COVA SERIES TRUST, 485APOS, 1998-02-13

COVA SERIES TRUST
485APOS, 1998-02-13

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Registration Nos. 33-16005
811-5252

==============================================================================

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 18 [X]

and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 19 [X]

(Check appropriate box or boxes.)

COVA SERIES TRUST
--------------------------------
(Exact name of registrant as specified in charter)

One Tower Lane, Suite 3000
Oakbrook Terrace, Illinois 60181-4644
--------------------------------------- -------------
(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, Including Area Code (800) 831-5433

Lorry J. Stensrud
President and Chief Executive Officer
Cova Series Trust
One Tower Lane, Suite 3000
Oakbrook Terrace, Illinois 60181-4644

(Name and Address of Agent For Service)

Copy to:

Raymond A. O'Hara III, Esq.
Blazzard, Grodd & Hasenauer, P.C.
P.O. Box 5108
Westport, CT 06881
(203) 226-7866

It is proposed that this filing will become effective:

___ immediately upon filing pursuant to paragraph (b)
___ on (date) pursuant to paragraph (b)
___ 60 days after filing pursuant to paragraph (a)(1)
___ on (date) pursuant to paragraph (a)(1)
___ 75 days after filing pursuant to paragraph (a)(2)
_X_ on May 1, 1998 pursuant to paragraph (a)(2) of rule 485

If appropriate, check the following box:

___ this post-effective amendment designates a new effective date for
a previously filed post-effective amendment.

Title of Securities Being Registered:
Investment Company Shares

<TABLE>
<CAPTION>
<S> <C> <C>
CROSS REFERENCE SHEET
(required by Rule 495)

Item No. Location
- -------- ---------------------------------
PART A

Item 1. Cover Page............................. Cover Page

Item 2. Synopsis............................... Summary

Item 3. Condensed Financial Information........ Financial Highlights

Item 4. General Description of Registrant...... The Trust; Investment Objectives
and Policies of the Portfolios;
Investment Practices

Item 5. Management of the Fund................. Management of the Trust

Item 6. Capital Stock and Other Securities..... Description of the Trust

Item 7. Purchase of Securities Being Offered... Description of the Trust

Item 8. Redemption or Repurchase............... Description of the Trust

Item 9. Pending Legal Proceedings.............. Not Applicable

PART B

Item 10. Cover Page............................. Cover Page

Item 11. Table of Contents...................... Table of Contents

Item 12. General Information and History........ General Information and History

Item 13. Investment Objectives and Policies..... Investment Objectives and
Policies

Item 14. Management of the Fund................. Officers and Trustees

Item 15. Control Persons and Principal Holders
of Securities..................... Officers and Trustees

Item 16. Investment Advisory and Other
Services.......................... Investment Advisory Agreement

Item 17. Brokerage Allocation and
Other Practices.................... Portfolio Transactions

Item 18. Capital Stock and Other Securities..... Description of the Trust (Part A)

Item 19. Purchase, Redemption and Pricing of
Securities Being Offered........... Net Asset Values (Part A)

Item 20. Tax Status......................... Tax Status (Part A)

Item 21. Underwriters....................... Distribution and Redemption of
Shares (Part A)

Item 22. Calculation of Performance Data........ Performance Data

Item 23. Financial Statements................... Financial Statements (Part B)
</TABLE>

PART C

Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.

EXPLANATORY NOTE

- ------------------------------------------------------------------------------
This Registration Statement contains twenty Portfolios of Cova Series Trust.
Several versions of the Prospectus will be created from this Registration
Statement. The distribution system for each version of the Prospectus is
different. All versions of the Prospectus will be filed with the Commission
pursuant to Rule 497 under the Securities Act of 1933.

The Registrant undertakes to update this Explanatory Note, as needed, each
time a Post-Effective Amendment is filed.
- ------------------------------------------------------------------------------

PART A

COVA SERIES TRUST
ONE TOWER LANE, SUITE 3000
OAKBROOK TERRACE, ILLINOIS 60181-4644

COVA SERIES TRUST ("Trust") is intended to meet differing investment
objectives with its twenty separate Portfolios: Money Market Portfolio,
Quality Income Portfolio, High Yield Portfolio, Stock Index Portfolio, VKAC
Growth and Income Portfolio (formerly Growth and Income Portfolio), Bond
Debenture Portfolio, Quality Bond Portfolio, Small Cap Stock Portfolio,
Large Cap Stock Portfolio, Select Equity Portfolio, International Equity
Portfolio, Emerging Markets Equity Portfolio, Mid-Cap Value Portfolio, Large
Cap Research Portfolio, Developing Growth Portfolio, Lord Abbett Growth and
Income Portfolio, Balanced Portfolio, Small Cap Equity Portfolio, Equity Income
Portfolio and Growth & Income Equity Portfolio. The Trustees may provide for
additional Portfolios from time to time. Each Portfolio issues its own class
of shares which has rights separate from the other classes of shares.

This Prospectus concisely sets forth the information about the Trust that a
prospective investor should know before investing. Investors should read and
retain this Prospectus for future reference.

A Statement of Additional Information, dated May 1, 1998, containing
information about the Trust has been filed with the Securities and Exchange
Commission and is hereby incorporated by reference into this Prospectus. A
copy of the Statement of Additional Information may be obtained without charge
by calling (800) 831-LIFE, or writing Cova Financial Services Life Insurance
Company at One Tower Lane, Suite 3000, Oakbrook Terrace, Illinois 60181-4644.

PURCHASERS SHOULD BE AWARE THAT AN INVESTMENT IN THE MONEY MARKET PORTFOLIO IS
NEITHER INSURED NOR GUARANTEED BY THE U. S. GOVERNMENT. THERE CAN BE NO
ASSURANCE THAT THE MONEY MARKET PORTFOLIO WILL BE ABLE TO MAINTAIN A STABLE
NET ASSET VALUE OF $1.00 PER SHARE.

THE HIGH YIELD PORTFOLIO AND THE BOND DEBENTURE PORTFOLIO MAY INVEST A
SUBSTANTIAL PORTION OF THEIR ASSETS IN LOWER GRADE CORPORATE DEBT SECURITIES
COMMONLY KNOWN AS "JUNK BONDS." INVESTORS SHOULD BE AWARE THAT SUCH
INVESTMENTS INVOLVE A SIGNIFICANT DEGREE OF RISK. SEE "RISK FACTORS - SPECIAL
RISKS OF HIGH YIELD INVESTING."

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

This Prospectus is dated: May 1, 1998.

TABLE OF CONTENTS

PAGE

SUMMARY
The Trust
Investment Adviser and Sub-Advisers
The Portfolios
Investment Risks
Sales and Redemptions

EXPENSE SUMMARY

FINANCIAL HIGHLIGHTS

THE TRUST

INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS
Quality Bond Portfolio
Small Cap Stock Portfolio
Large Cap Stock Portfolio
Select Equity Portfolio
International Equity Portfolio
Emerging Markets Equity Portfolio
Bond Debenture Portfolio
Mid-Cap Value Portfolio
Large Cap Research Portfolio
Developing Growth Portfolio
Lord Abbett Growth and Income Portfolio
Balanced Portfolio
Small Cap Equity Portfolio
Equity Income Portfolio
Growth & Income Equity Portfolio
Money Market Portfolio
Quality Income Portfolio
High Yield Portfolio
Stock Index Portfolio
VKAC Growth and Income Portfolio

INVESTMENT PRACTICES
Investment Limitations

RISK FACTORS
Tax Considerations
Special Considerations Relating to Foreign Securities
Special Risks of High Yield Investing

PORTFOLIO TURNOVER RATES
Money Market Portfolio and Quality Income Portfolio
High Yield Portfolio and Bond Debenture Portfolio
Stock Index Portfolio
VKAC Growth and Income Portfolio
Quality Bond, Small Cap Stock, Select Equity, International Equity and Large
Cap Stock Portfolios
Balanced, Small Cap Equity, Equity Income, Growth & Income Equity, Mid-Cap
Value, Large Cap Research, Developing Growth and Lord Abbett Growth
and Income Portfolios

MANAGEMENT OF THE TRUST
The Trustees
Adviser
Trust Administration
Portfolio Management
Expenses of the Trust
Sub-Advisers
Sub-Advisory Fees

DESCRIPTION OF THE TRUST
Shareholder Rights
Inquiries
Distribution and Redemption of Shares
Dividends
Tax Status
Net Asset Values

FUND PERFORMANCE

ADDITIONAL PERFORMANCE INFORMATION

APPENDIX - DESCRIPTION OF CORPORATE BOND RATINGS

SUMMARY

THE TRUST

The Trust is an open-end management investment company established as a
Massachusetts business trust under a Declaration of Trust dated July 9, 1987.
Each Portfolio issues a separate class of shares. The Declaration of Trust
permits the Trustees to issue an unlimited number of full or fractional shares
of each class of stock.

Each Portfolio has distinct investment objectives and policies. (See
"Investment Objectives and Policies of the Portfolios.") Additional Portfolios
may be added to the Trust in the future. This Prospectus will be supplemented
to reflect the addition of new Portfolios.

INVESTMENT ADVISER AND SUB-ADVISERS

Subject to the authority of the Board of Trustees of the Trust, Cova
Investment Advisory Corporation (the "Adviser") serves as the Trust's
investment adviser and has responsibility for the overall management of the
investment strategies and policies of the Portfolios. The Adviser has engaged
Sub-Advisers for each of the Portfolios to make investment decisions and place
orders. The Sub-Advisers for the Portfolios are:

<TABLE>
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<S> <C>
SUB-ADVISER NAME OF PORTFOLIO

J.P. Morgan Quality Bond Portfolio
Investment Small Cap Stock Portfolio
Management Inc. Large Cap Stock Portfolio
Select Equity Portfolio
International Equity Portfolio
Emerging Markets Equity Portfolio

Lord, Abbett & Co. Bond Debenture Portfolio
Mid-Cap Value Portfolio
Large Cap Research Portfolio
Developing Growth Portfolio
Lord Abbett Growth and Income Portfolio

Mississippi Valley Balanced Portfolio
Advisors Inc. Small Cap Equity Portfolio
Equity Income Portfolio
Growth & Income Equity Portfolio

Van Kampen American Money Market Portfolio
Capital Investment Quality Income Portfolio
Advisory Corp. High Yield Portfolio
Stock Index Portfolio
VKAC Growth and Income Portfolio
</TABLE>

For additional information concerning the Adviser and the Sub-Advisers,
including a description of advisory and sub-advisory fees, see "Expense
Summary" and "Management of the Trust."

THE PORTFOLIOS

PORTFOLIOS MANAGED BY J.P. MORGAN INVESTMENT MANAGEMENT INC.:

QUALITY BOND PORTFOLIO.

The investment objective of this Portfolio is to provide a high total
return consistent with moderate risk of capital and maintenance of liquidity.
Although the net asset value of the Portfolio will fluctuate, the Portfolio
attempts to preserve the value of its investments to the extent consistent
with its objective.

SMALL CAP STOCK PORTFOLIO.

The investment objective of this Portfolio is to provide a high total
return from a portfolio of equity securities of small companies. The Portfolio
will invest primarily in the common stock of small U.S. companies. The small
company holdings of the Portfolio will be primarily securities included in the
Russell 2000 Index.

LARGE CAP STOCK PORTFOLIO.

The investment objective of this Portfolio is long-term growth of capital
and income. The equity holdings of the Portfolio will be primarily stocks of
large- and medium-sized companies. The Portfolio will be highly diversified
and hold approximately 300 stocks.

SELECT EQUITY PORTFOLIO.

INTERNATIONAL EQUITY PORTFOLIO.

The investment objective of this Portfolio is to provide a high total
return from a portfolio of equity securities of foreign corporations. The
equity holdings of the Portfolio will be primarily stocks of established
companies based in developed countries outside the United States. The
Portfolio is actively managed and seeks to outperform the Morgan Stanley
Capital International Europe, Australia and Far East Index. Investments in
foreign securities involve certain risks not typically involved in domestic
investment. Investors should carefully consider these risks set forth under
"Risk Factors-Special Considerations Relating to Foreign Securities" before
investing.

EMERGING MARKETS EQUITY PORTFOLIO.

The investment objective of this Portfolio is to achieve a high total
return from a portfolio of equity securities of companies in emerging markets.
The Portfolio is designed for long term investors who want exposure to the
rapidly growing emerging markets. Many investments in emerging markets can be
considered speculative, and therefore may offer higher potential for gains and
losses and may be more volatile than investments in the developed markets of
the world. Investors should carefully consider these risks set forth under
"Risk Factors-Special Considerations Relating to Foreign Securities" before
investing.

PORTFOLIOS MANAGED BY LORD, ABBETT & CO.:

BOND DEBENTURE PORTFOLIO.

The investment objective of this Portfolio is high current income and the
opportunity for capital appreciation to produce a high total return through a
professionally-managed portfolio consisting primarily of convertible and
discount debt securities, many of which are lower-rated. These lower-rated
debt securities entail greater risks than investments in higher-rated debt
securities. Investors should carefully consider these risks set forth under
"Risk Factors - Special Risks of High Yield Investing" before investing.

MID-CAP VALUE PORTFOLIO.

The investment objective of this Portfolio is to seek capital
appreciation through investments, primarily in equity securities, which are
believed to be undervalued in the marketplace. Under normal circumstances, at
least 65% of the Portfolio's total assets will consist of investments in
companies whose outstanding equity securities have an aggregate market value
of between $200 million and $5 billion.

LARGE CAP RESEARCH PORTFOLIO.

The investment objective of this Portfolio is growth of capital and
growth of income consistent with reasonable risk. Production of current income
is a secondary consideration. Under normal circumstances, at least 65% of the
Portfolio's total assets will consist of investments in companies whose
outstanding equity securities have an aggregate market value of $1.5 billion
and above.

DEVELOPING GROWTH PORTFOLIO.

The investment objective of this Portfolio is long-term growth of capital
through a diversified and actively-managed portfolio consisting of developing
growth companies, many of which are traded over the counter. The Portfolio
will invest primarily in the common stocks of companies with long-range growth
potential, particularly smaller companies considered to be in the developing
growth phase. Volatile price movement can be expected.

LORD ABBETT GROWTH AND INCOME PORTFOLIO.

The investment objective of this Portfolio is long-term growth of capital
and income without excessive fluctuation in market value. The Portfolio will
normally invest in common stocks (including securities convertible into common
stocks) of large, seasoned companies in sound financial condition, which
common stocks are expected to show above-average price appreciation.

PORTFOLIOS MANAGED BY MISSISSIPPI VALLEY ADVISORS INC.

BALANCED PORTFOLIO.

The investment objective of this Portfolio is to maximize total return
through a combination of growth of capital and current income consistent with
the preservation of capital. The Portfolio uses a disciplined approach of
allocating assets primarily among three major asset groups, i.e., equity
securities, fixed-income securities and cash equivalents.

SMALL CAP EQUITY PORTFOLIO.

The investment objective of this Portfolio is capital appreciation.
Current income is an incidental consideration in the selection of portfolio
securities. The Portfolio normally invests primarily in common stocks of
emerging or established small- to medium-sized companies with above-average
potential for price appreciation.

EQUITY INCOME PORTFOLIO.

The investment objective of this Portfolio is to seek to provide an
above-average level of income consistent with long-term capital appreciation.
In pursuing its investment objective, the Portfolio intends to invest, under
normal market and economic conditions, substantially all of its assets in
common stock, preferred stock, rights, warrants, and securities convertible
into common stock.

GROWTH & INCOME EQUITY PORTFOLIO.

The investment objective of this Portfolio is to provide long-term
capital growth, with income as a secondary consideration. The Portfolio
normally invests substantially all of its assets in common stock, preferred
stock, rights, warrants and securities convertible into common stock.

PORTFOLIOS MANAGED BY VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP.:

MONEY MARKET PORTFOLIO.

The investment objective of this Portfolio is to provide high current
income consistent with the preservation of capital and liquidity through
investment in a broad range of money market instruments that will mature
within 12 months of the date of purchase. An investment in the Money Market
Portfolio is neither insured nor guaranteed by the U.S. Government.

QUALITY INCOME PORTFOLIO.

The investment objective of this Portfolio is to seek a high level of
current income, consistent with safety of principal, by investing in
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities or in various investment grade debt obligations including
mortgage pass-through certificates and collateralized mortgage obligations.

HIGH YIELD PORTFOLIO.

The investment objective of this Portfolio is the maximization of total
investment return through income and capital appreciation. The Portfolio will
pursue its investment objective by investing in a portfolio substantially
consisting of medium and lower grade domestic corporate debt securities. The
Portfolio may also invest up to 35% of its assets in foreign government and
foreign corporate debt securities of similar quality. The Portfolio may also,
from time to time, invest in cash or cash equivalents due to market conditions
or for other defensive purposes. Lower grade corporate debt securities are
commonly known as "junk bonds" and involve a significant degree of risk. (See
"Risk Factors - Special Risks of High Yield Investing.")

STOCK INDEX PORTFOLIO.

The investment objective of this Portfolio is to achieve investment
results that approximate the aggregate price and yield performance of the
Standard & Poor's 500 Composite Stock Price Index by investing in common
stocks, stock index futures contracts and options on stock indexes and stock
index futures contracts, and certain short-term fixed income securities such
as cash reserves.

"Standard & Poor's ", "S&P ", "S&P 500 ", "Standard & Poor's 500" and "500" re
trademarks of McGraw-Hill Inc. and have been licensed for use by Cova
Financial Services Life Insurance Company and its affiliates .
The Stock Index Portfolio is not sponsored, endorsed, sold or promoted by
Standard & Poor's Corporation ("S&P") and S&P makes no representation
regarding the advisability of investing in the Stock Index Portfolio.

VKAC GROWTH AND INCOME PORTFOLIO.

The investment objective of this Portfolio is to seek long-term growth of
both capital and income by investing in a portfolio of common stocks which are
considered by the Portfolio's Sub-Adviser to have potential for capital
appreciation and dividend growth. The Portfolio may also invest up to 35% of
its assets in common stocks which are considered by the Portfolio's
Sub-Adviser to have potential for capital appreciation but which are issued by
foreign corporations.

The investment objectives of a Portfolio and policies and restrictions
specifically cited as fundamental may not be changed without the approval of a
majority of the outstanding shares of that Portfolio. Other investment
policies and practices described in this Prospectus and in the Statement of
Additional Information are not fundamental, and the Board of Trustees may
change them without shareholder approval. A complete list of investment
restrictions, including those restrictions which cannot be changed without
shareholder approval, is contained in the Statement of Additional Information.
There is no assurance that a Portfolio will meet its stated objective.

INVESTMENT RISKS

The value of a Portfolio's shares will fluctuate with the value of the
underlying securities in its portfolio, and in the case of debt securities, with
the general level of interest rates. When interest rates decline, the value of
an investment portfolio invested in fixed-income securities can be expected to
rise. Conversely, when interest rates rise, the value of an investment portfolio
invested in fixed-income securities can be expected to decline. In the case of
foreign currency denominated securities, these trends may be offset or amplified
by fluctuations in foreign currencies. Investments by a Portfolio in foreign
securities may be affected by adverse political, diplomatic, and economic
developments, changes in foreign currency exchange rates, taxes or other
assessments imposed on distributions with respect to those investments, and
other factors affecting foreign investments generally. Investments in securities
of issuers in emerging markets countries may involve a high degree of risk and
many may be considered speculative. These investments carry all of the risks of
investing in securities of foreign issuers described herein to a heightened
degree. High-yielding fixed-income securities, which are commonly known as "junk
bonds", are subject to greater market fluctuations and risk of loss of income
and principal than investments in lower yielding fixed-income securities.
Certain of the Portfolios intend to employ, from time to time, certain
investment techniques which are designed to enhance income or total return or
hedge against market or currency risks but which themselves involve additional
risks. These techniques include options on securities, futures, options on
futures, options on indexes, options on foreign currencies, foreign currency
exchange transactions, lending of securities and when-issued securities and
delayed-delivery transactions. The Portfolios may have higher- than-average
portfolio turnover which may result in higher-than-average brokerage commissions
and transaction costs.

SALES AND REDEMPTIONS

All Portfolios of the Trust sell shares to the separate accounts of Cova
Financial Services Life Insurance Company and its affiliated life insurance
companies (collectively, "Cova Life") as a funding vehicle for the variable
annuity contracts and/or variable life insurance policies ("Variable
Contracts") offered by Cova Life. No fee is charged upon the sale or
redemption of the Trust's shares. Expenses of the Trust are passed through to
the separate accounts of Cova Life, and therefore, are ultimately borne by
Variable Contract owners. In addition, other fees and expenses are assessed
by Cova Life at the separate account level. (See the Prospectus for the Variable
Contract for a description of all fees and charges relating to the Variable
Contract.)

FINANCIAL HIGHLIGHTS
(FOR ONE SHARE OF EACH PORTFOLIO OUTSTANDING THROUGHOUT THE PERIOD)
[TO BE FILED BY AMENDMENT]

THE TRUST

The Trust is currently comprised of twenty separate Portfolios: Money Market
Portfolio, Quality Income Portfolio, High Yield Portfolio, Stock Index
Portfolio, VKAC Growth and Income Portfolio, Bond Debenture Portfolio,
Quality Bond Portfolio, Small Cap Stock Portfolio, Large Cap Stock Portfolio,
Select Equity Portfolio, International Equity Portfolio, Emerging Markets
Equity Portfolio, Mid-Cap Value Portfolio, Large Cap Research Portfolio,
Developing Growth Portfolio, Lord Abbett Growth and Income Portfolio, Balanced
Portfolio, Small Cap Equity Portfolio, Equity Income Portfolio and Growth &
Income Equity Portfolio. The Trustees may provide for additional Portfolios
from time to time. Each Portfolio issues a separate class of shares. The
Declaration of Trust permits the Trustees to issue an unlimited number of full
or fractional shares of each class of stock.

INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS

Each Portfolio of the Trust has a different investment objective which it
pursues through separate investment policies as described below. The risks and
opportunities of each Portfolio should be examined separately. The differences
in objectives and policies among the Portfolios can be expected to affect the
return of each Portfolio and the degree of market and financial risk of each
Portfolio.

There is no assurance that the investment objectives of the various Portfolios
will be met.

PORTFOLIOS MANAGED BY J.P. MORGAN INVESTMENT MANAGEMENT INC.:

QUALITY BOND PORTFOLIO

The investment objective of the Portfolio is to provide a high total return
consistent with moderate risk of capital and maintenance of liquidity. Total
return will consist of income plus realized and unrealized capital gains and
losses.

The Portfolio is designed for investors who seek a total return over time that
is higher than that generally available from a portfolio of shorter-term
obligations while recognizing the greater price fluctuation of longer-term
instruments. It may also be a convenient way to add fixed income exposure to
diversify an existing portfolio.

The Sub-Adviser actively manages the Portfolio's duration, the allocation of
securities across market sectors, and the selection of specific securities
within sectors. Based on fundamental, economic and capital markets research,
the Sub-Adviser adjusts the duration of the Portfolio in light of market
conditions and the Sub-Adviser's interest rate outlook. For example, if
interest rates are expected to fall, the duration may be lengthened to take
advantage of the expected associated increase in bond prices. The Sub-Adviser
also actively allocates the Portfolio's assets among the broad sectors of the
fixed income market including, but not limited to, U.S. Government and agency
securities, corporate securities, private placements, and asset-backed and
mortgage related securities. Specific securities which the Sub-Adviser
believes are undervalued are selected for purchase within the sectors using
advanced quantitative tools, analysis of credit risk, the expertise of a
dedicated trading desk, and the judgment of fixed income portfolio managers
and analysts. Under normal circumstances, the Sub-Adviser intends to keep the
Portfolio essentially fully invested with at least 65% of the Portfolio's
assets invested in bonds.

Duration is a measure of the weighted average maturity of the bonds held in
the Portfolio and can be used as a measure of the sensitivity of the
Portfolio's market value to changes in interest rates. Under normal market
conditions the Portfolio's duration will range between one year shorter and
one year longer than the duration of the U.S. investment grade fixed income
universe, as represented by Salomon Brothers Broad Investment Grade Bond
Index, the Portfolio's benchmark. Currently, the benchmark's duration is
approximately ______ years. The maturities of the individual securities in the
Portfolio may vary widely, however.

The Portfolio intends to manage its portfolio actively in pursuit of its
investment objective. Portfolio transactions are undertaken principally to
accomplish the Portfolio's objective in relation to expected movements in the
general level of interest rates, but the Portfolio may also engage in
short-term trading consistent with its objective. To the extent the Portfolio
engages in short-term trading, it may incur increased transaction costs.

CORPORATE BONDS, ETC. The Portfolio may invest in a broad range of debt
securities of domestic and foreign issuers. These include debt securities of
various types and maturities, e.g., debentures, notes, mortgage securities,
equipment trust certificates and other collateralized securities and zero
coupon securities. Collateralized securities are backed by a pool of assets
such as loans or receivables which generate cash flow to cover the payments
due on the securities. Collateralized securities are subject to certain risks,
including a decline in the value of the collateral backing the security,
failure of the collateral to generate the anticipated cash flow or in certain
cases more rapid prepayment because of events affecting the collateral, such
as accelerated prepayment of mortgages or other loans backing these securities
or destruction of equipment subject to equipment trust certificates. In the
event of any such prepayment the Portfolio will be required to reinvest the
proceeds of prepayments at interest rates prevailing at the time of
reinvestment, which may be lower. In addition, the value of zero coupon
securities which do not pay interest is more volatile than that of interest
bearing debt securities with the same maturity. The Portfolio does not intend
to invest in common stock but may invest to a limited extent in convertible
debt or preferred stock. The Portfolio does not expect to invest more than 25%
of its assets in securities of foreign issuers. If the Portfolio invests in
non-U.S. dollar denominated securities, it hedges the foreign currency
exposure into the U.S. dollar. See "Investment Practices" and "Risk Factors"
for further information on foreign investments and convertible securities.

GOVERNMENT OBLIGATIONS, ETC. The Portfolio may invest in obligations
issued or guaranteed by the U.S. Government and backed by the full faith and
credit of the United States. These securities include Treasury securities,
GNMA Certificates, and obligations of the Farmers Home Administration and the
Export Import Bank. GNMA Certificates are mortgage-backed securities which
evidence an undivided interest in mortgage pools. These securities are
subject to more rapid repayment than their stated maturity would indicate
because prepayments of principal on mortgages in the pool are passed through
to the holder of the securities. During periods of declining interest rates,
prepayments of mortgages in the pool can be expected to increase. The
pass-through of these prepayments would have the effect of reducing the
Portfolio's positions in these securities and requiring the Portfolio to
reinvest the prepayments at interest rates prevailing at the time of
reinvestment. The Portfolio may also invest in obligations issued or
guaranteed by U.S. Government agencies or instrumentalities where the
Portfolio must look principally to the issuing or guaranteeing agency for
ultimate repayment; some examples of agencies or instrumentalities issuing
these obligations are the Federal Farm Credit System, the Federal Home Loan
Banks and the Federal National Mortgage Association. Although these
governmental issuers are responsible for payments on their obligations, they
do not guarantee their market value.

The Portfolio may also invest in municipal obligations which may be general
obligations of the issuer or payable only from specific revenue sources.
However, the Portfolio will invest only in municipal obligations that have
been issued on a taxable basis or have an attractive yield excluding tax
considerations. In addition, the Portfolio may invest in debt securities of
foreign governments and governmental entities. See "Investment Practices" and
"Risk Factors" for further information on foreign investments.

MONEY MARKET INSTRUMENTS. The Portfolio may purchase money market
instruments to invest temporary cash balances or to maintain liquidity to meet
withdrawals. However, the Portfolio may also invest in money market
instruments as a temporary defensive measure taken during, or in anticipation
of, adverse market conditions. The money market investments permitted for the
Portfolio include U.S. Government Securities, other debt securities,
commercial paper, bank obligations and repurchase agreements. For more
detailed information about these money market investments, see "Investment
Objectives and Policies" in the Statement of Additional Information.

QUALITY INFORMATION. It is a current policy of the Portfolio that under
normal circumstances at least 65% of its total assets will consist of
securities that are rated at least A by Moody's or S&P or that are unrated and
in the Sub-Adviser's opinion are of comparable quality. In the case of 30% of
the Portfolio's investments, the Portfolio may purchase debt securities that
are rated Baa or better by Moody's or BBB or better by S&P or are unrated and
in the Sub-Adviser's opinion are of comparable quality. The remaining 5% of
the Portfolio's assets may be invested in debt securities that are rated Ba or
better by Moody's or BB or better by S&P or are unrated and in the
Sub-Adviser's opinion are of comparable quality. Securities rated Baa by
Moody's or BBB by S&P are considered investment grade, but have some
speculative characteristics. Securities rated Ba by Moody's or BB by S&P are
below investment grade and considered to be speculative with regard to payment
of interest and principal. These standards must be satisfied at the time an
investment is made. If the quality of the investment later declines, the
Portfolio may continue to hold the investment. See "Appendix - Description of
Corporate Bond Ratings" for more detailed information on these ratings.

The Portfolio may also purchase and sell obligations on a when-issued or
delayed delivery basis, enter into repurchase and reverse repurchase
agreements, loan its portfolio securities, purchase certain privately placed
securities and enter into certain hedging transactions that may involve
options on securities and securities indexes, futures contracts and options on
futures contracts. For a discussion of these investments and investment
techniques, see "Investment Practices" and "Risk Factors."

SMALL CAP STOCK PORTFOLIO

The investment objective of the Portfolio is to provide a high total return
from a portfolio of equity securities of small companies. Total return will
consist of realized and unrealized capital gains and losses plus income. The
Portfolio invests primarily in the common stock of small U.S. companies. The
small company holdings of the Portfolio are primarily companies included in
the Russell 2000 Index.

The Portfolio is designed for investors who are willing to assume the somewhat
higher risk of investing in small companies in order to seek a higher return
over time than might be expected from a portfolio of stocks of large
companies. The Portfolio may also serve as an efficient vehicle to diversify
an existing portfolio by adding the equities of smaller U.S. companies.

The Sub-Adviser seeks to enhance the Portfolio's total return relative to that
of the U.S. small company universe. To do so, the Sub-Adviser uses fundamental
research, systematic stock valuation and a disciplined portfolio construction
process. The Sub-Adviser continually screens the universe of small
capitalization companies to identify for further analysis those companies
which exhibit favorable characteristics such as significant and predictable
cash flow and high quality management. Based on fundamental research and using
a dividend discount model, the Sub-Adviser ranks these companies within
economic sectors according to their relative value. The Sub-Adviser then
selects for purchase the most attractive companies within each economic
sector.

The Sub-Adviser uses a disciplined portfolio construction process to seek to
enhance returns and reduce volatility in the market value of the Portfolio
relative to that of the U.S. small company universe. The Sub-Adviser believes
that under normal market conditions, the Portfolio will have sector weightings
comparable to that of the U.S. small company universe, although it may
moderately under- or over-weight selected economic sectors. In addition, as a
company moves out of the market capitalization range of the small company
universe, it generally becomes a candidate for sale by the Portfolio.

The Portfolio intends to manage its investments actively in pursuit of its
investment objective. Since the Portfolio has a long-term investment
perspective, it does not intend to respond to short-term market fluctuations
or to acquire securities for the purpose of short-term trading; however, it
may take advantage of short-term trading opportunities that are consistent
with its objective. To the extent the Portfolio engages in short-term trading,
it may incur increased transaction costs.

EQUITY INVESTMENTS. During ordinary market conditions, the Sub-Adviser
intends to keep the Portfolio essentially fully invested with at least 65% of
the Portfolio's net assets invested in equity securities consisting of common
stocks and other securities with equity characteristics such as preferred
stocks, warrants, rights and convertible securities. The Portfolio's primary
equity investments are the common stocks of small U.S. companies and, to a
limited extent, similar securities of foreign corporations. The common stock
in which the Portfolio may invest includes the common stock of any class or
series or any similar equity interest, such as trust or limited partnership
interests. The small company holdings of the Portfolio are primarily
companies included in the Russell 2000 Index. These equity investments may or
may not pay dividends and may or may not carry voting rights. The Portfolio
invests in securities listed on a securities exchange or traded in an
over-the-counter market, and may invest in certain restricted or unlisted
securities.

FOREIGN INVESTMENTS. The Portfolio may invest in equity securities of
foreign issuers that are listed on a national securities exchange or
denominated or principally traded in U.S. dollars. However, the Portfolio does
not expect to invest more than 5% of its assets at the time of purchase in
foreign equity securities. For further information on foreign investments and
foreign currency exchange transactions, see "Investment Practices" and "Risk
Factors."

The Portfolio may also purchase and sell securities on a when-issued or
delayed delivery basis, enter into repurchase and reverse repurchase
agreements, loan its portfolio securities, purchase certain privately placed
securities and money market instruments, and enter into certain hedging
transactions that may involve options on securities and securities indexes,
futures contracts and options on futures contracts. For a discussion of these
investments and investment techniques, see "Investment Practices" and "Risk
Factors."

LARGE CAP STOCK PORTFOLIO.

The investment objective of the Portfolio is long-term growth of capital and
income. The Portfolio seeks to achieve its objective consistent with
reasonable investment risk.

The Portfolio is designed for investors who want an actively managed portfolio
of medium- to large-cap equity securities that seeks to outperform the total
return of the S&P 500.

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

STOCK SELECTION. The Portfolio is not subject to any limit on the size of
companies in which it may invest, but intends, under normal circumstances, to
be fully invested to the extent practicable in the stock of large- and
medium-sized companies typically represented by the S&P 500. In managing the
Portfolio, the potential for appreciation and dividend growth is given more
weight than current dividends. Nonetheless, the Sub-Adviser will normally
strive for gross income for the Portfolio at a level not less than 75% of the
dividend income generated on the stocks included in the S&P 500, although this
income level is merely a guideline and there can be no certainty that this
income level will be achieved.

The Portfolio does not seek to achieve its objective with any individual
portfolio security, but rather it aims to manage the portfolio as a whole in
such a way as to achieve its objective. The Portfolio attempts to reduce risk
by investing in many different economic sectors, industries and companies.
Portfolio sector weightings will generally equal those of the S&P 500. In
selecting securities, the Sub-Adviser may emphasize securities that it
believes to be undervalued. Securities of a company may be undervalued for a
variety of reasons such as an overreaction by investors to unfavorable news
about a company, an industry, or the stock markets in general; or as a result
of a market decline, poor economic conditions, tax-loss selling, or actual or
anticipated unfavorable developments affecting a company.

The Sub-Adviser uses a dividend discount model to rank companies within
economic sectors according to their relative value and then separates them
into quintiles by sector. The Portfolio will normally be comprised, based on
the dividend discount model, of stocks in the first three quintiles. The
Portfolio will be highly diversified and will typically hold approximately 300
stocks.

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

Convertible bonds and other fixed income securities (other than money market
instruments) in which the Portfolio may invest will, at the time of
investment, be rated Baa or better by Moody's or BBB or better by S&P or, if
not rated by Moody's or S&P, will be of comparable quality as determined by
the Sub-Adviser. In the event that an existing holding is downgraded below
these ratings, the Portfolio may nonetheless retain the security.

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

SELECT EQUITY PORTFOLIO.

The investment objective of the Portfolio is long-term growth of capital and
income. The Portfolio seeks to achieve its objective consistent with
reasonable investment risk.

The Portfolio is designed for investors who want an actively managed portfolio
of selected equity securities that seeks to outperform the total return of the
S&P 500.

STOCK SELECTION. The Portfolio is not subject to any limit on the size
of companies in which it may invest, but intends, under normal circumstances,
to be fully invested to the extent practicable in the stock of large- and
medium-sized companies primarily included in the S&P 500. In managing the
Portfolio, the potential for appreciation and dividend growth is given more
weight than current dividends. Nonetheless, the Sub-Adviser will normally
strive for gross income for the Portfolio at a level not less than 75% of the
dividend income generated on the stocks included in the S&P 500, although this
income level is merely a guideline and there can be no certainty that this
income level will be achieved.

The Portfolio does not seek to achieve its objective with any individual
portfolio security, but rather it aims to manage the portfolio as a whole in
such a way as to achieve its objective. The Portfolio attempts to reduce risk
by investing in many different economic sectors, industries and companies. The
Sub-Adviser may under- or over-weight selected economic sectors against the
S&P 500's sector weightings to seek to enhance the Portfolio's total return or
reduce fluctuations in market value relative to the S&P 500. In selecting
securities, the Sub-Adviser may emphasize securities that it believes to be
undervalued. Securities of a company may be undervalued for a variety of
reasons such as an overreaction by investors to unfavorable news about a
company, an industry, or the stock markets in general; or as a result of a
market decline, poor economic conditions, tax-loss selling, or actual or
anticipated unfavorable developments affecting a company.

The Sub-Adviser uses a dividend discount model to rank companies within
economic sectors according to their relative value and then separates them
into quintiles by sector. The Portfolio will primarily consist of stocks of
companies from the first and second quintiles. The Portfolio will typically
hold between 60 and 90 stocks.

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

INTERNATIONAL EQUITY PORTFOLIO.

The investment objective of the Portfolio is to provide a high total return
from a portfolio of equity securities of foreign corporations. Total return
will consist of realized and unrealized capital gains and losses plus income.

The Portfolio is designed for investors with a long-term investment horizon
who want to diversify their portfolios by investing in an actively managed
portfolio of non-U.S. securities that seeks to outperform the Morgan Stanley
Capital International Europe, Australia and Far East Index (the "EAFE Index").

Investments in foreign securities involve certain risks not typically involved
in domestic investment. See "Risk Factors-Special Considerations Relating to
Foreign Securities."

The Portfolio seeks to achieve its investment objective through country
allocation, stock selection and management of currency exposure. The
Sub-Adviser uses a disciplined portfolio construction process to seek to
enhance returns and reduce volatility in the market value of the Portfolio
relative to that of the EAFE Index.

Based on fundamental research, quantitative valuation techniques, and
experienced judgment, the Sub-Adviser uses a structured decision-making
process to allocate the Portfolio primarily across the developed countries of
the world outside the United States by under- or over-weighting selected
countries in the EAFE Index. Currently, Japan has the heaviest weighting in
the EAFE Index (approximately ___%). The Portfolio will not invest more than
25% of its net assets in Japan notwithstanding the Japan weighting in the EAFE
Index.

Using a dividend discount model and based on analysts' industry expertise,
securities within each country are ranked within economic sectors according to
their relative value. Based on this valuation, the Sub-Adviser selects the
securities which appear the most attractive for the Portfolio. The Sub-Adviser
believes that under normal market conditions, economic sector weightings
generally will be similar to those of the EAFE Index.

Finally, the Sub-Adviser actively manages currency exposure, in conjunction
with country and stock allocation, in an attempt to protect and possibly
enhance the Portfolio's market value. Through the use of forward foreign
currency exchange contracts, the Sub-Adviser will adjust the Portfolio's
foreign currency weightings to reduce its exposure to currencies deemed
unattractive and, in certain circumstances, increase exposure to currencies
deemed attractive, as market conditions warrant, based on fundamental
research, technical factors, and the judgment of a team of experienced
currency managers. For further information on foreign currency exchange
transactions, see "Investment Practices" and "Risk Factors."

The Portfolio intends to manage its portfolio actively in pursuit of its
investment objective. The Portfolio does not expect to trade in securities for
short-term profits; however, when circumstances warrant, securities may be
sold without regard to the length of time held. To the extent the Portfolio
engages in short-term trading, it may incur increased transaction costs.

EQUITY INVESTMENTS. In normal circumstances, the Sub-Adviser intends to
keep the Portfolio essentially fully invested with at least 65% of the value
of its total assets in equity securities of foreign issuers, consisting of
common stocks and other securities with equity characteristics such as
preferred stock, warrants, rights and convertible securities. The Portfolio's
primary equity investments are the common stock of established companies based
in developed countries outside the United States. Such investments will be
made in at least three foreign countries. The common stock in which the
Portfolio may invest includes the common stock of any class or series or any
similar equity interest such as trust or limited partnership interests. The
Portfolio may also invest in securities of issuers located in developing
countries. See "Investment Practices" and "Risk Factors." The Portfolio
invests in securities listed on foreign or domestic securities exchanges and
securities traded in foreign or domestic over-the-counter markets, and may
invest in certain restricted or unlisted securities.

The Portfolio may also invest in money market instruments denominated in U.S.
dollars and other currencies, purchase and sell securities on a when-issued or
delayed delivery basis, enter into repurchase and reverse repurchase
agreements, loan its portfolio securities, purchase certain privately placed
securities, enter into forward contracts on foreign currencies and enter into
certain hedging transactions that may involve options on securities and
securities indexes, futures contracts and options on futures contracts. For a
discussion of these investments and investment techniques, see "Investment
Practices" and "Risk Factors."

EMERGING MARKETS EQUITY PORTFOLIO.

The investment objective of the Portfolio is to achieve a high total return
from a portfolio of equity securities of companies in emerging markets.
Total return will consist of realized and unrealized capital gains and
losses plus income.

The Portfolio is designed for long-term investors who want exposure to the
rapidly growing emerging markets. THE PORTFOLIO DOES NOT REPRESENT A
COMPLETE INVESTMENT PROGRAM NOR IS THE PORTFOLIO SUITABLE FOR ALL INVESTORS.
Many investments in emerging markets can be considered speculative, and
therefore may offer higher potential for gains and losses and may be more
volatile than investments in the developed markets of the world. See "Risk
Factors-Special Considerations Relating to Foreign Securities."

The Sub-Adviser considers "emerging markets" to be any country which is
generally considered to be an emerging or developing country by the World
Bank, the International Finance Corporation, the United Nations or its
authorities. These countries generally include every country in the world
except Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany,
Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Spain, Sweden,
Switzerland, United Kingdom and United States. The Portfolio will focus its
investments in those emerging markets countries which it believes have strongly
developing economies and in which the markets are becoming more sophisticated.

A company in an emerging market is one that: (i) has its principal securities
trading market in an emerging market country; (ii) is organized under the laws
of an emerging market; (iii) derives 50% or more of its total revenue from
either goods produced, sales made or services performed in emerging markets;
or (iv) has at least 50% of its assets located in emerging markets.

The Sub-Adviser seeks to achieve the Portfolio's investment objective by a
disciplined process of country allocation and company selection. Based on
fundamental research, quantitative analysis, and experienced judgment, the
Sub-Adviser identifies those countries where economic and political factors,
including currency movements, are likely to produce above-average returns.
Based on their relative value, the Sub-Adviser then selects those companies in
each country's major industry sectors which it believes are best positioned and
managed to take advantage of these economic and political factors.

The Portfolio's investments are primarily denominated in foreign currencies but
it may also invest in securities denominated in the U.S. dollar or multinational
currency units such as the ECU. The Sub-Adviser will not routinely attempt to
hedge the Portfolio's foreign currency exposure. However, the Sub-Adviser may
from time to time engage in foreign currency exchange transactions if, based on
fundamental research, technical factors, and the judgment of experienced
currency managers, it believes the transactions would be in the Portfolio's best
interest. For further information on foreign currency exchange transactions,
see "Strategic Transactions."

The Sub-Adviser intends to manage the Portfolio actively in pursuit of its
investment objective. The Portfolio does not expect to trade in securities
for short-term profits; however, when circumstances warrant, securities may
be sold without regard to the length of time held. To the extent the
Portfolio engages in short-term trading, it may incur increased transaction
costs. See "Portfolio Turnover Rates."

EQUITY INVESTMENTS. In normal circumstances, the Sub-Adviser intends to
keep the Portfolio essentially fully invested with at least 65% of the value
of its total assets in equity securities of companies in emerging markets
consisting of common stocks and other securities with equity characteristics
comprised of preferred stock, warrants, rights, convertible securities,
trust certificates, limited partnership interests and equity participations.
The Portfolio's primary equity investments are the common stock of established
companies in the emerging markets countries the Sub-Adviser has identified as
attractive. The assets of the Portfolio ordinarily will be invested in the
securities of issuers in at least three different countries considered to be
emerging markets. The common stock in which the Portfolio may invest includes
the common stock of any class or series or any similar equity interest, such as
trust or limited partnership interests. These equity investments may or may
not pay dividends and may or may not carry voting rights. The Portfolio
invests in securities listed on foreign or domestic securities exchange and
securities traded in foreign or domestic over-the-counter markets, and may
invest in certain restricted or unlisted securities.

Certain emerging markets are closed in whole or in part to equity investments
by foreigners except through specifically authorized investment funds.
Securities of other investment companies may be acquired by the Portfolio to
the extent permitted under the Investment Company Act of 1940, as amended (the
"1940 Act")--that is, the Portfolio may invest up to 10% of its total assets in
securities of other investment companies so long as not more than 3% of the
outstanding voting stock of any one investment company is held by the Portfolio.
In addition, not more than 5% of the Portfolio's total assets may be invested in
the securities of any one investment company. As a shareholder in an investment
fund, the Portfolio would bear its share of that investment fund's expenses,
including its advisory and administration fees. At the same time the Portfolio
would continue to pay its own operating expenses.

The Portfolio may also invest in money market instruments denominated in U.S.
dollars and other currencies, purchase securities on a when-issued or delayed
delivery basis, enter into repurchase and reverse repurchase agreements, lend
its portfolio securities, purchase certain privately placed securities and enter
into forward foreign currency exchange contracts. In addition, the Portfolio
may use options on securities and indexes of securities indexes, futures
contracts and options on futures contracts for hedging and risk management
purposes. For a discussion of these investments and investment techniques, see
"Investment Practices" and "Risk Factors."

PORTFOLIOS MANAGED BY LORD, ABBETT & CO.:

BOND DEBENTURE PORTFOLIO.

The investment objective of the Bond Debenture Portfolio is high current
income and the opportunity for capital appreciation to produce a high total
return through a professionally-managed portfolio consisting primarily of
convertible and discount debt securities, many of which are lower-rated. These
lower-rated debt securities entail greater risks than investments in
higher-rated debt securities. Investors should carefully consider these risks
set forth under "Risk Factors - Special Risks of High Yield Investing."

It is the belief of the Portfolio's management that a high total return
(current income and capital appreciation) may be derived from an
actively-managed, diversified debt- security portfolio. In no event will the
Portfolio voluntarily purchase any securities other than debt securities, if,
at the time of such purchase or acquisition, the value of the debt securities
in the Portfolio is less than 80% of the value of its total assets. The
Portfolio seeks unusual values, particularly in lower-rated debt securities,
some of which are convertible into common stocks or have warrants to purchase
common stocks.

Higher yield on debt securities can occur during periods of inflation when the
demand for borrowed funds is high. Also, buying lower-rated bonds when the
credit risk is above average but, in the view of Portfolio management, likely
to decrease, can generate higher yields. Such debt securities normally will
consist of secured debt obligations of the issuer (i.e., bonds), general
unsecured debt obligations of the issuer (i.e., debentures) and debt
securities which are subordinate in right of payment to other debt of the
issuer.

Capital appreciation potential is an important consideration in the selection
of portfolio securities. Capital appreciation may be obtained by (1) investing
in debt securities when the trend of interest rates is expected to be down;
(2) investing in convertible debt securities or debt securities with warrants
attached entitling the holder to purchase common stock; and (3) investing in
debt securities of issuers in financial difficulties when, in the view of
Portfolio management, the problems giving rise to such difficulties can be
successfully resolved, with a consequent improvement in the credit standing of
the issuers (such investments involve corresponding risks that interest and
principal payments may not be made if such difficulties are not resolved). In
no event will the Portfolio invest more than 10% of its gross assets at the
time of investment in debt securities which are in default as to interest or
principal.

Normally, the Portfolio invests in long-term debt securities when Portfolio
management believes that interest rates in the long run will decline and
prices of such securities generally will be higher. When Portfolio management
believes that long-term interest rates will rise, Portfolio management will
endeavor to shift the Portfolio into short-term debt securities whose prices
might not be affected as much by an increase in interest rates.

The following policies are subject to change without shareholder approval:
(a) the Portfolio must keep at least 20% of the value of its total assets in
(1) debt securities which, at the time of purchase, are rated within one of
the four highest grades determined either by Moody's or S&P, (2) debt
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, (3) cash or cash equivalents (short-term obligations of
banks, corporations or the U.S. Government), or (4) a combination of any of
the foregoing; (b) the Portfolio may invest up to 10% of its gross assets,
at market value, in debt securities primarily traded in foreign countries -
such foreign debt securities normally will be limited to issues where there
does not appear to be substantial risk of nationalization, exchange
controls, confiscation or other government restrictions; (c) subject to the
percentage limitations for purchases of other than debt securities
described below, the Portfolio may purchase common and preferred stocks;
(d) the Portfolio may hold or sell any property or securities which it may
obtain through the exercise of conversion rights or warrants or as a result
of any reorganization, recapitalization or liquidation proceedings for any
issuer of securities owned by it. In no event will the Portfolio voluntarily
purchase any securities other than debt securities, if, at the time of
such purchase or acquisition, the value of the property and securities,
other than debt securities, in the Portfolio is greater than 20% of the
value of its gross assets. A purchase or acquisition will not be
considered "voluntary" if made in order to avoid loss in value of a
conversion or other premium; and (e) the Portfolio does not purchase
securities for short-term trading, nor does it purchase securities for the
purpose of exercising control of management.

The Portfolio may invest up to 15% of its net assets in illiquid securities.
Bonds which are subject to legal or contractual restrictions on resale, but
which have been determined by the Board of Trustees to be liquid, will not be
subject to this limit. Investment by the Portfolio in such securities,
initially determined to be liquid, could have the effect of diminishing the
level of the Portfolio's liquidity during periods of decreased market interest
in such securities.

The Portfolio may, but has no present intention to, commit more than 5% of its
gross assets to the lending of its portfolio securities.

The Portfolio will not change its investment objective without shareholder
approval.

The Portfolio may invest substantially in lower-rated bonds for their higher
yields which entail greater risks. Since the risk of default generally is
higher among lower-rated bonds, the research and analysis performed by the
Sub-Adviser are especially important in the selection of such bonds, which, if
rated BB/Ba or lower, often are described as "high-yield bonds" because of
their generally higher yields and referred to colloquially as "junk bonds"
because of their greater risks. In selecting lower-rated bonds for investment,
the Sub-Adviser does not rely upon ratings, which evaluate only the safety of
principal and interest, not market value risk, and which, furthermore, may not
accurately reflect an issuer's current financial condition. The Portfolio does
not have any minimum rating criteria for its investments in bonds and some
issuers may default as to principal and/or interest payments subsequent to the
purchase of their securities. Through portfolio diversification, good credit
analysis and attention to current developments and trends in interest rates
and economic conditions, investment risk can be reduced, although there is no
assurance that losses will not occur.

The Portfolio may invest in the securities markets of foreign countries.
Investments in foreign securities present certain risks not ordinarily found
in investments in securities of U.S. issuers. See "Risk Factors - Special
Considerations Relating to Foreign Securities."

MID-CAP VALUE PORTFOLIO

The investment objective of the Mid-Cap Value Portfolio is to seek capital
appreciation through investments, primarily in equity securities, which are
believed to be undervalued in the marketplace.

The Portfolio invests primarily in common stocks (including securities
convertible into common stocks) of companies with good prospects for
improvement in earnings trends or asset values that are not yet fully
recognized in the investment community. Selection of stocks is based on
appreciation potential, without regard to current income. Under normal
circumstances, at least 65% of the Portfolio's total assets will consist of
investments in mid-cap companies, determined at the time of purchase.
"Mid-cap" companies are defined for this purpose as companies whose
outstanding equity securities have an aggregate market value of between $200
million and $5 billion.

It is intended that the investment portfolio will be diversified among many
issues representing many different industries. The holdings in the Portfolio
typically will be selected for their potential for significant market
appreciation from growing recognition of substantial improvement in the
company's financial results or increasing anticipation of such improvement.
This potential may derive from such factors as (i) changes in the economic and
financial environment, (ii) new or improved products or services, (iii) new or
rapidly expanding markets, (iv) changes in management or structure of the
company, (v) price increases due to shortages of resources or productive
capacity, (vi) improved efficiencies resulting from new technologies or
changes in distribution or (vii) changes in governmental regulations,
political climate or competitive conditions. The companies represented will
have a strong or, in the perception of Portfolio management, an improving
financial position. The outstanding stock of companies in the Portfolio
ordinarily will have an aggregate market value of not less than approximately
$50 million. At the time of purchase, the stocks may be largely neglected by
the investment community or, if widely followed, they may be out of favor or
at least controversial. Characteristically, the Portfolio will not carry a
large cash position as an investment strategy. While the Portfolio may take
short-term gains if deemed appropriate, normally the Portfolio will hold
securities in order to realize long-term capital gains. Although normally the
Portfolio intends to be fully invested in common stocks, it may temporarily
put a portion of its assets in cash or cash equivalents (short-term
obligations of banks, corporations or the U.S. Government) for liquidity
purposes or to create reserve purchasing power pending other investments.
Since the Portfolio invests primarily in common stocks with their inherent
market risks, there is, of course, no assurance that its investment
objective will be achieved. If it is determined that the Portfolio's objective
can best be achieved by a substantive change in investment policy or
strategy, the Portfolio may make such a change without shareholder approval
by disclosing it in this Prospectus. The Portfolio may invest up to 10% of its
net assets in securities (of the type described above) which are primarily
traded in foreign countries.

LARGE CAP RESEARCH PORTFOLIO
The investment objective of the Large Cap Research Portfolio is growth of
capital and growth of income consistent with reasonable risk. Production of
current income is a secondary consideration.

The Portfolio invests primarily in common stocks (including securities
convertible into common stocks such as investment-grade convertible bonds or
convertible-preferred stocks) of large-cap companies defined for these
purposes as companies whose outstanding equity securities have an aggregate
market value of $1.5 billion and above. Under normal circumstances, at least
65% of the Portfolio's total assets will consist of investments made in
large-cap companies, determined at the time of purchase. These companies will
have good prospects for improvement in earnings trends or asset values. The
Portfolio will invest in companies on the basis of the fundamental economic
and business factors (such as government, fiscal and monetary policies,
employment levels, demographics, retail sales and market share) which will
affect future earnings and which Portfolio management believes are the primary
factors determining the future market valuation of stocks. Although the prices
of common stocks fluctuate and their dividends vary, historically, common
stocks have appreciated in value and their dividends have increased when the
companies they represent have prospered and grown. There can be no assurance
that stocks selected for the Portfolio will appreciate in value or that their
dividends will increase or be maintained.

In selecting securities for investment, more weight is given to the
possibilities of capital growth and growth of income than to current income.
In seeking to fulfill its objective, the Portfolio will invest also in both
small and middle-sized companies, as measured by the value of their
outstanding stock guided by the policies mentioned herein. Stock prices of
such small-sized companies may be more volatile than those of large and
middle-sized companies.

Portfolio management concentrates its research and stock selection on
companies that are undervalued or out of current investment favor and thus the
investment portfolio typically will encompass less market risk as measured by
its price-to-normal earnings and price-to-book value ratios. The Portfolio's
management process results in the sale of stocks that it judges to be
overpriced and reinvestment in other securities which it believes offer better
values and less market risk.

The Portfolio will be diversified among many issuers representing many
different industries. The Portfolio reflects the collective judgment of the
Research Department of the Sub-Adviser as to what securities represent the
greatest investment value, regardless of industry sector, market
capitalization, or Wall Street sponsorship. At the time of purchase,
securities selected for the Portfolio may be largely neglected by the
investment community or, if widely followed, they may be out of favor or at
least controversial.

Up to 10% of the Portfolio's net assets (at the time of investment) may be
invested in foreign securities (of the type described herein) primarily
traded in foreign countries.

For securities in the Portfolio with a market value of up to 5% of its gross
assets at the time an option is written, the Portfolio may write covered call
options which are traded on a national securities exchange in an attempt to
increase its income and to provide greater flexibility in the disposition of
portfolio securities.

The Portfolio may engage in (a) lending of portfolio securities to
broker-dealers on a secured basis and (b) investing in rights and warrants to
purchase securities. The Portfolio has no present intention to commit more
than 5% of gross assets to any one of these two identified practices. The term
"warrants" includes warrants which are not listed on the New York or American
Stock Exchanges. Such unlisted warrants may not exceed 2% of the Portfolio's
assets.

The Portfolio may invest in closed-end investment companies if bought in the
secondary market with a fee or commission no greater than the customary
broker's commission in compliance with the 1940 Act. Shares of such investment
companies sometimes trade at a discount or premium in relation to their net
asset value and there may be duplication of fees, for example, to the extent
that the Portfolio and the closed-end investment company both charge a
management fee.

The Portfolio will not borrow money, except as a temporary measure for
extraordinary or emergency purposes and then not in excess of 5% of gross
assets at the lower of cost or market value.

Neither an issuer's ceasing to be rated investment grade nor a rating
reduction below that grade will require elimination of a bond from the
Portfolio. For temporary defensive purposes, the Portfolio may invest in high
quality, short-term debt obligations of banks, corporations or the U.S.
Government of the type normally owned by a money market fund.

The Portfolio may invest up to 15% of its net assets in illiquid securities.
Securities determined by the Trust's Board of Trustees to be liquid pursuant
to Securities and Exchange Commission Rule 144A ("Rule 144A") will not be
subject to this limit. Under Rule 144A, a qualifying security may be resold to
a qualified institutional buyer without registration and without regard to
whether the seller originally purchased the security for investment.
Investments in Rule 144A securities initially determined to be liquid could
have the effect of diminishing the level of liquidity during periods of
decreased market interest in such securities.

The Portfolio may deal in financial futures transactions with respect to the
type of securities described herein, including indices of such securities and
options on such financial futures. The Portfolio will not enter into any
futures contracts, or options thereon, if the aggregate market value of the
securities covered by futures contracts plus options on such financial futures
exceeds 50% of the Portfolio's total assets.

Convertible bonds and convertible-preferred stocks tend to be more volatile
than straight bonds but less volatile and more income-producing than their
underlying common stocks.

DEVELOPING GROWTH PORTFOLIO.

The investment objective of the Developing Growth Portfolio is long-term
growth of capital through a diversified and actively-managed portfolio
consisting of developing growth companies, many of which are traded over the
counter.

The Portfolio's present investment strategy, as developed by the Sub-Adviser,
is based on the four phases of corporate growth. As described below, only the
second (or developing growth) phase is characterized by a dramatic rate of
growth. The management of the Portfolio looks for companies in that phase and,
under normal circumstances, will invest at least 65% of the Portfolio's total
assets in securities of such companies. The Portfolio also may invest in
companies which are in their formative phase. Developing growth companies are
almost always small, usually young and their shares are generally traded over
the counter. Having, in the view of Portfolio management, passed the pitfalls
of the formative years, they are now in a position to grow rapidly in their
market.

THE FOUR PHASES OF BUSINESS GROWTH
(as perceived by the Sub-Adviser)

PHASE 1 - FORMATIVE: Phase 1 has high risk. Companies in this phase are
formative and the perils of infancy take a high toll during these years. Skill
of management and growth of revenues and earnings permit some companies to
survive and advance into the second phase.

PHASE 2 - DEVELOPING GROWTH: Phase 2 usually is a period of swift
development, when growth occurs at a rate rarely equaled by established
companies in their mature years. The management of the Portfolio focuses on
companies which it believes are strongly positioned in this phase. Of course,
the actual growth of a company cannot be foreseen and it may be difficult to
determine in which phase a company is presently situated.

PHASE 3 - ESTABLISHED GROWTH: Phase 3 is a time of established growth
when competitive forces, regulations and internal bureaucracy often begin to
blunt the sharp edge of success in the marketplace.

PHASE 4 - MATURITY: Phase 4 is a time of maturity when companies ease
into a growth pattern that roughly reflects the increase in Gross Domestic
Product.

At any given time, there are many hundreds of publicly-traded corporations in
the developing growth phase. In choosing from among them, Portfolio management
looks for special characteristics that will help their growth. These can
include a unique product or service for which management foresees a rising
demand; a special area of technological expertise; the ability to service a
region that is growing faster than average; a competitive advantage or new
opportunities in foreign trade or from shifts in government priorities and
programs; or an ability to take advantage of growth of consumers'
discretionary income and demographic changes.

The management of the Portfolio also looks for certain financial
characteristics such as: at least five years of higher-than-average growth of
revenues and earnings per share; higher-than-average returns on equity;
ability to finance growth in the form of a lower-than-average ratio of
long-term debt to capital and price/earnings ratios that are below expected
growth rates.

The Portfolio also looks for certain characteristics of management in addition
to those that are implied by the financial data. The Portfolio looks for
management that is well-seasoned and diverse in its talent and that is
aggressive enough to seize the opportunities it perceives in each company's
future. Finally, the Portfolio looks for management that has demonstrated an
ability to manage through a full economic cycle. The Portfolio does not,
however, invest in order to control management.

Securities being considered for the Portfolio are analyzed solely on
traditional investment fundamentals. The Portfolio does not select securities
based on trends indicated by chartists' technical analyses. In addition to the
financial data already mentioned, the management of the Portfolio evaluates
the market for each company's products or services, the strengths and
weaknesses of competitors, the availability of raw materials, diversity of
product mix, etc. Finally, in assembling the investment portfolio, the
management of the Portfolio tries to diversify the Portfolio's investments.
Within the bounds of other criteria, the management of the Portfolio tries to
invest in many securities and industries so that any misjudgments it might
make are adequately cushioned.

Up to 10% of the Portfolio's net assets (at the time of investment) may be
invested in foreign securities (of the type described above) primarily traded
in foreign countries.

Although the Portfolio has no present plans to change its policies, if it is
determined that the investment objective can best be achieved by a change in
investment policies or strategy, the Portfolio reserves the right to make such
a change without shareholder approval, provided it is not prohibited by the
Portfolio's investment restrictions or applicable law. Any material change
will first be disclosed in the current Prospectus.

There may be times when Portfolio management believes that economic conditions
or general levels of common stock prices are such that it would be advisable,
for defensive reasons, to curtail investments in common stocks. During such
periods, the Portfolio may invest a substantial portion of its assets in cash
or cash equivalents (short-term obligations of banks, corporations or the U.S.
Government).

An investment in the Portfolio is not intended as a complete investment
program. The Portfolio will not provide significant income. Moreover, because
stocks of developing growth companies are more risky and their prices more
volatile than those of mature companies, the Portfolio's net asset value per
share is likely to experience above-average fluctuations.

LORD ABBETT GROWTH AND INCOME PORTFOLIO.

The investment objective of the Lord Abbett Growth and Income Portfolio is
long-term growth of capital and income without excessive fluctuation in market
value.

The Portfolio intends to keep its assets invested in those securities which
are selling at reasonable prices in relation to value and, to do so, it may
have to forego some opportunities for gains when, in the judgment of Portfolio
management , they carry excessive risk.

The Portfolio will try to anticipate major changes in the economy and select
stocks which it believes will benefit most from these changes.

The Portfolio will normally invest in common stocks (including securities
convertible into common stocks) of large, seasoned companies in sound
financial condition, which common stocks are expected to show above-average
price appreciation. Although the prices of common stocks fluctuate and their
dividends vary, historically, common stocks have appreciated in value and
their dividends have increased when the companies they represent have
prospered and grown.

The Portfolio constantly seeks to balance the opportunity for profit against
the risk of loss. In the past, very few industries have continuously provided
the best investment opportunities. The Portfolio will take a flexible approach
and adjust the Portfolio to reflect changes in the opportunity for sound
investments relative to the risks assumed. Therefore, the Portfolio will sell
stocks that are judged to be overpriced and reinvest the proceeds in other
securities which are believed to offer better values for the Portfolio.

The Portfolio will not purchase securities for trading purposes. To create
reserve purchasing power and also for temporary defensive purposes, the
Portfolio may invest in straight bonds and other fixed-income securities.

When Portfolio management believes that the Portfolio should assume a
temporary defensive position because of unfavorable investment conditions, the
Portfolio may temporarily hold its assets in cash and short-term money market
instruments.

The Portfolio intends to utilize, from time to time, one or more of the
investment techniques identified below and described in the Statement of
Additional Information, including covered call options, rights and warrants
and repurchase agreements. It is the Portfolio's current intention that no
more than 5% of its net assets will be at risk in the use of any one of such
investment techniques identified below. While some of these techniques involve
risk when utilized independently, the Portfolio intends to use them to reduce
risk and volatility, although this result cannot be assured by the use of such
investment techniques.

The Portfolio may write call options on securities it owns. A call option on
stock gives the purchaser of the option, upon payment of a premium to the
writer of the option, the right to call upon the writer to deliver a specified
number of shares of a stock on or before a fixed date at a predetermined
price.

The Portfolio may invest in rights and warrants to purchase securities.
Included within these purchases, but not exceeding 2% of the value of the
Portfolio's net assets, may be warrants which are not listed on the New York
Stock Exchange or American Stock Exchange.

The Portfolio may enter into repurchase agreements with respect to a security.
A repurchase agreement is a transaction by which the Portfolio acquires a
security and simultaneously commits to resell that security to the seller (a
bank or securities dealer) at an agreed-upon price on an agreed-upon date. The
Portfolio requires at all times that the repurchase agreement be
collateralized by cash or U.S. Government securities having a value equal to,
or in excess of, the value of the repurchase agreement. Such agreements permit
the Portfolio to keep all of its assets at work while retaining flexibility in
pursuit of investments of a longer-term nature.

It is the Portfolio's current intention that no more than 5% of its net assets
will be at risk in the use of any one of the policies identified below.

The Portfolio may invest in shares of closed-end investment companies if
bought in primary or secondary offerings with a fee or commission no greater
than the customary broker's commission. Shares of such investment companies
sometimes trade at a discount or premium in relation to their net asset value.

The Portfolio may seek to earn income by lending its securities if the loan is
collateralized and complies with regulatory requirements.

The Portfolio will be permitted to borrow money up to one-third of the value
of its total assets taken at current value but only from banks as a temporary
measure for extraordinary or emergency purposes. Beyond 5% of the Portfolio's
total assets (at current value), this borrowing may not be used for investment
leverage to purchase securities. As a matter of operating policy, the
Portfolio will not borrow more than 25% of its total assets taken at current
value.

PORTFOLIOS MANAGED BY MISSISSIPPI VALLEY ADVISORS INC.

BALANCED PORTFOLIO.

The Balanced Portfolio's investment objective is to maximize total return
through a combination of growth of capital and current income consistent with
the preservation of capital. The Portfolio seeks to achieve its objective by
using a disciplined approach of allocating assets primarily among three major
asset groups, i.e. equity securities, fixed-income securities and cash
equivalents. In pursuing the Portfolio's investment objective, the Sub-Adviser
allocates the Portfolio's assets based upon its evaluation of the relative
attractiveness of the major asset groups. In an effort to better quantify the
relative attractiveness of the major asset groups over a one- to three-year
period of time, the Sub-Adviser has incorporated into its asset allocation
decision-making process several dynamic computer models which it has created.
The purpose of these models is to show the statistical impact of the
Sub-Adviser's economic outlook upon the future returns of each asset group.
The models are especially sensitive to the forecasts for inflation, interest
rates and long-term corporate earnings growth. Investment returns are normally
heavily impacted by such variables and their expected changes over time.
Therefore, the Sub-Adviser's method attempts to take advantage of changing
economic conditions by increasing or decreasing the ratio of stocks to bonds
in the Portfolio. For example, if the Sub-Adviser expected more rapid economic
growth leading to better corporate earnings, it would increase the Portfolio's
holdings of equity securities and reduce its holdings of fixed income
securities and cash equivalents.

Under normal market conditions, the Balanced Portfolio's policy is generally
to invest at least 25% of the value of its total assets in fixed-income
securities and no more than 75% in equity securities. The actual percentage of
assets invested in equity securities, fixed-income securities and cash
equivalents will vary from time to time, depending on the judgment of the
Sub-Adviser as to general market and economic conditions, trends and yields,
interest rates and fiscal and monetary developments.

The equity securities in which the Balanced Portfolio normally invests include
common stock, preferred stock, rights, warrants and securities convertible
into common or preferred stock. (For further information regarding these
instruments see the "Growth & Income Equity Portfolio" below.)

The fixed-income securities in which the Balanced Portfolio invests include
U.S. Government securities or other fixed-income and related debt securities
rated in one of the four highest rating categories assigned by a Rating Agency
at the time of purchase or in unrated investments deemed by the Sub-Adviser to
be of comparable quality pursuant to guidelines approved by the Trust's Board
of Trustees. Debt securities may include a broad range of fixed and variable
rate bonds, debentures, notes, and securities convertible into or exchangeable
for common stock; dollar-denominated debt obligations of foreign issuers,
including foreign corporations and governments; and first mortgage loans,
income participation loans, participation certificates in pools of mortgages,
including mortgages issued or guaranteed by the U.S. Government, its agencies
or instrumentalities, collateralized mortgage obligations and other
mortgage-related securities, and other asset-backed securities. The Portfolio
may invest up to 10% of its total assets at the time of purchase in
dollar-denominated debt obligations of foreign issuers, either directly or
through ADRs and European Depositary Receipts ("EDRs"), and up to 25% of its
total assets at the time of purchase in non-mortgage asset-backed securities,
respectively. (See "Special Considerations Relating to Foreign Securities"
below and the Statement of Additional Information under "Investment Objectives
and Policies - ADRs and EDRs.")

The Portfolio may purchase debt securities which are rated at the time of
purchase within the four highest rating categories assigned by Rating Agencies
or unrated debt securities (including convertible securities) which the
Sub-Adviser believes present attractive opportunities and are of at least
comparable quality to instruments so rated. The Portfolio's dollar-weighted
average portfolio quality is expected to be at least "A" or higher. Securities
rated in the lowest of the above four rating categories have speculative
characteristics, even though they are of investment-grade quality, and changes
in economic conditions or other circumstances are more likely to lead to a
weakened capacity to make principal and interest payments than is the case
with higher grade securities. Such securities will be purchased (and retained)
only when the Sub-Adviser believes the issuers have an adequate capacity to
pay interest and repay principal. (For a description of the rating categories
of Rating Agencies, see the Appendix and the Statement of Additional
Information.) In making investment decisions, the Sub-Adviser will consider a
number of factors including current yield, maturity, yield to maturity,
anticipated changes in interest rates, and the overall quality of the
investment. The Portfolio seeks to provide a current yield greater than that
generally available from money market instruments.

The Portfolio may purchase asset-backed securities (i.e., securities backed by
mortgages, installment sale contracts, corporate receivables, credit card
receivables or other assets) that are issued by entities such as the
Government National Mortgage Association ("GNMA"), Federal National Mortgage
Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC") and
private issuers such as commercial banks, financial companies, finance
subsidiaries of industrial companies, savings and loan associations, mortgage
banks, and investment banks. To the extent that the Portfolio invests in
asset-backed securities issued by companies that are investment companies
under the 1940 Act, such acquisitions will be subject to the percentage
limitations prescribed by the 1940 Act. (See "Investment Practices -
Securities of Other Investment Companies" below.)

Presently, there are several types of mortgage-backed securities, including
guaranteed mortgage pass-through certificates, which provide the holder with a
pro rata interest in the underlying mortgages, and collateralized mortgage
obligations ("CMOs"), which provide the holder with a specified interest in
the cash flow of a pool of underlying mortgages or other mortgage-backed
securities. CMOs are issued in multiple classes, each with a specified fixed
or floating interest rate and a final distribution date. The relative payment
rights of the various CMO classes may be subject to greater volatility and
interest-rate risk than other types of mortgage-backed securities. The average
life of asset-backed securities varies with the underlying instruments or
assets and market conditions, which in the case of mortgages have maximum
maturities of forty years. The average life of a mortgage-backed instrument,
in particular, is likely to be substantially less than the original maturity
of the mortgages underlying the securities as the result of unscheduled
principal payments and mortgage prepayments. The relationship between mortgage
prepayment and interest rates may give some high-yielding mortgage-backed
securities less potential for growth in value than conventional bonds with
comparable maturities. In addition, in periods of falling interest rates, the
rate of mortgage prepayments tends to increase. During such periods, the
reinvestment of prepayment proceeds by the Portfolio will generally be at
lower rates than the rates that were carried by the obligations that have been
prepaid. When interest rates rise, the value of an asset-backed security
generally will decline; however, when interest rates decline, the value of an
asset-backed security with prepayment features may not increase as much as
that of other fixed-income securities. Because of these and other reasons, an
asset-backed security's total return may be difficult to predict precisely.

In general, the collateral supporting non-mortgage asset-backed securities is
of shorter maturity than mortgage loans and is less likely to experience
substantial prepayments. Non-mortgage asset-backed securities involve certain
risks that are not presented by mortgage-backed securities arising primarily
from the nature of the underlying assets (i.e., credit card and automobile
loan receivables as opposed to real estate mortgages). For example, credit
card receivables are generally unsecured and the repossession of automobiles
and other personal property upon the default of the debtor may be difficult or
impracticable in some cases.

The Balanced Portfolio reserves the right to hold as a temporary defensive
measure up to 100% of its total assets in cash and short-term obligations
(having remaining maturities of 12 months or less) at such times and in such
proportions as, in the opinion of the Sub-Adviser, prevailing market or
economic conditions warrant. See the "Growth & Income Equity Portfolio" below
for a description of the types of short-term obligations in which the
Portfolio may invest.

SMALL CAP EQUITY PORTFOLIO.

The Small Cap Equity Portfolio's investment objective is capital appreciation.
Current income is an incidental consideration in the selection of portfolio
securities. In pursuing its investment objective, the Portfolio normally
invests primarily in common stock of emerging or established small- to
medium-sized companies with above-average potential for price appreciation.
The Portfolio may invest in preferred stock, rights, warrants, and securities
convertible into common stock. It may invest a portion of its assets in
established larger companies that, in the opinion of the Sub-Adviser, offer
improved growth possibilities because of rejuvenated management, product
changes, or other developments that might stimulate earnings or asset growth,
or in companies that seem undervalued relative to their underlying assets. The
Portfolio does not intend to invest more than 5% of the value of its total
assets in the securities of unseasoned companies, that is, companies (or their
predecessors) with less than three years' continuous operation.

The Small Cap Equity Portfolio may also invest a portion of its assets in
smaller companies that have limited specialized-product lines, markets or
financial resources, or are dependent upon one-person management. The
securities of such smaller companies may have limited marketability, may be
subject to more abrupt or erratic market movements than securities of larger
companies or the market averages in general, and may involve greater risk than
is customarily associated with more established companies. To qualify for
investment by the Portfolio, however, a company will be expected to have, in
the opinion of the Sub-Adviser, above-average possibilities for capital
appreciation (when compared with the average appreciation of companies whose
securities are included in the S&P 500 Index).

The Small Cap Equity Portfolio uses a research intensive approach and
valuation techniques that emphasize earnings and asset growth. The Sub-Adviser
selects stocks based on a number of factors, including historical and
projected earnings, asset value, potential for price appreciation and earnings
growth, and quality of products manufactured and/or services offered. Stocks
purchased for the Portfolio may be listed on a national securities exchange or
may be unlisted securities with or without an established over-the-counter
market. The Portfolio may also invest in initial public offerings of new
companies that demonstrate the potential for price appreciation. A convertible
security may be purchased for the Portfolio when, in the Sub-Adviser's
opinion, the price of the convertible security is favorable compared to the
price of the common stock. In general, the Portfolio's stocks and other
securities will be diversified over a number of industry groups in an effort
to reduce the risks inherent in such investments.

The Small Cap Equity Portfolio may indirectly invest in foreign securities
through the purchase of such obligations as ADRs and EDRs but will not do so
if, immediately after and as a result of the purchase, the value of ADRs and
EDRs would exceed 25% of the Portfolio's total assets. (For further
information, see the "Growth & Income Equity Portfolio" below, "Special
Considerations Relating to Foreign Securities" below, and the Statement of
Additional Information under "Investment Objectives and Policies - ADRs and
EDRs.") The Portfolio may also invest in securities issued by Canadian
corporations and Canadian counterparts of U.S. corporations, which may or may
not be listed on a national securities exchange or traded in over-the-counter
markets.

The Small Cap Equity Portfolio reserves the right to hold as a temporary
defensive measure up to 100% of its total assets in cash and short-term
obligations (having remaining maturities of 12 months or less) at such times
and in such proportions as, in the opinion of the Sub-Adviser, prevailing
market or economic conditions warrant. See the "Growth & Income Equity
Portfolio" below for a description of the types of short-term obligations in
which the Portfolio may invest.

EQUITY INCOME PORTFOLIO.

The Equity Income Portfolio's investment objective is to seek to provide an
above-average level of income consistent with long-term capital appreciation.
In pursuing its investment objective, the Portfolio intends to invest, under
normal market and economic conditions, substantially all of its assets in
common stock, preferred stock, rights, warrants, and securities convertible
into common stock. The Sub-Adviser will select stocks based on a number of
quantitative factors, including dividend yield, current and future earnings
potential compared to stock prices, total return potential and other measures
of value, such as cash flow, asset value or book value, if appropriate. Stocks
purchased for the Portfolio generally will be listed on a national securities
exchange or will be unlisted securities with an established over-the-counter
market. A convertible security may be purchased for the Portfolio when, in the
Sub-Adviser's opinion, the price and yield of the convertible security is
favorable as compared to the price and yield of the common stock. The stocks
or securities in which the Portfolio invests may be expected to produce an
above average level of income (as measured by the Standard & Poor's 500
Index). Under normal market and economic conditions, at least 65% of the
Portfolio's total assets will be invested in income-producing equity
securities.

The Portfolio may indirectly invest in foreign securities through the purchase
of ADRs and EDRs but will not do so if, immediately after and as a result of
the purchase, the value of ADRs and EDRs would exceed 15% of the Portfolio's
total assets. (For further information, see "Special Considerations Relating to
Foreign Securities" below and the Statement of Additional Information under
"Investment Objectives and Policies - ADRs and EDRs.")

The Portfolio reserves the right to hold as a temporary defensive measure
during abnormal market or economic conditions up to 100% of its total assets
in cash and short-term obligations (having remaining maturities of 13 months
or less) at such times and in such proportions as, in the opinion of the
Sub-Adviser, such abnormal market or economic conditions warrant. Short-term
obligations in which the Portfolio may invest include money market
instruments, such as commercial paper and bank obligations, obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities, and
repurchase agreements.

GROWTH & INCOME EQUITY PORTFOLIO

The Growth & Income Equity Portfolio's investment objective is to provide
long-term capital growth, with income as a secondary consideration. In pursuing
its investment objective, the Portfolio normally invests substantially all of
its assets in common stock, preferred stock, rights, warrants and securities
convertible into common stock. The Sub-Adviser selects stocks based on a
number of factors, including historical and projected earnings, growth and
asset value, earnings compared to stock prices generally (as measured by the
Standard & Poor's 500 Index), and consistency of earnings growth and earnings
quality. Stocks purchased for the Portfolio generally will be listed on a
national securities exchange or will be unlisted securities with an
established over-the-counter market. A convertible security may be purchased
for the Portfolio when, in the Sub-Adviser's opinion, the price and yield of
the convertible security is favorable compared to the price and yield of the
common stock. The stocks or securities in which the Portfolio invests may be
expected to produce some income but income is not a major criterion in their
selection. In general, the Portfolio's stocks and securities will be
diversified over a number of industry groups in an effort to reduce the risks
inherent in such investments.

The Growth & Income Equity Portfolio may indirectly invest in foreign
securities through the purchase of ADRs and EDRs but will not do so if,
immediately after and as a result of the purchase, the value of ADRs and EDRs
would exceed 15% of the Portfolio's total assets. (For further information,
see "Special Considerations Relating to Foreign Securities" below and the
Statement of Additional Information under "Investment Objectives and Policies
- - ADRs and EDRs.") The Portfolio may also invest in Canadian securities listed
on a national securities exchange.

The Growth & Income Equity Portfolio reserves the right to hold as a temporary
defensive measure up to 100% of its total assets in cash and short-term
obligations (having remaining maturities of 12 months or less) at such times
and in such proportions as, in the opinion of the Sub-Adviser, prevailing
market or economic conditions warrant. Short-term obligations include, but are
not limited to, commercial paper, bankers' acceptances, certificates of
deposit, demand and time deposits of domestic and foreign banks and savings
and loan associations, repurchase agreements, and obligations issued or
guaranteed by the U.S. Government or its agencies or instrumentalities.

PORTFOLIOS MANAGED BY VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP.:

MONEY MARKET PORTFOLIO.

The investment objective of the Money Market Portfolio is to provide high
current income consistent with the preservation of capital and liquidity
through investment in a broad range of money market instruments that will
mature within 12 months of the date of purchase.

INVESTMENT PROGRAM

The Money Market Portfolio seeks to achieve its objective by investing only in
the following securities and instruments: (a) obligations of or guaranteed by
the U.S. government, its agencies or instrumentalities ("U.S. Government
Securities"); (b) obligations of banks subject to U.S. government regulation
as well as such other bank obligations as are insured by a U.S. government
agency ("Bank Obligations"); (c) commercial paper (including variable amount
master demand notes); and (d) debt obligations (other than commercial paper)
of corporate issuers.

U.S. Government Securities include Treasury Bills, Notes and Bonds issued by
the U.S. government and backed by the full faith and credit of the U.S.
government, as well as securities issued or guaranteed as to principal and
interest by agencies and instrumentalities of the U.S. government. Bank
Obligations include certificates of deposit and bankers' acceptances of
domestic banks (or Euro-dollar obligations of foreign branches of those
domestic banks) subject to U.S. government regulation and time deposits of
federal and state banks whose accounts are insured by a government agency as
well as the accounts themselves.

See "Risk Factors - Tax Considerations" for a discussion of special
diversification standards which the Portfolio will meet.

The Portfolio may lend portfolio securities. The Portfolio may also enter into
repurchase agreements but only if the underlying securities are either
Government securities or First Tier Securities (see "Investment Quality" and
"Portfolio Maturity", below). The Portfolio may purchase and sell securities
on a "when issued" and "delayed delivery" basis. The Portfolio may borrow up
to 10% of its net assets in order to pay for redemptions when liquidation of
portfolio securities is considered disadvantageous or inconvenient and may
pledge up to 10% of its net assets to secure borrowings. The Portfolio may
invest up to 10% of its net assets in restricted securities. A more complete
description of these investments and transactions is contained under
"Investment Practices".

The Portfolio may also invest in Floating Rate Securities. Floating Rate
Securities provide for automatic adjustment of the interest rate whenever some
specified interest rate index changes. The interest rate on Floating Rate
Securities is ordinarily determined by reference to or is a percentage of a
bank's prime rate, the 90-day U.S. Treasury bill rate, the rate of return on
commercial paper or bank certificates of deposit, an index of short-term
interest rates, or some other objective measure. Floating Rate Securities
often include a demand feature which entitles the holder to sell the
securities to the issuer at par. In many cases, the demand feature can be
exercised at any time on seven days' notice; in other cases, the demand
feature is exercisable at any time on 30 days' notice or on similar notice at
intervals of not more than one year. With respect to Floating Rate Securities,
the financial institution issuing the instrument is considered the issuer.
However, where the securities are backed by an irrevocable letter of credit or
by insurance, without which the securities would not qualify for purchase
under the Portfolio's quality restrictions, the issuer of the letter of credit
will be considered the issuer of the securities.

Although the securities in which the Portfolio invests are of high quality and
the transactions which it enters into entail low risk, there is still the
possibility of loss of principal. Corporate issuers may default on their
obligations. Repurchase agreements may be deemed to be collateralized loans
and the Portfolio could experience delay and expenses in liquidating
collateral in the event of the failure of the repurchasing party to honor its
agreement to repurchase. Agencies or instrumentalities of the U.S. government
could also default on their securities which may not be guaranteed by or be
backed by the full faith and credit of the U.S. government.

INVESTMENT QUALITY

(a) Eligible Securities

The Money Market Portfolio will invest only in United States
dollar-denominated instruments which, at the time of acquisition, are
determined to be eligible securities ("Eligible Securities") by the
Sub-Adviser and which are determined by the Sub-Adviser to present minimal
credit risks.

An Eligible Security is any security that has a remaining maturity of less
than one year and (i) which is rated in one of the two highest rating
categories for short-term debt obligations by any two nationally recognized
statistical rating organizations ("NRSROs") that have issued a rating with
respect to a security or class of debt obligations of an issuer, or if only
one NRSRO has issued a rating, that NRSRO ("Requisite NRSROs"); or (ii) has a
security that has been issued by an issuer that has outstanding short-term
debt obligations (or security within that class) that are comparable in
priority and security with the security ("CPS Security") which is rated, or
the issuer of which is rated, by the Requisite NRSROs in one of the two
highest rating categories for short-term debt obligations. An unrated security
may also be an Eligible Security if it is determined by the Sub-Adviser to be
of comparable quality ("Comparable Quality Security") to either a First Tier
Security or Second Tier Security, as those terms are defined below.

A First Tier Security is an Eligible Security that (i) is itself rated, has a
CPS Security rated or the issuer of which security is rated by the Requisite
NRSROs in the highest rating category for short-term debt obligations or (ii)
is a Comparable Quality Security which is determined by the Sub-Adviser to be
of comparable quality to a First Tier Security.

A Second Tier Security is (i) an Eligible Security that is itself rated, has a
CPS Security rated or the issuer of which security is rated by the Requisite
NRSROs in the second highest rating category for short-term debt obligations,
(ii) an instrument that has been rated in the highest rating category for
short-term debt obligations by one NRSRO and has been rated in the second
highest rating category for short-term debt obligations by one or more other
NRSROs or (iii) a Comparable Quality Security which is determined by the
Sub-Adviser to be of comparable quality to a Second Tier Security.

(b) Guidelines for Purchasing Eligible Securities

The Sub-Adviser, on behalf of the Money Market Portfolio, may (i) acquire any
First Tier Security that, at the time of acquisition, has received the highest
rating from any two NRSROs; (ii) acquire any Second Tier Security that, at the
time of acquisition, has received the second highest rating from any two
NRSROs, and (iii) acquire any First Tier Security or any Second Tier Security
that at time of purchase is rated by a single NRSRO, or any Comparable Quality
Security, subject to approval by the Board of Trustees of the Trust.

PORTFOLIO MATURITY

The Money Market Portfolio may not purchase any instrument, other than a
Government security, with a remaining maturity of greater than one year. A
Government security is any security issued or guaranteed as to principal or
interest by the United States, or by a person controlled or supervised by and
acting as an instrumentality of the Government of the United States, or any
certificate of deposit for any of the above.

The Money Market Portfolio maintains a dollar-weighted average portfolio
maturity of ninety (90) days or less. The Portfolio determines the maturity of
portfolio investments in accordance with Rule 2a-7, a valuation and pricing
rule under the Investment Company Act of 1940, as amended.

QUALITY INCOME PORTFOLIO.

The investment objective of the Quality Income Portfolio is to seek a high
level of current income, consistent with safety of principal, by investing in
obligations issued or guaranteed by the U.S. government or its agencies or
instrumentalities or in various investment grade debt obligations including
mortgage pass-through certificates and collateralized mortgage obligations.

The Sub-Adviser will use the Lehman Brothers Government/Corporate Bond Index
as a benchmark against which it will gauge the performance of the Portfolio
and determine risk measurement. The Lehman Brothers Government/Corporate Bond
Index is comprised of all publicly issued, non-convertible, domestic debt of
the U.S. Government or any agency thereof, quasi-Federal corporation, or
corporate debt guaranteed by the U.S. Government and all publicly issued,
fixed-rate, non-convertible, domestic debt of the four major corporate
classifications: industrial, utility, financial and Yankee bond. Only notes
and bonds with a minimum outstanding principal amount of $50,000,000 and a
minimum maturity of one year are included. Bonds included must have a rating
of at least Baa by Moody's Investors Service, Inc. ("Moody's"), BBB by
Standard & Poor's Corporation ("S&P") or in the case of bank bonds not rated
by either Moody's or S&P, BBB by Fitch Investors Service, Inc.

Depending on market conditions and subject to the special diversification
provisions imposed on the Portfolio (see "Risk Factors"), the Portfolio may
invest a substantial portion of its assets in Government National Mortgage
Association ("GNMA") Certificates of the modified pass-through type. These
GNMA Certificates are debt securities issued by a mortgage holder (such as a
mortgage banker) and represent an interest in a pool of mortgages insured by
the Federal Housing Administration or the Farmers Home Administration or
guaranteed by the Veterans Administration. GNMA guarantees the timely payment
of monthly installments of principal and interest on the GNMA Certificates.
These guarantees are backed by the full faith and credit of the U.S.
government.

To the extent the Portfolio acquires GNMA Certificates at par or at discount,
the GNMA Certificates offer a high degree of safety of the principal
investment because of the GNMA guarantee. If the Portfolio buys GNMA
Certificates at a premium, however, mortgage foreclosures and repayments of
principal by mortgagors (which may be made at any time without penalty) may
result in some loss of the Portfolio's principal investment to the extent of
the premium paid. To avoid loss of this premium and of any gain in value of
its GNMA Certificates resulting from a decrease in interest rates generally,
the Portfolio may sell its GNMA Certificates which are selling at a
substantial premium. This practice may increase the Portfolio's portfolio
turnover rate. A more complete description of GNMA Certificates is contained
in the Statement of Additional Information.

The Portfolio, subject to the limitations on investments as described in "Risk
Factors", may invest in other obligations issued or guaranteed by the U.S.
government or by its agencies or instrumentalities. These instruments may be
either direct obligations of the Treasury (such as U.S. Treasury Notes, Bills
or Bonds) or securities issued or guaranteed by government agencies or
instrumentalities. Of the obligations issued or guaranteed by agencies or
instrumentalities of the U.S. government, some are backed by the full faith
and credit of the U.S. government (such as Maritime Administration Title XI
Ship Financing Bonds) and others are backed only by the rights of the issuer
to borrow from the U.S. Treasury (such as Federal Home Loan Bank Bonds and
Federal National Mortgage Association Bonds).

The Portfolio may also invest in one or more of the following:

(1) Marketable straight-debt securities of domestic issuers, and of
foreign issuers (payable in U.S. dollars) rated at the time of purchase within
the four highest grades assigned by Moody's (Aaa, Aa, A or Baa) or by S&P
(AAA, AA, A or BBB);

(2) Commercial paper rated at time of purchase Prime-3 by Moody's or A-3
by S&P;

(3) Bank obligations (including repurchase agreements and those
denominated in Eurodollars) of banks having total assets in excess of $1
billion; and

(4) Mortgage pass-through certificates and collateralized mortgage
obligations.

Securities rated Baa or BBB may have speculative characteristics and changes
in economic conditions or other circumstances are more likely to lead to a
weakened capacity to make principal and interest payments than is the case
with higher grade bonds. For a further description of the above investments
and the ratings used, see "Appendix - Description of Corporate Bond
Ratings" herein and "Description of Securities Ratings - Commercial
Paper Ratings" in the Statement of Additional Information.

The Portfolio may invest up to 35% of its assets in securities of foreign
issuers. These investments will be marketable straight-debt securities of
foreign issuers payable in U.S. dollars and rated at the time of purchase
within the four highest grades assigned by Moody's or by S&P. Investments in
foreign securities present certain risks not ordinarily found in investments
in securities of U.S. issuers. See "Risk Factors - Special Considerations
Relating to Foreign Securities."

The Portfolio may lend portfolio securities. The Portfolio may borrow under
certain circumstances. The Portfolio may also enter into repurchase
agreements, reverse repurchase agreements and may sell securities short. The
Portfolio may purchase and sell securities on a "when issued" and "delayed
delivery" basis. The Portfolio may invest in restricted securities. A more
complete description of these investments and transactions is contained under
"Investment Practices."

If the Sub-Adviser deems it appropriate to seek to partially hedge the
Portfolio's assets against market value changes, the Portfolio may enter into
various hedging transactions, such as futures contracts, financial index
futures contracts, and the related put or call options contracts on futures
contracts. Hedging is a means of offsetting, or neutralizing, the price
movement of an investment by making another investment, the price of which
should tend to move in the opposite direction from that of the original
investment. See "Investment Practices - Strategic Transactions" and the
Statement of Additional Information for a more complete description of these
transactions.

The Portfolio will be affected by general changes in interest rates resulting
in increases or decreases in the value of the Portfolio securities. Market
prices of debt securities tend to rise when interest rates fall and market
prices tend to fall when interest rates rise. Repurchase agreements may be
deemed to be collateralized loans and the Portfolio could experience delay and
expenses in liquidating such collateral in the event of the failure of the
repurchasing party to honor its agreement to repurchase. Agencies or
instrumentalities of the U.S. government could also default on their
securities which may not be guaranteed by or be backed by the full faith and
credit of the U.S. government.

See "Risk Factors - Tax Considerations" for a discussion of special
diversification standards which the Portfolio will meet.

HIGH YIELD PORTFOLIO.

The investment objective of the High Yield Portfolio is the maximization of
total investment return through income and capital appreciation.

The High Yield Portfolio will pursue its investment objective by investing in
a portfolio substantially consisting of medium and lower grade domestic
corporate debt securities. The Portfolio may also invest up to 35% of its
assets in foreign government and foreign corporate debt securities of similar
quality. The Portfolio may also, from time to time, invest in cash or cash
equivalents due to market conditions or for other defensive purposes.

Lower grade corporate debt securities are commonly known as "junk bonds" and
involve a significant degree of risk. See "Risk Factors - Special Risks of
High Yield Investing."

Medium grade corporate securities are generally regarded as having adequate,
but not outstanding, capacity to pay interest and repay principal. Medium
grade securities are obligations that are rated A and Baa by Moody's or A and
BBB by S&P, or which are not rated by either Moody's or S&P but are considered
by the Sub-Adviser to be of comparable quality. Securities rated Baa or BBB
may have speculative characteristics and changes in economic conditions or
other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case with higher grade bonds.
Lower grade corporate securities are those that are rated Ba or B by Moody's
or BB or B by S&P, or which are unrated or considered by the Sub-Adviser to be
of comparable quality. If the Sub-Adviser deems it appropriate, the Portfolio
may invest in domestic corporate debt securities of a higher quality. For a
further description of these ratings, see "Appendix - Description of Corporate
Bond Ratings."

Many issuers of medium and lower grade securities choose not to have a rating
assigned to their obligations by one of the rating agencies. Therefore, the
Portfolio's assets may at times consist of a high proportion of unrated
securities. The Portfolio will purchase only those unrated securities which
the Sub-Adviser believes are comparable to rated securities that qualify for
purchase by the Portfolio pursuant to criteria established by the Board of
Trustees. Although the Portfolio will invest primarily in medium and lower
grade securities, from time to time the Portfolio may also invest in higher
grade securities if the Sub-Adviser considers it appropriate, as when the
difference in return between different grades of securities is very narrow,
when the Sub-Adviser expects interest rates to increase, or when the
availability of medium and lower grade securities is limited. These
investments may result in a lower current income than if the Portfolio were
fully invested in medium and lower grade securities.

The Portfolio may invest up to 35% of its assets in foreign government and
foreign corporate debt securities of similar quality. Investments in foreign
securities present certain risks not ordinarily found in investments in
securities of U.S. issuers. See "Risk Factors - Special Considerations
Relating to Foreign Securities."

If the Sub-Adviser deems it appropriate to seek to partially hedge the
Portfolio's assets against market value changes resulting from changes in
interest rates or (with respect to the foreign securities which the Portfolio
invests in) currency fluctuations, the Portfolio may also enter into various
hedging transactions, such as futures contracts, financial index futures
contracts, and related put or call options contracts on these contracts and
foreign currency contracts. In addition, if the Sub-Adviser deems it
appropriate, the Portfolio may enter into other hedging transactions, such as
forward foreign currency contracts, currency futures contracts, and related
options contracts in order to protect the U.S. dollar equivalent values of
those foreign securities in which the Portfolio invests against declines
resulting from currency value fluctuations.

Hedging is a means of offsetting, or neutralizing, the price movement of an
investment by making another investment, the price of which should tend to
move in the opposite direction from that of the original investment. See
"Investment Practices - Strategic Transactions" and the Statement of
Additional Information for a more complete discussion of these transactions.

The Portfolio may lend portfolio securities. The Portfolio may borrow under
certain circumstances. The Portfolio may also enter into repurchase agreements
and reverse repurchase agreements. Repurchase agreements may be deemed to be
collateralized loans and the Portfolio could experience delay and expenses in
liquidating such collateral in the event of the failure of the repurchasing
party to honor its agreement to repurchase. The Portfolio may invest in
restricted securities. The Portfolio may purchase and sell securities on a
"when issued" and "delayed delivery" basis. A more complete description of
these investments and transactions is contained under "Investment Practices."

See "Risk Factors - Tax Considerations" for a discussion of special
diversification standards which the Portfolio will meet.

ASSET COMPOSITION

At December 31, 1997, the High Yield Portfolio was invested in bonds rated by
Moody's as follows:

<TABLE>
<CAPTION>
<S> <C>
PERCENTAGE OF TOTAL BOND
MOODY'S RATINGS INVESTMENTS IN THE PORTFOLIO

Caa ___%
Ba1 ___%
Ba2 ___%
Ba3 ___%
B1 ___%
B2 ___%
B3 ___%
Aaa ___%
Other ___%
</TABLE>

STOCK INDEX PORTFOLIO.

INVESTMENT OBJECTIVE

The investment objective of the Stock Index Portfolio is to achieve investment
results that approximate the aggregate price and yield performance of the
Standard & Poor's 500 Composite Stock Price Index (the "S&P 500 Index" or the
"Index").

The S&P 500 Index represents more than 70% of the total market value of all
publicly-traded common stocks, and is widely viewed among investors as a good
representative of the aggregate performance of publicly-traded common stocks.

"Standard & Poor's ", "S&P ", "S&P 500 ", "Standard & Poor's 500", and "500"
are trademarks of McGraw-Hill Inc. and have been licensed for use by Cova
Life. The Stock Index Portfolio is not sponsored, endorsed, sold or promoted
by Standard & Poor's Corporation ("S&P") and S&P makes no representation or
warranty, express or implied, to the owners of the Stock Index Portfolio or
any member of the public regarding the advisability of investing in securities
generally or in the Stock Index Portfolio particularly or the ability of the
S&P 500 Index to track general stock market performance. S&P's only
relationship to Cova Life is the licensing of certain trademarks and trade
names of S&P and of the S&P 500 Index which is determined, composed and
calculated by S&P without regard to Cova Life or the Stock Index Portfolio.
S&P has no obligation to take the needs of Cova Life or the owners of the
Stock Index Portfolio into consideration in determining, composing or
calculating the S&P 500 Index. S&P is not responsible for and has not
participated in the determination of the prices and amount of the Stock Index
Portfolio or the timing of the issuance or sale of the Stock Index Portfolio
or in the determination or calculation of the equation by which the Stock
Index Portfolio is to be converted into cash. S&P has no obligation or
liability in connection with the administration, marketing or trading of the
Stock Index Portfolio.

S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500
INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY
ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR
IMPLIED, AS TO RESULTS TO BE OBTAINED BY COVA LIFE, OWNERS OF THE STOCK INDEX
PORTFOLIO, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR
ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND
EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500 INDEX OR ANY DATA
INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P
HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL
DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH
DAMAGES.

INVESTMENT POLICIES

The Stock Index Portfolio is not managed according to traditional methods of
"active" investment management, which involve the buying and selling of
securities based upon economic, financial and market analysis and investment
judgment. Instead, the Portfolio, utilizing a "passive" or "indexing"
investment approach, attempts to duplicate the investment performance of the
respective index through statistical procedures.

The Sub-Adviser believes that the "indexing" approach described above is an
effective method of substantially duplicating percentage changes in the S&P
500 Index. It is a reasonable expectation that the correlation between the
performance of the Portfolio and that of the Index will be approximately 98%;
a figure of 100% would indicate perfect correlation. Perfect correlation would
be achieved when the net asset value per share of the Portfolio increases and
decreases in exact proportion to changes in the Index. The Board of Trustees
of the Trust will review the correlation between the Portfolio and the Index
on a quarterly basis. See the Statement of Additional Information for a
description of the monitoring procedures established by the Board.

In pursuing its investment objective, the Portfolio will invest in no fewer
than 100 stocks with the majority of the Portfolio consisting of those stocks
having the largest weightings in the Index. The Sub-Adviser will select stocks
for the Portfolio after taking into account their individual weights in the
Index and the weights in the Index of the industry groups to which they
belong.

Although the Portfolio will attempt to remain fully invested in common stocks,
it may also invest in certain short-term fixed income securities such as cash
reserves.

As described further below under "Implementation of Policies", the Portfolio
may also enter into stock index futures contracts and options on stock indexes
and stock index futures contracts for various reasons including to hedge
against changes in security prices. Hedging is a means of offsetting, or
neutralizing, the price movement of an investment by making another
investment, the price of which should tend to move in the opposite direction
from that of the original investment. See the Statement of Additional
Information for a more complete description of hedging and for a discussion of
the risks involved therein.

IMPLEMENTATION OF POLICIES

The S&P 500 Index is composed of 500 common stocks which are chosen by S&P to
be included in the unmanaged Index. Market value, liquidity and industry
representation are considered in the selection process. The inclusion of a
stock in the S&P 500 Index in no way implies that S&P believes the stock to be
an attractive investment. The 500 securities, 95% of which trade on the New
York Stock Exchange, represent approximately 75% of the market value of all
U.S. common stocks. Each stock in the S&P 500 Index is weighted by its market
value: its market price per share times the number of shares outstanding.

Because of the market-value weighting, the 50 largest companies in the S&P 500
Index currently account for approximately 50% of the Index. Typically,
companies included in the S&P 500 Index are the largest and most dominant
firms in their respective industries. As of December 31, 1997, the five
largest companies in the Index were: _____________________,
________________________, ________________________, _______________________,
and ________________________________. The largest industry categories
were ___________________________.

Although the Portfolio will normally seek to remain substantially fully
invested in common stocks, the Portfolio may invest temporarily in certain
short-term fixed income securities. Such securities may be used to
invest uncommitted cash balances or to maintain liquidity to meet shareholder
redemptions. These securities include: obligations of the United States
government and its agencies or instrumentalities; commercial paper, bank
certificates of deposit and bankers' acceptances; and repurchase
agreements and reverse repurchase agreements collateralized by these
securities. Repurchase agreements may be deemed to be collateralized loans
and the Portfolio could experience delay and expenses in liquidating such
collateral in the event of the failure of the repurchasing party to honor
its agreement to repurchase.

The Portfolio will employ a combination of an indexing strategy known as
"sampling" and stock index futures contracts and options. Sampling is a method
that is used to attempt to replicate the return of the Index without having to
purchase a weighted portfolio containing all 500 stocks in the Index. This
process selects stocks for the Portfolio so that various industry weightings,
market capitalizations and fundamental characteristics (e.g. price to book,
price to earnings, debt to asset ratios and dividend yields) match those of
the Index. The use of sampling involves certain risks with respect to the
ability of the Portfolio to achieve the desired correlation with the Index.
(See "Risk Factors - Stock Index Portfolio - Sampling", below).

As indicated above, the Portfolio may utilize stock index futures contracts
and options on stock indexes and stock index futures contracts. Specifically,
the Portfolio may enter into futures contracts provided that not more than 5%
of its assets are required as a futures contract deposit.

Stock index futures contracts and options may be used for several reasons: to
maintain cash reserves while remaining fully invested, to facilitate trading,
to reduce transaction costs, to hedge against changes in securities prices, or
to seek higher investment returns when a futures contract is priced more
attractively than the underlying equity security or the Index.

The Portfolio may lend its investment securities to qualified institutional
investors for the purpose of realizing additional income. Loans of securities
by the Portfolio will be collateralized by cash or securities issued or
guaranteed by the U.S. government or its agencies. The collateral will equal
at least 100% of the current market value of the loaned securities. The
Portfolio may borrow money from a bank but only for temporary or emergency
purposes. The Portfolio may borrow money up to one-third of the value of its
total assets taken at current value. The Portfolio would borrow money only to
meet redemption requests prior to the settlement of securities already sold or
in the process of being sold by the Portfolio. To the extent that the
Portfolio borrows money prior to selling securities, the Portfolio may be
leveraged; at such times, the Portfolio may appreciate or depreciate in value
more rapidly than the Index. The Portfolio may purchase and sell securities on
a "when issued" and "delayed delivery" basis. The Portfolio may invest in
restricted securities and may sell securities short. See "Investment
Practices" for a description of these investments and transactions.

See "Risk Factors - Tax Considerations" for a discussion of special
diversification standards which the Portfolio will meet.

RISK FACTORS - STOCK INDEX PORTFOLIO

FUTURES CONTRACTS AND OPTIONS

The primary risks associated with the use of futures contracts and options
are: (i) imperfect correlation between the change in market value of the
stocks held by the Portfolio and the prices of futures contracts and options;
and (ii) possible lack of a liquid secondary market for a futures contract and
the resulting inability to close a futures position when desired. The risk of
imperfect correlation will be minimized by investing only in those contracts
whose behavior is expected to resemble that of the Portfolio's underlying
securities. The risk that the Portfolio will be unable to close out a futures
position will be minimized by entering into such transactions on a national
exchange with an active and liquid secondary market. See the Statement of
Additional Information for a more complete discussion of the risks involved
with respect to investment in stock index futures contracts and options on
stock indexes and stock index futures contracts.

MARKET RISK

As the Portfolio invests primarily in common stocks, the Portfolio is subject
to market risk - i.e. the possibility that common stock prices will decline
over short or even extended periods. The U.S. stock market tends to be
cyclical, with periods when stock prices generally rise and periods when
prices generally decline.

To illustrate the volatility of stock prices, the following table sets forth
the extremes for stock market returns as well as the average return for the
period from 1926 to 1997, as measured by the S&P 500 Index:

U.S. STOCK MARKET RETURNS (1926-1997)
OVER VARIOUS TIME HORIZONS

<TABLE>
<CAPTION>
One Five Ten Twenty
Year Years Years Years
----- ------ ------ -------
<S> <C> <C> <C> <C>

Best _____ % _____ % _____ % _____%
Worst _____ % _____ % _____ % _____%
Average _____ % _____ % _____ % _____%
</TABLE>

As shown, from 1926 to 1997, common stocks, as measured by the S&P 500 Index,
have provided an average annual total return (capital appreciation plus
dividend income) of _____%. While this average return can be used as a guide
for setting reasonable expectations for future stock market returns, it may
not be useful for forecasting future returns in any particular period, as
stock returns are quite volatile from year to year.

SAMPLING

The use of the sampling technique may, particularly under certain market
conditions, result in a lower correlation between the Portfolio and the Index
than if the Portfolio owned all 500 stocks in the Index. The sampling
technique, when employed successfully, is effective primarily due to the
existence of long-term correlations between groups of stocks and whole
industry sectors within the Index. Sampling, by definition, creates a bias
toward the purchase by the Portfolio of the stocks of larger capitalization
companies. As a result, the Portfolio can be negatively impacted by the use of
sampling in a market where the stocks of smaller capitalization companies are
outperforming those of larger capitalization companies. When this happens, it
may result in the Portfolio underperforming the Index and not achieving its
anticipated degree of correlation with the Index. The Sub-Adviser will
actively monitor the effectiveness of its sampling technique and will
undertake corrective actions should the use of the sampling technique result
in underperformance or undercorrelation with respect to the Index. Such
corrective actions may include, but not necessarily be limited to, increasing
the number of companies represented in the Portfolio to incorporate more
secondary issues. As described under "Investment Policies" above, the Board of
Trustees of the Trust reviews the correlation between the Portfolio and the
Index on a quarterly basis. The Board has adopted monitoring procedures which
require, among other things, that the Sub-Adviser notify the Board in the
event that the correlation between the performance of the Portfolio and that
of the Index falls below 95%.

VKAC GROWTH AND INCOME PORTFOLIO .

The investment objective of the VKAC Growth and Income Portfolio is to seek
long-term growth of both capital and income by investing in a portfolio of
common stocks which are considered by the Sub-Adviser to have potential for
capital appreciation and dividend growth. The Portfolio may also invest up to
35% of its assets in common stocks which are considered by the Sub-Adviser to
have potential for capital appreciation but which are issued by foreign
corporations.

The Portfolio seeks to achieve its objective by investing primarily in a
diversified portfolio of dividend paying common stocks of large established
companies which are considered by the Sub-Adviser to have potential for both
capital appreciation and dividend growth. The Portfolio's stocks are actively
traded in U.S. domestic markets, primarily on national securities exchanges,
and are selected principally on the basis of fundamental investment values as
determined by the Sub-Adviser. The Portfolio's investments are usually viewed
by the Sub-Adviser as having comparatively low price-earning ratios and
anticipated higher dividends than the S&P 500 average and, at the time of
purchase, are considered by the Sub-Adviser to be undervalued in the
marketplace.

The Portfolio may invest up to 35% of its assets in dividend paying common
stocks of large established companies which are considered by the Sub-Adviser
to have potential for both capital appreciation and dividend growth but which
are issued by foreign corporations of the same type as the U.S. securities
described above. There is no current intention that these investments will
exceed 20% of the Portfolio's assets. Investments in foreign securities
present certain risks not ordinarily found in investments in securities of
U.S. issuers. See "Risk Factors - Special Considerations Relating to Foreign
Securities".

If the Sub-Adviser deems it appropriate to seek to partially hedge the
Portfolio's assets against market value changes resulting from changes in
interest rates or (with respect to the foreign securities which the Portfolio
invests in) currency fluctuations, the Portfolio may enter into various
hedging transactions, such as futures contracts, financial index futures
contracts, and related put or call options contracts on these contracts and
foreign currency contracts. In addition, if the Sub-Adviser deems it
appropriate, the Portfolio may enter into other hedging transactions, such as
forward foreign currency contracts, currency futures contracts, and related
options contracts in order to protect the U.S. dollar equivalent values of
those foreign securities in which the Portfolio invests against declines
resulting from currency value fluctuations. Hedging is a means of offsetting,
or neutralizing, the price movement of an investment by making another
investment, the price of which should tend to move in the opposite direction
from that of the original investment. See "Investment Practices - Strategic
Transactions" and the Statement of Additional Information for a more complete
description of these transactions.

The Portfolio may lend portfolio securities. The Portfolio may borrow under
certain circumstances. The Portfolio may also enter into repurchase
agreements, reverse repurchase agreements and may sell securities short. The
Portfolio may also invest in restricted securities. The Portfolio may purchase
and sell securities on a "when issued" and "delayed delivery" basis. A more
complete description of these investments and transactions is contained under
"Investment Practices".

See "Risk Factors - Tax Considerations" for a discussion of special
diversification standards which the Portfolio will meet.

As the Portfolio invests primarily in common stocks, the Portfolio is subject
to market risk - i.e. the possibility that common stock prices will decline
over short or even extended periods. Stock markets tend to be cyclical, with
periods when stock prices generally rise and periods when prices generally
decline.

The Portfolio's policy of investing in securities that have a potential for
growth means that the assets of the Portfolio generally will be subject to
greater risk than may be involved in investing in securities which are not
selected for such growth characteristics. Repurchase agreements may be deemed
to be collateralized loans and the Portfolio could experience delay and
expenses in liquidating such collateral in the event of the failure of the
repurchasing party to honor its agreement to repurchase.

INVESTMENT PRACTICES

In connection with the investment policies of the Portfolios described above,
the Portfolios may engage in certain investment practices subject to the
limitations set forth below. These investments entail risks.

STRATEGIC TRANSACTIONS. Certain Portfolios may purchase and sell
exchange-listed and over-the-counter put and call options on securities,
financial futures, fixed-income and equity indices and other financial
instruments and purchase and sell financial futures contracts. Certain
Portfolios may also enter into various currency transactions such as currency
forward contracts, currency futures contracts, currency swaps or options on
currencies or currency futures, stock index futures contracts and options on
stock indexes and stock index futures contracts. Collectively, all of the
above are referred to as "Strategic Transactions." Strategic Transactions are
hedging transactions which may be used to attempt to protect against possible
changes in the market value of securities held in or to be purchased for a
Portfolio, to protect a Portfolio's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective interest rate exposure of a Portfolio, to
protect against changes in currency exchange rates, or to establish a position
in the derivatives markets as a temporary substitute for purchasing or selling
particular securities. Any or all of these investment techniques may be used
at any time and there is no particular strategy that dictates the use of one
technique rather than another, as use of any Strategic Transaction is a
function of numerous variables including market conditions. The ability of a
Portfolio to utilize these Strategic Transactions successfully will depend on
a Sub-Adviser's ability to predict pertinent market movements, which cannot be
assured. The Portfolios will comply with applicable regulatory requirements
when implementing these strategies, techniques and instruments.

Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Sub-Adviser's view as to certain market movements is incorrect, the risk
that the use of such Strategic Transactions could result in losses greater
than if they had not been used. Use of put and call options may result in
losses to a Portfolio, force the sale of portfolio securities at inopportune
times or for prices other than at current market values, limit the amount of
appreciation a Portfolio can realize on its investments or cause a Portfolio
to hold a security it might otherwise sell. The use of currency transactions
can result in a Portfolio incurring losses as a result of a number of factors
including the imposition of exchange controls, suspension of settlements or
the inability to deliver or receive a specified currency. The use of options
and futures transactions entails certain other risks. In particular, the
variable degree of correlation between price movements of futures contracts
and price movements in the related portfolio position of a Portfolio creates
the possibility that losses on the hedging instrument may be greater than
gains in the value of a Portfolio's position. In addition, futures and options
markets may not be liquid in all circumstances and certain over-the-counter
options may have no markets. As a result, in certain markets, a Portfolio
might not be able to close out a transaction without incurring substantial
losses, if at all. Although the contemplated use of these futures contracts
and options thereon should tend to minimize the risk of loss due to a decline
in the value of the hedged position, at the same time they tend to limit any
potential gain which might result from an increase in value of such position.
Finally, the daily variation margin requirements for futures contracts would
create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value and possibly income. The Strategic Transactions that the Portfolios may
use and some of their risks are described more fully in the Statement of
Additional Information.

REPURCHASE AGREEMENTS. The Portfolios may enter into repurchase
agreements with selected commercial banks and broker-dealers, under which the
Portfolio acquires securities and agrees to resell the securities at an agreed
upon time and at an agreed upon price. The Portfolio accrues as interest the
difference between the amount it pays for the securities and the amount it
receives upon resale. At the time the Portfolio enters into a repurchase
agreement, the value of the underlying security including accrued interest
will be equal to or exceed the value of the repurchase agreement and, for
repurchase agreements that mature in more than one day, the seller will agree
that the value of the underlying security including accrued interest will
continue to be at least equal to the value of the repurchase agreement. Each
Sub-Adviser will monitor the value of the underlying security in this regard.
The Portfolio will enter into repurchase agreements only with commercial banks
whose deposits are insured by the Federal Deposit Insurance Corporation and
whose assets exceed $500 million or broker-dealers who are registered with the
Securities and Exchange Commission. In determining whether the Portfolio
should enter into a repurchase agreement with a bank or broker-dealer, the
Sub-Adviser will take into account the credit-worthiness of the party and will
monitor its credit-worthiness on an ongoing basis in accordance with standards
by the Board of Trustees. In the event of a default by the party, the delays
and expenses potentially involved in establishing the Portfolio's rights to,
and in liquidating, the security may result in a loss to the Portfolio. The
Money Market Portfolio may not invest in repurchase agreements which mature in
more than seven days.

There are additional limitations and restrictions relating to the ability of
the Money Market Portfolio to invest in repurchase agreements which have been
adopted by the Board of Trustees of the Trust and which relate primarily to
investment quality and diversification.

WHEN ISSUED AND DELAYED DELIVERY TRANSACTIONS. Certain Portfolios may
purchase and sell securities on a "when issued" and "delayed delivery" basis,
that is, obligate themselves to purchase or sell securities with delivery and
payment to occur at a later date in order to secure what is considered to be
an advantageous price and yield to the Portfolio at the time of entering into
the obligation. When a Portfolio engages in such transactions, the Portfolio
relies on the buyer or seller, as the case may be, to consummate the sale. No
income accrues to or is earned by the Portfolio on portfolio securities in
connection with such transactions prior to the date the Portfolio actually
takes delivery of such securities. These transactions are subject to market
fluctuation; the value of such securities at delivery may be more or less than
their purchase price, and yields generally available on such securities when
delivery occurs may be higher than yields on such securities obtained pursuant
to such transactions. Because the Portfolio relies on the buyer or seller, as
the case may be, to consummate the transaction, failure by the other party to
complete the transaction may result in the Portfolio missing the opportunity
of obtaining a price or yield considered to be advantageous. When the
Portfolio is the buyer in such a transaction, however, it will maintain, in a
segregated account with its custodian, cash or high-grade portfolio securities
having an aggregate value equal to the amount of such purchase commitments
until payment is made. The Portfolio will make commitments to purchase
securities on such basis only with the intention of actually acquiring these
securities, but the Portfolio may sell such securities prior to the settlement
date if such sale is considered to be advisable. To the extent the Portfolio
engages in when issued and delayed delivery transactions, it will do so for
the purpose of acquiring securities for the Portfolio consistent with the
Portfolio's investment objective and policies and not for the purposes of
investment leverage. No specific limitation exists as to the percentage of any
Portfolio's assets which may be used to acquire securities on a when issued or
delayed delivery basis. See the Statement of Additional Information for
additional discussion of these transactions.

U.S. GOVERNMENT OBLIGATIONS. Certain Portfolios may invest in securities
issued or guaranteed by the U.S. Government, its agencies and
instrumentalities which historically have involved little risk of loss of
principal if held to maturity. However, due to fluctuations in interest rates,
the market value of such securities may vary during the period a shareholder
owns shares of a Portfolio. Examples of the types of U.S. Government
obligations that may be held by the Portfolios, subject to their investment
objectives and policies, include, in addition to U.S. Treasury bonds, notes
and bills, the obligations of Federal Home Loan Banks, Federal Farm Credit
Banks, Federal Land Banks, the Federal Housing Administration, Farmers Home
Administration, Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association ("GNMA"), Federal
National Mortgage Association ("FNMA"), Federal Home Loan Mortgage Corporation
("FHLMC"), General Services Administration, Student Loan Marketing
Association, Central Bank for Cooperatives, Federal Intermediate Credit Banks,
Resolution Trust Corporation, and Maritime Administration. Obligations of
certain agencies and instrumentalities of the U.S. Government, such as those
of GNMA, are supported by the full faith and credit of the U.S. Treasury;
others, such as the Export-Import Bank of the United States, are supported by
the right of the issuer to borrow from the Treasury; others, such as those of
FNMA, are supported by the discretionary authority of the U.S. Government to
purchase the agency's obligations; still others such as those of the Student
Loan Marketing Association, are supported only by the credit of the
instrumentality. There is no assurance that the U.S. Government would provide
financial support to U.S. Government-sponsored instrumentalities if it is not
obligated to do so by law.

STRIPPED GOVERNMENT SECURITIES. To the extent consistent with their
respective investment policies, certain Portfolios may invest in bills, notes
and bonds (including zero coupon bonds) issued by the U.S. Treasury, as well
as "stripped" U.S. Treasury obligations offered under the Separate Trading of
Registered Interest and Principal Securities ("STRIPS") program or Coupon
Under Bank-Entry Safekeeping ("CUBES") program or other stripped securities
issued directly by agencies or instrumentalities of the U.S. Government.
STRIPS and CUBES represent either future interest or principal payments and
are direct obligations of the U.S. Government that clear through the Federal
Reserve System. Stripped securities are issued at a discount to their "face
value" and may exhibit greater price volatility than ordinary debt securities
because of the manner in which their principal and interest are returned to
investors. The Sub-Adviser will consider the liquidity needs of a Portfolio
when any investments in zero coupon obligations or other principal-only
obligations are made.

VARIABLE AND FLOATING RATE INSTRUMENTS. Certain Portfolios may purchase
rated or unrated variable and floating rate instruments. These instruments may
include variable rate master demand notes that permit the indebtedness
thereunder to vary in addition to providing for periodic adjustments in the
interest rate. Unrated instruments purchased by a Portfolio will be determined
by the Sub-Adviser to be of comparable quality at the time of purchase to
rated instruments that may be purchased. The absence of an active secondary
market for a particular variable or floating rate instrument, however, could
make it difficult for a Portfolio to dispose of an instrument if the issuer
were to default on its payment obligation. A Portfolio could, for these or
other reasons, suffer a loss with respect to such instruments.

SECURITIES OF OTHER INVESTMENT COMPANIES. Under certain circumstances and
subject to their investment policies, certain Portfolios may invest in
securities issued by other investment companies which invest in securities in
which such Portfolios are permitted to invest. These Portfolios may invest in
securities of other investment companies to the extent permitted under the 1940
Act--that is, a Portfolio may invest up to 10% of its total assets in
securities of other investment companies so long as not more than 3% of the
outstanding voting stock of any one investment company is held by the Portfolio.
In addition, not more than 5% of a Portfolio's total assets may be invested
in the securities of any one investment company. As a shareholder in an
investment fund, a Portfolio would bear its share of that investment fund's
expenses, including its advisory and administration fees. At the same time the
Portfolio would continue to pay its own operating expenses. (See the Statement
of Additional Information under "Investment Objectives and Policies -
Securities of Other Investment Companies.")

RESTRICTED AND ILLIQUID SECURITIES. The Portfolios may each invest up to
15% (10% with respect to the Portfolios for which Van Kampen American Capital
Investment Advisory Corp. acts as Sub-Adviser) of their respective net assets
in securities the disposition of which is subject to substantial legal or
contractual restrictions on resale and securities that are not readily
marketable. The sale of restricted and illiquid securities often requires more
time and results in higher brokerage charges or dealer discounts and other
selling expenses than does the sale of securities eligible for trading on
national securities exchanges or in the over-the-counter markets. Restricted
securities may sell at a price lower than similar securities that are not
subject to restrictions on resale. Restricted and illiquid securities in all
Portfolios will be valued at fair value as determined in good faith by or at
the direction of the Trustees for the purposes of determining the net asset
value of each Portfolio. Restricted securities salable among qualified
institutional buyers without restriction pursuant to Rule 144A under the
Securities Act of 1933 that are determined to be liquid by the Sub-Adviser
under guidelines adopted by the Board of Trustees of the Trust (under which
guidelines the Sub-Adviser will consider factors such as trading activities
and the availability of price quotations) will not be treated as restricted
securities by the Portfolios pursuant to such rules.

LOANS OF PORTFOLIO SECURITIES. Consistent with applicable regulatory
requirements, all of the Portfolios may lend their securities to selected
commercial banks or broker-dealers up to a maximum of 25% of the assets of
each Portfolio (except up to 33 1/3% with respect to the Emerging Markets
Equity Portfolio and the Portfolios managed by Mississippi Valley Advisors
Inc.). Such loans must be callable at any time and be continuously secured by
collateral deposited by the borrower in a segregated account with the Trust's
custodian consisting of cash or of securities issued or guaranteed by the U.S.
Government or its agencies, which collateral is equal at all times to at least
100% of the value of the securities loaned, including accrued interest. A
Portfolio will receive amounts equal to earned income for having made the
loan. Any cash collateral pursuant to these loans will be invested in short-
term instruments. A Portfolio is the beneficial owner of the loaned securities
in that any gain or loss in the market price during the loan inures to the
Portfolio and its shareholders. Thus, when the loan is terminated, the value
of the securities may be more or less than their value at the beginning of the
loan. In determining whether to lend its portfolio securities to a bank or
broker-dealer, a Portfolio will take into account the credit-worthiness of
such borrower and will monitor such credit-worthiness on an ongoing basis in
as much as a default by the other party may cause delays or other collection
difficulties. A Portfolio may pay finders' fees in connection with loans of
its portfolio securities.

REVERSE REPURCHASE AGREEMENTS AND BORROWINGS. The Portfolios may enter
into reverse repurchase agreements with selected commercial banks or
broker-dealers with respect to securities which could otherwise be sold by the
Portfolios. Reverse repurchase agreements involve sales by a Portfolio of
Portfolio assets concurrently with an agreement by the Portfolio to repurchase
the same assets at a later date at a fixed price which is greater than the
sales price. The difference between the amount the Portfolio receives for the
securities and the amount it pays on repurchase is deemed to be a payment of
interest by the Portfolio. Each Portfolio will maintain, in a segregated
account with its custodian, cash, Treasury bills, or other U.S. Government
Securities having an aggregate value equal to the amount of commitment to
repurchase, including accrued interest, until payment is made. Each Portfolio
will enter into reverse repurchase agreements only with commercial banks whose
deposits are insured by the Federal Deposit Insurance Corporation and whose
assets exceed $500 million or broker-dealers who are registered with the SEC.
In determining whether a Portfolio should enter into a reverse repurchase
agreement with a bank or broker-dealer, each Sub-Adviser will take into
account the credit-worthiness of the party and will monitor the
credit-worthiness on an ongoing basis. During the reverse repurchase agreement
period, a Portfolio continues to receive principal and interest payments on
these securities. Reverse repurchase agreements involve the risk that the
market value of the securities retained by the Portfolio may decline below the
price of the securities the Portfolio has sold but is obligated to repurchase
under the agreement. In the event the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, a Portfolio's
use of the proceeds of the agreement may be restricted pending a determination
by the other party, or its trustee or receiver, whether to enforce the
Portfolio's obligation to repurchase the securities. Reverse repurchase
agreements create leverage and will be treated as borrowings for the purposes
of each Portfolio's investment restriction on borrowings.

Each of the Quality Income, High Yield, VKAC Growth and Income and Stock Index
Portfolios is permitted to borrow money up to one-third of the value of its
total assets taken at current value. The Money Market Portfolio may borrow up
to 10% of its total assets. Borrowing by these Portfolios may be only from
banks as a temporary measure for extraordinary or emergency purposes and not
for investment leverage. Each of the Mid-Cap Value, Large Cap Research,
Developing Growth and Lord Abbett Growth and Income Portfolios may borrow from
banks (as defined in the 1940 Act) in amounts up to 33 1/3% of its total
assets (including the amount borrowed) and may borrow up to an additional 5%
of its total assets for temporary purposes. Each of the Select Equity, Large
Cap Stock and Small Cap Stock Portfolios is permitted to borrow money for
extraordinary or emergency purposes in amounts up to 10% of the value of the
Portfolio's total assets. Each of the Quality Bond, International Equity
Emerging Markets Equity Portfolios is permitted to borrow money for
extraordinary or emergency purposes in amounts up to 30% of the value of the
Portfolio's total assets and in connection with reverse repurchase agreements.
The Bond Debenture Portfolio is permitted to borrow money for extraordinary or
emergency purposes in amounts up to 5% of the Portfolio's gross assets.

As a matter of operating policy, the Money Market Portfolio, the Quality
Income Portfolio, the Stock Index Portfolio and the VKAC Growth and Income
Portfolio will not borrow more than 10% of their net asset value when
borrowing is for any general purpose and 25% of their net asset value when
borrowing is a temporary measure to facilitate redemptions.

Each of the Balanced, Small Cap Equity, Equity Income and Growth & Income
Equity Portfolios may borrow money from banks for temporary defensive purposes
in amounts not in excess of 10% of the Portfolio's total assets at the time of
such borrowing.

Borrowing by a Portfolio creates an opportunity for increased net income but,
at the same time, creates special risk considerations such as changes in the
net asset value of the shares and in the yield on the Portfolio. Although the
principal of such borrowings will be fixed, the Portfolio's assets may change
in value during the time the borrowing is outstanding. Borrowing will create
interest expenses for the Portfolio which can exceed the income from the
assets retained. To the extent the income derived from securities purchased
with borrowed funds exceeds the interest the Portfolio will have to pay, the
Portfolio's net income will be greater than if borrowing were not used.
Conversely, if the income from the assets retained with borrowed funds is not
sufficient to cover the cost of borrowing, the net income of the Portfolio
will be less than if borrowing were not used.

SHORT SALES. Certain Portfolios may utilize short sales on securities to
implement their investment objectives. A short sale is effected when it is
believed that the price of a particular investment will decline, and involves
the sale of an investment which the Portfolio does not own in the hope of
purchasing the same investment at a later date at a lower price. To make
delivery to the buyer, the Portfolio must borrow the investment, and the
Portfolio is obligated to return the investment to the lender, which is
accomplished by a later purchase of the investment by the Portfolio.

The Portfolio will incur a loss as a result of the short sale if the price of
the investment increases between the date of the short sale and the date on
which the Portfolio purchases the investment to replace the borrowed
investment. The Portfolio will realize a gain if the investment declines in
price between those dates. The amount of any gain will be decreased and the
amount of any loss increased by any premium or interest the Portfolio may be
required to pay in connection with a short sale. It should be noted that
possible losses from short sales differ from those that could arise from a
cash investment in that the former may be limitless while the latter can only
equal the total amount of the Portfolio's investment in the investment. For
example, if the Portfolio purchases a $10 investment, the most that can be
lost is $10. However, if the Portfolio sells a $10 investment short, it may
have to purchase the investment for return to the lender when the market value
is $50, thereby incurring a loss of $40. The amount of any gain or loss on a
short sale transaction is also dependent on brokerage and other transaction
costs.

CONVERTIBLE SECURITIES. The convertible securities in which a Portfolio
may invest include any debt securities or preferred stock which may be
converted into common stock or which carry the right to purchase common stock.
Convertible securities entitle the holder to exchange the securities for a
specified number of shares of common stock, usually of the same company, at
specified prices within a certain period of time.

WARRANTS. A Portfolio may invest in warrants, which entitle the holder to
buy common stock from the issuer at a specific price (the strike price) for a
specific period of time. The market price of warrants may be substantially
lower than the current market price of the underlying securities, yet
warrants are subject to similar price fluctuations. As a result, warrants
may be more volatile investments than the underlying securities.

Warrants do not entitle the holder to dividends or voting rights with respect
to the underlying securities and do not represent any rights in the assets of
the issuing company. A warrant will expire worthless if it is not exercised on
or prior to the expiration date.

MONEY MARKET INSTRUMENTS. Certain Portfolios are permitted to invest in
money market instruments although they intend to stay invested in equity
securities to the extent practical in light of their objectives and long-term
investment perspective. These Portfolios may make money market investments
pending other investment or settlement, for liquidity or in adverse market
conditions. The money market investments permitted for these Portfolios
include U.S. Government Securities, other debt securities, commercial paper,
bank obligations and repurchase agreements. These Portfolios may also invest
in short-term obligations of sovereign foreign governments, their agencies,
instrumentalities and political subdivisions. For more detailed information
about these money market investments, see "Investment Objectives and Policies"
in the Statement of Additional Information.

INVESTMENT LIMITATIONS

In addition to the investment policies set forth above, certain additional
restrictive policies relating to the investment of assets of the Portfolios
have been adopted by the Trust. The Investment Limitations of the Trust are
deemed fundamental and may not be changed without the approval of the holders
of a majority of the outstanding voting shares of each Portfolio affected
(which for this purpose and under the 1940 Act means the lesser of (i) 67%
of the shares represented at a meeting at which more than 50% of the
outstanding shares are present or represented by proxy and (ii) more than
50% of the outstanding shares). A change in policy affecting only one
Portfolio may be effected with the approval of a majority of the outstanding
shares of the Portfolio. Details as to the policies are set forth in the
Statement of Additional Information.

RISK FACTORS

TAX CONSIDERATIONS

The Trust serves as the underlying investment for Variable Contracts issued by
Cova Life.

Section 817(h) of the Internal Revenue Code of 1986, as amended (the "Code"),
imposes certain diversification standards on the underlying assets of variable
contracts held in the Portfolios of the Trust. The Code provides that a
variable contract shall not be treated as an annuity contract for any period
(and any subsequent period) for which the investments are not, in accordance
with regulations prescribed by the Treasury Department, adequately
diversified. Disqualification of the variable contract as an annuity contract
would result in imposition of federal income tax on contract owners with
respect to earnings allocable to the variable contract prior to the receipt of
payments under the variable contract. Section 817(h)(2) of the Code is a safe
harbor provision which provides that contracts such as the Variable Contracts
meet the diversification requirements if, as of the close of each quarter, the
underlying assets meet the diversification standards for a regulated
investment company and no more than fifty-five percent (55%) of the total
assets consists of cash, cash items, U.S. government securities and securities
of other regulated investment companies.

On March 2, 1989, the Treasury Department issued Regulations (Treas. Reg.
1.817-5), which established diversification requirements for the investment
portfolios underlying variable contracts. The Regulations amplify the
diversification requirements for variable contracts set forth in Section
817(h) of the Code and provide an alternative to the safe harbor provision
described above. Under the Regulations, an investment portfolio will be deemed
adequately diversified if (i) no more than 55 percent of the value of the
total assets of the portfolio is represented by any one investment; (ii) no
more than 70 percent of such value is represented by any two investments;
(iii) no more than 80 percent of such value is represented by any three
investments; and (iv) no more than 90 percent of such value is represented by
any four investments. For purposes of these Regulations, all securities of the
same issuer are treated as a single investment.

The Code provides that for purposes of determining whether or not the
diversification standards imposed on the underlying assets of variable
contracts by Section 817(h) of the Code have been met, "each United States
government agency or instrumentality shall be treated as a separate issuer".

Each Portfolio of the Trust will be managed in such a manner as to comply with
these diversification requirements. It is possible that in order to comply
with the diversification requirements, less desirable investment decisions may
be made which would affect the investment performance of the Portfolios.

SPECIAL CONSIDERATIONS RELATING TO FOREIGN SECURITIES

All of the Portfolios may invest in foreign securities. The Stock Index
Portfolio, however, may only invest in foreign securities which are issued
by companies in the S & P 500 Index. The Stock Index Portfolio may also
invest in American Depositary Receipts ("ADRs") for foreign securities.
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.
Certain other Portfolios may invest in ADRs and also in EDRs. See "Investment
Objectives and Policies - ADRs and EDRs" in the Statement of Additional
Information. The VKAC Growth and Income Portfolio, High Yield Portfolio and
Quality Income Portfolio may invest up to 35% in foreign securities. The
International Equity Portfolio may invest without limitation in foreign
securities. However, the Trust has no current intention that these
investments will exceed 20% of a Portfolio's assets except with respect
to the International Equity Portfolio. Investments in the securities
of foreign entities and securities denominated in foreign currencies involve
risks not typically involved in domestic investment, including fluctuations in
foreign exchange rates, future foreign political and economic developments,
and the possible imposition of exchange controls or other foreign or United
States governmental laws or restrictions applicable to such investments. Where
a Portfolio invests in securities denominated or quoted in currencies other
than the United States dollar, changes in foreign currency exchange rates may
affect the value of investments in the Portfolio and the accrued income and
unrealized appreciation or depreciation of investments. Changes in foreign
currency exchange rates relative to the U.S. dollar will affect the U.S.
dollar value of a Portfolio's assets denominated in that currency and the
Portfolio's yield on such assets. With respect to certain foreign countries,
there is the possibility of expropriation of assets, confiscatory taxation,
political or social instability or diplomatic developments which could affect
investment in those countries. There may be less publicly available
information about a foreign security than about a United States security, and
foreign entities may not be subject to accounting, auditing and financial
reporting standards and requirements comparable to those of United States
entities. In addition, certain foreign investments made by a Portfolio may be
subject to foreign withholding taxes, which would reduce the Portfolio's total
return on such investments and the amounts available for distributions by the
Portfolio to its shareholders. Foreign financial markets, while growing in
volume, have, for the most part, substantially less volume than United States
markets, and securities of many foreign companies are less liquid and their
prices more volatile than securities of comparable domestic companies. The
foreign markets also have different clearance and settlement procedures and in
certain markets there have been times when settlements have been unable to
keep pace with the volume of securities transactions making it difficult to
conduct such transactions. Delays in settlement could result in temporary
periods when assets of a Portfolio are not invested and no return is earned
thereon. The inability of a Portfolio to make intended security purchases due
to settlement problems could cause the Portfolio to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems could result either in losses to a Portfolio due to subsequent
declines in value of the portfolio security or, if a Portfolio has entered
into a contract to sell the security, could result in possible liability to
the purchaser. Costs associated with transactions in foreign securities,
including custodial costs and foreign brokerage commissions, are generally
higher than with transactions in United States securities. In addition, a
Portfolio will incur costs in connection with conversions between various
currencies. There is generally less government supervision and regulation of
exchanges, financial institutions and issuers in foreign countries than there
is in the United States.

The Emerging Markets Equity Portfolio invests primarily in equity securities of
companies in emerging markets countries. Investments in securities of issuers
in emerging markets countries may involve a high degree of risk and many may be
considered speculative. These investments carry all of the risks of investing
in securities of foreign issuers outlined in this section to a heightened
degree. These heightened risks include (i) greater risks of expropriation,
confiscatory taxation, nationalization, and less social, political and
economic stability; (ii) the small current size of the markets for securities
of emerging markets issuers and the currently low or non-existent volume of
trading, resulting in lack of liquidity and in price volatility; (iii) certain
national policies which may restrict the Portfolio's investment opportunities
including restrictions on investing in issuers or industries deemed sensitive
to relevant national interests; and (iv) the absence of developed legal
structures governing private or foreign investment and private property.

As a matter of operating policy, each Portfolio will comply with the
following:

1. a Portfolio will be invested in a minimum of five different foreign
countries at all times. However, this minimum is reduced to four when foreign
country investments comprise less than 80% of the Portfolio's net asset value;
to three when less than 60% of such value; to two when less than 40% of such
value; and to one when less than 20% of such value.

2. except as set forth in items 3 and 4 below, a Portfolio will have no
more than 20% of its net asset value invested in securities of issuers located
in any one country.

3. a Portfolio may have an additional 15% of its value invested in
securities of issuers located in any one of the following countries:
Australia, Canada, France, Japan, the United Kingdom or Germany.

4. a Portfolio's investments in United States issuers are not subject to
the foregoing operating policies.

SPECIAL RISKS OF HIGH YIELD INVESTING

Each of the High Yield Portfolio and the Bond Debenture Portfolio intends to
invest a substantial portion of its assets in medium and lower grade corporate
debt securities.

Debt securities which are in those medium and lower grade categories generally
offer a higher current yield than is offered by securities which are in the
higher grade categories, but they also generally involve greater price
volatility and greater credit and market risk. Credit risk relates to the
issuer's ability to make timely payments of principal and interest when due as
well as fundamental developments in an issuer's business. Market risk relates
to the changes in market value that occur as a result of variation in the
level of prevailing interest rates and yield relationships in the securities
market. Typically, market prices tend to fall as interest rates rise and tend
to rise as interest rates fall. Generally, prices tend to fluctuate more for
lower grade issues than for higher grade issues, and, for any given change in
interest rates, prices for longer maturity issues tend to fluctuate more than
for shorter maturity issues. Yields on lower-rated securities will fluctuate
over time.

The prices of lower-grade securities, while generally less sensitive to
interest rate changes than higher-rated investments, tend to be more sensitive
to adverse economic changes or individual corporate developments. During an
economic downturn or substantial period of rising interest rates, the ability
of a highly leveraged issuer to service its principal and interest payment
obligations, to meet projected business goals and to obtain additional
financing may be adversely affected. An economic downturn could disrupt the
market for high yield bonds, adversely affect the value of outstanding bonds
and the ability of the issuers of such bonds to repay principal and interest,
cause increased volatility in the market prices of high yield bonds and a
Portfolio's net asset value and may result in a higher incidence of defaults
by issuers on bond obligations. If the issuer of a bond defaults, a Portfolio
may incur additional expenses to seek recovery. A Portfolio will seek to
reduce risk through portfolio diversification, credit analysis, and attention
to current developments and trends in the industries and with the issuers
involved. The Portfolios' Sub-Advisers will continuously monitor the condition
of the economy and the financial and credit markets.

To the extent that there is no established retail secondary market for high
yield bonds, such bonds may be thinly traded, making the bonds less liquid
than investment grade bonds. 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. In the
event of an illiquid secondary market, or in the absence of readily available
market quotations, the responsibility of the Board of Trustees of the Trust to
value the securities becomes more difficult and will involve a greater degree
of judgment in that there is less reliable, objective data available.

If the market for high yield bonds is restricted by the enactment of
legislation, or if steps are taken to limit the use of such securities, or
other advantages of such securities, the value of the securities and the
Portfolio's ability to acquire them may be adversely affected.

A description of the corporate bond ratings is contained in the Appendix.
Purchasers should be aware, however, that credit ratings evaluate the safety
of principal and interest payments and not the market value risk of high yield
bonds. In addition, credit ratings may not always be modified on a timely
basis to reflect events subsequent to the most recent ratings which may have a
material impact on the securities rated. However, the Portfolios' Sub-Advisers
will continuously monitor the issuers of high yield bonds in the Portfolios to
determine if the issuers will have sufficient cash flow and profits to meet
required principal and interest payments, and to assure the bonds' liquidity.
Achievement of the investment objectives of the Portfolios may be more
dependent on the credit analysis of the Portfolios' Sub-Advisers than is the
case with higher quality bonds.

The Portfolios may also invest in unrated corporate securities. Although
unrated securities are not necessarily of lower quality than rated securities,
the market for them may not be as broad and, accordingly, they may carry
greater risk and higher yield than rated securities.

PORTFOLIO TURNOVER RATES

MONEY MARKET PORTFOLIO AND QUALITY INCOME PORTFOLIO

Although the Money Market and Quality Income Portfolios are not subject to
specific restrictions on portfolio turnover, they generally do not seek
profits by short-term trading. However, they may dispose of a portfolio
security prior to its maturity where disposition seems advisable because of a
revised credit evaluation of the issuer or other considerations. Because
brokerage commissions are not customarily charged on the investments invested
in by each of the two Portfolios, a high turnover rate should not affect the
net asset value.

HIGH YIELD PORTFOLIO AND BOND DEBENTURE PORTFOLIO

The Portfolios will not generally engage in trading of securities for the
purpose of realizing short-term profits, but they will adjust their portfolios
as they deem advisable in view of prevailing or anticipated market conditions
to accomplish their investment objectives. For example, the Portfolios may
sell securities in anticipation of a movement in interest rates or to avoid
loss of premiums paid and unrealized capital gains earned on GNMA Certificates
selling at a substantial premium. Frequency of portfolio turnover will not be
a limiting factor if the Sub-Adviser considers it advantageous to purchase or
sell securities. Each Portfolio anticipates that its portfolio turnover rate
will normally be less than 200%, and may be significantly less in a period of
stable or rising interest rates. For the years ended December 31, 1997 and
1996, the portfolio turnover rates for the High Yield Portfolio were ___% and
117%, respectively. For the period ended December 31, 1996, the portfolio
turnover rate for the Bond Debenture Portfolio was 58%. A high rate of
portfolio turnover involves correspondingly higher brokerage commissions and
transaction expenses than a lower rate, which expenses must be borne by the
Portfolio and its shareholders.

STOCK INDEX PORTFOLIO

Although the Portfolio generally seeks to invest for the long term, the
Portfolio retains the right to sell securities irrespective of how long they
have been held. However, because of the "passive" investment management
approach of the Portfolio, the portfolio turnover rate is expected to be under
50%, a generally lower turnover rate than for most other investment companies.
A portfolio turnover rate of 50% would occur if one-half of the Portfolio's
securities were sold within one year. Ordinarily, securities will be sold from
the Portfolio only to reflect certain administrative changes in the Index
(including mergers or changes in the composition of the Index) or to
accommodate cash flows into and out of the Portfolio while maintaining the
similarity of the Portfolio to the Index. For the years ended December 31,
1997 and 1996, the portfolio turnover rates for the Stock Index Portfolio were
___% and 1%, respectively.

VKAC GROWTH AND INCOME PORTFOLIO

The Portfolio will not generally engage in trading of securities for the
purpose of realizing short-term profits, but it will adjust its portfolio as
it deems advisable in view of prevailing or anticipated market conditions to
accomplish the Portfolio's investment objectives. For example, the Portfolio
may sell portfolio securities in anticipation of a movement in interest rates.
Other than for tax purposes, frequency of portfolio turnover will not be a
limiting factor if the Portfolio considers it advantageous to purchase or sell
securities. The Portfolio anticipates that its annual portfolio turnover rate
will normally be less than 200%. A high rate of portfolio turnover involves
correspondingly higher brokerage commissions and transaction expenses than a
lower rate, which expenses must be borne by the Portfolio and its
shareholders. For the years ended December 31, 1997 and 1996, the portfolio
turnover rates for the Growth and Income Portfolio were ___% and 113%,
respectively.

QUALITY BOND, SMALL CAP STOCK, SELECT EQUITY, INTERNATIONAL EQUITY, LARGE
CAP STOCK AND EMERGING MARKETS EQUITY PORTFOLIOS

Portfolio transactions for these Portfolios will be undertaken principally to
accomplish their respective investment objectives, and the Portfolios may
engage in short-term trading consistent with their respective objectives. A
portfolio turnover rate of 100% indicates that the equivalent of all of a
Portfolio's assets have been sold and reinvested in a year. Overall, high
portfolio turnover may result in increased portfolio transaction costs and the
realization of substantial net capital gains or losses. To the extent net
short term capital gains are realized, any distributions resulting from such
gains are considered ordinary income for general income tax purposes. The
Quality Bond Portfolio's annual turnover rate is not expected to exceed 300%.
The turnover rate for each of the Small Cap Stock, Select Equity, International
Equity, Large Cap Stock and Emerging Markets Equity Portfolios is not expected
to exceed 100%. For the year ended December 31, 1997 and the period ended
December 31, 1996, the portfolio turnover rates for the Quality Bond, Small
Cap Stock, Select Equity, International Equity and Large Cap Stock Portfolios
were ___% and 181%, ___% and 102%, ___% and 124%, ____% and 48%; ___%
and 36%, respectively. The Emerging Markets Equity Portfolio has not yet
commenced investment operations.

BALANCED, SMALL CAP EQUITY, EQUITY INCOME, GROWTH & INCOME EQUITY, MID-CAP
VALUE, LARGE CAP RESEARCH, DEVELOPING GROWTH AND LORD ABBETT GROWTH AND INCOME
PORTFOLIOS

Although the Portfolios will not normally engage in short-term trading, each
Portfolio reserves the right to do so if its Sub-Adviser believes that selling
a particular security is appropriate in light of the Portfolio's investment
objective. Investments may be sold for a variety of reasons, such as a more
favorable investment opportunity or other circumstances bearing on the
desirability of continuing to hold such investments. A high rate of portfolio
turnover involves correspondingly greater brokerage commission expenses and
other transaction costs, which must be borne directly by the Portfolio and
ultimately by its shareholders. Although the Portfolios cannot accurately
predict their respective annual portfolio turnover rates, such rates are not
expected to exceed 100%. For the period ended December 31, 1997, the portfolio
turnover rates for the Balanced, Small Cap Equity, Equity Income, Growth &
Income Equity, Mid-Cap Value, Large Cap Research and Developing Growth
Portfolios were ___%, ___%, ___%, ___%, ___%, ___% and ___%. The Lord Abbett
Growth and Income Portfolio has not yet commenced investment operations.

MANAGEMENT OF THE TRUST

THE TRUSTEES

The Trust is organized as a Massachusetts business trust. The overall
responsibility for the supervision of the affairs of the Trust vests in the
Trustees. The Trustees have entered into an Investment Advisory Agreement with
the Adviser to handle the day-to-day affairs of the Trust (see below). The
Trustees meet periodically to review the affairs of the Trust and to establish
certain guidelines which the Adviser is expected to follow in implementing the
investment policies and objectives of the Trust.

ADVISER

Under an Investment Advisory Agreement dated April 1, 1996, as amended,
the Adviser, located at One Tower Lane, Suite 3000, Oakbrook Terrace,
Illinois 60181-4644, manages the business and affairs of the Portfolios and
the Trust, subject to the control of the Trustees.

The Adviser is an Illinois corporation which was incorporated on August 31,
1993 under the name Oakbrook Investment Advisory Corporation and is
registered with the Securities and Exchange Commission as an investment
adviser under the Investment Advisers Act of 1940. The Adviser changed its
name to its present name on January 17, 1996. The Adviser is a wholly-owned
subsidiary of Cova Life Management Company, a Delaware corporation, which in
turn, is a wholly-owned subsidiary of Cova Corporation, a Missouri
corporation, which in turn, is a wholly-owned subsidiary of General American
Life Insurance Company ("General American"), a St. Louis-based mutual company.
General American has more than $235 billion of life insurance in force and
approximately $9.6 billion in assets. The Adviser has acted as the investment
adviser to the Trust since May 1, 1996.

Under the terms of the Investment Advisory Agreement, the Adviser is obligated
to (i) manage the investment and reinvestment of the assets of each Portfolio
of the Trust in accordance with each Portfolio's investment objective and
policies and limitations, or (ii) in the event that Adviser shall retain a
sub-adviser or sub-advisers, to supervise and implement the investment
activities of any Portfolio for which any such sub-adviser has been retained,
including responsibility for overall management and administrative support
including managing, providing for and compensating any sub-advisers; and to
administer the Trust's affairs. The Investment Advisory Agreement further
provides that Adviser agrees, among other things, to administer the business
affairs of each Portfolio, to furnish offices and necessary facilities and
equipment to each Portfolio, to provide administrative services for each
Portfolio, to render periodic reports to the Board of Trustees of the Trust
with respect to each Portfolio, and to permit any of its officers or
employees, or those of any sub-adviser to serve without compensation as
trustees or officers of the Portfolio if elected to such positions.

As full compensation for its services under the Investment Advisory Agreement,
the Trust will pay the Adviser a monthly fee at the following annual rates
shown in the table below based on the average daily net assets of each
Portfolio:

<TABLE>
<CAPTION>
Average Daily
Portfolio Net Assets % Per Annum
- ---------------------- ------------------ ------------
<S> <C> <C>

Money Market First $500 million .50%
Over $500 million .40%

Quality Income First $500 million .50%
Over $500 million .45%

High Yield First $500 million .75%
Over $500 million .65%

VKAC Growth and Income First $500 million .60%
Over $500 million .50%

Stock Index _______________ .50%

Bond Debenture _______________ .75%

Quality Bond First $75 million .55%
Over $75 million .50%

International Equity First $50 million .85%
Over $50 million .75%

Select Equity First $50 million .75%
Over $50 million .65%

Emerging Markets
Equity First $25 million 1.25%
Over $25 million 1.05%

Small Cap Stock _______________ .85%

Large Cap Stock _______________ .65%

Mid-Cap Value _______________ 1.00%

Large Cap Research _______________ 1.00%

Developing Growth _______________ .90%

Lord Abbett
Growth and Income _______________ .75%

Balanced _______________ 1.00%

Small Cap Equity _______________ 1.00%

Equity Income _______________ 1.00%

Growth & Income Equity _______________ 1.00%
</TABLE>

The advisory fee of .750 of 1% to be deducted on the first $500 million of
assets of the High Yield Portfolio is higher than fees paid by many other
investment companies with similar investment objectives.

Cova Financial Services Life Insurance Company, Cova Life Management Company
and the Adviser have entered into an Investment Advisory Services Agreement,
dated April 1, 1996, the purpose of which is to ensure that the Adviser, which
is minimally capitalized, has adequate facilities and financing for the
carrying on of its business. Under the terms of the Agreement, Cova
Financial Services Life Insurance Company is obligated to provide the Adviser
with adequate capitalization in order for the Adviser to meet any minimum
capital requirements. Cova Financial Services Life Insurance Company is further
obligated to reimburse the Adviser or assume payment for any obligation
incurred by the Adviser. Cova Life Management Company is obligated to provide
the Adviser with facilities and personnel sufficient for the Adviser to
perform its obligations under the Investment Advisory Agreement.

TRUST ADMINISTRATION

The Adviser retains Investors Bank & Trust Company ("IBTC"), a Massachusetts
trust company, to supervise various aspects of the Trust's administrative
operations and to perform certain specific services including, but not limited
to, the preparation and filing of Trust reports and tax returns, pursuant to
an Administration Agreement between the Trust, the Adviser and IBTC.

PORTFOLIO MANAGEMENT

For the year ended December 31, 1997, the Adviser was paid advisory fees as
follows: $______, with respect to the Quality Income Portfolio, $________,
with respect to the High Yield Portfolio, $________, with respect to the
Stock Index Portfolio, $_______, with respect to the VKAC Growth and Income
Portfolio,$______, with respect to the Bond Debenture Portfolio, $________,
with respect to the Quality Bond Portfolio, $________, with respect to the
International Equity Portfolio, $________, with respect to the Select Equity
Portfolio, $_______, with respect to the Large Cap Stock Portfolio,
$_______, with respect to the Small Cap Stock Portfolio, $____, with respect
to the Balanced Portfolio, $_______, with respect to the Small Cap Equity
Portfolio, $______, with respect to the Equity Income Portfolio, $______, with
respect to the Growth & Income Equity Portfolio, $_______, with respect to the
Mid-Cap Value Portfolio, $_____, with respect to the Large Cap Research
Portfolio and $_____, with respect to the Developing Growth Portfolio. The
Adviser waived its advisory fees of $______, with respect to the Money Market
Portfolio.

EXPENSES OF THE TRUST

Although each Portfolio must bear the expenses directly attributable to it,
the Portfolios are expected to experience cost savings over the aggregate
amount that would be payable if each Portfolio were a separate fund, because
they have the same Trustees, accountants, attorneys and other general and
administrative expenses. Any expenses which are not directly attributable to a
specific Portfolio are allocated on the basis of the net assets of the
respective Portfolios.

For the year ended December 31, 1997, the expenses, taking into account the
waivers and expense assumptions, borne by the Quality Income Portfolio
amounted to $_______ or ___% of its average net assets on an annualized basis;
the net expenses borne by the High Yield Portfolio amounted to $_______ or ___%
of its average net assets on an annualized basis; the net expenses borne by
the Money Market Portfolio amounted to $______ or ___% of its average net
assets on an annualized basis; the net expenses borne by the Stock Index
Portfolio amounted to $______ or ___% of its average net assets on an
annualized basis; the net expenses borne by the VKAC Growth and Income
Portfolio amounted to $______ or ___% of its average net assets on an
annualized basis; the net expenses borne by the Bond Debenture Portfolio
amounted to $______ or ___% of its average net assets on an annualized basis;
the net expenses borne by the Quality Bond Portfolio amounted to $_____ or
___% of its average net assets on an annualized basis; the net expenses borne
by the International Equity Portfolio amounted to $______ or ___% of its
average net assets on an annualized basis; the net expenses borne by the
Select Equity Portfolio amounted to $______ or ___% of its average net assets
on an annualized basis; the net expenses borne by the Large Cap Stock
Portfolio amounted to $______ or ___% of its average net assets on an
annualized basis; the net expenses borne by the Small Cap Stock Portfolio
amounted to $______ or ___% of its average net assets on an annualized basis;
the net expenses borne by the Balanced Portfolio amounted to $_____ or ___%
of its average net assets on an annualized basis; the net expenses borne by
the Small Cap Equity Portfolio amounted to $______ or ___% of its average
net assets on an annualized basis; the net expenses borne by the Equity
Income Portfolio amounted to $_____ or ___% of its average net assets on an
annualized basis; the net expenses borne by the Growth & Income Equity Portfolio
amounted to $_______ or ___% of its average net assets on an annualized basis;
the net expenses borne by the Mid-Cap Value Portfolio amounted to $_____ or ___%
of its average net assets on an annualized basis; the net expenses borne by the
Large Cap Research Portfolio amounted to $_______ or ___% of its average net
assets on an annualized basis; and the net expenses borne by the Developing
Growth Portfolio amounted to $______ or ___% of its average net assets on an
annualized basis.

Cova Life and/or the Adviser may at their discretion, but are not obligated
to, assume all or any portion of Trust expenses. For the year ended December
31, 1997, Cova Life and the Adviser together assumed expenses of $_______ with
respect to the Quality Income Portfolio; $______ with respect to the High
Yield Portfolio; $______ with respect to the Money Market Portfolio; $______
with respect to the Stock Index Portfolio; $______ with respect to the
VKAC Growth and Income Portfolio; $______ with respect to the Bond Debenture
Portfolio; $______, with respect to the Quality Bond Portfolio; $_______, with
respect to the International Equity Portfolio; $______, with respect to the
Select Equity Portfolio; $______, with respect to the Large Cap Stock
Portfolio; $______, with respect to the Small Cap Stock Portfolio; $_____
with respect to the Balanced Portfolio; $______ with respect to the
Small Cap Equity Portfolio; $______ with respect to the Equity Income
Portfolio; $______ with respect to the Growth & Income Equity Portfolio; $______
with respect to the Mid-Cap Value Portfolio; $______ with respect to the Large
Cap Research Portfolio and $_______ with respect to the Developing Growth
Portfolio.

SUB-ADVISERS

In accordance with each Portfolio's investment objective and policies and
under the supervision of Adviser and the Trust's Board of Trustees, each
Portfolio's Sub-Adviser is responsible for the day-to-day investment
management of the Portfolio, makes investment decisions for the Portfolio and
places orders on behalf of the Portfolio to effect the investment decisions
made as provided in separate Sub-Advisory Agreements among each Sub-Adviser,
the Adviser and the Trust. The following organizations act as Sub-Advisers to
the Portfolios:

J.P. MORGAN INVESTMENT MANAGEMENT INC., 522 Fifth Avenue, New York, New York
10036, a Delaware corporation, and a wholly-owned subsidiary of J.P. Morgan &
Co., Incorporated, is the Sub-Adviser for the Quality Bond, International
Equity, Select Equity, Large Cap Stock, Small Cap Stock and Emerging Markets
Equity Portfolios of the Trust.

Harriet T. Huber, Vice President of the Sub-Adviser, is the Portfolio Manager
for the Quality Bond Portfolio. Ms. Huber is a portfolio manager of active
portfolios. Previously she worked in the insurance asset and liability group at
Salomon Brothers and prior to that she traded interest rate swaps and sold
taxable fixed income securities at First Boston. She was also an Associate
Member of the Chicago Board of Trade for two years. Ms. Huber received a B.A. in
mathematics from the University of Wisconsin, Madison, and an M.B.A. from the
University of Chicago.

Anne Richards, Assistant Vice President of the Sub-Adviser, is the Portfolio
Manager for the International Equity Portfolio. Ms. Richards joined J.P.
Morgan in 1994 as an international equity portfolio manager. Previously she
has held positions as an engineering analyst with Alliance Capital, a project
engineer for Cambridge Consultants and a research fellow for CERN, European
Laboratory for Particle Physics. Ms. Richards holds a BSc from the University
of Edinburgh and an MBA from INSEAD, France.

James B. Otness, Managing Director of the Sub-Adviser, is the Portfolio
Manager for the Small Cap Stock Portfolio. Mr. Otness is a member of the
Equity and Balanced Accounts Group. Mr. Otness co-manages Morgan's Small
Company Fund and other client portfolios employing a small company investment
approach. Mr. Otness joined Morgan in 1970 after graduation from Harvard
University and service in the U.S. Marine Corps Reserve. Prior to his current
assignment, he managed large capitalization equities and before that was unit
head in the Investment Research Department. Mr. Otness is a Chartered
Financial Analyst with 24 years of investment experience.

James Wiess, Vice President of the Sub-Adviser, is the Portfolio Manager for
the Large Cap Stock Portfolio. Mr. Wiess is a member of the Equity and
Balanced Accounts Group, with responsibility for portfolio rebalancing and
product research and development in structured equity strategies. Prior to
joining Morgan in 1992, Mr. Wiess gained experience in stock index arbitrage
during seven years at Oppenheimer & Co. He also was a financial markets
consultant at Data Resources. Mr. Wiess earned his undergraduate degree from
the Wharton School at the University of Pennsylvania.

Michael J. Kelly, Vice President of the Sub-Adviser, is the Portfolio Manager
for the Select Equity Portfolio. Mr. Kelly is an institutional portfolio
manager with responsibility for a number of employee benefit, foundation, and
endowments clients. Prior to assuming his current position, he was in the
Equity Research Group covering capital goods, electrical equipment, and
conglomerates. Mr. Kelly also served as the group's generalist. Before joining
Morgan in 1985, he held a position at the economic firm Townsend-Greenspan &
Co., Inc. Mr. Kelly served as President of the Machinery Analysts of New York,
Vice President of the Electrical Products Group, committee member for the AIMR
and is a member of the Money Marketeers of New York. Mr. Kelly has an
undergraduate degree from Gettysburg College and an M.B.A. from The Wharton
School. Mr. Kelly is a Chartered Financial Analyst.

[Information relating to the Portfolio Manager of the Emerging Markets Equity
Portfolio to be filed by Amendment.]

LORD, ABBETT & CO. ("LORD ABBETT"), The General Motors Building, 767 Fifth
Avenue, New York, New York 10153-0203. Lord Abbett has been an investment
manager for over 68 years and currently manages approximately $25
billion in a family of mutual funds and other advisory accounts. Lord Abbett
is the Sub-Adviser for the Bond Debenture, Mid-Cap Value, Large Cap Research,
Developing Growth and Lord Abbett Growth and Income Portfolios.

Christopher J. Towle, Executive Vice President of Lord Abbett, is Portfolio
Manager for the Bond Debenture Portfolio. Mr. Towle joined Lord Abbett in 1987
as Assistant Fixed Income Portfolio Manager and assumed full responsibilities
as Fixed Income Portfolio Manager in August, 1995. Prior to joining Lord
Abbett, Mr. Towle was an Assistant Vice President and Portfolio Manager with
American International Group. He earned a B.A. degree in economics from
Rutgers University and is a Chartered Financial Analyst.

Edward K. von der Linde is primarily responsible for the day-to-day management
of the Mid-Cap Value Portfolio. Mr. von der Linde has been with Lord Abbett
since 1988 and has over 11 years of investment experience.

Robert G. Morris, Lord Abbett partner, is primarily responsible for the
day-to-day management of the Large Cap Research Portfolio. Prior to joining
Lord Abbett in 1991, Mr. Morris was Vice President and Manager of Chase
Manhattan Bank, N.A. Mr. Morris delegates management duties to a committee
consisting, at any time, of three Lord Abbett employees from the Research
Department. The members of the committee have staggered terms to assure
continuity and a forum for different judgments as to what securities represent
the greatest investment value, regardless of industry sector, market
capitalization or Wall Street sponsorship.

Stephen J. McGruder serves as portfolio manager for the Developing Growth
Portfolio. Prior to joining Lord Abbett, Mr. McGruder had served as Vice
President of Wafra Investments Advisory Group, a private investment
company, since October 1988. Mr. McGruder has over 25 years of experience
in the investment business.

W. Thomas Hudson, Jr. is primarily responsible for the day-to-day management
of the Lord Abbett Growth and Income Portfolio. Mr. Hudson has been employed
by Lord Abbett since 1982.

MISSISSIPPI VALLEY ADVISORS INC. ("MVA"), One Mercantile Center, Seventh &
Washington Streets, St. Louis, Missouri 63101. MVA is the Sub-Adviser for the
Balanced, Small Cap Equity, Equity Income and Growth & Income Equity
Portfolios. MVA is a wholly-owned subsidiary of Mercantile Bank of St. Louis
National Association ("Mercantile"). As of December 31, 1997, MVA had
approximately $___ billion in assets under investment management.

Timothy S. Engelbrecht is the person primarily responsible for the day-to-day
management of the Growth & Income Equity Portfolio. Mr. Engelbrecht, a Senior
Associate, has been employed by MVA for the past seventeen years and has had
portfolio management and other responsibilities for MVA for the past sixteen
years.

Peter Merzian is the person primarily responsible for the day-to-day
management of the Balanced Portfolio. Mr. Merzian, a Senior Associate, has
been with MVA since 1993 and prior thereto was employed as a portfolio manager
of another financial institution.

Robert J. Anthony is the person primarily responsible for the day-to-day
management of the Small Cap Equity Portfolio. Mr. Anthony, a Senior
Associate, has been with MVA for 23 years.

Gregory A. Glidden is the person primarily responsible for the day-to-day
management of the Equity Income Portfolio. Mr. Glidden, a Senior Associate,
has been with MVA since 1983. For the past 15 years, he has served as a stock
analyst and has managed several of Mercantile's common funds.

VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP. ("VKAC"), One Parkview
Plaza, Oakbrook Terrace, Illinois 60181. VKAC, formerly known as Van Kampen
Merritt Investment Advisory Corp., served as the investment adviser to the
Trust from its commencement of operations until May 1, 1996. VKAC is the
Sub-Adviser for the Quality Income, High Yield, Stock Index, Money Market and
VKAC Growth and Income Portfolios of the Trust. VKAC is an indirect
subsidiary of Morgan Stanley, Dean Witter, Discover & Co.

Van Kampen American Capital, Inc. is a diversified asset management company
with more than two million retail investor accounts and nearly $50 billion
under management or supervision. Van Kampen American Capital, Inc.'s over 40
open-end and 38 closed-end funds and more than 2,700 unit investment trusts
are distributed by financial advisers nationwide. In connection with advising
the Trust, VKAC utilizes at its own expense credit analysis and research
services provided by its affiliate, McCarthy, Crisanti & Maffei, Inc.

Pete Papageorgakis has been a member of VKAC since 1992 and is currently the
Portfolio Manager for the Stock Index Portfolio of the Trust. Additionally, he
serves as a Portfolio Analyst for Institutional Accounts and is responsible
for both equity and corporate bond securities. Prior to his current duties, he
assisted in the management of the Van Kampen Merritt Growth & Income Fund, the
VKAC Growth and Income Portfolio of the Trust, the Van Kampen Merritt Utility
Fund and the Van Kampen Merritt Balanced Fund. Mr. Papageorgakis received his
B.S. degree, Summa Cum Laude, in Finance from the University of Illinois at
Urbana-Champaign. He is currently working towards receiving his Chartered
Financial Analyst (CFA) designation, having successfully completed the CFA
Level II Exam.

James A. Gilligan is the Portfolio Manager for the VKAC Growth and Income
Portfolio of the Trust. Mr. Gilligan is also the Portfolio Manager for the
American Capital Equity Income Fund and American Capital Growth & Income Fund.
Mr. Gilligan has eleven years investment experience. Prior to joining VKAC in
1985, as Securities Analyst, he was an Auditor, Credit Analyst, and Financial
Analyst for Gulf Oil Corporation. Mr. Gilligan holds a BS in Business
Administration from Miami University and an MBA from the University of
Pittsburgh. He is a Chartered Financial Analyst and Certified Public
Accountant.

Anne Lorsung is Vice President of VKAC and the Portfolio Manager for the High
Yield Portfolio of the Trust. Ms. Lorsung joined VKAC in January, 1994, as a
high yield "desk" analyst, where her responsibilities were that of an
Associate Portfolio Manager and included credit analysis, value assessment,
and trading. As of May, 1995, Ms. Lorsung took over as the Portfolio Manager
for the Van Kampen American Capital High Yield Fund, the Van Kampen Series
Trust High Yield Fund, the Van Kampen Intermediate Term High Income Trust, and
the Van Kampen Limited Term High Income Trust. Prior to joining Van Kampen
American Capital, Ms. Lorsung was a Group Vice President in the high yield
research area of Duff & Phelps and its predecessor (McCarthy, Crisanti &
Maffei) where responsibilities included supervising other analysts as well as
covering the casino industry. She started in high yield/corporate bond
research in 1984 at Kidder, Peabody & Co., in New York. Since that time, Ms.
Lorsung has analyzed high yield bond investments in a variety of industries,
including cable/media, housing and health care. Ms. Lorsung is a Chartered
Financial Analyst. She received a B.A. degree, cum laude, in economics from
Dartmouth College.

Reid J. Hill is the Portfolio Manager for the Money Market Portfolio of the
Trust. Mr. Hill is also the Portfolio Manager for the Van Kampen American
Capital Tax Free Money Fund and the Van Kampen Series Trust Money Market Fund.
Mr. Hill has four years of experience in the taxable and tax free fixed
income sector. Mr. Hill is also responsible for the management of the short
term cash for the entire complex of Van Kampen funds. Mr. Hill received his
B.S. degree in Finance and Marketing from Bradley University.

Robert J. Hickey is the Portfolio Manager for the Quality Income Portfolio of
the Trust. Mr. Hickey is Vice President of VKAC. He has been a member of VKAC
since 1989. He has ten years of experience in the taxable and tax free
fixed income sector. Currently, he is the Portfolio Manager for the Van Kampen
American Capital Strategic Income Fund and the Van Kampen Series Trust Quality
Income Fund. In addition, Mr. Hickey manages the assets of the OakRe Life
Insurance portfolio, formerly known as Xerox Financial Services Life
Insurance. Previous experience includes managing the Van Kampen Adjustable
Rate U.S. Government Fund, the Van Kampen Money Market Fund, and the Van
Kampen Tax Free Money Fund. Mr. Hickey received his B.A. in Economics and
International Affairs from the University of Wisconsin at Madison, and his
M.B.A. with a specialization in Finance from the Kellogg Graduate School of
Management at Northwestern University.

SUB-ADVISORY FEES

Under the terms of the Sub-Advisory Agreements, the Adviser shall pay to the
Sub-Advisers, as full compensation for services rendered under the respective
Agreements with respect to the various Portfolios, monthly fees at the
following annual rates shown in the table below based on the average daily net
assets of each Portfolio.

<TABLE>
<CAPTION>
Average Daily Sub-Advisory
Portfolio Net Assets Fee
- ---------------------- ------------------ -------------
<S> <C> <C>

Money Market First $500 million .25%
Over $500 million .15%

Quality Income First $500 million .25%
Over $500 million .20%

High Yield First $500 million .50%
Over $500 million .40%

VKAC Growth and Income First $500 million .35%
Over $500 million .25%

Stock Index _______________ .25%

Bond Debenture _______________ .50%

Quality Bond First $75 million .30%
Over $75 million .25%

International Equity First $50 million .60%
Over $50 million .50%

Emerging Markets Equity First $25 million 1.00%
Over $25 million .80%

Select Equity First $50 million .50%
Over $50 million .40%

Large Cap Stock __________________ .40%

Small Cap Stock __________________ .60%

Mid-Cap Value __________________ .75%

Large Cap Research __________________ .75%

Developing Growth __________________ .65%

Lord Abbett Growth and
Income __________________ .50%

Balanced __________________ .75%

Small Cap Equity __________________ .75%

Equity Income __________________ .75%

Growth & Income Equity __________________ .75%
</TABLE>

DESCRIPTION OF THE TRUST

SHAREHOLDER RIGHTS

The Trust is an unincorporated business trust established under the laws of
the Commonwealth of Massachusetts by a Declaration of Trust dated July 9,
1987. The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares.

Each Portfolio issues its own class of shares. Each share represents an equal
proportionate interest in the assets of the Portfolio with each other share in
the Portfolio. On any matter submitted to a vote of shareholders, all shares
of the Trust then issued and outstanding and entitled to vote will be voted in
the aggregate and not by class except for matters concerning only one class.
The holders of each share of stock of the Trust will be entitled to one vote
for each full share and a fractional vote for each fractional share of stock.
Shares of one class may not bear the same economic relationship to the Trust
as another class.

In accordance with its view of present applicable law, the separate account(s)
of Cova Life, as shareholder(s) of the Trust, have the right to vote Trust
shares at any meeting of shareholders and will provide pass-through voting
privileges to all Variable Contract owners. Cova Life will vote shares of
the Trust held in the separate account(s) for which no timely voting
instructions from Variable Contract owners are received, as well as shares it
owns, in the same proportion as those shares for which voting instructions are
received. Additional information concerning voting rights is described in the
Variable Account Prospectus attached hereto under the caption,"Investment
Options - Voting Rights".

The Trust is not required to hold annual meetings of shareholders
and does not plan to do so. The Trustees may call special meetings of
shareholders for action by shareholder vote as may be required by the 1940 Act
or the Declaration of Trust. The Trust will hold a shareholder meeting to fill
existing vacancies on the Board in the event that less than a majority of
Trustees were elected by the shareholders. The Trustees shall also call a
meeting of shareholders for the purpose of voting upon the question of removal
of any Trustee when requested in writing to do so by the record holders of
not less than 10 percent of the outstanding shares.

The Trust has an obligation to assist shareholder communications.

The Declaration of Trust provides that shareholders are not liable for any
liabilities of the Trust, requires inclusion of a clause to that effect in
every agreement entered into by the Trust and indemnifies shareholders against
any liability. Although shareholders of an unincorporated business trust
established under Massachusetts law may, under certain limited circumstances,
be held personally liable for the obligations of the Trust as though they were
general partners in a partnership, the provisions of the Declaration of Trust
described in the foregoing sentence make the likelihood of personal liability
remote.

The Trustees may amend the Declaration of Trust in any manner without
shareholder approval, except that the Trustees may not adopt any amendment
adversely affecting the rights of shareholders without approval by a majority
of the shares present at a meeting of shareholders (or higher vote as may be
required by the 1940 Act, or other applicable law) and except that the
Trustees cannot amend the Declaration of Trust to impose any liability on
shareholders, make any assessment on shares, or impose liabilities on the
Trustees without approval from each affected shareholder or Trustee, as the
case may be.

INQUIRIES

Any inquiries should be directed to Cova Life, One Tower Lane, Suite 3000,
Oakbrook Terrace, Illinois 60181-4644. The telephone number is (800) 831-LIFE.

DISTRIBUTION AND REDEMPTION OF SHARES

Shares of the Trust are currently issued and redeemed in connection with
investment in and payments under the Variable Contracts issued by Cova Life.
The shares of the Trust are purchased and redeemed at net asset value (see
below). Redemptions will be effected by the separate accounts to meet
obligations under the Variable Contracts. Variable Contract owners do not deal
directly with the Trust with respect to acquisition or redemption of shares.

DIVIDENDS

All dividends are distributed to the separate accounts and will be
automatically reinvested in Trust shares. Dividends and distributions made by
the Portfolios are taxable, if at all, to Cova Life; they are not taxable to
Variable Contract owners.

TAX STATUS

It is the intention of the Trust to qualify as a "regulated investment
company" under Sub-chapter M of the Internal Revenue Code. If the Trust so
qualifies and distributes each year to its shareholders at least 90% of its
net investment income in each year, it will not be required to pay federal
income taxes on any income distributed to shareholders. Each Portfolio of the
Trust distributes all of its net income and gains to its shareholders (the
separate accounts). Each Portfolio is treated as a separate entity for
Federal income tax purposes and, therefore, the investments and results of the
Portfolio are determined separately for purposes of determining whether the
Trust qualifies as a "regulated investment company" and for purposes of
determining net ordinary income (or loss) and net realized capital gains (or
losses).

Some of the Trust's investment practices are subject to special provisions of
the Code that, among other things, may defer the use of certain losses of the
Trust and affect the holding period of the securities held by the Trust and
the character of the gains or losses realized by the Trust. These provisions
may also require the Trust to mark-to-market some of the positions in its
portfolio (i.e., treat them as if they were closed out), which may cause the
Trust to recognize income without receiving cash with which to make
distributions in amounts necessary to satisfy the 90% distribution requirement
and the distribution requirements for avoiding income and excise taxes. The
Trust will monitor its transactions and may make certain tax elections in
order to mitigate the effect of these rules and prevent disqualification of
the Trust as a regulated investment company.

Investments of the Trust in securities issued at a discount or providing for
deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
shareholders. For example, with respect to securities issued at a discount,
the Trust will be required to accrue as income each year a portion of the
discount and to distribute such income each year in order to maintain its
qualification as a regulated investment company and to avoid income and excise
taxes. In order to generate sufficient cash to make distributions necessary to
satisfy the 90% distribution requirement and to avoid income and excise taxes,
the Trust may have to dispose of securities that it would otherwise have
continued to hold.

NET ASSET VALUES

Portfolio shares are sold and redeemed at a price equal to the share's net
asset value. The net asset value of a Portfolio is determined by calculating
the total value of the Portfolio's assets, deducting its total liabilities,
and dividing the result by the number of shares outstanding. The net asset
value for each Portfolio is computed once daily as of the close of the New
York Stock Exchange, Monday through Friday, except on customary business
holidays, or except on any day on which no purchase or redemption orders are
received, or there is not a sufficient degree of trading in the Portfolio's
investments so that the Portfolio's net asset value per share might be
materially affected. The Trust reserves the right to calculate the net asset
value and to adjust the public offering price based thereon more frequently
than once a day if deemed desirable.

Securities that are listed on a securities exchange are valued at their
closing sales price on the day of the valuation. Price valuations for listed
securities are based on market quotations where the security is primarily
traded or, if not available, are valued at the mean of the bid and asked
prices on any valuation date. Unlisted securities in a Portfolio are primarily
valued based on their latest quoted bid price or, if not available, are valued
by a method determined by the Trustees to accurately reflect fair value. Money
market instruments maturing in 60 days or less are valued on the basis of
amortized cost, which means that securities are valued at their acquisition
cost to reflect a constant amortization rate to maturity of any premium or
discount, rather than at current market value.

The Money Market Portfolio values its securities on the basis of amortized
cost, which means that securities are valued at their acquisition cost to
reflect a constant amortized rate to maturity of any premium or discount,
rather than at current market value. Calculations are made to compare the
amortized cost valuation of the securities with current market values. Money
market valuations are obtained by using market quotations provided by market
makers, estimates of market values, or values obtained from published yield
data of money market instruments. If a deviation of 1/2 of 1% or more were to
occur between the net asset value calculated by reference to market values and
the Portfolio's $1.00 per share net asset value, or if there were any other
deviation which the Trustees believe would result in a material dilution to
shareholders, the Trustees would promptly consider what action, if any, should
be initiated. Other assets are valued at fair value as determined in good
faith by the Trustees.

FUND PERFORMANCE

From time to time advertisements and other sales materials for the Trust may
include information concerning the historical performance of the Trust. Such
advertisements will also describe the performance of the relevant insurance
company separate accounts. Any such information will include the average
annual total return of the Trust calculated on a compounded basis for
specified periods of time. Total return information will be calculated
pursuant to rules established by the Securities and Exchange Commission. In
lieu of or in addition to total return calculations, such information may
include performance rankings and similar information from independent
organizations such as Lipper Analytical Services, Inc., Morningstar, Business
Week, Forbes or other industry publications.

The Trust calculates average annual total return by determining the redemption
value at the end of specified periods (assuming reinvestment of all dividends
and distributions) of a $1,000 investment in the Trust at the beginning of the
period, deducting the initial $1,000 investment, annualizing the increase or
decrease over the specified period and expressing the result as a percentage.

Total return figures utilized by the Trust are based on historical
performance and are not intended to indicate future performance. Total
return and net asset value per share can be expected to fluctuate over time,
and accordingly, upon redemption, shares may be worth more or less than
their original cost. See "Performance Data" in the Statement of Additional
Information.

Inception dates for the Portfolios depicted below are: December 11, 1989 for
the Quality Income and High Yield Portfolios; July 1, 1991 for the Money
Market Portfolio; November 1, 1991 for the Stock Index Portfolio; and May 1,
1992 for the VKAC Growth and Income Portfolio. The average annual total
return computations for these Portfolios are calculated from the first day of
the month following the month in which the investment operations commenced.

The inception date for the Quality Bond, Small Cap Stock, Large Cap Stock,
Select Equity, International Equity and Bond Debenture Portfolios is May 1,
1996. The inception date for the Balanced, Small Cap Equity, Equity Income
and Growth & Income Equity Portfolios is July ___, 1997. The inception
date for the Mid-Cap Value, Large Cap Research and Developing Growth
Portfolios is _______________, 1997. All of the inception dates shown
in this paragraph are the dates from which the average annual total return
computations are calculated for these Portfolios.

The performance figures shown for the Portfolios in the chart below reflect
the actual fees and expenses paid by the Portfolios.

AVERAGE ANNUAL TOTAL RETURN FOR THE PERIODS ENDED 12/31/97

<TABLE>
<CAPTION>
<S> <C> <C> <C>
Portfolio Performance
----------------------
Portfolio 1 year 5 years Since Inception
- ---------------------- ---------------------- --------- ----------------

VKAC Growth and Income _____% -- _____%
Money Market _____% _____% _____%
Quality Income _____% _____% _____%
High Yield _____% _____% _____%
Stock Index _____% _____% _____%
Quality Bond _____% _____% _____%
Small Cap Stock _____% _____% _____%
Large Cap Stock _____% _____% _____%
Select Equity _____% _____% _____%
International Equity _____% _____% _____%
Bond Debenture _____% _____% _____%
Balanced -- -- _____%
Small Cap Equity -- -- _____%
Equity Income -- -- _____%
Growth & Income Equity -- -- _____%
Mid-Cap Value -- -- _____%
Large Cap Research -- -- _____%
Developing Growth -- -- _____%
</TABLE>

* Not annualized

PUBLIC FUND PERFORMANCE

The Bond Debenture Portfolio, which is managed by Lord, Abbett & Co.,
commenced public sale of its shares on May 1, 1996. The Mid-Cap Value,
Large Cap Research and Developing Growth Portfolios, also managed by Lord
Abbett, commenced public sale of their shares as of ____________, 1997.
Each of these Portfolios has the same investment objective and follows
substantially the same investment strategies as a mutual fund ("public
fund") whose shares are sold to the public and managed by the same
portfolio managers of Lord, Abbett & Co. as a corresponding public fund.

Set forth below is the historical performance of the public funds. Investors
should not consider the performance data of the public funds as an indication
of the future performance of the Portfolios. The performance figures shown
below reflect the deduction of the historical fees and expenses paid by the
public funds, and not those to be paid by the Portfolios. The figures also do
not reflect the deduction of any insurance fees or charges which are imposed
by Cova Life in connection with its sale of Variable Contracts. Investors
should refer to the separate account prospectus describing the Variable
Contracts for information pertaining to these insurance fees and charges.
The insurance separate account fees will have a detrimental effect on the
performance of the Portfolios. Additionally, although it is anticipated
that each Portfolio and its corresponding public fund series will hold similar
securities, their investment results are expected to differ. In particular,
differences in asset size and in cash flow resulting from purchases and
redemptions of Portfolio shares may result in different security selections,
differences in the relative weightings of securities or differences in the
price paid for particular portfolio holdings. The results shown reflect the
reinvestment of dividends and distributions, and were calculated in the same
manner that will be used by the Portfolios to calculate their own performance.

The following tables show average annualized total returns for the time
periods shown for the public funds. The inception date for the Lord Abbett
Research Fund (Large Cap Series) was June 3, 1992.

BOND DEBENTURE PORTFOLIO

Corresponding 1 5 10
Public Fund Year Year Year
_________________________________________________________________

Lord Abbett - Bond
Debenture Fund, Inc. ____% ____% ____%

MID-CAP VALUE PORTFOLIO

Corresponding 1 5 10
Public Fund Year Year Year
_________________________________________________________________

Lord Abbett -
Mid-Cap Value Fund _____% _____% _____%

LARGE CAP RESEARCH PORTFOLIO

Corresponding 1 Since
Public Fund Year Inception
_________________________________________________________________

Lord Abbett Research Fund
(Large Cap Series) _____% _____%

DEVELOPING GROWTH PORTFOLIO

Corresponding 1 5 10
Public Fund Year Year Year
_________________________________________________________________

Lord Abbett
Developing Growth Fund _____% _____% _____%

CORRESPONDING PORTFOLIO PERFORMANCE - LORD ABBETT GROWTH AND INCOME PORTFOLIO

The Lord Abbett Growth and Income Portfolio, which is managed by Lord, Abbett
& Co., has not yet commenced operations. It has the same investment objective
and follows substantially the same investment strategies as the Growth and
Income Portfolio ("Corresponding Portfolio") of Lord Abbett Series Fund, Inc.,
a mutual fund whose shares are offered only (i) to life insurance companies
for allocation to certain of their separate accounts established for the
purpose of funding variable annuity contracts and variable life insurance
policies and (ii) to tax-qualified pension and retirement plans. This
Corresponding Portfolio is managed by the same portfolio manager of Lord,
Abbett & Co. who manages the Lord Abbett Growth and Income Portfolio.

Set forth below is the historical performance of the Corresponding Portfolio.
Investors should not consider the performance data of the Corresponding
Portfolio as an indication of the future performance of the Lord Abbett Growth
and Income Portfolio. The performance figures shown below reflect the
deduction of the historical fees and expenses paid by the Corresponding
Portfolio, and not those to be paid by the Lord Abbett Growth and Income
Portfolio. The figures also do not reflect the deduction of any insurance fees
or charges which are imposed by Cova Life in connection with its sale of
Variable Contracts. Investors should refer to the separate account prospectus
describing the Variable Contracts for information pertaining to these
insurance fees and charges. The insurance separate account fees will have a
detrimental effect on the performance of the Lord Abbett Growth and Income
Portfolio. The results shown reflect the reinvestment of dividends and
distributions, and were calculated in the same manner that will be used by the
Lord Abbett Growth and Income Portfolio to calculate its own performance.

The following table shows average annualized total return for the time periods
shown for the Corresponding Portfolio. The inception date for the
Corresponding Portfolio was December 11, 1989.

LORD ABBETT GROWTH AND INCOME PORTFOLIO

Corresponding 1 5 Since
Portfolio Year Year Inception
_________________________________________________________________

Lord Abbett Series Fund, Inc.
(Growth and Income Portfolio) _____% _____% _____%

PRIVATE ACCOUNT PERFORMANCE

The Select Equity, Large Cap Stock, Small Cap Stock and Quality Bond
Portfolios, each of which is managed by J.P. Morgan Investment Management
Inc., commenced public sale of their shares on May 1, 1996. Each of these
Portfolios has investment objectives, policies and strategies which are
substantially similar to those employed by J.P. Morgan Investment Management
Inc. with respect to certain Private Accounts.

The Balanced, Small Cap Equity, Equity Income and Growth & Income Equity
Portfolios, managed by MVA, commenced public sale of their shares as of July
___, 1997. Each of these Portfolios has investment objectives, policies and
strategies which are substantially similar to those employed by MVA with
respect to certain Private Accounts.

Thus, the performance information derived from these Private Accounts may be
deemed relevant to the investor. The performance of the Portfolios will vary
from the Private Account composite information because each Portfolio will be
actively managed and its investments will vary from time to time and will not
be identical to the past portfolio investments of the Private Accounts.
Moreover, the Private Accounts are not subject to certain investment
limitations, diversification requirements and other restrictions imposed by
the 1940 Act and the Internal Revenue Code of 1986, as amended, which, if
applicable, may have adversely affected the performance results of the Private
Account Composites.

The chart below shows performance information derived from historical composite
performance of the Private Accounts . The performance figures for the
Portfolios represent the performance results of the composites of comparable
Private Accounts, adjusted to reflect the deduction of the fees and expenses
paid or anticipated to be paid by the Portfolios. The Private Account
composite performance figures are time-weighted rates of return which
include all income and accrued income and realized and unrealized gains or
losses, but do not reflect the deduction of investment advisory fees actually
charged to the Private Accounts. Inception was June 1, 1987 for the Public Bond
Composite, November 1, 1989 for the Structured Stock Selection Composite and
January 1, 1989 for the Equity Income Composite.

Investors should not consider the performance data of these Private Accounts as
an indication of the future performance of the respective Portfolios. The
figures also do not reflect the deduction of any insurance fees or charges which
are imposed by Cova Life in connection with its sale of Variable Contracts.
Investors should refer to the separate account prospectus describing the
Variable Contracts for information pertaining to these insurance fees and
charges. Any fees and charges will have a detrimental effect on the performance
of a Portfolio.

PRIVATE ACCOUNT COMPOSITE PERFORMANCE
REDUCED BY PORTFOLIO FEES AND EXPENSES
FOR THE PERIODS ENDED 12/31/97

AVERAGE ANNUAL TOTAL RETURN

<TABLE>
<CAPTION>
10 Years
or Since
Portfolio 1 Year 5 Years Inception
- ------------------------------ ------- -------- ----------
<S> <C> <C> <C>

Active Equity
Composite _____% _____% _____%
(Select Equity Portfolio)

Structured Stock Selection
Composite
(Large Cap Stock Portfolio) _____% _____% _____%

Small Cap Directly Invested
Composite _____% _____% _____%
(Small Cap Stock Portfolio)

Public Bond
Composite _____% _____% _____%
(Quality Bond Portfolio)

Balanced
Composite _____% _____% _____%
(Balanced Portfolio)

Small Cap Equity
Composite _____% _____% _____%
(Small Cap Equity Portfolio)

Equity Income
Composite _____% _____% _____%
(Equity Income Portfolio)

Growth & Income Equity
Composite _____% _____% _____%
(Growth & Income Equity
Portfolio)
</TABLE>

ADDITIONAL PERFORMANCE INFORMATION

Further information about the Trust's performance is contained in the Annual
Report to shareholders which may be obtained, without charge, by calling (800)
831-LIFE, or writing Cova Life at One Tower Lane, Suite 3000, Oakbrook
Terrace, Illinois 60181-4644.

APPENDIX - DESCRIPTION OF CORPORATE BOND RATINGS

STANDARD & POOR'S CORPORATION. A brief description of the applicable Standard
& Poor's Corporation ("S&P") rating symbols and their meanings (as published
by S&P) follows:

An S&P corporate or municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers,
or lessees.

The debt rating is not a recommendation to purchase, sell, or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.

The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources it considers reliable. S&P does not perform
an audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended, or withdrawn as
a result of changes in, or unavailability of, such information, or for other
circumstances.

The ratings are based, in varying degrees, on the following considerations:

1. Likelihood of default - capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance with
the terms of the obligation;

2. Nature of and provisions of the obligation;

3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.

LONG-TERM CORPORATE BONDS.

AAA - Debt rated 'AAA' has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.

AA - Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.

A - Debt rated 'A' has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.

BBB - Debt rated 'BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.

BB, B, CCC, CC - Debt rated 'BB', 'B', 'CCC', or 'CC' 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 debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.

C - This rating is reserved for income bonds on which no interest is
being paid.

D - Debt rated 'D' is in default, and payment of interest and/or
repayment of principal is in arrears.

PLUS (+) OR MINUS (-): The ratings from 'A' to 'B' may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.

PROVISIONAL RATINGS: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on
the likelihood of, or the risk of default upon failure of, such completion.
The investor should exercise judgment with respect to such likelihood and
risk.

L - The letter 'L' indicates that the rating pertains to the principal
amount of those bonds where the underlying deposit collateral is fully insured
by the Federal Deposit Insurance Corp.

[DAGGER] - Continuance of the rating is contingent upon S&P's receipt of
closing documentation confirming investments and cash flow.

* - Continuance of the rating is contingent upon S&P's receipt of an
executed copy of the escrow agreement.

NR - Indicates no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.

MOODY'S INVESTORS SERVICE, INC. A brief description of the applicable
Moody's Investors Service, Inc. rating symbols and their meanings (as
published by Moody's Investors Service, Inc.) follows:

LONG-TERM CORPORATE BONDS.

Aaa - Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred
to as "gilt edge". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.

Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than in Aaa
securities.

A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.

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

Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.

B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.

Caa - Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to
principal or interest.

Ca - Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.

C - Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.

NOTE: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa
1, A 1, Baa 1, Ba 1 and B 1.

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
PERFORMANCE RECAP Performance
10 Yrs or
Portfolio Type 1 Yr 5 Yrs Since Inception
- ---------- ---- ------ ------ ----------------

MANAGED BY J. P. MORGAN
INVESTMENT MANAGEMENT INC.
Select Equity Private Account _____% _____% _____%
Composite
Existing Portfolio -- -- _____%*
Small Cap Stock Private Account _____% _____% _____%
Composite
Existing Portfolio -- -- _____%*
Quality Bond Private Account _____% _____% _____%
Composite
Existing Portfolio -- -- _____%*
Large Cap Stock Private Account _____% _____% _____%
Composite
Existing Portfolio -- -- _____%*
International Equity Existing Portfolio -- -- _____%*

MANAGED BY LORD, ABBETT & CO.
Bond Debenture Public Fund _____% _____% _____%
Existing Portfolio -- -- _____%*
Mid-Cap Value Public Fund _____% _____% _____%
Existing Portfolio -- -- _____%*
Large Cap Research Public Fund _____% -- _____%
Existing Portfolio -- -- _____%*
Developing Growth Public Fund _____% _____% _____%
Existing Portfolio -- -- _____%*
Lord Abbett Growth and Income Corresponding Portfolio _____% _____% _____%

MANAGED BY VAN KAMPEN
AMERICAN CAPITAL INVESTMENT
ADVISORY CORP.
VKAC Growth and Income Existing Portfolio _____% -- _____%
Money Market Existing Portfolio _____% _____% _____%
Quality Income Existing Portfolio _____% _____% _____%
High Yield Existing Portfolio _____% _____% _____%
Stock Index Existing Portfolio _____% _____% _____%

MANAGED BY MISSISSIPPI
VALLEY ADVISORS, INC.
Balanced Private Account _____% _____% _____%
Composite
Existing Portfolio -- -- _____%*
Small Cap Equity Private Account _____% _____% _____%
Composite
Existing Portfolio -- -- _____%*
Equity Income Private Account _____% _____% _____%
Composite
Existing Portfolio -- -- _____%*
Growth & Income Equity Private Account _____% _____% _____%
Composite
Existing Portfolio -- -- _____%*
- ----------------------------- ------------------ ------ ------- -------
</TABLE>

* The inception date for the Quality Bond, Small Cap Stock, Large
Cap Stock, Select Equity, International Equity and Bond Debenture Portfolios
is May 1, 1996. The inception date for the Balanced, Small Cap Equity,
Equity Income and Growth & Income Equity Portfolios is July ___, 1997. The
inception date for the Mid-Cap Value, Large Cap Research and Developing
Growth Portfolios is ________________, 1997. All of the inception dates
shown in this paragraph are the dates from which the average annual total
return computations are calculated for these Portfolios.

(1) Investors should not consider the performance data of these Private
Accounts and Public Funds as an indication of the future performance of the
respective Portfolios. The figures also do not reflect the deduction of any
insurance fees or charges which are imposed by Cova Life in connection with its
sale of Variable Contracts. Investors should refer to the separate account
prospectus describing the Variable Contracts for information pertaining to these
insurance fees and charges. All fees and charges will have a detrimental effect
on the performance of a Portfolio.

(2) Inception dates for the following Existing Portfolios depicted
above are: December 11, 1989 for the Quality Income and High Yield
Portfolios; July 1, 1991 for the Money Market Portfolio; November 1, 1991
for the Stock Index Portfolio; and May 1, 1992 for the VKAC Growth and
Income Portfolio. The average annual total return computations for these
Portfolios are calculated from the first day of the month following the
month in which the investment operations commenced.

PART B

STATEMENT OF ADDITIONAL INFORMATION

COVA SERIES TRUST
ONE TOWER LANE, SUITE 3000
OAKBROOK TERRACE, ILLINOIS 60181-4644

THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS BUT SHOULD BE
READ IN CONJUNCTION WITH THE PROSPECTUS FOR COVA SERIES TRUST, DATED MAY 1,
1998 (the "PROSPECTUS"). A COPY OF THE PROSPECTUS MAY BE OBTAINED WITHOUT
CHARGE BY CALLING (800) 831-LIFE, OR WRITING COVA FINANCIAL SERVICES LIFE
INSURANCE COMPANY AT ONE TOWER LANE, SUITE 3000, OAKBROOK TERRACE, ILLINOIS
60181-4644.

The Prospectus and this Statement of Additional Information omit certain of
the information contained in the registration statement filed with the
Securities and Exchange Commission, Washington, D.C. These items may be
obtained from the Commission upon payment of the fee prescribed, or inspected
at the Commission's office at no charge.

THIS STATEMENT OF ADDITIONAL INFORMATION IS
DATED MAY 1, 1998

TABLE OF CONTENTS

PAGE

GENERAL INFORMATION AND HISTORY

INVESTMENT OBJECTIVES AND POLICIES

STOCK INDEX PORTFOLIO - MONITORING PROCEDURES

INVESTMENT LIMITATIONS

DESCRIPTION OF SECURITIES RATINGS

OFFICERS AND TRUSTEES

COMPENSATION TABLE

SUBSTANTIAL SHAREHOLDERS

OWNERSHIP BY CERTAIN BENEFICIAL OWNERS

CUSTODIAN

PERFORMANCE DATA

LEGAL COUNSEL AND INDEPENDENT AUDITORS

INVESTMENT ADVISORY AGREEMENT

PORTFOLIO TRANSACTIONS

FINANCIAL STATEMENTS

GENERAL INFORMATION AND HISTORY

Cova Series Trust was established as a Massachusetts business trust under a
Declaration of Trust dated July 9, 1987. The Trust changed its name from "Van
Kampen Merritt Series Trust" to its current name on May 1, 1996.

INVESTMENT OBJECTIVES AND POLICIES

OBJECTIVES

For a description of the objectives of the Portfolios, see "Prospectus -
Investment Objectives." The following information is provided for those
investors wishing to have more comprehensive information than that contained
in the Prospectus.

ADDITIONAL INFORMATION - INVESTMENT OBJECTIVES AND POLICIES OF PORTFOLIOS
MANAGED BY J.P. MORGAN INVESTMENT MANAGEMENT INC.

QUALITY BOND PORTFOLIO. The Quality Bond Portfolio is designed to be an
economical and convenient means of making substantial investments in a broad
range of corporate and government debt obligations and related investments of
domestic and foreign issuers, subject to certain quality and other
restrictions. See "Quality and Diversification Requirements." The Portfolio's
investment objective is to provide a high total return consistent with
moderate risk of capital and maintenance of liquidity. Although the net asset
value of the Portfolio will fluctuate, the Portfolio attempts to conserve the
value of its investments to the extent consistent with its objective.

The Portfolio attempts to achieve its investment objective by investing
in high grade corporate and government debt obligations and related securities
of domestic and foreign issuers described in the Prospectus and this Statement
of Additional Information.

INVESTMENT PROCESS

Duration/yield curve management: The Sub-Adviser's duration decision
begins with an analysis of real yields, which its research indicates are
generally a reliable indicator of longer term interest rate trends. Other
factors the Sub-Adviser studies in regard to interest rates include economic
growth and inflation, capital flows and monetary policy. Based on this
analysis, the Sub-Adviser forms a view of the most likely changes in the level
and shape of the yield curve -- as well as the timing of those changes -- and
sets the Portfolio's duration and maturity structure accordingly. The
Sub-Adviser typically limits the overall duration of the Portfolio to a range
between one year shorter and one year longer than that of the Salomon Brothers
Broad Investment Grade Bond Index, the benchmark index.

Sector allocations: Sector allocations are driven by the Sub-Adviser's
fundamental and quantitative analysis of the relative valuation of a broad
array of fixed income sectors. Specifically, the Sub-Adviser utilizes market
and credit analysis to assess whether the current risk-adjusted yield spreads
of various sectors are likely to widen or narrow. The Sub-Adviser then
overweights (underweights) those sectors its analysis indicates offer the most
(least) relative value, basing the speed and magnitude of these shifts on
valuation considerations.

Security selection: Securities are selected by the portfolio manager,
with substantial input from the Sub-Adviser's fixed income analysts and
traders. Using quantitative analysis as well as traditional valuation methods,
the Sub-Adviser's applied research analysts aim to optimize security selection
within the bounds of the Portfolio's investment objective. In addition, credit
analysts -- supported by the Sub-Adviser's equity analysts -- assess the
creditworthiness of issuers and counterparties. A dedicated trading desk
contributes to security selection by tracking new issuance, monitoring dealer
inventories, and identifying attractively priced bonds. The traders also
handle all transactions for the Portfolio.

SELECT EQUITY PORTFOLIO AND LARGE CAP STOCK PORTFOLIO. The investment
objective of each Portfolio is long-term growth of capital and income.

In normal circumstances, at least 65% of each Portfolio's net assets will
be invested in equity securities consisting of common stocks and other
securities with equity characteristics comprised of preferred stock, warrants,
rights, convertible securities, trust certificates, limited partnership
interests and equity participations (collectively, "Equity Securities"). Each
Portfolio's primary equity investments are the common stock of large and
medium sized U.S. corporations and, to a limited extent, similar securities of
foreign corporations.

INVESTMENT PROCESS

Fundamental research: The Sub-Adviser's domestic equity analysts, each an
industry specialist, follow 700 predominantly large- and medium-sized U.S.
companies -- 500 of which form the universe for each Portfolio's investments.
Their research goal is to forecast normalized, longer term earnings and
dividends for the most attractive companies among those they cover. In doing
this, they may work in concert with the Sub-Adviser's international equity
analysts in order to gain a broader perspective for evaluating industries and
companies in today's global economy.

Systematic valuation: The analysts' forecasts are converted into
comparable expected returns by a dividend discount model, which calculates
those expected returns by comparing a company's current stock price with the
"fair value" price forecasted by its estimated long term earnings power.
Within each sector, companies are ranked by their expected return and grouped
into quintiles: those with the highest expected returns (Quintile 1) are
deemed the most undervalued relative to their long-term earnings power, while
those with the lowest expected returns (Quintile 5) are deemed the most
overvalued.

Disciplined portfolio construction: A diversified portfolio is
constructed using disciplined buy and sell rules. The specific names selected
reflect the portfolio manager's judgment concerning the soundness of the
underlying forecasts, the likelihood that the perceived misvaluation will be
corrected within a reasonable time frame and the magnitude of the risks versus
the rewards. Portfolio sector weightings are held close to those of the S&P
500 Index, reflecting the Sub-Adviser's belief that its research has the
potential to add value at the individual stock level, but not at the sector
level. Sector neutrality is also seen as a way to help protect the portfolio
from macroeconomic risks, and -- together with diversification -- represents
an important element of the Sub-Adviser's risk control strategy. A dedicated
trading desk handles all transactions for the Portfolio.

SMALL CAP STOCK PORTFOLIO. This Portfolio is designed for investors who
are willing to assume the somewhat higher risk of investing in small companies
in order to seek a higher return over time than might be expected from a
portfolio of stocks of large companies. The Portfolio's investment objective
is to provide a high total return from a portfolio of Equity Securities of
small companies.

The Portfolio attempts to achieve its investment objective by investing
primarily in the common stock of small U.S. companies included in the Russell
2000 Index, which is composed of 2000 common stocks of U.S. companies with
market capitalizations ranging between $100 million and $1.5 billion.

INVESTMENT PROCESS

Fundamental Research: The Sub-Adviser's domestic equity analysts -- each
an industry specialist -- continuously monitor the small cap stocks in their
respective sectors with the aim of identifying companies that exhibit superior
financial strength and operating returns. Meetings with management and on-site
visits play a key role in shaping their assessments. Their research goal is to
forecast normalized, long-term earnings and dividends for the most attractive
small cap companies among those they monitor -- a universe that generally
contains a total of 300-350 names. Because the Sub-Adviser's analysts follow
both the larger and smaller companies in their industries -- in essence,
covering their industries from top to bottom -- they are able to bring broad
perspective to the research they do on both.

Systematic valuation: The analysts' forecasts are converted into
comparable expected returns by the Sub-Adviser's dividend discount model,
which calculates those returns by comparing a company's current stock price
with the "fair value" price forecasted by its estimated long-term earnings
power. Within each industry, companies are ranked by their expected returns
and grouped into quintiles: those with the highest expected returns (Quintile
1) are deemed the most undervalued relative to their long-term earnings power,
while those with the lowest expected returns (Quintile 5) are deemed the most
overvalued.

Disciplined portfolio construction: A diversified portfolio is
constructed using disciplined buy and sell rules. Purchases are concentrated
among the stocks in the top two quintiles of the rankings: the specific names
selected reflect the portfolio manager's judgment concerning the soundness of
the underlying forecasts, the likelihood that the perceived misevaluation will
soon be corrected and the magnitude of the risks versus the rewards. Once a
stock falls into the third quintile -- because its price has risen or its
fundamentals have deteriorated -- it generally becomes a sale candidate. The
portfolio manager seeks to hold sector weightings close to those of the
Russell 2000 Index, the Portfolio's benchmark, reflecting the Sub-Adviser's
belief that its research has the potential to add value at the individual
stock level, but not at the sector level. Sector neutrality is also seen as a
way to help to protect the portfolio from macroeconomic risks, and -- together
with diversification -- represents an important element of the Sub-Adviser's
investment strategy.

INTERNATIONAL EQUITY PORTFOLIO. This Portfolio is designed for investors
with a long-term investment horizon who want to diversify their portfolios by
investing in an actively managed portfolio of non-U.S. securities that seeks
to outperform the Morgan Stanley Capital International Europe, Australia and
Far East Index (the "EAFE Index"). The Portfolio's investment objective is to
provide a high total return from a portfolio of Equity Securities of foreign
corporations.

The Portfolio seeks to achieve its investment objective by investing
primarily in the Equity Securities of foreign corporations. Under normal
circumstances, the Portfolio expects to invest at least 65% of its total
assets in such securities. The Portfolio does not intend to invest in U.S.
securities (other than money market instruments), except temporarily, when
extraordinary circumstances prevailing at the same time in a significant
number of developed foreign countries render investments in such countries
inadvisable.

INVESTMENT PROCESS

Country allocation: The Sub-Adviser's country allocation decision begins
with a forecast of equity risk premiums, which provide a valuation signal by
measuring the relative attractiveness of stocks versus bonds. Using a
proprietary approach, the Sub-Adviser calculates this risk premium for each of
the nations in the Portfolio's universe, determines the extent of its
deviation -- if any -- from its historical norm, and then ranks countries
according to the size of those deviations. Countries with high (low) rankings
are overweighted (underweighted) in comparisons to the EAFE Index to reflect
the above-average (below-average) attractiveness of their stock markets. In
determining weightings, the Sub-Adviser analyzes a variety of qualitative
factors as well -- including the liquidity, earnings momentum and interest
rate climate of the market at hand. These qualitative assessments can change
the magnitude but not the direction of the country allocations called for by
the risk premium forecast. The Sub-Adviser places limits on the total size of
the Portfolio's country over- and under-weightings relative to the EAFE Index.

Stock selection: The Sub-Adviser's international equity analysts, each an
industry and country specialist, forecast normalized earnings and dividend
payouts for roughly 1,000 non-U.S. companies -- taking a long-term perspective
rather than the short time frame common to consensus estimates. These
forecasts are converted into comparable expected returns by a dividend
discount model, and then companies are ranked from most to least attractive by
industry and country. A diversified portfolio is constructed using disciplined
buy and sell rules. The portfolio manager's objective is to concentrate the
purchases in the top third of the rankings, and to keep sector weightings
close to those of the EAFE Index, the Portfolio's benchmark. Once a stock
falls into the bottom third of the rankings, it generally becomes a sales
candidate. Where available, warrants and convertibles may be purchased instead
of common stock if they are deemed a more attractive means of investing in an
undervalued company.

Currency management: Currency is actively managed, in conjunction with
country and stock allocation, with the goal of protecting and possibly
enhancing the Portfolio's return. The Sub-Adviser's currency decisions are
supported by a proprietary tactical mode which forecasts currency movements
based on an analysis of four fundamental factors -- trade balance trends,
purchasing power parity, real short-term interest differentials and real bond
yields -- plus a technical factor designed to improve the timing of
transactions. Combining the output of this model with a subjective assessment
of economic, political and market factors, the Sub-Adviser's currency group
recommends currency strategies that are implemented in conjunction with the
Portfolio's investment strategy.

EMERGING MARKETS EQUITY PORTFOLIO. This Portfolio is designed for investors
with a long term investment horizon who want exposure to the rapidly growing
emerging markets. The Portfolio's investment objective is to provide a high
total return from a portfolio of equity securities of companies in emerging
markets.

The Portfolio seeks to achieve its investment objective by investing
primarily in equity securities of emerging markets issuers. Under normal
circumstances, the Portfolio expects to invest at least 65% of its total
assets in such securities. The Portfolio does not intend to invest in U.S.
securities (other than money market instruments), except temporarily, when
extraordinary circumstances prevailing at the same time in a significant
number of emerging markets countries render investments in such countries
inadvisable.

INVESTMENT PROCESS

Country allocation: The Sub-Adviser's country allocation decision
begins with a forecast of the expected return of each market in the Portfolio's
universe. These expected returns are calculated using a proprietary valuation
method that is forward looking in nature rather than based on historical data.
The Sub-Adviser then evaluates these expected returns from two different
perspectives: first, it identifies those countries that have high real expected
returns relative to their own history and other nations in their universe.
Second, it identifies those countries that it expects will provide high returns
relative to their currency risk. Countries that rank highly on one or both of
these scores are overweighted relative to the Portfolio's benchmark, the MSCI
Emerging Markets Free Index, while those that rank poorly are underweighted.
To help contain risk, the Sub-Adviser places limits on the total size of the
Portfolio's country over- and under-weightings.

Stock selection: The Sub-Adviser's 12 emerging market equity analysts--
each an industry specialist--monitor a universe of approximately 900 companies
in these countries, developing forecasts of earnings and cash flows for the
most attractive among them. Companies are ranked from most to least attractive
based on this research, and then a diversified portfolio is constructed using
disciplined buy and sell rules. The portfolio manager's objective is to
concentrate the Portfolio's holdings in the stocks deemed most undervalued,
and to keep sector weightings relatively close to those of the index. Stocks
are generally held until they fall into the bottom half of the Sub-Adviser's
rankings.

MONEY MARKET INSTRUMENTS

As discussed in the Prospectus, each Portfolio may invest in money market
instruments to the extent consistent with its investment objective and
policies. A description of the various types of money market instruments that
may be purchased by the Portfolios appears below. See "Quality and
Diversification Requirements."

U.S. TREASURY SECURITIES. Each of the Portfolios may invest in direct
obligations of the U.S. Treasury, including Treasury bills, notes and bonds,
all of which are backed as to principal and interest payments by the full
faith and credit of the United States.

ADDITIONAL U.S. GOVERNMENT OBLIGATIONS. Each of the Portfolios may invest
in obligations issued or guaranteed by U.S. Government agencies or
instrumentalities. These obligations may or may not be backed by the "full
faith and credit" of the United States. In the case of securities not backed
by the full faith and credit of the United States, each Portfolio must look
principally to the federal agency issuing or guaranteeing the obligations for
ultimate repayment, and may not be able to assert a claim against the United
States itself in the event the agency or instrumentality does not meet its
commitments. Securities in which each Portfolio may invest that are not backed
by the full faith and credit of the United States include, but are not limited
to, obligations of the Tennessee Valley Authority, the Federal Home Loan
Mortgage Corporation and the U.S. Postal Service, each of which has the right
to borrow from the U.S. Treasury to meet its obligations, and obligations of
the Federal Farm Credit System and the Federal Home Loan Banks, both of whose
obligations may be satisfied only by the individual credits of each issuing
agency. Securities which are backed by the full faith and credit of the United
States include obligations of the Government National Mortgage Association,
the Farmers Home Administration, and the Export-Import Bank.

FOREIGN GOVERNMENT OBLIGATIONS. Each of the Portfolios, subject to its
applicable investment policies, may also invest in short-term obligations of
foreign sovereign governments or of their agencies, instrumentalities,
authorities or political subdivisions. These securities may be denominated in
the U.S. dollar or in another currency. See "Foreign Investments."

STRIPPED U.S. GOVERNMENT OBLIGATIONS. As described in the Prospectus and
subject to their respective investment policies, certain Portfolios may hold
stripped U.S. Treasury securities, including (1) coupons that have been
stripped from U.S. Treasury bonds, which are held through the Federal Reserve
Bank's book-entry system called "Separate Trading of Registered Interest and
Principal of Securities" ("STRIPS") or (2) through a program entitled "Coupon
Under Book-Entry Safekeeping" ("CUBES"). Certain Portfolios may also acquire
U.S. Government obligations and their unmatured interest coupons that have
been stripped by a custodian bank or investment brokerage firm. Having
separated the interest coupons from the underlying principal of the U.S.
Government obligations, the holder will resell the stripped securities in
custodial receipt programs with a number of different names, including
"Treasury Income Growth Receipts" ("TIGRS") and "Certificates of Accrual on
Treasury Securities" ("CATS"). Such securities may not be as liquid as STRIPS
and CUBES and are not viewed by the staff of the SEC as U.S. Government
securities for purposes of the 1940 Act.

The stripped coupons are sold separately from the underlying principal,
which is sold at a deep discount because the buyer receives only the right to
receive a future fixed payment on the security and does not receive any rights
to periodic interest (cash) payments. Purchasers of stripped principal-only
securities acquire, in effect, discount obligations that are economically
identical to the zero coupon securities that the Treasury Department sells
itself. In the case of bearer securities (i.e., unregistered securities which
are owned ostensibly by the bearer or holder), the underlying U.S. Treasury
bonds and notes themselves are held in trust on behalf of the owners.

The U.S. Government does not issue stripped Treasury securities directly.
The STRIPS program, which is ongoing, is designed to facilitate the secondary
market in the stripping of selected U.S. Treasury notes and bonds into
separate interest and principal components. Under the program, the U.S.
Treasury continues to sell its notes and bonds through its customary auction
process. A purchaser of those specified notes and bonds who has access to a
book-entry account at a Federal Reserve bank, however, may separate the
Treasury notes and bonds into interest and principal components. The selected
Treasury securities thereafter may be maintained in the book-entry system
operated by the Federal Reserve in a manner that permits the separate trading
and ownership of the interest and principal payments.

For custodial receipts, the underlying debt obligations are held separate
from the general assets of the custodian and nominal holder of such
securities, and are not subject to any right, charge, security interest, lien
or claim of any kind in favor of or against the custodian or any person
claiming through the custodian. The custodian is also responsible for
applying all payments received on those underlying debt obligations to the
related receipts or certificates without making any deductions other than
applicable tax withholding. The custodian is required to maintain insurance
for the protection of holders of receipts or certificates in customary amounts
against losses resulting from the custody arrangement due to dishonest or
fraudulent action by the custodian's employees. The holders of receipts or
certificates, as the real parties in interest, are entitled to the rights and
privileges of the underlying debt obligations, including the right, in the
event of default in payment of principal or interest, to proceed individually
against the issuer without acting in concert with other holders of those
receipts or certificates or the custodian.

VARIABLE AND FLOATING RATE INSTRUMENTS. Subject to their respective
investment limitations, certain Portfolios may purchase variable and floating
rate obligations. The Sub-Advisers will consider the earning power, cash
flows and other liquidity ratios of the issuers and guarantors of such
obligations and, for obligations subject to a demand feature, will monitor
their financial status to meet payment on demand. In determining average
weighted portfolio maturity, a variable or floating rate instrument issued or
guaranteed by the U.S. Government, its agencies and instrumentalities, or a
variable or floating rate instrument scheduled on its face to be paid in 397
days or less, will be deemed to have a maturity equal to the period remaining
until the obligation's next interest rate adjustment. Other variable or
floating rate notes will be deemed to have a maturity equal to the longer of
the period remaining to the next interest rate adjustment or the time the
Portfolio can recover payment of principal as specified in the instrument.

BANK OBLIGATIONS. Each of the Portfolios, unless otherwise noted in the
Prospectus or below, may invest in negotiable certificates of deposit, time
deposits and bankers' acceptances of (i) banks, savings and loan associations
and savings banks which (for those Portfolios managed by J.P. Morgan
Investment Management Inc. except the International Equity Portfolio) have
more than $2 billion in total assets and are organized under the laws of the
United States or any state, (ii) foreign branches of these banks or of foreign
banks of equivalent size (Euros) and (iii) U.S. branches of foreign banks of
equivalent size (Yankees) with respect to the Portfolios managed by J.P.
Morgan Investment Management Inc. See "Foreign Investments." The Portfolios
will not invest in obligations for which J.P. Morgan Investment Management
Inc., or any of its affiliated persons, is the ultimate obligor or accepting
bank. Each of the Portfolios may also invest in obligations of international
banking institutions designated or supported by national governments to
promote economic reconstruction, development or trade between nations (e.g.,
the European Investment Bank, the Inter-American Development Bank, or the
World Bank).

COMMERCIAL PAPER. Each of the Portfolios may invest in commercial paper,
including master demand obligations. Master demand obligations are obligations
that provide for a periodic adjustment in the interest rate paid and permit
daily changes in the amount borrowed. The monies loaned to the borrower come
from accounts managed by a Sub-Adviser or its affiliates, pursuant to
arrangements with such accounts. Interest and principal payments are credited
to such accounts. The Sub-Adviser, or its affiliates, acting as a fiduciary on
behalf of its clients, has the right to increase or decrease the amount
provided to the borrower under an obligation. The borrower has the right to
pay without penalty all or any part of the principal amount then outstanding
on an obligation together with interest to the date of payment. Since these
obligations typically provide that the interest rate is tied to the Federal
Reserve commercial paper composite rate, the rate on master demand obligations
is subject to change. Repayment of a master demand obligation to participating
accounts depends on the ability of the borrower to pay the accrued interest
and principal of the obligations on demand which is continuously monitored by
the Sub-Adviser. Since master demand obligations typically are not rated by
credit rating agencies, the Portfolios may invest in such unrated obligations
only if at the time of an investment the obligation is determined by the
Sub-Adviser to have a credit quality which satisfies the Portfolio's quality
restrictions. See "Quality and Diversification Requirements." Although there
is no secondary market for master demand obligations, such obligations are
considered by the Portfolios to be liquid because they are payable upon
demand. The Portfolios do not have any specific percentage limitation on
investments in master demand obligations.

REPURCHASE AGREEMENTS. Each of the Portfolios may enter into repurchase
agreements with brokers, dealers or banks that meet the credit guidelines
approved by the Trustees of the Trust. In a repurchase agreement, a Portfolio
buys a security from a seller that has agreed to repurchase the same security
at a mutually agreed upon date and price. The resale price normally is in
excess of the purchase price, reflecting an agreed upon interest rate. This
interest rate is effective for the period of time the Portfolio is invested in
the agreement and is not related to the coupon rate on the underlying
security. A repurchase agreement may also be viewed as a fully collateralized
loan of money by a Portfolio to the seller. The period of these repurchase
agreements will usually be short, from overnight to one week, and at no time
will the Portfolios invest in repurchase agreements for more than thirteen
months. The securities which are subject to repurchase agreements, however,
may have maturity dates in excess of thirteen months from the effective date
of the repurchase agreement. The Portfolios will always receive securities as
collateral whose market value is, and during the entire term of the agreement
remains, at least equal to 100% of the dollar amount invested by the
Portfolios in each agreement plus accrued interest, and the Portfolios will
make payment for such securities only upon physical delivery or upon evidence
of book entry transfer to the account of the Custodian. The Money Market
Portfolio will be fully collateralized within the meaning of paragraph (a)(3)
of Rule 2a-7 under the Investment Company Act of 1940, as amended (the "1940
Act"). If the seller defaults, a Portfolio might incur a loss if the value of
the collateral securing the repurchase agreement declines and might incur
disposition costs in connection with liquidating the collateral. In addition,
if bankruptcy proceedings are commenced with respect to the seller of the
security, realization upon disposal of the collateral by a Portfolio may be
delayed or limited.

Each of the Portfolios may make investments in other debt securities with
remaining effective maturities of not more than thirteen months, including
without limitation corporate and foreign bonds, asset-backed securities and
other obligations described in the prospectus or this Statement of Additional
Information.

CORPORATE BONDS AND OTHER DEBT SECURITIES

As discussed in the Prospectus, certain of the Portfolios may invest in bonds
and other debt securities of domestic and foreign issuers to the extent
consistent with their investment objectives and policies. A description of
these investments appears in the prospectus and below. See "Quality and
Diversification Requirements." For information on short-term investments in
these securities, see "Money Market Instruments."

ASSET-BACKED SECURITIES. Asset-backed securities 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 motor vehicle or
credit card receivables. Payments of principal and interest may be guaranteed
up to certain amounts and for a certain time period by a letter of credit
issued by a financial institution unaffiliated with the entities issuing the
securities. The asset-backed securities in which a Portfolio may invest are
subject to the Portfolio's overall credit requirements. However, asset-backed
securities, in general, are subject to certain risks. Most of these risks are
related 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, if the letter of credit
is exhausted, holders of asset-backed securities may also experience delays in
payments or losses if the full amounts due on underlying sales contracts are
not realized. Because asset-backed securities are relatively new, the market
experience in these securities is limited and the market's ability to sustain
liquidity through all phases of the market cycle has not been tested.

EQUITY INVESTMENTS

As discussed in the prospectus, certain of the Portfolios invest primarily in
Equity Securities. The Equity Securities in which these Portfolios invest
include those listed on any domestic or foreign securities exchange or traded
in the over-the-counter market as well as certain restricted or unlisted
securities. A discussion of the various types of equity investments which may
be purchased by these Portfolios appears in the prospectus and below. See
"Quality and Diversification Requirements."

EQUITY SECURITIES. The Equity Securities in which these Portfolios may
invest may or may not pay dividends and may or may not carry voting rights.
Common stock occupies the most junior position in a company's capital
structure.

The convertible securities in which these Portfolios may invest include
any debt securities or preferred stock which may be converted into common
stock or which carry the right to purchase common stock. Convertible
securities entitle the holder to exchange the securities for a specified
number of shares of common stock, usually of the same company, at specified
prices within a certain period of time.

The terms of any convertible security determine its ranking in a
company's capital structure. In the case of subordinated convertible
debentures, the holders' claims on assets and earnings are subordinated to the
claims of other creditors, and are senior to the claims of preferred and
common shareholders. In the case of convertible preferred stock, the holders'
claims on assets and earnings are subordinated to the claims of all creditors
and are senior to the claims of common shareholders.

RIGHTS AND WARRANTS

Certain of the Portfolios may participate in rights offerings and purchase
warrants, which are privileges issued by corporations enabling the owners to
subscribe to and purchase a specified number of shares of the corporation at a
specified price during a specified period of time. Subscription rights
normally have a short life span to expiration. The purchase of rights or
warrants involves the risk that the Portfolio could lose the purchase value of
a right or warrant if the right to subscribe to additional shares is not
exercised prior to the rights' or warrants' expiration. Also, the purchase of
rights or warrants involves the risk that the effective price paid for the
right or warrant added to the subscription price of the related security may
exceed the value of the subscribed security's market price such as when there
is no movement in the level of the underlying security.

FOREIGN INVESTMENTS

Each of the Portfolios may invest in foreign securities except that the
Stock Index Portfolio may only invest in the foreign securities of issuers in
the S&P 500 Index. The International Equity Portfolio and the Emerging Markets
Equity Portfolio make substantial investments in foreign countries. The
Quality Bond, Select Equity, Large Cap Stock, Small Cap Stock and Quality
Income Portfolios may invest in certain foreign securities. The Quality Bond
Portfolio may invest in U.S. and non-U.S. dollar-denominated fixed income
securities of foreign issuers. The Select Equity and Large Cap Stock
Portfolios may invest in equity securities of foreign corporations listed on a
U.S. securities exchange. The Small Cap Stock Portfolio may invest in equity
securities of foreign issuers that are listed on a national securities
exchange or denominated or principally traded in the U.S. dollar. The Quality
Bond Portfolio, Select Equity Portfolio, Large Cap Stock Portfolio and the
Small Cap Stock Portfolio do not expect to invest more than 25%, 5%, 5%, and
5%, respectively, of their total assets at the time of purchase in securities
of foreign issuers. All investments of the Money Market Portfolio must be U.S.
dollar-denominated. In the case of the Quality Bond Portfolio, any foreign
commercial paper must not be subject to foreign withholding tax at the time of
purchase. Foreign investments may be made directly in securities of foreign
issuers or in the form of American Depositary Receipts ("ADRs") and European
Depositary Receipts ("EDRs"). (See "ADRs and EDRs", below.)

Since investments in foreign securities may involve foreign currencies, the
value of a Portfolio's assets as measured in U.S. dollars may be affected
favorably or unfavorably by changes in currency rates and in exchange control
regulations, including currency blockage. Certain of the Portfolios may enter
into forward commitments for the purchase or sale of foreign currencies in
connection with the settlement of foreign securities transactions or to manage
the Portfolios' currency exposure related to foreign investments.

For a description of the risks associated with investing in foreign
securities, see "Investment Practices" and "Risk Factors" in the Prospectus.

ADRs AND EDRs

Certain Portfolios may invest their assets in securities such as ADRs and
EDRs, which are receipts issued by a U.S. bank or trust company evidencing
ownership of underlying securities issued by a foreign issuer. ADRs and EDRs
may be listed on a national securities exchange or may trade in the
over-the-counter market. ADR and EDR prices are denominated in U.S. dollars,
even though the underlying security may be denominated in a foreign currency.
The underlying security may be subject to foreign government taxes which would
reduce the yield on such securities. Investments in such instruments involve
risks similar to those of investing directly in foreign securities. Such
risks include political or economic instability of the issuer or the country
of issue, the difficulty of predicting international trade patterns and the
possibility of imposition of exchange controls. Such securities may also be
subject to greater fluctuations in price than securities of domestic
corporations. In addition, there may be less publicly available information
about a foreign company than about a domestic company. Foreign companies
generally are not subject to uniform accounting, auditing and financial
reporting standards comparable to those applicable to domestic companies.
With respect to certain foreign countries, there is a possibility of
expropriation or confiscatory taxation, or diplomatic developments which could
affect investment in those countries.

ADDITIONAL INVESTMENTS

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each of the Portfolios may
purchase securities on a when-issued or delayed delivery basis. For example,
delivery of and payment for these securities can take place a month or more
after the date of the purchase commitment. The purchase price and the interest
rate payable, if any, on the securities are fixed on the purchase commitment
date or at the time the settlement date is fixed. The value of such securities
is subject to market fluctuation and no interest accrues to a Portfolio until
settlement takes place. At the time a Portfolio makes the commitment to
purchase securities on a when-issued or delayed delivery basis, it will record
the transaction, reflect the value each day of such securities in determining
its net asset value and, if applicable, calculate the maturity for the
purposes of average maturity from that date. At the time of settlement a
when-issued security may be valued at less than the purchase price. To
facilitate such acquisitions, each Portfolio will maintain with the Custodian
a segregated account with liquid assets, consisting of cash, U.S. Government
securities or other appropriate securities, in an amount at least equal to
such comments. On delivery dates for such transactions, each Portfolio will
meet its obligations from maturities or sales of the securities held in the
segregated account and/or from cash flow. If a Portfolio chooses to dispose of
the right to acquire a when-issued security prior to its acquisition, it
could, as with the disposition of any other portfolio obligation, incur a gain
or loss due to market fluctuation. It is the current policy of each Portfolio
not to enter into when-issued commitments exceeding in the aggregate 15% of
the market value of the Portfolio's total assets, less liabilities other than
the obligations created by when-issued commitments.

SECURITIES OF OTHER INVESTMENT COMPANIES. Securities of other investment
companies may be acquired by each of the Portfolios to the extent permitted
under the 1940 Act. These limits require that, as determined immediately after
a purchase is made, (i) not more than 5% of the value of a Portfolio's total
assets will be invested in the securities of any one investment company, (ii)
not more than 10% of the value of its total assets will be invested in the
aggregate in securities of investment companies as a group, and (iii) not more
than 3% of the outstanding voting stock of any one investment company will be
owned by a Portfolio.

REVERSE REPURCHASE AGREEMENTS. Each of the Portfolios may enter into
reverse repurchase agreements. In a reverse repurchase agreement, a Portfolio
sells a security and agrees to repurchase the same security at a mutually
agreed upon date and price. For purposes of the 1940 Act it is also considered
as a borrowing of money by the Portfolio and, therefore, a form of leverage.
The Portfolios will invest the proceeds of borrowings under reverse repurchase
agreements. In addition, a Portfolio will enter into a reverse repurchase
agreement only when the interest income to be earned from the investment of
the proceeds is greater than the interest expense of the transaction. A
Portfolio will not invest the proceeds of a reverse repurchase agreement for a
period which exceeds the duration of the reverse repurchase agreement. A
Portfolio may not enter into reverse repurchase agreements exceeding in the
aggregate one-third of the market value of its total assets, less liabilities
other than the obligations created by reverse repurchase agreements. Each
Portfolio will establish and maintain with the Custodian a separate account
with a segregated portfolio of securities in an amount at least equal to its
purchase obligations under its reverse repurchase agreements.

MORTGAGE DOLLAR ROLL TRANSACTIONS. Certain of the Portfolios of the Trust
may engage in mortgage dollar roll transactions with respect to mortgage
securities issued by the Government National Mortgage Association, the Federal
National Mortgage Association and the Federal Home Loan Mortgage Corporation,
In a mortgage dollar roll transaction, the Portfolio sells a mortgage backed
security and simultaneously agrees to repurchase a similar security on a
specified future date at an agreed upon price. During the roll period, the
Portfolio will not be entitled to receive any interest or principal paid on
the securities sold. The Portfolio is compensated for the lost interest on the
securities sold by the difference between the sales price and the lower price
for the future repurchase as well as by the interest earned on the
reinvestment of the sales proceeds. The Portfolio may also be compensated by
receipt of a commitment fee. When the Portfolio enters into a mortgage dollar
roll transaction, liquid assets in an amount sufficient to pay for the future
repurchase are segregated with the Custodian. Mortgage dollar roll
transactions are considered reverse repurchase agreements for purposes of the
Portfolio's investment restrictions.

LOANS OF PORTFOLIO SECURITIES. Each of the Portfolios may lend its
securities if such loans are secured continuously by cash or equivalent
collateral or by a letter of credit in favor of the Portfolio at least equal
at all times to 100% of the market value of the securities loaned, plus
accrued interest. While such securities are on loan, the borrower will pay the
Portfolio any income accruing thereon. Loans will be subject to termination by
the Portfolios in the normal settlement time, generally five business days
after notice, or by the borrower on one day's notice. Borrowed securities must
be returned when the loan is terminated. Any gain or loss in the market price
of the borrowed securities which occurs during the term of the loan inures to
a Portfolio and its respective investors. The Portfolios may pay reasonable
finders' and custodial fees in connection with a loan. In addition, a
Portfolio will consider all facts and circumstances including the
creditworthiness of the borrowing financial institution, and no Portfolio will
make any loans in excess of one year.

PRIVATELY PLACED AND CERTAIN UNREGISTERED SECURITIES. The Portfolios may
invest in privately placed, restricted, Rule 144A or other unregistered
securities as described in the Prospectus.

As to illiquid investments, a Portfolio is subject to a risk that should
the Portfolio decide to sell them when a ready buyer is not available at a
price the Portfolio deems representative of their value, the value of the
Portfolio's net assets could be adversely affected. Where an illiquid security
must be registered under the Securities Act of 1933, as amended (the "1933
Act") before it may be sold, a 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, a Portfolio might obtain a
less favorable price than prevailed when it decided to sell.

QUALITY AND DIVERSIFICATION REQUIREMENTS

Each of the Portfolios intends to meet the diversification requirements of the
1940 Act. To meet these requirements, 75% of the assets of these Portfolios is
subject to the following fundamental limitations: (1) the Portfolio may not
invest more than 5% of its total assets in the securities of any one issuer,
except obligations of the U.S. Government, its agencies and instrumentalities,
and (2) the Portfolio may not own more than 10% of the outstanding voting
securities of any one issuer. As for the other 25% of the Portfolio's assets
not subject to the limitation described above, there is no limitation on
investment of these assets under the 1940 Act, so that all of such assets may
be invested in securities of any one issuer, subject to the limitation of any
applicable state securities laws, or with respect to the Money Market
Portfolio, as described below. Investments not subject to the limitations
described above could involve an increased risk to a Portfolio should an
issuer, or a state or its related entities, be unable to make interest or
principal payments or should the market value of such securities decline.

QUALITY BOND AND QUALITY INCOME PORTFOLIOS. These Portfolios invest
principally in a diversified portfolio of "high grade" and "investment grade"
securities. Investment grade debt is rated, on the date of investment, within
the four highest ratings of Moody's, currently Aaa, Aa, A and Baa, or of
Standard & Poor's, currently AAA, AA, A and BBB, while high grade debt is
rated, on the date of the investment, within the two highest of such ratings.
The Quality Bond Portfolio may also invest up to 5% of its total assets in
securities which are "below investment grade." Such securities must be rated,
on the date of investment, Ba by Moody's or BB by Standard & Poor's. The
Portfolios may invest in debt securities which are not rated or other debt
securities to which these ratings are not applicable, if in the opinion of the
Sub-Adviser, such securities are of comparable quality to the rated securities
discussed above. In addition, at the time the Portfolios invest in any
commercial paper, bank obligation or repurchase agreement, the issuer must
have outstanding debt rated A or higher by Moody's or Standard & Poor's, the
issuer's parent corporation, if any, must have outstanding commercial paper
rated Prime-1 by Moody's or A-1 by Standard & Poor's, or if no such ratings
are available, the investment must be of comparable quality in the
Sub-Adviser's opinion.

CONVERTIBLE AND OTHER DEBT SECURITIES. Certain of the Portfolios may
invest in convertible debt securities, for which there are no specific quality
requirements. In addition, at the time a Portfolio invests in any commercial
paper, bank obligation or repurchase agreement, the issuer must have
outstanding debt rated A or higher by Moody's or Standard & Poor's, the
issuer's parent corporation, if any, must have outstanding commercial paper
rated Prime-1 by Moody's or A-1 by Standard & Poor's, of ir no such ratings
are available, the investment must be of comparable quality in the
Sub-Adviser's opinion. At the time the Portfolio invests in any other
short-term debt securities, they must be rated A or higher by Moody's or
Standard & Poor's, or if unrated, the investment must be of comparable quality
in the Sub-Adviser's opinion.

In determining suitability of investment in a particular unrated
security, the Sub-Adviser takes into consideration asset and debt service
coverage, the purpose of the financing, history of the issuer, existence of
other rated securities of the issuer, and other relevant conditions, such as
comparability to other issuers.

GNMA CERTIFICATES

GOVERNMENT NATIONAL MORTGAGE ASSOCIATION. The Government National
Mortgage Association is a wholly-owned corporate instrumentality of the United
States within the U.S. Department of Housing and Urban Development. GNMA's
principal programs involve its guarantees of privately issued securities
backed by pools of mortgages.

NATURE OF GNMA CERTIFICATES. GNMA Certificates are mortgage-backed
securities. The Certificates evidence part ownership of a pool of mortgage
loans. The Certificates which the Portfolio purchases are of the modified
pass-through type. Modified pass-through Certificates entitle the holder to
receive all interest and principal payments owed on the mortgage pool, net of
fees paid to the GNMA Certificate issuer and GNMA, regardless of whether or
not the mortgagor actually makes the payment.

GNMA Certificates are backed by mortgages and, unlike most bonds, their
principal amount is paid back by the borrower over the length of the loan
rather than in a lump sum at maturity. Principal payments received by the
Portfolio will be reinvested in additional GNMA Certificates or in other
permissible investments.

GNMA Guarantee. The National Housing Act authorizes GNMA to guarantee the
timely payment of principal of and interest on securities backed by a pool of
mortgages insured by the Federal Housing Administration or the Farmers Home
Administration or guaranteed by the Veterans Administration. The GNMA
guarantee is backed by the full faith and credit of the United States. GNMA is
also empowered to borrow without limitation from the U.S. Treasury if
necessary to make any payments required under its guarantee. The net asset
value and return of the Portfolio will, however, fluctuate depending on market
conditions and other factors.

LIFE OF GNMA CERTIFICATES. The average life of a GNMA Certificate is
likely to be substantially less than the original maturity of the mortgage
pools underlying the securities. Prepayments of principal by mortgagors and
mortgage foreclosures will result in the return of a portion of principal
invested before the maturity of the mortgages in the pool.

As prepayment rates of individual mortgage pools will vary widely, it is
not possible to predict accurately the average life of a particular issue of
GNMA Certificates. However, statistics published by the Federal Housing
Administration are normally used as an indicator of the expected average life
of GNMA Certificates. These statistics indicate that the average life of
single-family dwelling mortgages with 25-30 year maturities (the type of
mortgages backing the vast majority of GNMA Certificates) is approximately 12
years. For this reason, it is customary for pricing purposes to consider GNMA
Certificates as 30-year mortgage-backed securities which prepay fully in the
twelfth year.

YIELD CHARACTERISTICS OF GNMA CERTIFICATES. The coupon rate of interest of
GNMA Certificates is lower than the interest rate paid on the VA-guaranteed or
FHA-insured mortgages underlying the Certificates, but only by the amount of
the fees paid to GNMA and the GNMA Certificate issuer. For the most common
type of mortgage pool, containing single-family dwelling mortgages, GNMA
receives an annual fee of 0.06 of 1% of the outstanding principal for
providing its guarantee, and the GNMA Certificate issuer is paid an annual
servicing fee of 0.44 of 1% for assembling the mortgage pool and for passing
through monthly payments of interest and principal to Certificate holders.

The coupon rate by itself, however, does not indicate the yield which
will be earned on the Certificates for the following reasons:

1. Certificates are usually issued at a premium or discount, rather than
at par.

2. After issuance, Certificates usually trade in the secondary market at
a premium or discount.

3. Interest is paid monthly rather than semi-annually as is the case for
traditional bonds. Monthly compounding has the effect of raising the effective
yield earned on GNMA Certificates.

4. The actual yield of each GNMA Certificate is influenced by the
prepayment experience of the mortgage pool underlying the Certificate. If
mortgagors prepay their mortgages, the principal returned to Certificate
holders may be reinvested at higher or lower rates.

In quoting yields for GNMA Certificates, the customary practice is to
assume that the Certificates will have a 12-year life. Compared on this basis,
GNMA Certificates have historically yielded roughly 1/4 of 1% more than high
grade corporate bonds and 1/2 of 1% more than U.S. Government and U.S.
Government agency bonds. As the life of individual pools may vary widely,
however, the actual yield earned on any issue of GNMA Certificates may differ
significantly from the yield estimated on the assumption of a 12-year life.

MARKET FOR GNMA CERTIFICATES. Since the inception of the GNMA
mortgage-backed securities program in 1970, the amount of GNMA Certificates
outstanding has grown rapidly. The size of the market and the active
participation in the secondary market by securities dealers and many types of
investors make GNMA Certificates highly liquid instruments. Quotes for GNMA
Certificates are readily available from securities dealers and depend on,
among other things, the level of market rates, the Certificate's coupon rate
and the prepayment experience of the pool of mortgages backing each
Certificate.

FNMA AND FHLMC CERTIFICATES. Mortgage-backed securities issued by the
Federal National Mortgage Association ("FNMA") include FNMA Guaranteed
Mortgage Pass-through Certificates (also known as "Fannie Maes") which are
solely the obligations of the FNMA and are not backed by or entitled to the
full faith and credit of the United States, but are supported by the right of
the issuer to borrow from the Treasury. FNMA is a government-sponsored
organization owned entirely by private stockholders. Fannie Maes are
guaranteed as to timely payment of the principal and interest by FNMA.
Mortgage-backed securities issued by the Federal Home Loan Mortgage
Corporation ("FHLMC") include FHLMC Mortgage Participation Certificates (also
known as "Freddie Macs" or "PCs"). FHLMC is a corporate instrumentality of
the United States, created pursuant to an Act of Congress, which is owned
entirely by Federal Home Loan Banks. Freddie Macs are not guaranteed by the
United States or by any Federal Home Loan Bank. Freddie Macs entitle the
holder to timely payment of interest, which is guaranteed by the FHLMC. FHLMC
guarantees either ultimate collection or timely payment of all principal
payments on the underlying mortgage loans. When FHLMC does not guarantee
timely payment of principal, FHLMC may remit the amount due on account of its
guarantee of ultimate payment of principal at any time after default on an
underlying mortgage, but in no event later than one year after it becomes
payable.

LOWER GRADE SECURITIES

Certain of the Portfolios may invest in lower-grade income securities. (The
High Yield Portfolio may invest a substantial portion of its assets in medium
and lower grade corporate debt securities entailing certain risks. See
"Special Risks of High Yield Investing" in the Prospectus.) Such lower grade
securities are rated BB or B by S&P or Ba or B by Moody's and are commonly
referred to as "junk bonds." Investment in such securities involves special
risks, as described herein. Liquidity relates to the ability of the Portfolio
to sell a security in a timely manner at a price which reflects the value of
that security. As discussed below, the market for lower grade securities is
considered generally to be less liquid than the market for investment grade
securities. The relative illiquidity of some of the Portfolio's portfolio
securities may adversely affect the ability of the Portfolio to dispose of
such securities in a timely manner and at a price which reflects the value of
such security in the Sub-Adviser's judgment. The market for less liquid
securities tends to be more volatile than the market for more liquid
securities and market values of relatively illiquid securities may be more
susceptible to change as a result of adverse publicity and investor
perceptions than are the market values of higher grade, more liquid
securities.

The Portfolio's net asset value will change with changes in the value of its
portfolio securities. Because the Portfolio will invest in fixed income
securities, the Portfolio's net asset value can be expected to change as
general levels of interest rates fluctuate. When interest rates decline, the
value of a portfolio invested in fixed income securities can be expected to
rise. Conversely, when interest rates rise, the value of a portfolio invested
in fixed income securities can be expected to decline. Net asset value and
market value may be volatile due to the Portfolio's investment in lower grade
and less liquid securities. Volatility may be greater during periods of
general economic uncertainty.

The Portfolio's investments are valued pursuant to guidelines adopted and
periodically reviewed by the Board of Trustees. To the extent that there is no
established retail market for some of the securities in which the Portfolio
may invest, during periods of reduced market liquidity and in the absence of
readily available market quotations for securities held in the Portfolio's
portfolio, the valuation of such securities becomes more difficult and
judgment may play a greater role in the valuation of the Portfolio's
securities due to the reduced availability of reliable objective data. To the
extent that the Portfolio invests in illiquid securities and securities which
are restricted as to resale, the Portfolio may incur additional risks and
costs. Illiquid and certain restricted securities are particularly difficult
to dispose of.

Lower grade securities generally involve greater credit risk than higher grade
securities. A general economic downturn or a significant increase in interest
rates could severely disrupt the market for lower grade securities and
adversely affect the market value of such securities. In addition, in such
circumstances, the ability of issuers of lower grade securities to repay
principal and to pay interest, to meet projected financial goals and to obtain
additional financing may be adversely affected. Such consequences could lead
to an increased incidence of default for such securities and adversely affect
the value of the lower grade securities in the Portfolio's portfolio and thus
the Portfolio's net asset value. The secondary market prices of lower grade
securities are less sensitive to changes in interest rates than are those for
higher rated securities, but are more sensitive to adverse economic changes or
individual issuer developments. Adverse publicity and investor perceptions,
whether or not based on rational analysis, may also affect the value and
liquidity of lower grade securities.

Yields on the Portfolio's portfolio securities can be expected to fluctuate
over time. In addition, periods of economic uncertainty and changes in
interest rates can be expected to result in increased volatility of the market
prices of the lower grade securities in the Portfolio's portfolio and thus in
the net asset value of the Portfolio. Net asset value and market value may be
volatile due to the Portfolio's investment in lower grade and less liquid
securities. Volatility may be greater during periods of general economic
uncertainty. The Portfolio may incur additional expenses to the extent it is
required to seek recovery upon a default in the payment of interest or a
repayment of principal on its portfolio holdings, and the Portfolio may be
unable to obtain full recovery thereof. In the event that an issuer of
securities held by the Portfolio experiences difficulties in the timely
payment of principal or interest and such issuer seeks to restructure the
terms of its borrowings, the Portfolio may incur additional expenses and may
determine to invest additional capital with respect to such issuer or the
project or projects to which the Portfolio's portfolio securities relate.

The Portfolio will rely on the Sub-Adviser's judgment, analysis and experience
in evaluating the creditworthiness of an issue. In this evaluation, the
Sub-Adviser will take into consideration, among other things, the issuer's
financial resources, its sensitivity to economic conditions and trends, its
operating history, the quality of the issuer's management and regulatory
matters. The Sub-Adviser also may consider, although it does not rely
primarily on, the credit ratings of S&P and Moody's in evaluating fixed-income
securities. Such ratings evaluate only the safety of principal and interest
payments, not market value risk. Additionally, because the creditworthiness of
an issuer may change more rapidly than is able to be timely reflected in
changes in credit ratings, the Sub-Adviser continuously monitors the issuers
of such securities held in the Portfolio's portfolio. The Portfolio may, if
deemed appropriate by the Sub-Adviser, retain a security whose rating has been
downgraded below B by S&P or below B by Moody's, or whose rating has been
withdrawn.

With respect to Portfolios which may invest in these unrated income
securities, achievement by the Portfolio of its investment objective may be
more dependent upon the Sub-Adviser's investment analysis than would be the
case if the Portfolio were investing exclusively in rated securities.

STRATEGIC TRANSACTIONS

As described in the Prospectus, certain Portfolios of the Trust may, but are
not required to, utilize various other investment strategies as described
below to hedge various market risks (such as interest rates, currency exchange
rates and broad or specific market movements) or to manage the effective
maturity or duration of a Portfolio's income securities. Such strategies are
generally accepted by modern portfolio managers and are regularly utilized by
many mutual funds and other institutional investors. Techniques and
instruments may change over time as new instruments and strategies are
developed or regulatory changes occur.

In the course of pursuing these investment strategies, a Portfolio may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, equity and income indices and other financial instruments,
purchase and sell financial futures contracts and options thereon, enter into
various interest rate transactions such as swaps, caps, floors or collars and
enter into various currency transactions such as currency forward contracts,
currency futures contracts, currency swaps or options on currencies or
currency futures (collectively, all the above are called "Strategic
Transactions"). Strategic Transactions are hedging transactions which may be
used to attempt to protect against possible changes in the market value of
securities held in or to be purchased for a Portfolio's portfolio resulting
from securities markets or exchange rate fluctuations, to protect a
Portfolio's unrealized gains in the value of its portfolio securities, to
facilitate the sale of such securities for investment purposes, to manage the
effective maturity or duration of a Portfolio's portfolio, or to establish a
position in the derivatives markets as a temporary substitute for purchasing
or selling particular securities.

Any or all of these investment techniques may be used at any time and there is
no particular strategy that dictates the use of one technique rather than
another, as use of any Strategic Transaction is a function of numerous
variables including market conditions. The ability of a Portfolio to utilize
these Strategic Transactions successfully will depend on the Sub-Adviser's
ability to predict pertinent market movements, which cannot be assured. A
Portfolio will comply with applicable regulatory requirements when
implementing these strategies, techniques and instruments.

Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Sub-Adviser's view as to certain market movements is incorrect, the risk
that the use of such Strategic Transactions could result in losses greater
than if they had not been used. Use of put and call options may result in
losses to a Portfolio, force the sale or purchase of portfolio securities at
inopportune times or for prices other than current market values, limit the
amount of appreciation a Portfolio can realize on its investments or cause a
Portfolio to hold a security it might otherwise sell. The use of currency
transactions can result in a Portfolio incurring losses as a result of a
number of factors including the imposition of exchange controls, suspension of
settlements or the inability to deliver or receive a specified currency. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of a
Portfolio creates the possibility that losses on the hedging instrument may be
greater than gains in the value of a Portfolio's position. In addition,
futures and options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets,
a Portfolio might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to
limit any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures
contracts would create a greater ongoing potential financial risk than would
purchases of options, where the exposure is limited to the cost of the initial
premium. Losses resulting from the use of Strategic Transactions would reduce
net asset value, and possibly income, and such losses can be greater than if
the Strategic Transactions had not been utilized. Income earned or deemed to
be earned, if any, by a Portfolio from its Strategic Transactions will
generally be taxable income of the Trust. See "Tax Status" in the Prospectus.

GENERAL CHARACTERISTICS OF OPTIONS. Put options and call options
typically have similar structural characteristics and operational mechanics
regardless of the underlying instrument on which they are purchased or sold.
Thus, the following general discussion relates to each of the particular types
of options discussed in greater detail below. In addition, many Strategic
Transactions involving options require segregation of Portfolio assets in
special accounts, as described below under "Use of Segregated and Other
Special Accounts."

A put option gives the purchaser of the option, upon payment of a
premium, the right to sell, and the writer the obligation to buy, the
underlying security, commodity, index, currency or other instrument at the
exercise price. For instance, a Portfolio's purchase of a put option on a
security might be designed to protect its holdings in the underlying
instrument (or, in some cases, a similar instrument) against a substantial
decline in the market value by giving the Portfolio the right to sell such
instrument at the option exercise price. A call option, upon payment of a
premium, gives the purchaser of the option the right to buy, and the seller
the obligation to sell, the underlying instrument at the exercise price. A
Portfolio's purchase of a call option on a security, financial future, index,
currency or other instrument might be intended to protect the Portfolio
against an increase in the price of the underlying instrument that it intends
to purchase in the future by fixing the price at which it may purchase such
instrument. An American style put or call option may be exercised at any time
during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. As
described in the Prospectus, certain Portfolios of the Trust are authorized to
purchase and sell exchange listed options and over-the-counter options ("OTC
options"). Exchange listed options are issued by a regulated intermediary such
as the Options Clearing Corporation ("OCC"), which guarantees the performance
of the obligations of the parties to such options. The discussion below uses
the OCC as a paradigm, but is also applicable to other financial
intermediaries.

With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although
in the future cash settlement may become available. Index options and
Eurodollar instruments are cash settled for the net amount, if any, by which
the option is "in-the-money" (i.e., where the value of the underlying
instrument exceeds, in the case of a call option, or is less than, in the case
of a put option, the exercise price of the option) at the time the option is
exercised. Frequently, rather than taking or making delivery of the underlying
instrument through the process of exercising the option, listed options are
closed by entering into offsetting purchase or sale transactions that do not
result in ownership of the new option.

A Portfolio's ability to close out its position as a purchaser or seller
of an OCC or exchange listed put or call option is dependent, in part, upon
the liquidity of the option market. Among the possible reasons for the absence
of a liquid option market on an exchange are: (i) insufficient trading
interest in certain options; (ii) restrictions on transactions imposed by an
exchange; (iii) trading halts, suspensions or other restrictions imposed with
respect to particular classes or series of options or underlying securities
including reaching daily price limits; (iv) interruption of the normal
operations of the OCC or an exchange; (v) inadequacy of the facilities of an
exchange or OCC to handle current trading volume; or (vi) a decision by one or
more exchanges to discontinue the trading of options (or a particular class or
series of options), in which event the relevant market for that option on that
exchange would cease to exist, although outstanding options on that exchange
would generally continue to be exercisable in accordance with their terms.

The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent
that the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.

OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of
an OTC option, including such terms as method of settlement, term, exercise
price, premium, guarantees and security, are set by negotiation of the
parties. A Portfolio will only sell OTC options (other than OTC currency
options) that are subject to a buy-back provision permitting the Portfolio to
require the Counterparty to sell the option back to the Portfolio at a formula
price within seven days. The Portfolios expect generally to enter into OTC
options that have cash settlement provisions, although they are not required
to do so.

Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty fails to
make or take delivery of the security, currency or other instrument underlying
an OTC option it has entered into with a Portfolio or fails to make a cash
settlement payment due in accordance with the terms of that option, the
Portfolio will lose any premium it paid for the option as well as any
anticipated benefit of the transaction. Accordingly, the Sub-Adviser must
assess the creditworthiness of each such Counterparty or any guarantor or
credit enhancement of the Counterparty's credit to determine the likelihood
that the terms of the OTC option will be satisfied. A Portfolio will engage in
OTC option transactions only with United States government securities dealers
recognized by the Federal Reserve Bank of New York as "primary dealers", or
broker dealers, domestic or foreign banks or other financial institutions
which have received (or the guarantors of the obligation of which have
received) a short-term credit rating of "A-1" from Standard & Poor's
Corporation or "P-1" from Moody's Investors Service, Inc. or an equivalent
rating from any other nationally recognized statistical rating organization
("NRSRO"). The staff of the SEC currently takes the position that, in general,
OTC options on securities other than U.S. government securities purchased by a
Portfolio, and portfolio securities "covering" the amount of the Portfolio's
obligation pursuant to an OTC option sold by it (the cost of the sell-back
plus the in-the-money amount, if any) are illiquid, and are subject to each
Portfolio's limitation on investing no more than 10% of its assets in
restricted securities.

If a Portfolio sells a call option, the premium that it receives may
serve as a partial hedge, to the extent of the option premium, against a
decrease in the value of the underlying securities or instruments in its
portfolio or will increase a Portfolio's income. The sale of put options can
also provide income.

A Portfolio may purchase and sell call options on securities, including
U.S. Treasury and agency securities, municipal obligations, mortgage-backed
securities, corporate debt securities, equity securities (including
convertible securities) and Eurodollar instruments that are traded on U.S. and
foreign securities exchanges and in the over-the-counter markets and or
securities indices, currencies and futures contracts. All calls sold by a
Portfolio must be "covered" (i.e., the Portfolio must own the securities or
futures contract subject to the call) or must meet the asset segregation
requirements described below as long as the call is outstanding. Even though a
Portfolio will receive the option premium to help protect it against loss, a
call sold by a Portfolio exposes the Portfolio during the term of the option
to possible loss of opportunity to realize appreciation in the market price of
the underlying security or instrument and may require the Portfolio to hold a
security or instrument which it might otherwise have sold. In selling calls on
securities not owned by the Portfolio, the Portfolio may be required to
acquire the underlying security at a disadvantageous price in order to satisfy
its obligations with respect to the call.

A Portfolio may purchase and sell put options on securities including
U.S. Treasury and agency securities, mortgage-backed securities, municipal
obligations, corporate debt securities, equity securities (including
convertible securities) and Eurodollar instruments (whether or not it holds
the above securities in its portfolio) and on securities indices, currencies
and futures contracts other than futures on individual corporate debt and
individual equity securities. A Portfolio will not sell put options if, as a
result, more than 50% of the Portfolio's assets would be required to be
segregated to cover its potential obligations under such put options other
than those with respect to futures and options thereon. In selling put
options, there is a risk that a Portfolio may be required to buy the
underlying security at a disadvantageous price above the market price.

General Characteristics of Futures. Certain Portfolios of the Trust may
enter into financial futures contracts or purchase or sell put and call
options on such futures as a hedge against anticipated interest rate,
currency, equity or income market changes, for duration management and for
risk management purposes. Futures are generally bought and sold on the
commodities exchanges where they are listed with payment of initial and
variation margin as described below. The purchase of a futures contract
creates a firm obligation by a Portfolio, as purchaser, to take delivery from
the seller of the specific type of financial instrument called for in the
contract at a specific future time for a specified price (or, with respect to
index futures and Eurodollar instruments, the net cash amount). The sale of a
futures contract creates a firm obligation by the Portfolio, as seller, to
deliver to the buyer the specific type of financial instrument called for in
the contract at a specific future time for a specified price (or, with respect
to index futures and Eurodollar instruments, the net cash amount). Options on
futures contracts are similar to options on securities except that an option
on a futures contract gives the purchaser the right in return for the premium
paid to assume a position in a futures contract and obligates the seller to
deliver such option.

The Portfolio's use of financial futures and options thereon will in all
cases be consistent with applicable regulatory requirements and, in
particular, with the rules and regulations of the Commodity Futures Trading
Commission. Typically, maintaining a futures contract or selling an option
thereon requires the Portfolio to deposit with a financial intermediary, as
security for its obligations, an amount of cash or other specified assets
(initial margin) which initially is typically 1% to 10% of the face amount of
the contract (but may be higher in some circumstances). Additional cash or
assets (variation margin) may be required to be deposited thereafter on a
daily basis as the mark to market value of the contract fluctuates. The
purchase of options on financial futures involves payment of a premium for the
option without any further obligation on the part of the Portfolio. If the
Portfolio exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures
contracts and options thereon are generally settled by entering into an
offsetting transaction but there can be no assurance that the position can be
offset prior to settlement at an advantageous price nor that delivery will
occur.

A Portfolio will not enter into a futures contract or related option
(except for closing transactions) for other than bona fide hedging purposes
if, immediately thereafter, the sum of the amount of its initial margin and
premiums on open futures contracts and options thereon would exceed 5% of the
Portfolio's total assets (taken at current value); however, in the case of an
option that is in-the-money at the time of the purchase, the in-the-money
amount may be excluded in calculating the 5% limitation. The segregation
requirements with respect to futures contracts and options thereon are
described below.

Options on Securities Indices and Other Financial Indices. A Portfolio
also may purchase and sell call and put options on securities indices and
other financial indices and in so doing can achieve many of the same
objectives it would achieve through the sale or purchase of options on
individual securities or other instruments. Options on securities indices and
other financial indices are similar to options on a security or other
instrument except that, rather than settling by physical delivery of the
underlying instrument, they settle by cash settlement, i.e., an option on an
index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the index upon which the option is
based exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option (except if, in the case of an OTC option,
physical delivery is specified). This amount of cash is equal to the excess of
the closing price of the index over the exercise price of the option, which
also may be multiplied by a formula value. The seller of the option is
obligated, in return for the premium received, to make delivery of this
amount. The gain or loss on an option on an index depends on price movements
in the instruments making up the market, market segment, industry or other
composite on which the underlying index is based, rather than price movements
in individual securities, as is the case with respect to options on
securities.

Currency Transactions. Certain Portfolios of the Trust may engage in
currency transactions with Counterparties in order to hedge the value of
portfolio holdings denominated in particular currencies against fluctuations
in relative value. Currency transactions include forward currency contracts,
exchange listed currency futures, exchange listed and OTC options on
currencies, and currency swaps. A forward currency contract involves a
privately negotiated obligation to purchase or sell (with delivery generally
required) a specific currency at a future date, which may be any fixed number
of days from the date of the contract agreed upon by the parties, at a price
set at the time of the contract. A currency swap is an agreement to exchange
cash flows based on the notional difference among two or more currencies and
operates similarly to an interest rate swap, which is described below. A
Portfolio may enter into currency transactions with Counterparties which have
received (or the guarantors of the obligations of such Counterparties have
received) a credit rating of A-1 or P-1 by S&P or Moody's, respectively, or
that have an equivalent rating from an NRSRO or (except for OTC currency
options) are determined to be of equivalent credit quality by the Sub-Adviser.

Dealings by the Portfolios in forward currency contracts and other
currency transactions such as futures, options, options on futures and swaps
will be limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is entering into a currency transaction with
respect to specific assets or liabilities of the Portfolio, which will
generally arise in connection with the purchase or sale of its portfolio
securities or the receipt of income therefrom. Position hedging is entering
into a currency transaction with respect to portfolio security positions
denominated or generally quoted in that currency.

A Portfolio will not enter into a transaction to hedge currency exposure
to an extent greater, after netting all transactions intended to wholly or
partially offset other transactions, than the aggregate market value (at the
time of entering into the transaction) of the securities held in its portfolio
that are denominated or generally quoted in or currently convertible into such
currency other than with respect to cross hedging and proxy hedging as
described below.

A Portfolio may cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the Portfolio has or in which the
Portfolio expects to have portfolio exposure.

To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, a Portfolio may also engage in
proxy hedging. Proxy hedging is often used when the currency to which the
Portfolio's portfolio is exposed is difficult to hedge or to hedge against the
dollar. Proxy hedging entails entering into a forward contract to sell a
currency whose changes in value are generally considered to be linked to a
currency or currencies in which some or all of the Portfolio's portfolio
securities are or are expected to be denominated, and to buy U.S. dollars. For
example, if the Sub-Adviser considers the Austrian schilling as being linked
to the German deutschemark (the "D-mark") and the Trust holds securities
denominated in schillings and the Sub-Adviser believes that the value of
schillings will decline against the U.S. dollar, the Sub-Adviser may enter
into a contract to sell D-marks and buy dollars. Currency hedging involves
some of the same risks and considerations as other transactions with similar
instruments. Currency transactions can result in losses to a Portfolio if the
currency being hedged fluctuates in value to a degree or in a direction that
is not anticipated. Further, there is the risk that the perceived linkage
between various currencies may not be present or may not be present during the
particular time that the Portfolio is engaging in proxy hedging. If a
Portfolio enters into a currency hedging transaction, the Portfolio will
comply with the asset segregation requirements described below.

Risks of Currency Transactions. Currency transactions are subject to
risks different from those of other portfolio transactions. Because currency
control is of great importance to the issuing governments and influences
economic planning and policy, purchases and sales of currency and related
instruments can be negatively affected by government exchange controls,
blockages, and manipulations or exchange restrictions imposed by governments.
These can result in losses to a Portfolio if it is unable to deliver or
receive currency or funds in settlement of obligations and could also cause
hedges it has entered into to be rendered useless, resulting in full currency
exposure as well as incurring transaction costs. Buyers and sellers of
currency futures are subject to the same risks that apply to the use of
futures generally. Further, settlement of a currency futures contract for the
purchase of most currencies must occur at a bank based in the issuing nation.
Trading options on currency futures is relatively new, and the ability to
establish and close out positions on such options is subject to the
maintenance of a liquid market which may not always be available. Currency
exchange rates may fluctuate based on factors extrinsic to that country's
economy.

Combined Transactions. Certain Portfolios of the Trust may enter into
multiple transactions, including multiple options transactions, multiple
futures transactions, multiple currency transactions (including forward
currency contracts), multiple interest rate transactions and any combination
of futures, options, currency and interest rate transactions ("component"
transactions), instead of a single Strategic Transaction, as part of a single
or combined strategy when, in the opinion of the Sub-Adviser, it is in the
best interest of the Portfolio to do so. A combined transaction will usually
contain elements of risk that are present in each of its component
transactions. Although combined transactions are normally entered into based
on the Sub-Adviser's judgment that the combined strategies will reduce risk or
otherwise more effectively achieve the desired portfolio management goal, it
is possible that the combination will instead increase such risks or hinder
achievement of the portfolio management objective.

SWAPS, CAPS, FLOORS AND COLLARS. Among the Strategic Transactions into
which certain Portfolios may enter are interest rate, currency and index swaps
and the purchase or sale of related caps, floors and collars. The Portfolios
expect to enter into these transactions primarily to preserve a return or
spread on a particular investment or portion of their portfolios, to protect
against currency fluctuations, as a duration management technique or to
protect against any increase in the price of securities the Portfolio
anticipates purchasing at a later date. The Portfolios intend to use these
transactions as hedges and not as speculative investments and will not sell
interest rate caps or floors where they do not own securities or other
instruments providing the income stream the Portfolios may be obligated to
pay. Interest rate swaps involve the exchange by the Portfolio with another
party of their respective commitments to pay or receive interest, e.g., an
exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal. A currency swap is an agreement to exchange
cashflows on a notional amount of two or more currencies based on the relative
value differential among them. An index swap is an agreement to swap cash
flows on a notional amount based on changes in the values of the reference
indices. The purchase of a cap entitles the purchaser to receive payments on a
notional principal amount from the party selling such cap to the extent that a
specified index exceeds a predetermined interest rate or amount. The purchase
of a floor entitles the purchaser to receive payments on a notional principal
amount from the party selling such floor to the extent that a specified index
falls below a predetermined interest rate or amount. A collar is a combination
of a cap and a floor that preserves a certain return within a predetermined
range of interest rates or values.

A Portfolio will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or
dates specified in the instrument, with the Portfolio receiving or paying, as
the case may be, only the net amount of the two payments. Inasmuch as these
swaps, caps, floors and collars are entered into for good faith hedging
purposes, the Sub-Adviser and the Portfolio believe such obligations do not
constitute senior securities under the Investment Company Act of 1940, as
amended, and, accordingly, will not treat them as being subject to its
borrowing restrictions. A Portfolio will not enter into any swap, cap, floor
or collar transaction unless, at the time of entering into such transaction,
the unsecured long-term debt of the Counterparty, combined with any credit
enhancements, is rated at least "A" by S&P or Moody's or has an equivalent
equity rating from an NRSRO or is determined to be of equivalent credit
quality by the Sub-Adviser. If there is a default by the Counterparty, the
Portfolio may have contractual remedies pursuant to the agreements related to
the transaction. The swap market has grown substantially in recent years with
a large number of banks and investment banking firms acting both as principals
and agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid. Caps, floors and collars are more recent
innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than swaps.

EURODOLLAR INSTRUMENTS. Certain Portfolios of the Trust may make
investments in Eurodollar instruments. Eurodollar instruments are U.S.
dollar-denominated futures contracts or options thereon which are linked to
the London Interbank Offered Rate ("LIBOR"), although foreign
currency-denominated instruments are available from time to time. Eurodollar
futures contracts enable purchasers to obtain a fixed rate for the lending of
funds and sellers to obtain a fixed rate for borrowings. A Portfolio might use
Eurodollar futures contracts and options thereon to hedge against changes in
LIBOR, to which many interest rate swaps and income instruments are linked.

RISKS OF STRATEGIC TRANSACTIONS OUTSIDE THE UNITED STATES. When conducted
outside the United States, Strategic Transactions may not be regulated as
rigorously as in the United States, may not involve a clearing mechanism and
related guarantee, and are subject to the risk of governmental actions
affecting trading in, or the prices of, foreign securities, currencies and
other instruments. The value of such positions also could be adversely
affected by: (i) other complex foreign political, legal 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) lower
trading volume and liquidity.

USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS. Many Strategic
Transactions, in addition to other requirements, require that the Portfolio
segregate liquid high-grade assets with its custodian to the extent Portfolio
obligations are not otherwise "covered" through ownership of the underlying
security, financial instrument or currency. In general, either the full amount
of any obligation by the Portfolio to pay or deliver securities or assets must
be covered at all times by the securities, instruments or currency required to
be delivered, or, subject to any regulatory restrictions, an amount of cash or
liquid high-grade debt securities at least equal to the current amount of the
obligation must be segregated with the custodian. The segregated assets cannot
be sold or transferred unless equivalent assets are substituted in their place
or it is no longer necessary to segregate them. For example, a call option
written by a Portfolio will require the Portfolio to hold the securities
subject to the call (or securities convertible into the needed securities
without additional consideration) or to segregate liquid high-grade debt
securities sufficient to purchase and deliver the securities if the call is
exercised. A call option sold by a Portfolio on an index will require the
Portfolio to own portfolio securities which correlate with the index or to
segregate liquid high-grade assets equal to the excess of the index value over
the exercise price on a current basis. A put option written by a Portfolio
requires the Portfolio to segregate liquid, high-grade assets equal to the
exercise price.

Except when a Portfolio enters into a forward contract for the purchase or
sale of a security denominated in a particular currency, which requires no
segregation, a currency contract which obligates the Portfolio to buy or sell
currency will generally require the Portfolio to hold an amount of that
currency or liquid securities denominated in that currency equal to the
Portfolio's obligations or to segregate liquid high-grade assets equal to the
amount of the Portfolio's obligation.

OTC options entered into by a Portfolio, including those on securities,
currencies, financial instruments or indices and OCC issued and exchange
listed index options, will generally provide for cash settlement. As a result,
when a Portfolio sells these instruments it will only segregate an amount of
assets equal to its accrued net obligations, as there is no requirement for
payment or delivery of amounts in excess of the net amount. These amounts will
equal 100% of the exercise price in the case of a non cash-settled put, the
same as an OCC guaranteed listed option sold by the Portfolio, or the
in-the-money amount plus any sell-back formula amount in the case of a
cash-settled put or call. In addition, when the Portfolio sells a call option
on an index at a time when the in-the-money amount exceeds the exercise price,
the Portfolio will segregate, until the option expires or is closed out, cash
or cash equivalents equal in value to such excess. OCC issued and exchange
listed options sold by the Portfolio other than those above generally settle
with physical delivery or with an election of either physical delivery or cash
settlement, and the Portfolio will segregate an amount of assets equal to the
full value of the option. OTC options settling with physical delivery, or with
an election of either physical delivery or cash settlement, will be treated
the same as other options settling with physical delivery.

In the case of a futures contract or an option thereon, the Portfolio
must deposit initial margin and possible daily variation margin in addition to
segregating assets sufficient to meet its obligation to purchase or provide
securities or currencies, or to pay the amount owed at the expiration of an
index-based futures contract. Such assets may consist of cash, cash
equivalents, liquid debt securities or other acceptable assets.

With respect to swaps, a Portfolio will accrue the net amount of the
excess, if any, of its obligations over its entitlements with respect to each
swap on a daily basis and will segregate an amount of cash or liquid
high-grade securities having a value equal to the accrued excess. Caps, floors
and collars require segregation of assets with a value equal to a Portfolio's
net obligation, if any.

Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. A Portfolio may also enter into offsetting
transactions so that its combined position, coupled with any segregated
assets, equals its net outstanding obligation in related options and Strategic
Transactions. For example, a Portfolio could purchase a put option if the
strike price of that option is the same or higher than the strike price of a
put option sold by the Portfolio. Moreover, instead of segregating assets if
the Portfolio held a futures or forward contract, it could purchase a put
option on the same futures or forward contract with a strike price as high or
higher than the price of the contract held. Other Strategic Transactions may
also be offset in combinations. If the offsetting transaction terminates at
the time of or after the primary transaction, no segregation is required.
However, if it terminates prior to such time, assets equal to any remaining
obligation would need to be segregated.

The Trust's activities involving Strategic Transactions may be limited by
the requirements of Subchapter M of the Internal Revenue Code for
qualification as a regulated investment company. See "Tax Status" in the
Prospectus.

VKAC GROWTH AND INCOME PORTFOLIO - DEBT SECURITIES INVESTMENTS

The VKAC Growth and Income Portfolio may invest up to 5% of its assets in
various debt securities. These include obligations issued or guaranteed by the
U.S. government or its agencies or instrumentalities or in various investment
grade debt obligations including mortgage pass-through certificates and
collateralized mortgage obligations. These securities may also include
corporate debt securities, some of which may be medium and lower grade
quality. Lower grade corporate debt securities are commonly known as "junk
bonds" and involve a significant degree of risk.

STOCK INDEX PORTFOLIO - MONITORING PROCEDURES

MONITORING PROCEDURES

The Board of Trustees of the Trust reviews the correlation between the
Portfolio and the Index on a quarterly basis. The Board of Trustees has
adopted monitoring procedures which it believes are reasonably designed to
assure a high degree of correlation between the performance of the Portfolio
and the S&P 500 Index. The procedures, which are reviewed and reconfirmed
annually by the Board, provide that in the event that the correlation between
the performance of the Portfolio and that of the S&P 500 Index falls below
95%, the Sub-Adviser will promptly notify the Board which shall consider what
action, if any, should be taken.

INVESTMENT LIMITATIONS

The Trust has adopted the following restrictions and policies relating to the
investment of assets of the Portfolios and their activities. These are
fundamental policies and may not be changed without the approval of the
holders of a majority of the outstanding voting shares of each Portfolio
affected (which for this purpose and under the Investment Company Act of 1940
means the lesser of (i) 67% of the shares represented at a meeting at which
more than 50% of the outstanding shares are present or represented by proxy
and (ii) more than 50% of the outstanding shares). A change in policy
affecting only one Portfolio may be effected with the approval of a majority
of the outstanding shares of such Portfolio. Where an investment restriction
or policy restricts it to a specified percentage of its total assets in any
type of instrument, that percentage is measured at the time of purchase.
There will be no violation of any investment policy or restriction if that
restriction is complied with at the time the relevant action is taken
notwithstanding a later change in the market value of an investment, in net or
total assets, in the securities rating of the investment or any other change.

QUALITY INCOME, HIGH YIELD, MONEY MARKET, VKAC GROWTH AND INCOME AND STOCK
INDEX PORTFOLIOS

Each of the Quality Income, High Yield, Money Market, VKAC Growth and Income
and Stock Index Portfolios of the Trust may not:

1. Borrow money which is in excess of one-third of the value of its total
assets taken at market value (including the amount borrowed) (except the Money
Market Portfolio which is limited to 10% of the value of its total assets) and
then only from banks as a temporary measure for extraordinary or emergency
purposes. This borrowing provision is not for investment leverage but solely
to facilitate management of the Portfolio by enabling the Trust to meet
redemption requests where the liquidation of the Portfolio's investment is
deemed to be inconvenient or disadvantageous. Monies used to pay interest on
borrowed funds will not be available for investment. The Portfolio will not
make additional investments while it has borrowings outstanding;

2. Underwrite securities of other issuers;

3. Invest 25% or more of a Portfolio's assets taken at market value in
any one industry. Investing in cash items (including bank time and demand
deposits such as certificates of deposit), U.S. Treasury bills or securities
issued or guaranteed by the U.S. government, its agencies or
instrumentalities, or instruments secured by those money market instruments,
such as repurchase agreements, will not be considered investments in any one
industry;

4. Purchase or sell commodities, commodity contracts, foreign exchange or
real estate, or invest in oil, gas or other mineral development or exploration
programs, except as noted in connection with hedging transactions. (This does
not prohibit investment in the securities of corporations which own interests
in commodities, foreign exchange, real estate or oil, gas or other mineral
development or exploration programs);

5. Invest more than 5% of the value of the assets of a Portfolio in
securities of any one issuer (except in the case of the securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities), or, if,
as a result, the Portfolio would hold more than 10% of the outstanding voting
securities of an issuer except that up to 25% of the Portfolio's total assets
may be invested without regard to such limitations;

6. Invest in securities of a company for the purpose of exercising
control or management;

7. Invest in securities issued by any other registered investment
company;

8. Purchase or sell real estate, except the Portfolios may purchase
securities which are issued by companies which invest in real estate or
interests therein;

9. Issue senior securities as defined in the Investment Company Act of
1940, except insofar as a Portfolio may be deemed to have issued a senior
security by reason of (a) entering into any repurchase agreement; (b)
borrowing money in accordance with restrictions described above; (c) lending
Portfolio securities; (d) purchasing securities on a when-issued or delayed
delivery basis; (e) accommodating short sales; (f) implementing the hedging
transactions described above. If the asset coverage falls below 300%, when
taking into account items (a) through (e), the Portfolio may be required to
liquidate investments to be in compliance with the Investment Company Act of
1940;

10. Lend portfolio securities in excess of twenty-five percent (25%) of
the value of a Portfolio's assets. Any loans of a Portfolio's securities will
be made according to guidelines established by the Trustees, including
maintenance of collateral of the borrower at least equal at all times to the
current market value of the securities loaned;

11. Invest in securities subject to legal or contractual restrictions on
resale and repurchase agreements maturing in more than seven days if, as a
result of the investment, more than 10% of the total assets of the Portfolio
(taken at market value at the time of such investment) would be invested in
the securities;

12. Make loans (the acquisition of a portion of an issue of publicly
distributed bonds, debentures, notes and other securities as permitted by the
investment objectives of the Portfolios will not be deemed to be the making of
loans) except that the Portfolios may purchase securities subject to
repurchase agreements under policies established by the Trustees or lend
portfolio securities pursuant to restriction 10 above;

13. Purchase securities on margin (but the Portfolios may obtain such
short-term credits as may be necessary for the clearance of transactions or to
implement the hedging transactions described above); and

14. Make short sales of securities or maintain a short position, unless
not more than 10% of the Portfolio's net assets (taken at current value) is
held as collateral for the sales at any one time, or unless at all times when
a short position is open the Portfolio owns an equal amount of the securities
or securities convertible into or exchangeable, without payment of any further
consideration (or for additional cash consideration held in a segregated
account by the Trust's custodian), for securities of the same issue as, and
equal in amount to, the securities sold short ("short sale against-the-box").

ADDITIONAL INVESTMENT LIMITATION - STOCK INDEX PORTFOLIO

The Stock Index Portfolio may not invest more than 5% of assets in the
securities of companies that have a continuous operating history of less than
3 years. However, such period of three years may include the operation of any
predecessor company or companies, partnership or individual enterprise if the
company whose securities are proposed as an investment for funds of the
Portfolio has come into existence as the result of a merger, consolidation,
reorganization or the purchase of substantially all of the assets of such
predecessor company or companies, partnership or individual enterprise.

ADDITIONAL INVESTMENT LIMITATIONS - MONEY MARKET PORTFOLIO

Rule 2a-7 under the Investment Company Act of 1940, which contains certain
requirements relating to the diversification, quality and maturity of a money
market fund's investments, was recently amended by the Securities and Exchange
Commission. The Board of Trustees of the Trust has modified its Rule 2a-7
procedures in order to comply with the Rule, as amended. As part of that
modification, the Board has adopted certain additional investment restrictions
pertaining to the diversification of the investments of the Money Market
Portfolio. These investment limitations, which are not fundamental policies
and which therefore may be changed without shareholder approval, are as
follows:

The Money Market Portfolio shall not acquire any instrument, including puts,
repurchase agreements and bank instruments, which, as measured at the time of
acquisition, would cause the Portfolio to:

1. invest, at any time, more than 5% of its total assets in the First
Tier Securities (as that term is defined in the Trust Prospectus) of a single
issuer (including puts written by, and repurchase agreements entered into
with, such issuer); except that the Portfolio may invest more than 5% of its
total assets in Government securities; and, for purposes of this calculation,
entering into a repurchase agreement shall be deemed to be an acquisition of
the underlying securities to the extent that the repurchase agreement is
collateralized fully;

2. invest, at any time, more than 5% of its total assets in securities
which when acquired by the Portfolio were Second Tier Securities (as that term
is defined in the Trust Prospectus); or

3. invest, at any time, more than the greater of 1% of the Portfolio's
total assets or $1,000,000 in securities of a single issuer which were Second
Tier Securities when acquired by the Portfolio.

QUALITY BOND PORTFOLIO

The Quality Bond Portfolio of the Trust may not:

1. Borrow money, except from banks for extraordinary or emergency
purposes and then only in amounts up to 30% of the value of the Portfolio's
total assets, taken at cost at the time of such borrowing and except in
connection with reverse repurchase agreements permitted by Investment
Restriction No. 8. Mortgage, pledge, or hypothecate any assets except in
connection with any such borrowing in amounts up to 30% of the value of the
Portfolio's net assets at the time of such borrowing. The Portfolio will not
purchase securities while borrowings (including reverse repurchase agreements)
exceed 5% of the Portfolio's total assets. This borrowing provision
facilitates the orderly sale of portfolio securities, for example, in the
event of abnormally heavy redemption requests. This provision is not for
investment purposes. Collateral arrangements for premium and margin payments
in connection with the Portfolio's's hedging activities are not deemed to be a
pledge of assets;

2. Purchase the securities or other obligations of any one issuer if,
immediately after such purchase, more than 5% of the value of the Portfolio's
total assets would be invested in securities or other obligations of any one
such issuer. This limitation shall not apply to securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities or to
permitted investments of up to 25% of the Portfolio's total assets;

3. Purchase the securities of an issuer if, immediately after such
purchase, the Portfolio owns more than 10% of the outstanding voting
securities of such issuer. This limitation shall not apply to permitted
investments of up to 25% of the Portfolio's total assets;

4. Purchase securities or other obligations of issuers conducting their
principal business activity in the same industry if, immediately after such
purchase the value of its investments in such industry would exceed 25% of the
value of the Portfolio's total assets. For purposes of industry concentration,
there is no percentage limitation with respect to investments in U.S.
Government securities;

5. Make loans, except through the purchase or holding of debt obligations
(including privately placed securities) or the entering into of repurchase
agreements, or loans of portfolio securities in accordance with the
Portfolio's investment objective and policies;

6. Purchase or sell puts, calls, straddles, spreads, or any combination
thereof, real estate, commodities, commodity contracts, except for the
Portfolio's interest in hedging activities as described under "Investment
Objectives and Policies"; or interests in oil, gas, or mineral exploration or
development programs. However, the Portfolio may purchase debt obligations
secured by interests in real estate or issued by companies which invest in
real estate or interests therein including real estate investment trusts;

7. Purchase securities on margin, make short sales of securities, or
maintain a short position in securities, except in the course of the
Portfolio's hedging activities, unless at all times when a short position is
open the Portfolio owns an equal amount of such securities, provided that this
restriction shall not be deemed to be applicable to the purchase or sale of
when-issued securities or delayed delivery securities;

8. Issue any senior security, except as appropriate to evidence
indebtedness which constitutes a senior security and which the Portfolio is
permitted to incur pursuant to Investment Restriction No. 1 and except that
the Portfolio may enter into reverse repurchase agreements, provided that the
aggregate of senior securities, including reverse repurchase agreement, shall
not exceed one-third of the market value of the Portfolio's total assets, less
liabilities other than obligations created by reverse repurchase agreements.
The Portfolio's arrangements in connection with its hedging activities as
described in "Investment Objectives and Policies" shall not be considered
senior securities for purposes hereof;

9. Acquire securities of other investment companies, except as permitted
by the 1940 Act; or

10. Act as an underwriter of securities.

SELECT EQUITY, LARGE CAP STOCK AND SMALL CAP STOCK PORTFOLIOS

Each of the Select Equity, Large Cap Stock and Small Cap Stock Portfolios
may not:

1. Purchase the securities or other obligations of issuers conducting
their principal business activity in the same industry if, immediately after
such purchase the value of its investments in such industry would exceed 25%
of the value of the Portfolio's total assets. For purposes of industry
concentration, there is no percentage limitation with respect to investments
in U.S. Government securities;

2. Borrow money, except from banks for extraordinary or emergency
purposes and then only in amounts not to exceed 10% of the value of the
Portfolio's total assets, taken at cost, at the time of such borrowing.
Mortgage, pledge, or hypothecate any assets except in connection with any such
borrowing and in amounts not to exceed 10% of the value of the Portfolio's net
assets at the time of such borrowing. The Portfolio will not purchase
securities while borrowings exceed 5% of the Portfolio's total assets. This
borrowing provision is included to facilitate the orderly sale of portfolio
securities, for example, in the event of abnormally heavy redemption requests,
and is not for investment purposes. Collateral arrangements for premium and
margin payments in connection with the Portfolio's hedging activities are not
deemed to be a pledge of assets;

3. Purchase the securities or other obligations of any one issuer if,
immediately after such purchase, more than 5% of the value of the Portfolio's
total assets would be invested in securities or other obligations of any one
such issuer. This limitation shall not apply to issues of the U.S. Government,
its agencies or instrumentalities and to permitted investments of up to 25% of
the Portfolio's total assets;

4. Purchase the securities of an issuer if, immediately after such
purchase, the Portfolio owns more than 10% of the outstanding voting
securities of such issuer;

5. Make loans, except through the purchase or holding of debt obligations
(including privately placed securities), or the entering into of repurchase
agreements, or loans of portfolio securities in accordance with the
Portfolio's investment objective and policies (see "Investment Objectives and
Policies");

6. Purchase or sell puts, calls, straddles, spreads, or any combination
thereof, real estate, commodities, or commodity contracts, except for the
Portfolio's interest in hedging activities as described under "Investment
Objectives and Policies"; or interests in oil, gas, or mineral exploration or
development programs. However, the Portfolio may purchase securities or
commercial paper issued by companies which invest in real estate or interests
therein, including real estate investment trusts;

7. Purchase securities on margin, make short sales of securities, or
maintain a short position, except in the course of the Portfolio's hedging
activities, provided that this restriction shall not be deemed to be
applicable to the purchase or sale of when-issued securities or delayed
delivery securities;

8. Acquire securities of other investment companies, except as permitted
by the 1940 Act;

9. Act as an underwriter of securities;

10. Issue any senior security, except as appropriate to evidence
indebtedness which the Portfolio is permitted to incur pursuant to Investment
Restriction No. 2. The Portfolio's arrangements in connection with its hedging
activities as described in "Investment Objectives and Policies" shall not be
considered senior securities for purposes hereof; or

11. Purchase any equity security if, as a result, the Portfolio would
then have more than 5% of its total assets invested in securities of companies
(including predecessors) that have been in continuous operation for fewer than
three years.

INTERNATIONAL EQUITY PORTFOLIO

The International Equity Portfolio may not:

1. Borrow money, except from banks for extraordinary or emergency
purposes and then only in amounts up to 30% of the value of the Portfolio's
net assets at the time of borrowing, and except in connection with reverse
repurchase agreements and then only in amounts up to 33 1/3% of the value of
the Portfolio's net assets; or purchase securities while borrowings, including
reverse repurchase agreements, exceed 5% of the Portfolio's total assets. The
Portfolio will not mortgage, pledge, or hypothecate any assets except in
connection with any such borrowing and in amounts not to exceed 30% of the
value of the Portfolio's net assets at the time of such borrowing;

4. Purchase the securities or other obligations of issuers conducting
their principal business activity in the same industry if, immediately after
such purchase, the value of its investments in such industry would exceed 25%
of the value of the Portfolio's total assets. For purposes of industry
concentration, there is no percentage limitation with respect to investments
in U.S. Government securities;

5. Make loans, except through the purchase or holding of debt obligations
(including restricted securities), or the entering into of repurchase
agreements, or loans of portfolio securities in accordance with the
Portfolio's investment objective and policies, see "Investment Practices" in
the Prospectus and "Investment Objectives and Policies" in this Statement of
Additional Information;

6. Purchase or sell puts, calls, straddles, spreads, or any combination
thereof, real property, including limited partnership interests, commodities,
or commodity contracts, except for the Portfolio's interests in hedging and
foreign exchange activities as described under "Investment Practices" in the
Prospectus; or interests in oil, gas, mineral or other exploration or
development programs or leases. However, the Portfolio may purchase securities
or commercial paper issued by companies that invest in real estate or
interests therein including real estate investment trusts;

7. Purchase securities on margin, make short sales of securities, or
maintain a short position in securities, except to obtain such short-term
credit as necessary for the clearance of purchases and sales of securities,
provided that this restriction shall not be deemed to apply to the purchase or
sale of when-issued securities or delayed delivery securities;

8. Acquire securities of other investment companies, except as permitted
by the 1940 Act;

9. Act as an underwriter of securities, except insofar as the Portfolio
may be deemed to be an underwriter under the 1933 Act by virtue of disposing
of portfolio securities; or

10. Issue any senior security, except as appropriate to evidence
indebtedness which the Portfolio is permitted to incur pursuant to Investment
Restriction No. 1. The Portfolio's arrangements in connection with its hedging
activities as described in "Investment Practices" in the Prospectus shall not
be considered senior securities for purposes hereof.

EMERGING MARKETS EQUITY PORTFOLIO

The Emerging Markets Equity Portfolio may not:

1. Purchase any security if, as a result, more than 25% of the value of
the Portfolio's total assets would be invested in securities of issuers having
their principal business activities in the same industry. This limitation
shall not apply to obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities;

2. Borrow money, except that the Portfolio may (i) borrow money from
banks for temporary or emergency purposes (not for leveraging purposes) and
(ii) enter into reverse repurchase agreements for any purpose; provided that
(i) and (ii) in total do not exceed 33 1/3% of the value of the Portfolio's
total assets (including the amount borrowed)less liabilities (other than
borrowings). If at any time any borrowings come to exceed 33 1/3% of the
value of the Portfolio's total assets, the Portfolio will reduce its
borrowings within three business days to the extent necessary to comply with
the 33 1/3% limitation;

3. With respect to 75% of its total assets, purchase any security if,
as a result, (a) more than 5% of the value of the Portfolio's total assets
would be invested in securities or other obligations of any one issuer; or
(b) the Portfolio would hold more than 10% of the outstanding voting
securities of that issuer. This limitation shall not apply to Government
securities (as defined in the 1940 Act);

4. Make loans to other persons, except through the purchase of debt
obligations, loans of portfolio securities, and participation in repurchase
agreements;

5. Purchase or sell physical commodities or contracts thereon, unless
acquired as a result of the ownership of securities or instruments, but the
Portfolio may purchase or sell futures contracts or options (including
options on futures contracts, but excluding options or futures contracts on
physical commodities) and may enter into foreign currency forward contracts;

6. Purchase or sell real estate, but the Portfolio may purchase or
sell securities that are secured by real estate or issued by companies
(including real estate investment trusts) that invest or deal in real
estate;

7. Underwrite securities of other issuers, except to the extent the
Portfolio, in disposing of portfolio securities, may be deemed an underwriter
within the meaning of the 1933 Act; and

8. Issue senior securities, except as permitted under the 1940 Act or
any rule, order or interpretation thereunder.

BOND DEBENTURE PORTFOLIO

The Bond Debenture Portfolio of the Trust may not:

1. Sell short or buy on margin, although it may obtain short-term credit
as needed to clear purchases of securities;

2. Buy or sell put or call options, although it may buy, hold or sell
warrants acquired with debt securities;

3. Borrow in excess of 5% of the Portfolio's gross assets taken at cost
or market value whichever is lower at the time of borrowing, and then only as
a temporary measure for extraordinary or emergency purposes;

4. Act as an underwriter of securities issued by others, except where it
may be deemed to be an underwriter by selling a portfolio security requiring
registration under the Securities Act of 1933;

5. Invest knowingly more than 15% of its gross assets in illiquid
securities;

6. Make loans, except for (a) time or demand deposits with banks, (b)
purchasing commercial paper or publicly-offered debt securities at original
issue or otherwise, (c) short-term repurchase agreements with sellers of
securities the Portfolio has bought and (d) loans of portfolio securities to
registered broker-dealers if 100% secured by cash or cash equivalents, made in
full compliance with applicable regulations and which, in management's
opinion, do not expose the Portfolio to significant risks or impair its
qualification for pass-through tax treatment under the Internal Revenue Code;

7. Pledge, mortgage, or hypothecate its assets;

8. Buy or sell real estate (including limited partnership interests but
excluding securities of companies, such as real estate investment trusts,
which deal in real estate or interests therein) or oil, gas or other mineral
leases, or commodities, or commodity contracts although it may buy securities
of companies that deal in such interests (however, the Portfolio may hold and
sell any of the aforementioned or any other property acquired through
ownership of other securities, although the Portfolio may not purchase
securities for the purpose of acquiring those interests);

9. Buy securities issued by any other open-end investment company (except
pursuant to a plan of merger, consolidation or acquisition of assets),
although it may invest up to 5% of its gross assets, taken at market value at
the time of investment, in closed-end investment companies, provided such
purchase is made in the open market and does not involve the payment of a fee
or commission greater than the customary broker's commission;

10. Invest more than 5% of its gross assets, taken at market value at the
time of investment in securities of companies with less than three years'
continuous operation, including predecessor companies;

11. With respect to 75% of its gross assets, buy the securities of any
issuer if the purchase causes it (a) to have more than 5% of its gross assets
invested in the securities of such issuer (except obligations of the United
States, its agencies or instrumentalities) or (b) to own more than 10% of the
outstanding voting securities of such issuer;

12. Hold securities of any issuer, any of whose officers, directors or
security holders is an officer, director or partner of the Adviser or
Sub-Adviser or an officer or director of the Portfolio, if after the purchase
of the securities of such issuer, one or more of such persons owns
beneficially more than 1/2 of 1% of the securities of such issuer and such
persons together own beneficially more than 5% of such securities;

13. Concentrate its investments in a particular industry, though, if it
is deemed appropriate to its investment objective, up to 25% of the market
value of its gross assets at the time of investment may be invested in any one
industry classification used for investment purposes;

14. Buy from or sell to any of the Trust's directors, employees, or the
Investment Adviser or Sub-Adviser or any of its officers, directors, partners
or employees, any securities other than shares of the Portfolio's common
stock; or

15. Invest more than 10% of the market value of its gross assets at the
time of investment in debt securities which are in default as to interest or
principal.

With respect to investment restriction 5. above, securities subject to legal
or contractual restrictions on resale, which are determined by the Board of
Trustees, or by the Sub-Adviser pursuant to delegated authority, to be liquid
are considered liquid securities.

GROWTH & INCOME EQUITY, SMALL CAP EQUITY, BALANCED AND EQUITY INCOME
PORTFOLIOS

The Growth & Income Equity, Small Cap Equity, Balanced and Equity Income
Portfolios of the Trust may not:

1. Purchase securities of any one issuer (other than obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities), if,
immediately after and as a result of such investments, more than 5% of the
Portfolio's total assets would be invested in the securities of such issuer,
or more than 10% of the issuer's outstanding voting securities would be owned
by the Portfolio or the Trust, except that up to 25% of the Portfolio's total
assets may be invested without regard to such limitations.

2. Purchase any securities which would cause 25% or more of the
Portfolio's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business
activities in the same industry, provided that, however, (a) with respect to
each Portfolio, (i) there is no limitation with respect to obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities, and
repurchase agreements secured by obligations of the U.S. Government or its
agencies or instrumentalities, and with respect to the Equity Income Portfolio
only, securities issued by domestic banks, thrifts or savings institutions;
(ii) wholly-owned finance companies will be considered to be in the industries
of their parents if their activities are primarily related to financing the
activities of their parents; and (iii) utilities will be divided according to
their services (for example, gas, gas transmission, electric and gas,
electric, and telephone will each be considered a separate industry).

3. Borrow money or issue senior securities, except that the Portfolio
may borrow from banks and enter into reverse repurchase agreements for
temporary defensive purposes in amounts not in excess of 10% of the
Portfolio's total assets at the time of such borrowing; or mortgage, pledge,
or hypothecate any assets, except in connection with any such borrowing and in
amounts not in excess of the lesser of the dollar amounts borrowed or 10% of
the Portfolio's total assets at the time of such borrowing; or purchase
securities while its borrowings exceed 5% of its total assets. A Portfolio's
transactions in futures and related options (including the margin posted by a
Portfolio in connection with such transactions), and securities held in escrow
or separate accounts in connection with a Portfolio's investment practices
described in this Statement of Additional Information are not subject to this
limitation.

4. Make loans, except that each Portfolio may purchase or hold debt
instruments, lend portfolio securities, enter into repurchase agreements and
make other investments in accordance with its investment objective and
policies.

5. Purchase securities on margin, make short sales of securities or
maintain a short position, except that (a) this investment limitation shall
not apply to a Portfolio's transactions in options, and futures contracts and
related options, and (b) a Portfolio may obtain short-term credits as may be
necessary for the clearance of purchases and sales of portfolio securities.

6. Make investments for the purpose of exercising control or management.

7. Purchase or sell real estate, provided that each Portfolio may invest
in securities secured by real estate or interests therein or issued by
companies or investment trusts which invest in real estate or interests
therein.

8. Act as an underwriter of securities within the meaning of the
Securities Act of 1933 except insofar as a Portfolio might be deemed to be an
underwriter upon disposition of portfolio securities acquired within the
limitation on purchases of restricted securities and except to the extent that
the purchase of obligations directly from the issuer thereof in accordance
with a Portfolio's investment objective, policies and limitations may be
deemed to be underwriting.

9. Purchase or sell commodity contracts, or invest in oil, gas or
mineral exploration or development programs, except that each of the Balanced
Portfolio and the Equity Income Portfolio may, to the extent appropriate to
its investment objective, purchase publicly traded securities of companies
engaging in whole or in part in such activities and may invest in futures
contracts and related options in accordance with their respective investment
activities and policies.

10. Act as an underwriter of securities within the meaning of the
Securities Act of 1933 except insofar as a Portfolio might be deemed to be an
underwriter upon disposition of portfolio securities acquired within the
limitation on purchases of restricted securities and except to the extent that
the purchase of obligations directly from the issuer thereof in accordance
with a Portfolio's investment objective, policies and limitations may be
deemed to be underwriting.

LORD ABBETT GROWTH AND INCOME PORTFOLIO

The Lord Abbett Growth and Income Portfolio may not:

1. sell short securities or buy securities or evidences of interests
therein on margin, although it may obtain short-term credit necessary for the
clearance of purchases of securities;

2. buy or sell put or call options, although it may buy, hold or sell
rights or warrants, write covered call options and enter into closing purchase
transactions as discussed below;

3. borrow money which is in excess of one-third of the value of its
total assets taken at market value (including the amount borrowed) and then
only from banks as a temporary measure for extraordinary or emergency purposes
(borrowings beyond 5% of such total assets may not be used for investment
leverage to purchase securities but solely to meet redemption requests where
the liquidation of the Portfolio's investment is deemed to be inconvenient or
disadvantageous);

4. lend money or securities to any person except that it may enter into
short-term repurchase agreements with sellers of securities it has purchased,
and it may lend its portfolio securities to registered broker-dealers where
the loan is 100% secured by cash or its equivalent as long as it complies with
regulatory requirements and the Portfolio deems such loans not to expose the
Portfolio to significant risk (investment in repurchase agreements exceeding 7
days and in other illiquid investments is limited to a maximum of 5% of a
Portfolio's assets);

5. pledge, mortgage or hypothecate its assets; however, this provision
does not apply to permitted borrowing mentioned above or to the grant of
escrow receipts or the entry into other similar escrow arrangements arising
out of the writing of covered call options;

6. buy or sell real estate including limited partnership interests
therein (except securities of companies, such as real estate investment
trusts, that deal in real estate or interests therein), or oil, gas or other
mineral leases, commodities or commodity contracts in the ordinary course of
its business, except such interests and other property acquired as a result of
owning other securities, though securities will not be purchased in order to
acquire any of these interests;

7. invest more than 5% of its gross assets, taken at market value at the
time of investment, in companies (including their predecessors) with less than
three years' continuous operation;

8. buy securities if the purchase would then cause a Portfolio to have
more than (i) 5% of its gross assets, at market value at the time of purchase,
invested in securities of any one issuer, except securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, or (ii)
25% of its gross assets, at market value at the time of purchase, invested in
securities issued or guaranteed by a foreign government, its agencies or
instrumentalities;

9. buy voting securities if the purchase would then cause a Portfolio to
own more than 10% of the outstanding voting stock of any one issuer;

10. own securities in a company when any of its officers, directors or
security holders is an officer or Trustee of the Trust or an officer, director
or partner of the investment adviser or sub-adviser, if after the purchase any
of such persons owns beneficially more than 1/2 of 1% of such securities and
such persons together own more than 5% of such securities;

11. concentrate its investments in any particular industry, but if
deemed appropriate for attainment of its investment objective, up to 25% of
its gross assets (at market value at the time of investment) may be invested
in any one industry classification used for investment purposes; or

12. buy securities from or sell them to the Trust's officers, directors,
or employees, or to the investment adviser or sub-adviser or to their
partners, directors and employees.

LARGE CAP RESEARCH, DEVELOPING GROWTH AND MID-CAP VALUE PORTFOLIOS

The Large Cap Research, Developing Growth and Mid-Cap Value Portfolios
may not:

1. borrow money, except that (i) the Portfolio may borrow from banks (as
defined in the Investment Company Act of 1940, as amended (the "1940 Act")) in
amounts up to 33 1/3% of its total assets (including the amount borrowed),
(ii) the Portfolio may borrow up to an additional 5% of its total assets for
temporary purposes, (iii) the Portfolio may obtain such short-term credit as
may be necessary for the clearance of purchases and sales of portfolio
securities and (iv) the Portfolio may purchase securities on margin to the
extent permitted by applicable law;

2. pledge its assets (other than to secure borrowings, or to the extent
permitted by the Portfolio's investment policies as permitted by applicable
law);

3. engage in the underwriting of securities, except pursuant to a merger
or acquisition or to the extent that, in connection with the disposition of
its portfolio securities, it may be deemed to be an underwriter under federal
securities laws;

4. make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers acceptances, repurchase agreements or any similar instruments
shall not be subject to this limitation, and except further that the Portfolio
may lend its portfolio securities, provided that the lending of portfolio
securities may be made only in accordance with applicable law;

5. buy or sell real estate (except that the Portfolio may invest in
securities directly or indirectly secured by real estate or interests therein
or issued by companies which invest in real estate or interests therein) or
commodities or commodity contracts (except to the extent the Portfolio may do
so in accordance with applicable law and without registering as a commodity
pool operator under the Commodity Exchange Act, as, for example, with futures
contracts);

6. with respect to 75% of the gross assets of the Portfolio, buy
securities of one issuer representing more than (i) 5% of the Portfolio's
gross assets, except securities issued or guaranteed by the U.S. Government,
its agencies or instrumentalities or (ii) 10% of the voting securities of such
issuer;

7. invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding securities of the
U.S. Government, its agencies and instrumentalities); or

8. issue senior securities to the extent such issuance would violate
applicable laws.

NON-FUNDAMENTAL INVESTMENT LIMITATIONS - QUALITY BOND PORTFOLIO, SELECT EQUITY
PORTFOLIO, LARGE CAP STOCK PORTFOLIO, SMALL CAP STOCK PORTFOLIO AND
INTERNATIONAL EQUITY PORTFOLIO

The investment limitation described below is not a fundamental policy of these
Portfolios and may be changed by the Trustees. This non-fundamental investment
policy requires that each such Portfolio may not:

(i) Acquire any illiquid securities, such as repurchase agreements with
more than seven days to maturity or fixed time deposits with a duration of
over seven calendar days, if as a result thereof, more than 15% of the market
value of the Portfolio's total assets would be in investments that are
illiquid;

(ii) Purchase any security if, as a result, the Portfolio would then have
more than 5% of its total assets invested in securities of companies
(including predecessors) that have been in continuous operation for fewer than
three years;

(iii) Invest in warrants (other than warrants acquired by the Portfolio
as part of a unit or attached to securities at the time of purchase) if, as a
result, the investments (valued at the lower of cost or market) would exceed
5% of the value of the Portfolio's net assets or if, as a result, more than 2%
of the Portfolio's net assets would be invested in warrants not listed on a
recognized U.S. or foreign stock exchange, to the extent permitted by
applicable state securities laws; or

(iv) Purchase or retain securities of any issuer if, to the knowledge of
the Portfolio, any of the Portfolio's officers or Trustees or any officer of
the Advisor individually owns more than 1/2 of 1% of the issuer's outstanding
securities and such persons owning more than 1/2 of 1% of such securities
together beneficially own more than 5% of such securities, all taken at
market.

NON-FUNDAMENTAL INVESTMENT LIMITATIONS - EMERGING MARKETS EQUITY PORTFOLIO

(i) Acquire securities of other investment companies, except as
permitted by the 1940 Act or any rule, order or interpretation thereunder, or
in connection with a merger, consolidation, reorganization, acquisition of
assets or an offer of exchange;

(ii) Acquire any illiquid securities, such as repurchase agreements with
more than seven days to maturity or fixed time deposits with a duration of
over seven calendar days, if as a result thereof, more than 15% of the market
value of the Portfolio's net assets would be in investments that are illiquid;

(iii) Sell any security short, unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold or unless it
covers such short sales as required by the current rules or positions of the
SEC or its staff. Transactions in futures contracts and options shall not
constitute selling securities short; or

(iv) Purchase securities on margin, but the Portfolio may obtain such
short term credits as may be necessary for the clearance of transactions.

NON-FUNDAMENTAL INVESTMENT LIMITATIONS - LARGE CAP RESEARCH, DEVELOPING GROWTH
AND MID-CAP VALUE PORTFOLIOS

Each Portfolio may not:

1. borrow in excess of 5% of its gross assets taken at cost or market
value, whichever is lower at the time of borrowing, and then only as a
temporary measure for extraordinary or emergency purposes;

2. make short sales of securities or maintain a short position except to
the extent permitted by applicable law;

3. invest knowingly more than 15% of its net assets (at the time of
investment) in illiquid securities, except for securities qualifying for
resale under Rule 144A of the Securities Act of 1933, deemed to be liquid by
the Board of Trustees;

4. invest in the securities of other investment companies as defined in
the 1940 Act except as permitted by applicable law;

5. invest in securities of issuers which, with their predecessors, have
a record of less than three years' continuous operations, if more than 5% of
the Portfolio's total assets would be invested in such securities (this
restriction shall not apply to mortgaged-backed securities, asset-backed
securities or obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities);

6. hold securities of any issuer if more than 1/2 of 1% of the
securities of such issuer are owned beneficially by one or more officers or
Trustees of the Trust or by one or more partners or members of the Trust's
underwriter or investment adviser if these owners in the aggregate own
beneficially more than 5% of the securities of such issuer;

7. invest in warrants if, at the time of the acquisition, its investment
in warrants, value at the lower of cost or market, would exceed 5% of the
Portfolio's total assets (included within such limitation, but not to exceed
2% of the Portfolio's total assets, are warrants which are not listed on the
New York or American Stock Exchange or a major foreign exchange);

8. invest in real estate limited partnership interests or interests in
oil, gas or other mineral leases, or exploration or other development
programs, except that the Portfolio may invest in securities issued by
companies that engage in oil, gas or other mineral exploration or other
development activities;

9. write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except to the extent permitted in the Portfolio's
prospectus and statement of additional information, as they may be amended
from time to time; or

10. buy from or sell to any of its officers, Trustees, employees, or its
investment adviser or any of its officers, directors, partners or employees,
any securities other than shares of the Portfolio's common stock.

DESCRIPTION OF SECURITIES RATINGS

A description of Corporate Bond Ratings is found in the Appendix to the
Prospectus.

COMMERCIAL PAPER RATINGS

COMMERCIAL PAPER

A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt having an original maturity of no
more than 365 days. Ratings are graded into four categories, ranging from "A"
for the highest quality obligations to "D" for the lowest. The four categories
are as follows:

<TABLE>
<CAPTION>
<S> <C>
A Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are
delineated with the numbers 1, 2 and 3 to indicate the relative
degree of safety. Those issues determined to possess overwhelming
safety characteristics are denoted with a plus (+) sign designation.

A-1 This designation indicates that the degree of safety regarding
timely payment is very strong.

A-2 Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as
overwhelming as for issues designated "A-1."

A-3 Issues carrying this designation have a satisfactory capacity for
timely of payment. They are, however, somewhat more vulnerable to
the adverse effects changes in circumstances than obligations
carrying the higher designations.

B Issues rated "B" are regarded as having only an adequate capacity
for timely payment. However, such capacity may be damaged by
changing conditions or short-term adversities.

C&D These ratings indicate that the issue is either in default or is
expected to be in default upon maturity.
</TABLE>

Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:

Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations.

Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations.

Issuers rated Prime-3 (or related supporting institutions) have an acceptable
capacity for repayment of short-term promissory obligations.

Issuers rated Not Prime do not fall within any of the Prime rating categories.

The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff &
Phelps employs three designations, "D-1+." "D-1" and "D-1-," within the
highest rating category. The following summarizes the rating categories used
by Duff & Phelps for commercial paper:

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

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

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

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

"D-3" - Debt possesses satisfactory liquidity, and other protection
factors qualify issue as investment grade. Risk factors are larger and subject
to more variation. Nevertheless, timely payment is expected.

"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.

"D-5" - Issuer has failed to meet scheduled principal and/or
interest payments.

Fitch short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years. The following
summarizes the rating categories used by Fitch for short-term obligations:

"F-1+" - Securities possess exceptionally strong credit quality.
Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.

"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."

"F-2" - Securities possess good credit quality. Issues assigned this
rating have a satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as the "F-1+" and "F-1" categories.

"F-3" - Securities possess fair credit quality. Issues assigned this
rating have characteristics suggesting that the degree of assurance for timely
payment is adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.

"F-S" - Securities possess weak credit quality. Issues assigned this
rating have characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes in financial
and economic conditions.

"D" - Securities are in actual or imminent payment default.

Fitch may also use the symbol "LOC" with its short-term ratings to
indicate that the rating is based upon a letter of credit issued by a
commercial bank.

Thomson BankWatch short-term ratings assess the likelihood of an untimely
or incomplete payment of principal or interest of unsubordinated instruments
having a maturity of one year or less which are issued by United States
commercial banks, thrifts and non-bank banks; non-United States banks; and
broker-dealers. The following summarizes the ratings used by Thomson
BankWatch:

"TBW-1" - This designation represents Thomson BankWatch's highest
rating category and indicates a very high degree of likelihood that principal
and interest will be paid on a timely basis.

"TBW-2" - This designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."

"TBW-3" - This designation represents the lowest investment grade
category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher
ratings, capacity to service principal and interest in a timely fashion is
considered adequate.

"TBW-4" - This designation indicates that the debt is regarded as
non-investment grade and therefore speculative.

IBCA assesses the investment quality of unsecured debt with an original
maturity of less than one year which is issued by bank holding companies and
their principal bank subsidiaries. The following summarizes the rating
categories used by IBCA for short-term debt ratings:

"A1+" - Obligations supported by the highest capacity for timely
repayment.

"A1" - Obligations are supported by a strong capacity for timely
repayment.

"A2" - Obligations are supported by a satisfactory capacity for
timely repayment, although such capacity may be susceptible to adverse changes
in business, economic or financial conditions.

"A3" - Obligations are supported by a satisfactory capacity for
timely repayment. Such capacity is more susceptible to adverse changes in
business, economic or financial conditions than for obligations in higher
categories.

"B" - Obligations for which the capacity for timely repayment is
susceptible to adverse changes in business, economic or financial conditions.

"C" - Obligations for which there is an inadequate capacity to
ensure timely repayment.

"D" - Obligations which have a high risk of default or which are
currently in default.

VARIABLE RATE DEMAND BOND RATINGS

Standard & Poor's assigns "dual" ratings to all long-term debt issues that
have as part of their provisions a variable rate demand or double feature.

The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand feature. The
long-term debt rating symbols are used for bonds to denote the long-term
maturity and the commercial paper rating symbols are used to denote the put
option (for example, 'AAA/A-1') or if the nominal maturity is short, a rating
of 'SP-1+/AAA' is assigned.

NOTES

A Standard & Poor's note rating reflects the liquidity concerns and market
access risks unique to notes. Notes due in 3 years or less will likely receive
a note rating. Notes maturing beyond 3 years will most likely receive a
long-term debt rating. The following criteria will be used in making that
assignment:

- - Amortization schedule (the longer the final maturity relative to
other maturities the more likely it will be treated as a note).

- - Source of payment (the more dependent the issue is on the market
for its refinancing, the more likely it will be treated as a note). Note
rating symbols are as follows:

SP-1 Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be given
a plus (+) designation.

SP-2 Satisfactory capacity to pay principal and interest.

SP-3 Speculative capacity to pay principal and interest.

PREFERRED STOCK RATINGS (STANDARD & POOR'S)

AAA This is the highest rating that may be assigned by Standard & Poor's
to a preferred stock issue and indicates an extremely strong capacity to pay
the preferred stock obligations.

AA A preferred stock issue rated 'AA' also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated 'AAA'.

A An issue rated 'A' is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.

BBB An issue rated 'BBB' is regarded as backed by an adequate capacity
to pay the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to make payments for a
preferred stock in this category than for issues in the 'A' category.

BB Preferred stock rated 'BB', 'B' and 'CCC' is regarded, on balance, as

B Predominantly speculative with respect to the issuer's capacity to pay

CCC preferred stock obligations. 'BB' indicates the lowest degree of
speculation and 'CCC' the highest degree of speculation. While such issues
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse
conditions.

CC The rating 'CC' is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments, but that is currently paying.

C A preferred stock rated 'C' is a non-paying issue.

D A preferred stock rated 'D' is a non-paying issue with the issuer in
default on debt instruments.

PLUS (+) OR MINUS (-): To provide more detailed indications of preferred
stock quality, the ratings from 'AA' to 'B' may be modified by the addition of
a plus or minus sign to show relative standing within the major rating
categories.

NR This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate
a particular type of obligation as a matter of policy.

A preferred stock rating is not a recommendation to purchase, sell, or
hold a security inasmuch as it does not comment as to market price or
suitability for a particular investor. The ratings are based on current
information furnished to S&P by the issuer or obtained by S&P from other
sources it considers reliable. S&P does not perform an audit in connection
with any rating and may, on occasion, rely on unaudited financial information.
The ratings may be changed, suspended, or withdrawn as a result of changes in,
or unavailability of, such information, or based on other circumstances.

MOODY'S INVESTORS SERVICE, INC. - A brief description of the applicable
Moody's Investors Service, Inc. rating symbols with respect to preferred stock
and their meanings (as published by Moody's Investors Service, Inc.) follows:

PREFERRED STOCK RATINGS (MOODY'S)

Preferred stock rating symbols and their definitions are as follows:

aaa: An issue which is rated 'aaa' is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least
risk of dividend impairment within the universe of preferred stocks.

aa: An issue which is rated 'aa' is considered a high-grade preferred
stock. This rating indicates that there is a reasonable assurance the earnings
and asset protection will remain relatively well maintained in the foreseeable
future.

a: An issue which is rated 'a' is considered to be an upper-medium
preferred stock. While risks are judged to be somewhat greater than in the
'aaa' and 'aa' classifications, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.

baa: An issue which is rated 'baa' is considered to be a medium grade
preferred stock, neither highly protected nor poorly secured. Earnings and
asset protection appear adequate at present but may be questionable over any
great length of time.

ba: An issue which is rated 'ba' is considered to have speculative
elements and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse
periods. Uncertainty of position characterizes preferred stocks in this class.

b: An issue which is rated 'b' generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.

caa: An issue which is rated 'caa' is likely to be in arrears on
dividend payments. This rating designation does not purport to indicate the
future status of payments.

ca: An issue which is rated 'ca' is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual
payment.

c: This is the lowest rated class of preferred or preference stock.
Issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.

NOTE: Beginning May 3, 1982, Moody's began applying numerical modifiers
1, 2 and 3 in each rating classification from "aa" through "b" in its
preferred stock rating system. The modifier 1 indicates that the security
ranks in the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates that the issue
ranks in the lower end of its generic rating category.

OFFICERS AND TRUSTEES

MANAGEMENT OF THE TRUST

<TABLE>
<CAPTION>
<S> <C> <C>
Principal Occupation During Past
Position(s) Five Years (and Positions held with
Held with Affiliated Persons or Principal
Name, Address and Age Registrant Underwriters of the Registrant)
- ------------------------------- ------------------------- -------------------------------------
Lorry J. Stensrud* President and Chief President of Cova Financial Services
One Tower Lane, Suite 3000 Executive Officer Life Insurance Company ("Cova Life")
Oakbrook Terrace, IL 60181-4644 since June, 1995; prior thereto,
Age: 48 Executive Vice President of Cova Life

William C. Mair* Vice President, Treasurer, Vice President and Controller of
One Tower Lane, Suite 3000 Controller, Chief Cova Life; Vice President, Treasurer
Oakbrook Terrace, IL 60181-4644 Financial Officer, Chief and Controller of Cova Investment
Age: 56 Accounting Officer and Advisory Corporation
Trustee

Stephen M. Alderman Trustee Partner in the law firm of Garfield
211 West Wacker Drive & Merel
Chicago, IL 60606
Age: 38

Theodore A. Myers Trustee Senior Financial Advisor; formerly
550 Washington Avenue Chief Financial Officer of Qualitech Steel
Glencoe, IL 60022 Corporation, 1990-1994; Director of 34
Age: 67 Van Kampen American Capital Mutual Funds;
member of Arthur Andersen C.F.O. Advisory
Committee.

Deborah A. Vohasek Trustee Principal, Vohasek Oetjen Marketing
7752 W. Lake Street
Morton Grove, IL 60053
Age: 34

R. Kevin Williams Trustee Partner in the law firm of
20 North Wacker Drive O'Donnell, Byrne & Williams from
Chicago, IL 60606 June 1993 through the present;
Age: 44 Associate Attorney, Sonnenberg,
Anderson, O'Donnell & Rodriguez,
September 1988 through May 1993

William H. Wilton Vice President Vice President & Actuary of Cova
One Tower Lane, Suite 3000 Life; Prior to October, 1992,
Oakbrook Terrace, IL 60181-4844 Associate Actuary, Allstate Life
Age: 37 Insurance Co., Northbrook, IL

* Interested person of the Trust within the meaning of the 1940 Act.
</TABLE>

Each Trustee of the Trust who is not an interested person of the Trust or
Adviser or Sub-Adviser receives an annual fee of $10,000 and an additional fee
of $1,000 for each Trustees' meeting attended. In addition, disinterested
Trustees who are members of any Board committees will receive a separate
$1,000 fee for attendance of any committee meeting that is held on a day on
which no Board meeting is held.

COMPENSATION TABLE

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
(1) (2) (3) (4) (5)
Pension or Total
Aggregate Retirement Estimated Compensation
Compensation Benefits Accrued Annual From Registrant
Name of Person, From As Part of Fund Benefits Upon and Fund Complex
Position Registrant Expenses Retirement Paid to Trustees
- ---------------------------- -------------- ----------------- -------------- ------------------

William C. Mair, N/A N/A N/A N/A
Vice President, Treasurer,
Controller, Chief Financial
Officer, Chief Accounting
Officer and Trustee

Stephen M. Alderman, $______ N/A N/A $______
Trustee

Theodore A. Myers, $______ N/A N/A $______
Trustee

Deborah A. Vohasek, $______ N/A N/A $______
Trustee

R. Kevin Williams, $______ N/A N/A $______
Trustee
</TABLE>

SUBSTANTIAL SHAREHOLDERS

Shares of the Trust are issued and redeemed in connection with investments
in and payments under certain variable annuity contracts and variable life
insurance policies ("Variable Contracts") issued by Cova Financial Services
Life Insurance Company and/or its affiliated insurance companies. On April
1, 1998, Cova Variable Annuity Account One, a separate account of Cova
Financial Services Life Insurance Company, Cova Variable Annuity Account Five,
a separate account of Cova Financial Life Insurance Company, First Cova
Variable Annuity Account One, a separate account of First Cova Life Insurance
Company, together were known to the Board of Trustees and the management of
the Trust to own of record __% of the Trust's shares. Cova Financial Services
Life Insurance Company, which contributed the initial capital to certain
Portfolios of the Trust, owned of record __% of the Trust's shares as of
April 1, 1998.

OWNERSHIP BY CERTAIN BENEFICIAL OWNERS

Cova Life has advised the Trust that as of ______________, there were no
persons owning Variable Contracts which would entitle them to instruct Cova
Life with respect to more than 5% of the voting securities of the Trust.

CUSTODIAN

Investors Bank & Trust Company, 89 South Street, Boston, Massachusetts 02111,
is the custodian of the Trust and has custody of all securities and cash of
the Trust. The custodian, among other things, attends to the collection of
principal and income, and payment for and collection of proceeds of securities
bought and sold by the Trust.

PERFORMANCE DATA

As required by regulations of the Securities and Exchange Commission, the
annualized total return of the Portfolios for a period is computed by assuming
a hypothetical initial payment of $1,000. It is then assumed that all of the
dividends and distributions by the Portfolio over the period are reinvested.
It is then assumed that at the end of the period, the entire amount is
redeemed. The annualized total return is then calculated by determining the
annual rate required for the initial payment to grow to the amount which would
have been received upon redemption.

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 a Portfolio over a period of one, five and ten years (or, if less,
up to the life of a Portfolio, calculated pursuant to the formula:

(n)
P(1 + T) = ERV

Where: P = a hypothetical initial payment of $1,000
T = an average annual total return
n = the number of years
ERV = the ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 1, 5, or 10 year period at the
end of the 1, 5, or 10 year period (or fractional portion
thereof)

LEGAL COUNSEL AND INDEPENDENT AUDITORS

Blazzard, Grodd & Hasenauer, P.C., Westport, Connecticut is counsel to the
Trust and passes upon the legality of the Trust's shares.

The independent auditors for the Trust are KPMG Peat Marwick, LLP, 99 High
Street, Boston, Massachusetts 02110.

INVESTMENT ADVISORY AGREEMENT

Cova Investment Advisory Corporation (the "Investment Adviser"), One Tower
Lane, Suite 3000, Oakbrook Terrace, Illinois 60181-4644 is an Illinois
corporation which was incorporated on August 31, 1993 under the name Oakbrook
Investment Advisory Corporation and which is registered with the Securities
and Exchange Commission as an investment adviser under the Investment Advisers
Act of 1940. The Investment Adviser is a wholly-owned subsidiary of Cova Life
Management Company, a Delaware corporation, which in turn, is a wholly-owned
subsidiary of Cova Corporation, a Missouri corporation, which in turn, is a
wholly-owned subsidiary of General American Life Insurance Company ("General
American"), a St. Louis-based mutual company. General American has more than
$235 billion of life insurance in force and approximately $9.6 billion in
assets.

The Investment Adviser commenced providing investment advisory services to all
Portfolios of the Trust as of May 1, 1996 pursuant to an Investment Advisory
Agreement dated April 1, 1996, as amended ("Investment Advisory Agreement").
Prior to this date, VKAC had acted as the investment adviser to all Portfolios
of the Trust. The Investment Advisory Agreement, between the Investment
Adviser and the Trust, was approved by shareholders of the Trust at a Special
Meeting of Shareholders held on February 9, 1996 and was reapproved by the
Board of Trustees of the Trust on ___________, 1998. An Amendment to the
Investment Advisory Agreement providing for the addition of eight new
Portfolios to the Agreement was approved by the Board of Trustees of the Trust
on April 22, 1997 and by Cova Financial Services Life Insurance Company, as
sole shareholder of the eight new Portfolios, on April 28, 1997. An Amendment
to the Investment Advisory Agreement, providing for the addition of the
Emerging Markets Equity Portfolio, was approved by the Board of Trustees of
the Trust on ______________, 1998, and by Cova Financial Services Life
Insurance Company, as sole shareholder of the Portfolio, on _____________, 1998.

As described in the Prospectus, the Investment Adviser has retained
Sub-Advisers to assist it in managing the Portfolios. The Sub-Advisory
Agreement between the Investment Adviser and Van Kampen American Capital
Investment Advisory Corp. was reapproved by the Board of Trustees, including
a majority of the independent Trustees, at a meeting held on ___________,
1998 and was approved by the shareholders of the Trust at a Special Meeting
held on February 9, 1996. The Sub-Advisory Agreements between the Investment
Adviser and Lord, Abbett & Co. (with respect to the Bond Debenture Portfolio)
and between the Investment Adviser and J. P. Morgan Investment Management
Inc., respectively, were reapproved by the Board of Trustees, including a
majority of the independent Trustees, on _____________, 1998. Cova Financial
Services Life Insurance Company, as sole shareholder of the Portfolios for
which J. P. Morgan Investment Management Inc. and Lord, Abbett & Co. act as
Sub-Advisers, approved the Sub-Advisory Agreements between the Investment
Adviser and each of these two Sub-Advisers by way of corporate resolutions
adopted in April of 1996. An Amendment to the Sub-Advisory Agreement
between the Adviser and J.P. Morgan Investment Management, Inc., providing for
the addition of the Emerging Markets Equity Portfolio, was approved by the
Board of Trustees of the Trust on _____________, 1998, and by Cova Financial
Services Life Insurance Company, as sole shareholder of the Portfolio, on
_____________, 1998. The Sub-Advisory Agreements between the Investment
Adviser and Mississippi Valley Advisors Inc. ("MVA") and between the
Investment Adviser and Lord, Abbett & Co. (with respect to the Mid-Cap Value
Portfolio, Large Cap Research Portfolio, Developing Growth Portfolio and Lord
Abbett Growth and Income Portfolio), respectively, were approved by the Board
of Trustees, including a majority of the independent Trustees, on
April 22, 1997. Cova Financial Services Life Insurance Company, as sole
shareholder of the Portfolios for which MVA acts as Sub-Adviser and as sole
shareholder of the Portfolios listed above for which Lord, Abbett & Co. acts
as Sub-Adviser, approved the Sub-Advisory Agreements between the Investment
Adviser and each of these two Sub-Advisers by way of corporate resolutions
adopted on April 28, 1997.

Under the terms of the Investment Advisory Agreement, the Investment Adviser
is obligated to (i) manage the investment and reinvestment of the assets of
each Portfolio of the Trust in accordance with each Portfolio's investment
objective and policies and limitations, or (ii) in the event that the
Investment Adviser shall retain a sub-adviser or sub-advisers, to supervise
and implement the investment activities of any Portfolio for which any such
sub-adviser has been retained, including responsibility for overall management
and administrative support including managing, providing for and compensating
any sub-advisers; and to administer the Trust's affairs. The Investment
Advisory Agreement further provides that the Investment Adviser agrees, among
other things, to administer the business affairs of each Portfolio, to furnish
offices and necessary facilities and equipment to each Portfolio, to provide
administrative services for each Portfolio, to render periodic reports to the
Board of Trustees of the Trust with respect to each Portfolio, and to permit
any of its officers or employees, or those of any sub-adviser to serve without
compensation as trustees or officers of the Portfolio if elected to such
positions.

The Investment Advisory Agreement provides that the Investment Adviser will
not be liable for any error in judgment or of law, or for any loss suffered by
the Trust in connection with the matters to which the agreement relates,
except a loss resulting from willful misfeasance, bad faith, or gross
negligence on the part of the Investment Adviser in the performance of its
obligations and duties, or by reason of its reckless disregard of its
obligations and duties under the Agreement.

The Investment Adviser's activities are subject to the review and supervision
of the Trust's Trustees to whom the Investment Adviser renders periodic
reports of the Trust's investment activities.

The Investment Advisory Agreement may be terminated without penalty upon 60
days written notice by either party and will automatically terminate in the
event of assignment.

INVESTMENT DECISIONS

Investment decisions for the Trust and for the other investment advisory
clients of the Sub-Advisers are made with a view to achieving their respective
investment objectives and after consideration of such factors as their current
holdings, availability of cash for investment, and the size of their
investments generally. Frequently, a particular security may be bought or sold
for only one client or in different amounts and at different times for more
than one but less than all clients. Likewise, a particular security may be
bought for one or more clients when one or more other clients are selling the
security. In addition, purchases or sales of the same security may be made for
two or more clients of a Sub-Adviser on the same day. In such event, such
transactions will be allocated among the clients in a manner believed by the
Sub-Adviser to be equitable to each. In some cases, this procedure could have
an adverse effect on the price or amount of the securities purchased or sold
by the Trust. Purchase and sale orders for the Trust may be combined with
those of other clients of a Sub-Adviser in the interest of achieving the most
favorable net results for the Trust.

PORTFOLIO TRANSACTIONS

Transactions on U.S. stock exchanges and other agency transactions involve the
payment by the Trust 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. Transactions in foreign securities often involve the payment of
fixed brokerage commissions, which are generally higher than those in the
United States. There is generally no stated commission in the case of
securities traded in the over-the-counter markets, but the price paid by the
Trust usually includes an undisclosed dealer commission or mark-up. In
underwritten offerings, the price paid by the Trust includes a disclosed,
fixed commission or discount retained by the underwriter or dealer. It is
currently intended that the Sub-Advisers will place all orders for the
purchase and sale of portfolio securities for the Trust and buy and sell
securities for the Trust through a substantial number of brokers and dealers.
In so doing, the Sub-Advisers will use their best efforts to obtain for the
Trust the best price and execution available. In seeking the best price and
execution, the Sub-Advisers, having in mind the Trust's best interests, will
consider all factors they deem relevant, including, by way of illustration,
price, the size of the transaction, the nature of the market for the security,
the amount of the commission, the timing of the transaction taking into
account market prices and trends, the reputation, experience, and financial
stability of the broker-dealer involved, and the quality of service rendered
by the broker-dealer in other transactions.

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, statistical, and quotation services from
broker-dealers who execute portfolio transactions for the clients of such
advisers. Consistent with this practice, the Sub-Advisers may receive
research, statistical, and quotation services from any broker-dealers with
whom they place the Trust'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 Sub-Advisers and/or
their affiliates in advising various other clients (including the Trust),
although not all of these services are necessarily useful and of value in
managing the Trust. The management fees paid by the Trust are not reduced
because the Sub-Advisers and/or their affiliates may receive such services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, a
Sub-Adviser may cause a Portfolio to pay a broker-dealer who provides
brokerage and research services to the Sub-Adviser 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 provided that the Sub-Adviser determines in good faith that
such commission was reasonable in relation to the value of the brokerage and
research services provided by such broker-dealer viewed in terms of that
particular transaction or in terms of all of the accounts over which
investment discretion is so exercised. A Sub-Adviser's authority to cause a
Portfolio to pay any such greater commissions is also subject to such policies
as the Adviser or the Trustees may adopt from time to time.

FINANCIAL STATEMENTS

The financial statements, notes and reports of the Independent Auditors for
each of the Portfolios of the Trust.

[TO BE FILED BY AMENDMENT]

PART C
OTHER INFORMATION

ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS

(A) FINANCIAL STATEMENTS

To be filed by amendment.

(B) EXHIBITS

(1) Declaration of Trust(4)
(2) By-laws of Trust(4)
(3) Not Applicable
(4) Not Applicable
(5)(a)(i) Form of Investment Advisory Agreement(4)
(a)(ii) Form of Amendment to Investment Advisory Agreement(6)
(a)(iii) Form of Amendment to Investment Advisory Agreement (to be filed
by amendment)
(b)(i) Form of Sub-Advisory Agreement - Lord, Abbett & Co.(4)
(b)(ii) Form of Sub-Advisory Agreement - J.P. Morgan Investment
Management Inc.(4)
(b)(iii)Form of Sub-Advisory Agreement - Van Kampen American
Capital Investment Advisory Corp.(4)
(b)(iv) Form of Sub-Advisory Agreement - Mississippi Valley
Advisors Inc.(6)
(b)(v) Form of Amendment to Sub-Advisory Agreement - Lord, Abbett
& Co. - (Mid-Cap Value Portfolio, Large Cap Research Portfolio,
Developing Growth Portfolio and Lord Abbett Growth and
Income Portfolio)(6)
(b)(vi) Form of Amendment to Sub-Advisory Agreement - Emerging
Markets Equity Portfolio (to be filed by amendment)
(6)(a) Principal Underwriters Agreement(2)
(6)(b) Form of Addendum to Principal Underwriters Agreement(3)
(7) Not Applicable
(8)(a) Custodian Contract (5)
(8)(b) Not Applicable
(9)(a) Agency and Service Agreement(1)
(b) Administration Agreement (5)
(10) Consent and Opinion of Counsel (to be filed by amendment)
(11) Consent of Independent Auditors (to be filed by amendment)
(12) Not Applicable
(13) Agreement Governing Contribution of Capital(1)
(14) Not Applicable
(15) Not Applicable
(16) Schedule for Computation of Performance Quotations (to be filed by
amendment)
(27) Financial Data Schedules (to be filed by amendment)

(1) incorporated by reference to Registrant's initial registration on
Form N-1A filed on July 23, 1987.

(2) incorporated by reference to Registrant's Post-Effective Amendment No. 8
filed on May 1, 1993.

(3) incorporated by reference to Registrant's Post-Effective Amendment No. 10
filed on January 14, 1994.

(4) incorporated by reference to Registrant's Post-Effective Amendment No. 14
filed electronically on April 26, 1996.

(5) incorporated by reference to Registrant's Post-Effective Amendment No. 15
filed electronically on October 18, 1996.

(6) incorporated by reference to Registrant's Post-Effective Amendment No. 17
filed electronically on April 25, 1997.

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

The shares of the Trust are currently sold to Cova Variable Annuity Account
One of Cova Financial Services Life Insurance Company, Cova Variable Annuity
Account Five of Cova Financial Life Insurance Company and First Cova Variable
Annuity Account One of First Cova Life Insurance Company which together control
all Portfolios of the Trust through their share ownership thereof.

ITEM 26. NUMBER OF HOLDERS OF SECURITIES

Cova Variable Annuity Account One and Cova Variable Annuity Account Five own
all shares of beneficial interest of the Trust.

ITEM 27. INDEMNIFICATION

Please see Article 5.3 of the Registrant's Agreement and Declaration of Trust
(Exhibit 1) for indemnification of officers and trustees. Registrant's
trustees and officers are also covered by an Errors and Omissions Policy.
Section 5 of the Investment Advisory Agreement between the Registrant and Cova
Investment Advisory Corporation ("Adviser") provides that in the absence of
willful misfeasance, bad faith, gross negligence or reckless disregard of
the obligations or duties under the Investment Advisory Agreement on the part
of the Adviser, the Adviser shall not be liable to the Registrant or to any
shareholder of the Registrant for any error in judgment or of law, or for any
loss suffered by the Registrant in connection with the matters to which the
Investment Advisory Agreement relates.

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

ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER

See "Management of the Trust" in the Prospectus and "Officers and Trustees" in
the Statement of Additional Information for information regarding the
Investment Adviser. For information as to the business, profession, vocation
or employment of a substantial nature of each of the officers and directors of
the Investment Adviser, reference is made to the Investment Adviser's current
Form ADV filed under the Investment Advisers Act of 1940, incorporated herein
by reference (File No. 801-45567).

With respect to information regarding the Sub-Advisers, reference is hereby
made to "Management of the Trust" in the Prospectus. For information as to the
business, profession, vocation or employment of a substantial nature of each
of the officers and directors of the Sub-Advisers, reference is made to the
current Form ADVs of the Sub-Advisers filed under the Investment Advisers Act
of 1940, incorporated herein by reference and the file numbers of which are as
follows:

Van Kampen American Capital Investment Advisory Corp.
File No. 801-18161

Lord, Abbett & Co.
File No. 801-6997

J.P. Morgan Investment Management Inc.
File No. 801-21011

Mississippi Valley Advisors Inc.
File No. 801-28897

ITEM 29. PRINCIPAL UNDERWRITER

Not Applicable

ITEM 30. LOCATION OF ACCOUNTS AND RECORDS

All accounts, books and other documents required by Section 31(a) of the
Investment Company Act of 1940 and the Rules thereunder to be maintained (i)
by Registrant will be maintained at its offices, located at One Tower Lane,
Suite 3000, Oakbrook Terrace, Illinois 60181-4644 or at Investors Bank & Trust
Company, 89 South Street, Boston, Massachusetts 02111; and (ii) by the Adviser
will be maintained at its offices, located at One Tower Lane, Suite 3000,
Oakbrook Terrace, Illinois 60181-4644; and (iii) by each of the Sub-Advisers
at their respective offices as follows: Van Kampen American Capital Investment
Advisory Corp., One Parkview Plaza, Oakbrook Terrace, Illinois 60181; J.P.
Morgan Investment Management Inc., 522 Fifth Avenue, New York, NY 10036; Lord,
Abbett & Co., The General Motors Building, 767 Fifth Avenue, New York, NY
10153-0203; and Mississippi Valley Advisors Inc., One Mercantile Center, Suite
2100, Saint Louis, Missouri 63101.

ITEM 31. MANAGEMENT SERVICES

Not Applicable.

ITEM 32. UNDERTAKINGS

The Registrant will furnish each person to whom a prospectus is delivered with
a copy of the Registrant's latest Annual Report upon request and without
charge.

Registrant hereby undertakes to file a post-effective amendment, including
financial statements which need not be audited, within 4-6 months from
the later of the commencement of operations of the Emerging Markets
Equity Portfolio of the Registrant or the effective date of Post-Effective
Amendment No. 18 to the Registrant's 1933 Act Registration Statement.

SIGNATURES

Pursuant to the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant has duly caused this Post-Effective Amendment
No. 18 to its Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Oakbrook Terrace,
and State of Illinois on the 9th day of February, 1998.

COVA SERIES TRUST

By: /s/ LORRY J. STENSRUD
_____________________________________
Lorry J. Stensrud
President

Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 18 has been signed below by the following persons
in the capacities and on the date indicated.

<TABLE>
<CAPTION>
<S> <C> <C>
SIGNATURE TITLE DATE

/s/ LORRY J. STENSRUD President 2/9/98
- ----------------------- (Principal Executive Officer) -------
Lorry J. Stensrud

Vice President, Treasurer,
/S/WILLIAM C. MAIR* Controller and Trustee (Prin- 2/9/98
- ----------------------- cipal Financial Officer and -------
William C. Mair Principal Accounting Officer)

/S/WILLIAM H. WILTON* Vice President 2/9/98
- ----------------------- -------
William H. Wilton

/S/STEPHEN M. ALDERMAN* Trustee 2/9/98
- ----------------------- -------
Stephen M. Alderman

/S/THEODORE A. MYERS* Trustee 2/9/98
- ----------------------- -------
Theodore A. Myers

/S/DEBORAH A. VOHASEK* Trustee 2/9/98
- ----------------------- -------
Deborah A. Vohasek

/S/R. KEVIN WILLIAMS* Trustee 2/9/98
- ----------------------- -------
R. Kevin Williams
</TABLE>

*By: /s/ LORRY J. STENSRUD
___________________________________
Lorry J. Stensrud, Attorney-in-Fact