
involve the exchange by a Portfolio with another party of their respective
commitments to pay or receive interest; and (3) "interest rate index", which
involve the exchange by a Portfolio with another party of the respective
amounts payable with respect to a national principal amount at interest rates
equal to two specified indices; and other interest rate swap arrangements such
as: (1) "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) "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"; and (3) "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.

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.

Risks of Swap Agreements. Whether a Portfolio's use of swap agreements will
be successful in furthering its investment objective will depend on a
Portfolio Manager's ability to predict correctly whether certain types 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 unless otherwise specified in the investment policies of
the Portfolio). 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 the section "Taxation" for
more information.

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

Warrants or rights may be 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

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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.

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.

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.

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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 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 goal as set forth under "About the Portfolios,"
in the Prospectus, 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) except for the REIT Portfolio, 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). This
restriction does not apply to the REIT Portfolio, which will normally invest
more than 25% of its total assets in securities of issuers of real estate
investment trusts and in industries related to real estate.

(ii) with respect to 75% of its total assets (or, in the case of the
Strategic Value Portfolio, Focused 30 Portfolio, and REIT Portfolio, with
respect to 50% of its 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;

46
<PAGE>

(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 to the
extent permitted under applicable law; and

(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.

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;

(ii) sell property or securities short, except the Mid-Cap Value Portfolio;
or sell short against the box, except the Aggressive Equity, Equity, I-Net
Tollkeeper, Strategic Value, Focused 30 and Mid-Cap Value Portfolios;

(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, except for the Diversified
Research, I-Net Tollkeeper, and International Large-Cap Portfolios;

(iv) except the Growth LT, I-Net Tollkeeper, and Mid-Cap Value Portfolios,
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) except the Growth LT and Mid-Cap Value Portfolios, 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 that
subject to restrictions described in the Prospectus and in the SAI, (a) each
Portfolio other than the Money Market and Small-Cap Equity Portfolios may
engage in futures contracts and options on futures contracts; and (b) all
Portfolios may enter into foreign forward currency contracts.

47
<PAGE>

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.

ORGANIZATION AND MANAGEMENT OF THE FUND

The Fund was organized as a Massachusetts business trust on May 4, 1987, and
currently consists of twenty-two 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.
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.

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 and Trustee Director and Chief Executive
Newport Beach, CA 92660 Officer of Pacific Life,
Age 57 Pacific Mutual Holding
Company and Pacific
LifeCorp; and similar
positions with other
subsidiaries and affiliates
of Pacific Life; Director of
Newhall Land & Farming;
Director of The Irvine
Company; Director of Edison
International; Management
Board Member of PIMCO
Advisors L.P.; Former Equity
Board Member of PIMCO
Advisors L.P.

Lucie H. Moore Trustee Former Partner with Gibson,
1825 Port Manleigh Place Dunn & Crutcher.
Newport Beach, CA 92660
Age 43

Richard L. Nelson Trustee Business Consultant; retired
8 Cherry Hills Lane Partner with Ernst & Young
Newport Beach, CA 92660 LLP; Director of Wynn's
Age 70 International, Inc.

Lyman W. Porter Trustee Professor Emeritus of
2639 Bamboo Street Management in the Graduate
Newport Beach, CA 92660 School of Management at the
Age 70 University of California,
Irvine. Former Member of the
Academic Advisory Board of
the Czechoslovak Management
Center and of the Board of
Trustees of the American
University of Armenia.

Alan Richards Trustee Retired Chairman of E. F.
7381 Elegans Place Hutton Insurance Group;
Carlsbad, CA 92009 Former Director of E. F.
Age 70 Hutton and Company, Inc.;
Chairman of IBIS Capital,
LLC; Director of Inspired
Arts, Inc.; Former Director
of Western National
Corporation.
</TABLE>

48
<PAGE>

<TABLE>
<CAPTION>
Business Affiliates and
Name and Address Position with the Fund Principal Occupations
---------------- ---------------------- -----------------------

<C> <C> <S>
Glenn S. Schafer President President and Director of
700 Newport Center Drive Pacific Life, Pacific Mutual
Newport Beach, CA 92660 Holding Company and Pacific
Age 50 LifeCorp and similar
positions with other
subsidiaries and affiliates
of Pacific Life; Management
Board Member of PIMCO
Advisors L.P.; Former Equity
Board Member of PIMCO
Advisors L.P.

Brian D. Klemens Vice President Vice President and Treasurer
700 Newport Center Drive and Treasurer (12/98 to present); and
Newport Beach, CA 92660 Assistant Controller (4/94
Age 43 to 12/98) of Pacific Life.
Vice President and Treasurer
of other subsidiaries and
affiliates 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 60 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 44

Audrey L. Milfs Secretary Vice President, Director and
700 Newport Center Drive Corporate Secretary of
Newport Beach, CA 92660 Pacific Life and similar
Age 54 positions with other
subsidiaries of Pacific
Life.
</TABLE>
--------
* Mr. Sutton is an "interested person" of the Fund (as that term is defined
in the Investment Company Act) because of his position with Pacific Life as
shown above.

Trustees other than those affiliated with Pacific Life Insurance Company
("Pacific Life" or the "Adviser") 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, Policy and Nominating Committees each receive 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 1999. The table also shows total compensation paid to
these Trustees in 1999 by the Fund and PIMCO Funds: Multi-Manager Series, an
investment company managed by an affiliate of Pacific Life for which
Messrs. Nelson, Porter, and Richards (but not Mr. Sutton or Ms. Moore) also
serve as trustees (collectively, "Fund Complex").

<TABLE>
<CAPTION>
Pension or
Retirement Total
Benefits Estimated 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............... $40,000 0 0 $105,500
Lyman W. Porter................. $40,000 0 0 $103,500
Alan Richards................... $40,000 0 0 $108,500
Lucie H. Moore.................. $36,500 0 0 N/A
</TABLE>

None of the Trustees or Officers directly own shares of the Fund. As of
April 15, 2000, 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.

49
<PAGE>

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 a life insurance company that is domiciled in California.
Along with subsidiaries and affiliates, Pacific Life's operations include life
insurance, annuities, pension and institutional products, group employee
benefits, broker-dealer operations and investment advisory services. As of the
end of 1999, Pacific Life had $101 billion of individual life insurance in
force and total admitted assets of approximately $48 billion. Pacific Life is
ranked the 16th largest life insurance carrier in the U.S. based on admitted
assets as of December 31, 1999. The Pacific Life family of companies has total
assets and funds under management of $315 billion as of December 31, 1999.
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.

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, 2000, 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. An Addendum to the Advisory Contract for the Equity Index
Portfolio 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. 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 which increased the advisory fee schedule
with respect to the High Yield Bond, Managed Bond, Government Securities,
Small-Cap Equity, Equity Income, Multi-Strategy, and International Value
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, Small-Cap Equity, Equity Income,
Multi-Strategy, and International Value Portfolios at a Special Meeting of
Shareholders on December 13, 1993. An Addendum to the Advisory Contract for
the Equity and Bond

50
<PAGE>

and Income Portfolios 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 and Emerging Markets
Portfolios 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. An Addendum to the
Advisory Contract for the Large-Cap Value, Mid-Cap Value, Small-Cap Index, and
REIT Portfolios 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 6, 1998, and by the sole
shareholder of those Portfolios on December 21, 1998. An Addendum to the
Advisory Contract for the Diversified Research and International Large-Cap
Portfolios 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 27, 1999, and by the sole
shareholder of those Portfolios on December 14, 1999. An Addendum to the
Advisory Contract for the I-Net Tollkeeper 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
January 28, 2000 and by the sole shareholder of the Portfolio on April 10,
2000. An Addendum to the Advisory Contract for the Strategic Value and Focused
30 Portfolios 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 June 21, 2000, and by the sole
shareholder of those Portfolios on September 27, 2000. 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 pays .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 pays .60% of the average daily net assets of each of the
Portfolios. For the Small-Cap Equity, Equity Income, Multi-Strategy, and
Equity Portfolios, the Fund pays .65% of the average daily net assets of each
of the Portfolios. For the Aggressive Equity Portfolio, the Fund pays .80% of
the average daily net assets of the Portfolio. For the Growth LT Portfolio,
the Fund pays .75% of the average daily net assets of the Portfolio. For the
Equity Index Portfolio, the Fund pays .25% of the average daily net assets of
the Portfolio. For the Diversified Research Portfolio, the Fund pays .90% of
the average daily net assets of the Portfolio. For the International Large-Cap
Portfolio, the Fund pays 1.05% of the average daily net assets of the
Portfolio. For the Small-Cap Index Portfolio, the Fund pays .50% of the
average daily net assets of the Portfolio. For the Large-Cap Value, Mid-Cap
Value, and International Value Portfolios, the Fund pays .85% of the average
daily net assets of each of the Portfolios. For the REIT and Emerging Markets
Portfolios, the Fund pays 1.10% of the average daily net assets of each of the
Portfolios. For the I-Net Tollkeeper Portfolio, the Fund pays 1.50% of the
average daily net assets of the Portfolio. For the Strategic Value and Focused
30 Portfolios, the Fund pays .95% of the average daily net assets of each of
the Portfolios. The fee shall be computed and accrued daily and paid monthly.

Net advisory fees paid or owed to Pacific Life for 1999 were as follows:
Aggressive Equity Portfolio--$2,428,084, Emerging Markets Portfolio--
$1,641,630, Small-Cap Equity Portfolio--$1,897,060, Bond and Income
Portfolio--$1,184,797, Equity Portfolio--$4,542,082, Multi-Strategy
Portfolio--$4,280,824, Equity Income Portfolio--$9,869,169, Growth LT
Portfolio--$15,561,994, Mid-Cap Value Portfolio--$439,097, Equity Index
Portfolio--$3,003,427, Small-Cap Index Portfolio--$259,676, REIT Portfolio--
$309,008, International Value Portfolio--$10,752,012, Government Securities
Portfolio--$1,902,459, Managed Bond Portfolio--$5,736,488, Money Market
Portfolio--$2,572,715, High Yield Bond Portfolio--$2,551,011, and Large-Cap
Value Portfolio--$729,158. The Diversified Research and International Large-
Cap Portfolios did not begin operations until January 3, 2000, the I-Net
Tollkeeper Portfolio did not begin operations until May 1, 2000, and the
Strategic Value and Focused 30 Portfolios did not begin operations until
October 2, 2000.

51
<PAGE>

Net advisory fees paid or owed to Pacific Life for 1998 were as follows:
Aggressive Equity Portfolio--$1,301,554, Emerging Markets Portfolio--
$1,135,155, Small-Cap Equity Portfolio--$1,647,286, Bond and Income
Portfolio--$867,006, Equity Portfolio--$2,577,278, Multi-Strategy Portfolio--
$2,986,639, Equity Income Portfolio--$6,578,365, Growth LT Portfolio--
$6,762,035, Equity Index Portfolio--$1,888,470, International Value
Portfolio--$7,820,564, Government Securities Portfolio--$915,619, Managed Bond
Portfolio--$3,687,063, Money Market Portfolio--$1,802,788 and High Yield Bond
Portfolio--$2,126,319. The Large-Cap Value, Mid-Cap Value, Small-Cap Index and
REIT Portfolios did not begin operations until January 4, 1999. The
Diversified Research and International Large-Cap Portfolios did not begin
operations until January 3, 2000 and the I-Net Tollkeeper Portfolio did not
begin operations until May 1, 2000, and the Strategic Value and Focused 30
Portfolios did not begin operations until October 2, 2000.

Net advisory fees paid or owed to Pacific Life for 1997 were as follows:
Aggressive Equity Portfolio--$684,226, Emerging Markets Portfolio--$868,075,
Small-Cap Equity Portfolio--$1,355,092, Bond and Income Portfolio--$568,647,
Equity Portfolio--$1,818,664, Multi-Strategy Portfolio--$1,866,445, Equity
Income Portfolio--$4,062,587, Growth LT Portfolio--$4,193,552, Equity Index
Portfolio--$1,080,856, International Value Portfolio--$5,353,459, Government
Securities Portfolio--$645,820, Managed Bond Portfolio--$2,055,929, Money
Market Portfolio--$1,521,271 and High Yield Bond Portfolio--$1,466,135. The
Large-Cap Value, Mid-Cap Value, Small-Cap Index and REIT Portfolios did not
begin operations until January 4, 1999. The Diversified Research and
International Large-Cap Portfolios did not begin operations until January 3,
2000 and the I-Net Tollkeeper Portfolio did not begin operations until May 1,
2000, and the Strategic Value and Focused 30 Portfolios did not begin
operations until October 2, 2000.

To help limit expenses effective July 1, 2000, Pacific Life has
contractually agreed to waive all or part of its investment advisory fees or
otherwise reimburse each Portfolio for expenses (including organizational
expenses, but, not including advisory fees, additional costs associated with
foreign investing and extraordinary expenses) that exceed an annual rate of
0.10% of its average daily net assets through December 31, 2001. There can be
no assurance that this policy will be continued beyond December 31, 2001. Such
waiver or reimbursement is subject to repayment to Pacific Life to the extent
such expenses fall below the 0.10% expense cap. For each Portfolio other than
the Strategic Value and Focused 30 Portfolios, Pacific Life's right to
repayment is limited to amounts waived and/or reimbursed that exceed the new
0.10% expense cap, but do not exceed the previously established 0.25% expense
cap to Pacific Life by a Portfolio. Any amounts repaid to Pacific Life will
have the effect of increasing expenses of the Portfolio, but not above the
0.10% expense cap.

Other Expenses of the Fund

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.

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.

The Fund paid Pacific Life $264,738 for its services under the Agreement for
Support Services during 1999, $231,976 during 1998, and $165,000 during 1997,
representing 0.003%, 0.003%, and 0.004%, respectively, of the Fund's average
daily net assets and anticipates that fees to be paid for 2000 under said
Agreement will be approximately 0.002% of the Fund's average daily net assets.

52
<PAGE>

Portfolio Management Agreements

Pacific Life directly manages both the Money Market and the High Yield Bond
Portfolios. For the other twenty-one Portfolios Pacific Life employs other
investment advisory firms as Portfolio Manager, subject to Portfolio
Management Agreements, the terms of which are discussed below.

Pursuant to a Portfolio Management Agreement between the Fund, the Adviser,
and Alliance Capital Management L.P. ("Alliance Capital"), 1345 Avenue of the
Americas, New York, NY 10105, which became effective May 1, 1998, Alliance
Capital is the Portfolio Manager and provides investment advisory services to
the Aggressive Equity Portfolio.

For the services provided, Pacific Life pays a monthly fee to Alliance
Capital based on an annual percentage of the average daily net assets of the
Aggressive Equity Portfolio according to the following schedule:

<TABLE>
<CAPTION>
Aggressive Equity Portfolio

Rate (%) Break Point (assets)
-------- ---------------------
<S> <C>
.60% On first $100 million
.45% On next $400 million
.40% On excess
</TABLE>

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"), Metro Center, One Station Place, 8th Floor,
Stamford, Connecticut 06902, Columbus Circle served as the Portfolio Manager
and provided investment advisory services to the Aggressive Equity Portfolio.
For the services provided for the year 1997 and from January 1, 1998 through
April 30, 1998, Pacific Life paid a monthly fee to Columbus Circle based on an
annual percentage of the average daily net assets of the Aggressive Equity
Portfolio according to the following schedule:

<TABLE>
<CAPTION>
Aggressive Equity Portfolio

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>

Pursuant to a Portfolio Management Agreement between the Fund, the Adviser
and Alliance Capital as described above, which became effective January 1,
2000, Alliance Capital is the Portfolio Manager and provides investment
advisory services to the Emerging Markets Portfolio. For the services
provided, Pacific Life pays a monthly fee to Alliance Capital based on an
annual percentage of the average daily net assets of the Emerging Markets
Portfolio according to the following schedule:

<TABLE>
<CAPTION>
Emerging Markets Portfolio

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>

From April 1, 1996 to December 31, 1999, 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 served as the Portfolio Manager and provided investment advisory
services to

53
<PAGE>

the Emerging Markets Portfolio. For the services provided for the years 1997,
1998 and 1999, Pacific Life paid a monthly fee to Blairlogie based on an
annual percentage of the average daily net assets of the Emerging Markets
Portfolio according to the following schedule:

<TABLE>
<CAPTION>
Emerging Markets Portfolio

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>

Alliance Capital Management Corporation ("ACMC") is the general partner of
Alliance Capital and a wholly owned subsidiary of The Equitable Life Assurance
Society of the United States ("Equitable"). As of March 1, 2000, Equitable and
its subsidiaries were the beneficial owners of an approximately 55.7%
partnership interest in Alliance Capital, and Alliance Capital Management
Holding L.P. ("Alliance Holding") owned an approximately 41.87% partnership
interest in Alliance Capital. Equity interests in Alliance Holding are traded
on the New York Stock Exchange in the form of units. Approximately 98% of
Alliance Holding's units are owned by the public and management or employees
of Alliance Capital and approximately 2% are owned by Equitable. The general
partner of Alliance Holding is ACMC. Equitable, a New York life insurance
company, is a wholly owned subsidiary of AXA Financial, Inc. ("AXA
Financial"), a Delaware corporation whose shares are traded on the New York
Stock Exchange. As of March 1, 2000, AXA, a French insurance holding company,
owned approximately 60.3% of the issued and outstanding shares of the common
stock of AXA Financial.

Alliance Capital currently serves as investment adviser to other mutual
funds as well as individual, corporate, retirement, and charitable accounts.
As of December 31, 1999, Alliance Capital was retained as an investment
manager of employee benefit fund assets for 31 of the top 100 of America's
Fortune 500 companies.

Net fees paid or owed by Pacific Life to Alliance Capital for the Aggressive
Equity Portfolio for 1999 were $1,518,840, and from May 1, 1998 through
December 31, 1998 were $622,812. Net fees paid or owed by Pacific Life to
Columbus Circle from January 1, 1998 through April 30, 1998 were $251,083, and
for 1997 were $468,441.

Net fees paid or owed by Pacific Life to Blairlogie for the Emerging Markets
Portfolio for 1999 were $1,141,570, for 1998 were $821,133, and for 1997 were
$642,976.

Pursuant to Portfolio Management Agreements between the Fund, the Adviser,
and Capital Guardian Trust Company ("Capital Guardian"), a wholly-owned
subsidiary of Capital Group International, Inc., which itself is wholly-owned
by The Capital Group Companies, Inc. all of which are located at 333 South
Hope Street, Los Angeles, California 90071, Capital Guardian is the Portfolio
Manager and provides investment advisory services to the Diversified Research,
Small-Cap Equity, and International Large-Cap Portfolios. For the services
provided, Pacific Life pays a monthly fee to Capital Guardian based on an
annual percentage of the average daily net assets of the Diversified Research,
Small-Cap Equity, and International Large-Cap Portfolios according to the
following schedules:

<TABLE>
<CAPTION>
Diversified Research Portfolio

Rate (%) Break-Point (assets)
-------- ---------------------
<S> <C>
.50% On first $150 million
.45% On next $150 million
.35% On next $200 million
.30% On next $500 million
.275% On next $1 billion
.25% On excess
</TABLE>

54
<PAGE>

<TABLE>
<CAPTION>
Small-Cap Equity Portfolio

Rate (%) Break Point (assets)
-------- ------------------------
<S> <C>
.50% On first $30 million
.40% On next $30 million
.30% On excess

<CAPTION>
International Large-Cap Portfolio

Rate (%) Break-Point (assets)
-------- ------------------------
<S> <C>
.65% On first $150 million
.55% On next $150 million
.45% On next $200 million
.40% On next $500 million
.375% On next $1 billion
.35% 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 December 31, 1999, in excess of $122 billion. Capital
Guardian's research activities are conducted by affiliated companies that have
research facilities in Los Angeles, San Francisco, New York, Washington, D.C.,
Atlanta, London, Geneva, Hong Kong, Montreal, Singapore, and Tokyo.

Net fees paid or owed by Pacific Life to Capital Guardian for the Small-Cap
Equity Portfolio for 1999 were $966,856, for 1998 were $850,462, and for 1997
were $716,070. The Diversified Research and International Large-Cap Portfolios
did not begin operations until January 3, 2000.

Pursuant to a Portfolio Management Agreement between the Fund, the Adviser,
and Goldman Sachs Asset Management ("Goldman Sachs"), 32 Old Slip, New York,
New York 10005, which became effective May 1, 1998, Goldman Sachs is the
Portfolio Manager and provides investment advisory services to the Bond and
Income and Equity Portfolios.

For the services provided, Pacific Life pays a monthly fee to Goldman Sachs
based on an annual percentage of the combined average daily net assets of the
Bond and Income and Equity Portfolios according to the following schedule:

<TABLE>
<CAPTION>
Bond and Income and Equity Portfolios

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>

Pursuant to a Portfolio Management Agreement between the Fund, the Adviser,
and Goldman Sachs, as described above, which became effective May 1, 2000,
Goldman Sachs is the Portfolio Manager and provides investment advisory
services to the I-Net Tollkeeper PortfolioSM (I-Net Tollkeeper Portfolio is a
service mark of Goldman, Sachs & Co.).

For the services provided, Pacific Life pays a monthly fee to Goldman Sachs
based on an annual percentage of the average daily net assets of the I-Net
Tollkeeper Portfolio.

<TABLE>
<CAPTION>
I-Net Tollkeeper Portfolio

Rate (%) Break Point (assets)
-------- -------------------
<S> <C>
.95% On first $1 billion
.90% On excess
</TABLE>

55
<PAGE>

Goldman Sachs is a unit of the Investment Management Division of Goldman,
Sachs & Co., which was founded in 1869. As of December 31, 1999, Goldman Sachs
and its affiliates manage, administer and distribute over $258.5 billion for
institutional and individual investors worldwide, including fixed income
assets in excess of $50.5 billion for which they acted as investment adviser.
The Goldman Sachs Group, L.P., which controlled Goldman Sachs Asset
Management, merged into the Goldman Sachs Group, Inc. as a result of an
initial public offering.

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 served as the Portfolio Manager and provided
investment advisory services to the Bond and Income and Equity Portfolios. For
the services provided, for the year 1997 and from January 1, 1998 through
April 30, 1998, Pacific Life paid a monthly fee to Greenwich Street Advisors
based on an annual percentage of the combined average daily net assets of the
Bond and Income and Equity Portfolios according to the following schedule:

<TABLE>
<CAPTION>
Bond and Income and Equity Portfolios

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>

Net Fees paid or owed by Pacific Life to Goldman Sachs in 1999 were $525,489
for the Bond and Income Portfolio and $1,858,012 for the Equity Portfolio, and
from May 1, 1998 through December 31, 1998 were $290,917 for the Bond and
Income Portfolio and $772,931 for the Equity Portfolio. Net fees paid or owed
by Pacific Life to Greenwich Street Advisors from January 1, 1998 through
April 30, 1998 were $147,029 for the Bond and Income Portfolio and $437,389
for the Equity Portfolio and for 1997 were $368,846 for the Bond and Income
Portfolio and $1,088,097 for the Equity Portfolio. The I-Net Tollkeeper
Portfolio did not begin operations until May 1, 2000.

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 Multi-
Strategy and Equity Income Portfolios. For the services provided, Pacific Life
pays a monthly fee to J.P. Morgan Investment based on an annual percentage of
the combined average daily net assets of the Multi-Strategy and Equity Income
Portfolios according to the following schedule:

<TABLE>
<CAPTION>
Multi-Strategy and Equity Income Portfolios

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>

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

56
<PAGE>

subsidiary of Morgan. Morgan acquired its first tax-exempt client in 1913 and
its first pension account in 1940. As of December 31, 1999, Morgan, through
J.P. Morgan Investment and its other subsidiaries, had assets under management
of approximately $349 billion.

Net fees paid or owed by Pacific Life to J.P. Morgan Investment for 1999
were $1,651,512 for the Multi-Strategy Portfolio and $3,806,241 for the Equity
Income Portfolio, for 1998 were $1,263,563 for the Multi-Strategy Portfolio
and $2,783,163 for the Equity Income Portfolio, and for 1997 were $920,564 for
the Multi-Strategy Portfolio and $1,998,776 for the Equity Income 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 Strategic Value, Growth LT and Focused 30 Portfolios. For the
services provided, Pacific Life pays a monthly fee to Janus based on an annual
percentage of the average daily net assets of each of the Strategic Value,
Growth LT and Focused 30 Portfolios according to the following schedule:

<TABLE>
<CAPTION>
Strategic Value, Growth LT and Focused 30 Portfolios

Rate (%) Break Point (assets)
-------- ----------------------------------
<S> <C>
.55% On first $100 million
.50% On next $400 million
.45% On excess
</TABLE>

Janus serves as investment adviser to the Janus Funds, as well as other
mutual funds and individual, corporate, charitable, and retirement accounts.
Stilwell Financial, Inc. ("Stilwell") owns approximately 81.5% of the
outstanding voting stock of Janus. Stilwell is a publicly traded holding
company whose primary subsidiaries are engaged in financial services.

Net fees paid or owed by Pacific Life to Janus for the Growth LT Portfolio
for 1999 were $9,666,426, for 1998 were $4,364,703 and for 1997 were
$2,813,259. The Strategic Value and Focused 30 Portfolios did not begin
operations until October 2, 2000.

Pursuant to a Portfolio Management Agreement between the Fund, the Adviser,
and Lazard Asset Management ("Lazard"), 30 Rockefeller Plaza, New York, New
York 10112, which became effective January 1, 1999, Lazard is the Portfolio
Manager and provides investment advisory services to the Mid-Cap Value
Portfolio. For the services provided, Pacific Life pays a monthly fee to
Lazard based on an annual percentage of the average daily net assets of the
Mid-Cap Value Portfolio according to the following schedule:

<TABLE>
<CAPTION>
Mid-Cap Value Portfolio

Rate (%) Break Point (assets)
-------- ---------------------
<S> <C>
.55% On first $200 million
.50% On next $200 million
.45% On next $200 million
.40% On next $200 million
.30% On next $200 million
.25% On excess
</TABLE>

Lazard, a division of Lazard Freres & Co. LLC ("Lazard Freres"), a New York
limited liability company, which is registered as an investment adviser with
the SEC and is a member of the New York, American and Chicago Stock Exchanges.
Lazard Freres provides its clients with a wide variety of investment banking,

57
<PAGE>

brokerage and related services. Lazard and its affiliates provide investment
management services to client discretionary accounts with assets totaling
approximately $75 billion as of December 31, 1999. Lazard's clients are both
individuals and institutions, some of whose accounts have investment policies
similar to those of the Portfolio.

Net fees paid or owed by Pacific Life to Lazard for the Mid-Cap Value
Portfolio for 1999 were $284,822. The Mid-Cap Value Portfolio did not begin
operations until January 4, 1999.

Pursuant to a Portfolio Management Agreement between the Fund, the Adviser
and Fund Asset Management, L.P., doing business as Mercury Asset Management US
("Mercury"), a subsidiary of Merrill Lynch & Company, Inc., World Financial
Center, 225 Liberty Street, New York, NY 10080, which became effective January
1, 2000, Mercury is the Portfolio Manager and provides investment advisory
services to the Equity Index and Small-Cap Index Portfolios. For the services
provided, Pacific Life pays a monthly fee to Mercury based on an annual
percentage of the combined average daily net assets of the Equity Index and
Small-Cap Index Portfolios, according to the following schedule:

<TABLE>
<CAPTION>
Equity Index and Small-Cap Index Portfolios

Rate (%) Break-Point (assets)
-------- ------------------------------
<S> <C>
.08% On first $100 million
.04% On next $100 million
.02% On excess
</TABLE>

From January 30, 1991, in the case of the Equity Index Portfolio, and
January 1, 1999, in the case of the Small-Cap Index Portfolio, through
December 31, 1999, pursuant to a Portfolio Management Agreement between the
Fund, the Adviser and Bankers Trust Company ("BTCo"), a wholly-owned-
subsidiary of Bankers Trust Corporation, and an indirect subsidiary of
Deutsche Bank AG, 130 Liberty Street, New York, New York 10006, BTCo served as
the Portfolio Manager and provided investment advisory services to the Equity
Index and Small-Cap Index Portfolios. For the services provided for the year
1998, Pacific Life paid to BTCo, at the beginning of each calendar quarter, a
fee based on the net assets of the Equity Index Portfolio according to the
following schedule, subject to a minimum fee of $100,000. For the services
provided for the year 1999, Pacific Life paid to BTCo, at the beginning of
each calendar quarter a fee based on the combined net assets of the Equity
Index and Small-Cap Index Portfolios according to the following schedule,
subject to a minimum fee of $100,000:

<TABLE>
<CAPTION>
Equity Index and Small-Cap Index Portfolios

Rate (%) Break-Point (assets)
-------- ------------------------------
<S> <C>
.08% On first $100 million
.04% On next $100 million
.02% On excess
</TABLE>

For the services provided, for the year 1997, Pacific Life paid to BTCo a
quarterly fee in advance, based on the net assets of the Equity Index
Portfolio at the beginning of each calendar quarter at an annual rate in
accordance with the following schedule, subject to a minimum fee of $100,000:

<TABLE>
<CAPTION>
Equity Index Portfolio

Rate (%) Break Point (assets)
-------- ---------------------
<S> <C>
.07% On first $100 million
.03% On next $100 million
.01% On excess
</TABLE>

58
<PAGE>

Net fees paid or owed by Pacific Life to BTCo for the Equity Index Portfolio
for 1999 were $435,388, and for the Small-Cap Index Portfolio were $9,430. Net
fees paid or owed by Pacific Life to BTCo for the Equity Index Portfolio for
1998 were $188,793, and for 1997 were $135,863. The Small-Cap Index Portfolio
did not begin operations until January 4, 1999.

Pursuant to a Portfolio Management Agreement between the Fund, the Adviser,
and Morgan Stanley Asset Management ("MSAM"), a subsidiary of Morgan Stanley
Dean Witter & Co., whose address is 1221 Avenue of the Americas, New York, New
York 10020, MSAM is the Portfolio Manager and provides investment advisory
services to the REIT and International Value Portfolios. On December 1, 1998
Morgan Stanley Asset Management Inc. changed its name to Morgan Stanley Dean
Witter Investment Management Inc. but continues to do business in certain
instances using the name Morgan Stanley Asset Management.

For the services provided, under the Agreement for the REIT Portfolio, which
became effective January 1, 1999, Pacific Life pays a monthly fee to MSAM
based on an annual percentage of the average daily net assets of the REIT
Portfolio according to the following schedule:

<TABLE>
<CAPTION>
REIT Portfolio

Rate (%) Break Point (assets)
-------- -------------------------
<S> <C>
.60% On first $100 million
.45% On next $150 million
.40% On next $250 million
.35% On next $500 million
.30% On excess over $1 billion
</TABLE>

Net fees paid or owed by Pacific Life to MSAM for the REIT Portfolio for
1999 were $168,796. The REIT Portfolio did not begin operations until January
4, 1999.

For the services provided under the Agreement for the International Value
Portfolio, which became effective June 1, 1997, Pacific Life pays a monthly
fee to MSAM at an annual rate of 0.35% based on the average daily net assets
of the International Value Portfolio.

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 served as the Portfolio Manager and
provided investment advisory services to the International Value Portfolio.

For the services provided, for the period January 1, 1997 through May 31,
1997, Pacific Life paid a monthly fee to Templeton based on an annual
percentage of the average daily net assets of the International Value
Portfolio according to the following schedule:

<TABLE>
<CAPTION>
International Value Portfolio

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 MSAM for the International Value
Portfolio for 1999 were $4,433,877, for 1998 were $3,222,413, and from June 1,
1997 through December 31, 1997 were $1,478,065. Net fees paid or owed by
Pacific Life to Templeton for the International Value Portfolio from January
1, 1997 to May 31, 1997 were $945,379.

59
<PAGE>

MSAM, 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, 1999 MSAM, together with its affiliated institutional asset
management companies, had approximately $185 billion in assets under
management as an investment manager or as a fiduciary adviser.

Pursuant to a Portfolio Management Agreement between the Fund, the Adviser,
and Pacific Investment Management Company ("PIMCO"), 840 Newport Center Drive,
Suite 300, Newport Beach, California 92660, PIMCO is the Portfolio Manager and
provides investment advisory services to the Government Securities and Managed
Bond Portfolios.

For the services provided, Pacific Life pays a monthly fee to PIMCO based on
an annual percentage of the combined average daily net assets of the
Government Securities and Managed Bond Portfolios according to the following
schedule:

<TABLE>
<CAPTION>
Government Securities and Managed Bond Portfolios

Rate % Break Point (assets)
------ --------------------------------
<S> <C>
.50% On first $25 million
.375% On next $25 million
.25% On excess
</TABLE>

PIMCO is an investment counseling firm founded in 1971, and had
approximately $186 billion in assets under management as of December 31, 1999.
PIMCO is a subsidiary partnership of PIMCO Advisors L.P. ("PIMCO Advisors").
The general partners of PIMCO Advisors are PIMCO Partners, G.P. and PIMCO
Advisors Holdings L.P. ("PAH"). PIMCO Partners, G.P. is a general partnership
between PIMCO Holding LLC, a Delaware limited liability company and an
indirect wholly-owned subsidiary of Pacific Life Insurance Company, and PIMCO
Partners LLC, a California limited liability company controlled by the current
Managing Directors and two former Managing Directors of PIMCO. PIMCO Partners,
G.P. is the sole general partner of PAH. 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 is registered
as an investment adviser with the SEC and a commodity trading adviser with the
CFTC.

On October 31, 1999, PIMCO Advisors, PAH and Allianz AG ("Allianz")
announced that they had reached a definitive agreement under which Allianz
would acquire majority ownership of PIMCO Advisors and its subsidiaries (the
"Allianz Transaction"). PIMCO is a subsidiary of PIMCO Advisors. The Allianz
Transaction was completed on May 5, 2000. Under the terms of the transaction,
Allianz acquired all of PAH, the publicly traded general partner of PIMCO
Advisors. Pacific Life retained an approximate 30% interest in PIMCO Advisors.
The Allianz Group (which includes Allianz and PIMCO) collectively has over
$650 billion in assets under management.

Absent an order from the SEC or other relief, the Government Securities and
Managed Bond Portfolios generally cannot engage in principal transactions with
"Affiliated Brokers" of Allianz, including Dresdner Bank AG, Deutsche Bank AG,
Bankers Trust Company, BT Alex Brown, Inc., and certain other affiliated
entities. As a result, the Portfolios' ability to purchase securities
underwritten by an Affiliated Broker or to utilize the Affiliated Brokers for
agency transactions will be subject to regulatory restrictions. PIMCO has
advised that it does not believe that the above restrictions on transactions
with the Affiliated Brokers would materially adversely affect its ability to
provide services to the Portfolios, the Portfolios' ability to take advantage
of market opportunities, or their overall performance.

Net fees paid or owed by Pacific Life to PIMCO for 1999 were $817,241 for
the Government Securities Portfolio and $2,463,247 for the Managed Bond
Portfolio, for 1998 were $400,557 for the Government Securities

60
<PAGE>

Portfolio and $1,613,407 for the Managed Bond Portfolio, and for 1997 were
$292,079 for the Government Securities Portfolio and $929,041 for the Managed
Bond Portfolio.

Pursuant to a Portfolio Management Agreement between the Fund, the Adviser,
and Salomon Brothers Asset Management Inc ("SaBAM"), Seven World Trade Center,
New York, New York 10048, which became effective January 1, 1999, SaBAM is the
Portfolio Manager and provides investment advisory services to the Large-Cap
Value Portfolio. For the services provided, Pacific Life pays a monthly fee to
SaBAM based on an annual percentage of the average daily net assets of the
Large-Cap Value Portfolio according to the following schedule:

<TABLE>
<CAPTION>
Large-Cap Value Portfolio

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
.25% On next $250 million
.20% On excess
</TABLE>

SaBAM, a wholly-owned subsidiary of Citigroup, Inc. was incorporated in 1987
and, together with SaBAM affiliates in London, Frankfurt, Tokyo and Hong Kong,
provides a broad range of fixed-income and equity investment advisory services
to various individuals and institutional clients located throughout the world,
and serves as investment adviser to various investment companies. As of
December 31, 1999, SaBAM and such affiliates managed approximately $29 billion
of assets.

Net fees paid or owed by Pacific Life to SaBAM for the Large-Cap Value
Portfolio for 1999 were $376,747. The Large-Cap Value Portfolio did not begin
operations until January 4, 1999.

The Portfolio Management Agreements are not exclusive, and Alliance Capital,
Capital Guardian, Goldman Sachs, J.P. Morgan Investment, Janus, Lazard,
Mercury, MSAM, PIMCO, and SaBam may provide and currently are providing
investment advisory services to other clients, including other investment
companies.

Distribution of Fund Shares

Pacific Select Distributors, Inc. ("PSD") (formerly Pacific Mutual
Distributors, Inc.) 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. PSD
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 PSD in connection with the distribution or sale of
the shares.

As of March 31, 2000, Pacific Life beneficially owned 0% of the outstanding
shares of the Portfolios of the Fund. Pacific Asset Management LLC ("PAM"), a
wholly-owned subsidiary of Pacific Life, beneficially owned 45.27% of the
outstanding shares of the Diversified Research Portfolio and 17.84% of the
outstanding shares of the International Large-Cap Portfolio, including monies
paid in connection with the initial capital advances made to the Fund, and 0%,
of the outstanding shares of eighteen other Portfolios of the Fund. Pacific
Life and PAM would exercise voting rights attributable to any shares of the
Fund owned by them in accordance with voting instructions received by Owners
of the Policies issued by Pacific Life. To this extent, as of April 30, 2000,
Pacific Life did not exercise control over any Portfolio. As of April 30,
2000, Pacific Life owned 100% of the outstanding shares of the I-Net
Tollkeeper Portfolio. As of September 30, 2000, Pacific Life owned 100% of the
outstanding shares of the Strategic Value and Focused 30 Portfolios.

61
<PAGE>

Purchases and Redemptions

Shares of the Fund are not sold directly to the general public. Shares of
the Fund are currently offered only for purchase by the Separate Accounts to
serve as an investment medium for the Variable Contracts issued or
administered by Pacific Life or its affiliates. For information on purchase of
a Variable Contract, consult a prospectus for the Separate Account. The shares
of the Large-Cap Value, Mid-Cap Value, Small-Cap Index, Diversified Research,
International Large-Cap, REIT, I-Net Tollkeeper, Strategic Value and Focused
30 Portfolios are not available for Pacific Select variable universal life
insurance policies. The shares of the Large-Cap Value, Mid-Cap Value, Small-
Cap Index, REIT, Small-Cap Equity, Aggressive Equity, Emerging Markets,
Diversified Research, International Large-Cap, I-Net Tollkeeper, Strategic
Value and Focused 30 Portfolios are not available for Pacific Corinthian
variable annuity contracts.

Currently, each Portfolio offers shares of a single class. However, the Fund
is authorized to offer up to four additional classes of shares for each
Portfolio. These classes may be offered in the future to investors in
connection with individual retirement accounts, and certain other types of
qualified plans.

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. 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.

Exchanges Among the Portfolios

Variable Contract Owners do not deal directly with the Fund to purchase,
redeem, or exchange shares of a Portfolio, and Variable Contract Owners should
refer to the Prospectus for the applicable Separate Account for information on
the allocation of premiums and on transfers of accumulated value among options
available under the contract.

62
<PAGE>

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

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 selected at its discretion. 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. 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. 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 policy of obtaining the best net results, a portion of a
Portfolio's brokerage and futures transactions, including transactions on a
national securities exchange, may be conducted through an affiliated broker.

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.

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.

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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 1999, 1998, and 1997, respectively, the following
Portfolios incurred brokerage commissions as follows: the Aggressive Equity
Portfolio--$1,119,434, $855,826 and $296,940, the Emerging Markets Portfolio--
$600,207, $373,834 and $712,505, the Small-Cap Equity Portfolio--$268,990,
$251,753 and $225,232, the Bond and Income Portfolio--$42,627, $14,193 and $0,
of which $42,627 (100%) and $14,193 (100%) was paid to Goldman, Sachs & Co. in
1999 and 1998 respectively, an affiliate of Goldman Sachs Asset Management,
the Equity Portfolio--$368,208, $725,654 and $706,250 of which $18,759 (5.1%)
and $8,633 (1.2%) was paid to Goldman, Sachs & Co. in 1999 and 1998
respectively, an affiliate of Goldman Sachs Asset Management, and $6,900
(0.95%) and $61,512 (8.71%) was paid to Smith Barney Inc. and $4,500 (0.62%)
and $23,700 (3.36%) was paid to Robinson Humphrey Co., Inc., in 1998 and 1997
respectively, affiliates of Greenwich Street Advisors, the Multi-Strategy
Portfolio--$671,967, $455,757 and $283,791, the Equity Income Portfolio--
$2,018,844, $1,529,206 and $1,162,083, the Growth LT Portfolio--$4,255,430,
$1,517,836 and $1,057,621, the Equity Index Portfolio--$215,322, $140,167 and
$157,624, the International Value Portfolio--$3,194,813, $2,177,935 and
$1,606,247 of which $30,863 (0.97%), $41,033 (1.88%) and $39,617 (2.47%) was
paid to Morgan Stanley & Co., respectively, an affiliate of Morgan Stanley
Asset Management, the Government Securities Portfolio--$89,603, $29,467 and
$21,349, the Managed Bond Portfolio--$255,937, $122,103 and $41,315, the High
Yield Bond Portfolio--$5,250, $2,720 and $2,500. During the year ended 1999,
the following Portfolios incurred brokerage commissions as follows: the Mid-
Cap Value Portfolio--$280,370, the Small-Cap Index Portfolio--$124,792, the
REIT Portfolio--$144,524 and the Large-Cap Value Portfolio--$283,668 of which
$114 (0.04%) was paid to Salomon Smith Barney Inc., an affiliate of Salomon
Brothers Asset Management Inc.

During the fiscal year ended December 31, 1999, the Government Securities
Portfolio, the Managed Bond Portfolio, the Equity Income Portfolio, the Multi-
Strategy Portfolio, the Large-Cap Value Portfolio, and the Bond and Income
Portfolio acquired and sold securities of its regular broker-dealers. On
December 31, 1999, the Government Securities Portfolio held securities of
Merrill Lynch & Co., Morgan Stanley Dean Witter, and J.P. Morgan valued at
$2,900,389, $3,590,692, and $3,800,840, respectively; the Managed Bond
Portfolio held securities of Donaldson Lufkin & Jenrette, Bear Stearns, Lehman
Brothers, Inc. and Goldman, Sachs & Co. valued at $2,152,456, $24,817,987,
$19,461,587, and $9,612,636, respectively; the Equity Income Portfolio held
securities of Goldman, Sachs & Co. and BankAmerica Corp. valued at $18,168,769
and $14,003,718, respectively; the Multi-Strategy Portfolio held securities of
Goldman, Sachs & Co. valued at $4,634,025; and the Large-Cap Value Portfolio
held securities of Morgan Stanley Dean Witter valued at $4,782,125, each of
which is a broker or dealer regularly used for brokerage transactions by that
Portfolio.

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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; 200% for the Multi-Strategy Portfolio; 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.

NET ASSET VALUE

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. Eastern 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. Eastern 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., Eastern 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. 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. 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.,
Eastern 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 any Portfolio which invests in foreign securities
which are principally traded in a foreign market 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. Eastern 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

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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.
Eastern time, and the values that are determined will be deemed to be the
price at 4:00 p.m. Eastern 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 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.

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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, 1999, the current yield of the
Money Market Portfolio was 5.62% and the effective yield of the Portfolio was
5.77%.

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 + 1) (to the power of 6) - 1]
---
cd

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, 1999, the yield of the remaining
Portfolios that had commenced operations on or before that date was as
follows: (0.10)% for the Aggressive Equity Portfolio, 2.49% for the Emerging
Markets Portfolio, 0.32% for the Small-Cap Equity Portfolio, 7.15% for the
Bond and Income Portfolio, 0.15% for the Equity Portfolio, 2.84% for the
Multi-Strategy Portfolio, 1.08% for the Equity Income Portfolio, (0.17)% for
the Growth LT Portfolio, 0.59% for the Mid-Cap Value Portfolio, 1.04% for the
Equity Index Portfolio, 0.60% for the Small-Cap Index Portfolio, 5.99% for the
REIT Portfolio, 0.90% for the International Value Portfolio, 5.47% for the
Government Securities Portfolio, 6.31% for the Managed Bond Portfolio, 9.77%
for the High Yield Bond Portfolio, and 0.94% for the Large-Cap Value
Portfolio. The Diversified Research and International Large-Cap Portfolios did
not begin operations until January 3, 2000, the I-Net Tollkeeper Portfolio did
not begin operations until May 1, 2000, and the Strategic Value and Focused 30
Portfolios did not begin operations until October 2, 2000.

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)n = ERV (where P = a hypothetical initial
payment of $1,000, T = the total return for the period, n = the

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<PAGE>

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, 1999, the total return for each
Portfolio that had commenced operations on or before that date was as follows:
27.35% for the Aggressive Equity Portfolio, 53.56% for the Emerging Markets
Portfolio, 47.52% for the Small-Cap Equity Portfolio, (7.34)% for the Bond and
Income Portfolio, 38.54% for the Equity Portfolio, 7.04% for the Multi-
Strategy Portfolio, 13.26% for the Equity Income Portfolio, 98.08% for the
Growth LT Portfolio, 5.22% for the Mid-Cap Value Portfolio, 20.59% for the
Equity Index Portfolio, 19.36% for the Small-Cap Index Portfolio, (0.01)% for
the REIT Portfolio, 22.82% for the International Value Portfolio, (1.95)% for
the Government Securities Portfolio, (1.91)% for the Managed Bond Portfolio,
4.94% for the Money Market Portfolio, 2.90% for the High Yield Bond Portfolio,
and 11.46% for the Large-Cap Value Portfolio. The Diversified Research and
International Large-Cap Portfolios did not begin operations until January 3,
2000, the I-Net Tollkeeper Portfolio did not begin operations until May 1,
2000, and the Strategic Value and Focused 30 Portfolios did not begin
operations until October 2, 2000.

For the five year period ended December 31, 1999, the average annual total
return for each Portfolio that had commenced operations on or before that date
was as follows: 25.13% for the Small-Cap Equity Portfolio, 9.27% for the Bond
and Income Portfolio, 27.59% for the Equity Portfolio, 16.36% for the Multi-
Strategy Portfolio, 23.25% for the Equity Income Portfolio, 41.17% for the
Growth LT Portfolio, 28.11% for the Equity Index Portfolio, 13.81% for the
International Value Portfolio, 7.48% for the Government Securities Portfolio,
7.88% for the Managed Bond Portfolio, 5.23% for the Money Market Portfolio,
and 8.83% for the High Yield Bond Portfolio. The Aggressive Equity and
Emerging Markets Portfolios did not begin operations until April 1, 1996. The
Large-Cap Value, Mid-Cap Value, Small-Cap Index and REIT Portfolios did not
begin operations until January 4, 1999. The Diversified Research and
International Large-Cap Portfolios did not begin operations until January 3,
2000, the I-Net Tollkeeper Portfolio did not begin operations until May 1,
2000, and the Strategic Value and Focused 30 Portfolios did not begin
operations until October 2, 2000.

For the ten year period ended December 31, 1999, the average annual total
returns for each Portfolio was as follows: 16.59% for the Small-Cap Equity
Portfolio, 8.99% for the Bond and Income Portfolio, 17.73% for the Equity
Portfolio, 11.47% for the Multi-Strategy Portfolio, 14.67% for the Equity
Income Portfolio, 8.28% for the International Value Portfolio, 7.41% for the
Government Securities Portfolio, 7.97% for the Managed Bond Portfolio, 4.93%
for the Money Market Portfolio, and 10.39% for the High Yield Bond Portfolio.
Based upon the period from the commencement of operations of the Growth LT
Portfolio on January 4, 1994 until December 31, 1999, the average annual total
return for the Growth LT Portfolio was 36.12%. Based upon the period from the
commencement of operations of the Equity Index Portfolio on January 30, 1991
until December 31, 1999, the average annual total return for the Equity Index
Portfolio was 20.01%. Based upon the period from the commencement of
operations of the Aggressive Equity and Emerging Markets Portfolios on April
1, 1996 until December 31, 1999, the average annual total return for each of
these Portfolios was 13.60% and 1.79%, respectively. The Large-Cap Value,
Mid-Cap Value, Small-Cap Index, and REIT Portfolios did not begin operations
until January 4, 1999. The Diversified Research and the International Large-
Cap Portfolios did not begin operations until January 3, 2000, the I-Net
Tollkeeper Portfolio did not begin operations until May 1, 2000, and the
Strategic Value and Focused 30 Portfolios did not begin operations until
October 2, 2000.

The performance results for the Aggressive Equity, Equity Income, Multi-
Strategy, Equity, Bond and Income, and International Value Portfolios are
based, in part, on performance results when these Portfolios were advised by
different Portfolio Managers. Alliance Capital began serving as Portfolio
Manager to the Aggressive Equity Portfolio on May 1, 1998, J.P. Morgan
Investment began serving as Portfolio Manager to the Equity Income and Multi-
Strategy Portfolios on January 1, 1994, Morgan Stanley began serving as
Portfolio Manager to the International Value Portfolio on June 1, 1997, and
Goldman Sachs began serving as Portfolio Manager to the Equity and Bond and
Income Portfolios on May 1, 1998. The performance results for the Equity
Portfolio

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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. The performance results
for the Emerging Markets, Equity Index, and Small-Cap Index Portfolios are
based on performance results when these Portfolios were advised by different
Portfolio Managers. Alliance Capital began serving as Portfolio Manager to the
Emerging Markets Portfolio on January 1, 2000 and Mercury began serving as
Portfolio Manager to the Equity Index and Small-Cap Index Portfolios on
January 1, 2000.

Performance information for a Portfolio may be compared, in advertisements,
sales literature, and reports to shareholders to (i) various indices 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 Inc., 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 or its subsidiaries. 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.

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

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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.

Each Portfolio also intends to comply with diversification regulations under
Section 817(h) of the Code, that apply to mutual funds underlying variable
contracts. Generally, a Portfolio will be required to diversify its
investments so that on the last day of each quarter of a calendar year no more
than 55% of the value of its total assets is represented by any one
investment, no more than 70% is represented by any two investments, no more
than 80% is represented by any three investments, and no more than 90% is
represented by any four investments. For this purpose, securities of a given
issuer generally are treated as one investment, but each U.S. Government
agency and instrumentality is treated as a separate issuer. Compliance with
the diversification rules under Section 817(h) of the Code generally will
limit the ability of any Portfolio, and in particular, the Government
Securities Portfolio, to invest greater than 55% of its total assets in direct
obligations of the U.S. Treasury (or any other issuer) or to invest primarily
in securities issued by a single agency or instrumentality of the
U.S. Government.

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.

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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% 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, except the REIT Portfolio's,
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.

Brokerage Enhancement Plan

The Fund has adopted a Brokerage Enhancement Plan (the "Plan") pursuant to
Rule 12b-1 under the 1940 Act, under which the Fund may enter into agreements
or arrangements with brokers or dealers, pursuant to which brokerage
transactions can be directed on behalf of a Portfolio to the participating
broker-dealer to execute the transaction in return for credits, other
compensation or other types of benefits to be awarded to the Fund.

The credits, compensation or benefits earned as a result of directed
brokerage can be used in a number of ways to promote the distribution of the
Fund's shares. These ways include paying for all or part of the expenses for:
(i) PSD to participate in or sponsor seminars, sales meetings, conferences,
and other events held by the broker-dealer; (ii) broker/dealers to conduct due
diligence on the Fund or the variable contracts (to help that broker-dealer
defray the expenses of its due diligence); (iii) disseminating sales
literature about the Fund or the variable contracts (to help defray its
related expenses); or (iv) placing the Fund or the variable contracts on a
list of eligible funds or variable contracts that may be offered by that
broker-dealer's registered representatives (to help compensate it for the
associated expenses).

PSD can indirectly benefit from the Plan in that securities brokerage
allocated to a broker-dealer may help defray, in whole or in part,
distribution expenses that otherwise would be borne by PSD or an affiliate.
The Plan also permits credits generated by securities transactions from one
Portfolio to inure to the benefits of that Portfolio, of any other Portfolio,
or to the Fund as a whole.

The Plan provides that it is subject to annual renewal by the Board,
including those Trustees of the Fund who are not "interested persons" of the
Fund (as defined in the 1940 Act) and who have no direct or indirect financial

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interest in the operation of the Plan or any agreements related to it (the
"Rule 12b-1 Trustees"), and that PSD provide the Trustees with a written
report of securities transactions directed under the Plan, currently on a
quarterly basis. The Plan also provides that it may be terminated at any time
by the vote of a majority of the Rule 12b-1 Trustees, and that all material
Plan amendments must be approved by a vote of the Rule 12b-1 Trustees.

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.

Under Massachusetts law, shareholders could under certain circumstances, be
held personally liable for the obligations of the Fund. However, the
Declaration of Trust disclaims liability of the shareholders, Trustees, or
officers of the Fund for acts or obligations of the Fund, which are binding
only on the assets and property of the Fund and requires that notice of the
disclaimer be given in each contract or obligation entered into or executed by
the Fund or the Trustees. The Declaration of Trust provides for
indemnification out of Fund property for all loss and expense of any
shareholder held personally liable for the obligations of the Fund. The risk
of a shareholder incurring financial loss on account of shareholder liability
is limited to circumstances in which the Fund itself would be unable to meet
its obligations and thus should be considered remote.

Expenses incurred in connection with the Fund's organization and
establishment of the Aggressive Equity Portfolio and Emerging Markets
Portfolio in 1996 and the public offering of the shares of those Portfolios,
aggregated approximately $23,410 per Portfolio. These costs have been deferred
by the Aggressive Equity 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. These costs have been deferred and are being
amortized over a period of five years at the rates of 10%, 15%, and 25% in
years one, two, and three through five, respectively. At December 31, 1999,
the unamortized balance of such expenses amounted to $5,856 each for the
Aggressive Equity Portfolio and the Emerging Markets Portfolio.

Expenses incurred in connection with the Fund's organization and
establishment of the Diversified Research and International Large-Cap
Portfolios in 1999 and the public offering of the shares of those Portfolios,
aggregated approximately $19,733 per Portfolio. Expenses incurred in
connection with the Fund's organization and establishment of the I-Net
Tollkeeper Portfolio in 2000 and the public offering of the shares of the
Portfolio aggregated approximately $40,804. Estimated expenses incurred in
connection with the Fund's organization and establishment of the Strategic
Value and Focused 30 Portfolios in 2000 and the public offering of the shares
of those Portfolios were approximately $37,608 per Portfolio. These costs will
be expensed and charged separately to each of the Portfolios during each
Portfolio's first period of operations.

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 and Massachusetts business trust law, 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

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hold shareholders' meetings unless required by law, although special meetings
may be called for a specific Portfolio, or for the Fund as a whole, for
purposes such as electing or removing Trustees, changing fundamental policies,
or approving a new or amended advisory contract or portfolio management
agreement. 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 in writing to do so by the holders of not less than
10% of the outstanding shares or other voting interests of the Fund. In
accordance with current laws, it is anticipated that an insurance company
issuing a Variable Contract that participates in the Fund will request voting
instructions from Variable Contract Owners and will vote shares or other
voting interests in the Separate Account in proportion to the voting
instructions received. The Fund's shares do not have cumulative voting rights.

Custodian and Transfer Agency and Dividend Disbursing Services

State Street Bank and Trust Company of California, NA ("State Street"), a
national banking association chartered by the Comptroller of the Currency,
with a principal office at 633 West 5th Street, Los Angeles, CA 90071, serves
as Custodian of the Fund. Under the agreement with the Fund, State Street is
permitted to hold assets of the Fund in an account that it maintains or at its
parent, State Street Bank and Trust Company ("State Street Boston"), a
Massachusetts banking corporation with a principal place of business at 225
Franklin Street, Boston, Massachusetts 02110. 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. Chase Manhattan Bank, ("Chase"), a New York State
chartered bank, with principal offices at 270 Park Avenue, New York, NY 10081]
currently serves as sub-custodian of the Fund for foreign securities. Chase,
together with certain of its foreign branches and agencies and foreign banks
and securities depositories acting as sub-custodian to Chase, maintain custody
of the securities and other assets of foreign issuers for the Fund. The sub-
custodial arrangements with Chase are expected to terminate by the end of the
year 2000.

State Street Boston will become the foreign sub-custodian upon termination
of the arrangements with Chase. State Street Boston will place and maintain
the foreign assets of the Fund in the care of eligible foreign custodians
determined by State Street Boston and will monitor the appropriateness of
maintaining foreign assets with eligible custodians, which does not include
mandatory 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, 1999, 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, 1999.
The financial statements have been audited by Deloitte & Touche LLP,
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.

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Code of Ethics

The Fund and each of its Portfolio Managers have adopted codes of ethics
which have been approved by the Fund's Board of Trustees. Subject to certain
limitations and procedures, these codes permit personnel that they cover,
including employees of the Investment Adviser or Portfolio Managers who
regularly have access to information about securities purchased for the Fund,
to invest in securities for their own accounts. This could include securities
that may be purchased by Portfolios of the Fund. The codes are intended to
prevent these personnel from taking inappropriate advantage of their positions
and to prevent fraud upon the Fund. The Fund's Code of Ethics requires
reporting to the Board of Trustees on compliance violations.

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, (and including specifically all applicable Codes of
Ethics), are on file with and 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.

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APPENDIX

Description of Bond Ratings

Corporate Bonds: Bonds rated Aa by Moody's are judged by Moody's to be of
high quality by all standards. Together with bonds rated Aaa (Moody's highest
rating) they comprise what are generally known as high-grade bonds. Aa bonds
are rated lower than Aaa bonds because margins of protection may not be as
large as those of Aaa bonds, or fluctuation of protective elements may be of
greater amplitude, or there may be other elements present which make the long-
term risks appear somewhat larger than those applicable to Aaa securities.
Bonds which are rated A by Moody's possess many favorable investment
attributes and are to be considered as upper medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment sometime
in the future.

Moody's Baa rated bonds are considered as medium-grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and, in
fact, have speculative characteristics as well.

Bonds rated AA by Standard & Poor's are judged by Standard & Poor's to be
high-grade obligations and in the majority of instances differ only in small
degree from issues rated AAA (Standard & Poor's highest rating). Bonds rated
AAA are considered by Standard & Poor's to be the highest grade obligations
and possess the ultimate degree of protection as to principal and interest.
With AA bonds, as with AAA bonds, prices move with the long-term money market.

Bonds rated A by Standard & Poor's, regarded as upper medium grade, have a
strong capacity and interest, although they are somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions.

Standard & Poor's BBB rated bonds, or medium-grade category bonds, are
borderline between definitely sound obligations and those where the
speculative element begins to predominate. These bonds have adequate asset
coverage and normally are protected by satisfactory earnings. Their
susceptibility to changing conditions, particularly to depressions,
necessitates constant watching. These bonds generally are more responsive to
business and trade conditions than to interest rates. This group is the lowest
which qualifies for commercial bank investment.

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.

Moody's Ba rated bonds are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds rated Ba. Bonds which are rated B by Moody's generally
lack characteristics of the desirable investment. Assurance of interest and
principal payments or of maintenance of other terms of the contract over any
long period of time may be small.

Bonds rated Caa by Moody's are considered to be of poor standing. Such
issues may be in default or there may be elements of danger with respect to
principal or interest. Bonds rated Ca are considered by Moody's to be
speculative in a high degree, often in default. Bonds rated C, the lowest
class of bonds under Moody's bond ratings, are regarded by Moody's as having
extremely poor prospects.

Moody's also applies numerical indicators 1, 2 and 3 to rating categories.
The modifier 1 indicates that the security is in the higher end of its rating
category; 2 indicates a mid-range ranking; and 3 indicates a ranking toward
the lower end of the category.

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A bond rated BB, B, CCC, and CC by Standard & Poor's is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposure to adverse conditions.

Commercial Paper: The Prime rating is the highest commercial paper rating
assigned by Moody's. Among the factors considered by Moody's in assigning
ratings are the following: (1) evaluation of the management of the issuer; (2)
economic evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation
of the issuer's products in relation to competition and customer acceptance;
(4) liquidity; (5) amount and quality of long-term debt; (6) trend of earnings
over a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by management
of obligations which may be present or may arise as a result of public
interest questions and preparations to meet such obligations. Issuers with
this Prime category may be given ratings 1, 2 or 3, depending on the relative
strengths of these factors.

Commercial paper rated A by Standard & Poor's has the following
characteristics: (i) liquidity ratios are adequate to meet cash requirements;
(ii) long-term senior debt rating should be A or better, although in some
cases BBB credits may be allowed if other factors outweigh the BBB rating,
(iii) the issuer should have access to at least two additional channels of
borrowing; (iv) basic earnings and cash flow should have an upward trend with
allowances made for unusual circumstances; and (v) typically the issuer's
industry should be well established and the issuer should have a strong
position within its industry and the reliability and quality of management
should be unquestioned. Issuers rated A are further referred to by use of
numbers 1, 2 and 3 to denote relative strength with this highest
classification.