BT INSTITUTIONAL FUNDS, 485APOS, 1998-11-24

BT INSTITUTIONAL FUNDS
485APOS, 1998-11-24

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1933 Act File No. 33-34079
1940 Act File No. 811-6071

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form N-1A

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

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

Post-Effective Amendment No. _24_ ...................... X

and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X

Amendment No. 32 ................................... X
------- ---

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

5800 Corporate Drive
Pittsburgh, PA 15237-7010
(Address of Principal Executive Offices)

(412) 288-1900
(Registrant's Telephone Number)

Jay S. Neuman, Esquire Copies to: Burton M. Leibert, Esq.
Federated Investors Tower Willkie Farr & Gallagher
Pittsburgh, Pennsylvania 15222-3779 787 Seventh Avenue
(Name and Address of Agent for Service) New York, New York 10019

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

[ ] immediately upon filing pursuant to paragraph (b) [ ] on (date) pursuant to
paragraph (b) [X] 60 days after filing pursuant to paragraph (a)(1) [ ] on ____
pursuant to paragraph (a)(1) [ ] 75 days after filing pursuant to paragraph
(a)(2) [ ] on (date) pursuant to paragraph (a)(2) of rule 485.

If appropriate, check the following box:

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

BT Investment Portfolios and International Equity Portfolio have also executed
this Registration Statement.

BT Institutional Funds

Information About Investing in the
International Small Company Equity Fund

With the goal of achieving long-term capital appreciation through investment
primarily in stocks and other equity securities of small companies in
developed countries outside the United States

Prospectus
January 31, 1999

Bankers Trust Company
Investment Adviser

Like shares of all mutual funds, these securities have not been approved or
disapproved by the Securities and Exchange Commission nor has the Securities and
Exchange Commission passed

<PAGE>

upon the accuracy or adequacy of this prospectus. Any representation to the
contrary is a criminal offense.

<PAGE>

TABLE OF CONTENTS

INSTITUTIONAL INTERNATIONAL SMALL COMPANY EQUITY FUND OVERVIEW

Goal...........................................................3
Core Strategy..................................................4
Principal Risks of Investing in the Fund.......................5
Who Should Consider Investing in the Fund......................6
Total Returns, After Fees and Expenses.........................7
Annual Fund Operating Expenses.................................8

INSTITUTIONAL INTERNATIONAL SMALL COMPANY EQUITIES FUND IN DETAIL

Objective......................................................9
Strategy ......................................................10
Principal Investments..........................................11
Investment Process.............................................12
Risks..........................................................14
Management of the Fund.........................................19
Board of Trustees........................................19
Investment Adviser and Sub-Adviser.......................20
Portfolio Manager........................................21
Administrator............................................22
Organizational Structure.................................23

SHAREHOLDER INFORMATION
Calculating the Fund's Share Price...................................24
Dividends and Distributions..........................................25
Tax Considerations...................................................26
Managing Your Account................................................27
Contacting BT Institutional Funds..............................27
Minimum Account Investments....................................27
Opening a Fund Account.........................................27
Buying and Selling Shares......................................28
Exchange Privilege.............................................29
Financial Highlights.................................................31

<PAGE>

INTERNATIONAL SMALL COMPANY EQUITY FUND OVERVIEW

Goal
The Fund invests for long-term capital appreciation.

<PAGE>

Core Strategy

The Fund invests primarily in the stocks and other securities with equity
characteristics of small companies in developed countries outside the United
States.

<PAGE>

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

An investment in the Fund could also lose money, or under perform alternative
investments as a result of risks in the foreign countries in which the Fund
invests: o Adverse economic or social developments could undermine the value of
the
Fund's investments or prevent the Fund from realizing their full value; o
Different accounting and financial reporting standards, or less stringent
enforcement of these standards, could convey incomplete or inaccurate
information about a Fund investment; or
o The currency of a country in which the Fund invests may fluctuate in value
relative to the U.S. dollar, which could affect the value of the investment
itself to U.S. investors.

<PAGE>

Who Should Consider Investing in the Fund
The Institutional International Small Company Equity Fund requires a minimum
investment of $5 million. You should consider investing in the Fund if you are
seeking long-term capital appreciation. There is, of course, no guarantee that
the Fund will realize its goal. Moreover, you should be willing to accept
greater short-term fluctuation in the value of your investment than you would
typically experience investing in certain stocks, bonds or money market funds.

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

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

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

<PAGE>

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

<PAGE>

Annual Fund Operating Expenses (expenses paid from Fund assets)

This table describes the fees and expenses that you may pay if you buy and hold
shares of the Institutional International Small Company Equity Fund.

- --------------------------------------------------------------------------
percentage of average
daily net assets*
- --------------------------------------------------------------------------
Management Fees 1.10%
- --------------------------------------------------------------------------
Distribution and Service (12b-1) Fees none
- --------------------------------------------------------------------------
Other Expenses 45.52%
- --------------------------------------------------------------------------
Total Fund Operating Expenses 46.62%+
- --------------------------------------------------------------------------
Less: Fee Waivers and Expense
Reimbursements (44.72%)**
- --------------------------------------------------------------------------
Net Expenses 1.20%
- --------------------------------------------------------------------------

* Information on the annual operating expenses reflects the expenses of both the
Fund and the International Small Company Equity Portfolio, the master fund in
which Institutional International Small Company Equity Fund invests. (A further
discussion of the relationship between the Fund and the Portfolio appears in the
"Organizational Structure" section of this prospectus.) ** Bankers Trust has
agreed, for the 16-month period from the Fund's fiscal year end of September 30,
1998, to waive its fees and reimburse expenses, so that total expenses will not
exceed 1.20%. + This Fund has been in operation for three months. Generally,
when a fund begins operations, its expenses are relatively high and its assets
are relatively small, which makes its total fund operating expenses (expressed
as a percentage of average daily net assets) relatively high compared to funds
with longer operating histories and greater assets.

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

Example
- -------------------
1 year 3 years
- -------------------
$122 $381
- -------------------

<PAGE>

You may use this hypothetical example to compare the Fund's expense ratio with
other funds.* The example does not represent an estimate of future returns or
expenses. Actual costs may be higher or lower.

INSTITUTIONAL SMALL COMPANY EQUITY FUND IN DETAIL

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

[SIDEBAR: We define a "small company" as, at the time of purchase, having
publicly traded shares with a market capitalization within the market
capitalization range of the Salomon Brothers Extended Market Index of the World
ex-U.S. (Total). A small company's market capitalization may also appreciate
beyond the $1 billion cap while shares are held by the Fund.]

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

<PAGE>

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

[SIDEBAR: Replacement value measures the cost per share of replacing all the
physical assets of a business at current prices.]

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

<PAGE>

Principal Investments
When the Fund is fully invested, it intends to hold the shares of roughly 50 to
80 small companies. It focuses principally on companies with publicly traded
shares with a market capitalization within the market capitalization range of
the Salomon Brothers Extended Market Index of the World ex-U.S. (Total).

[SIDEBAR: This niche offers a large opportunity. The Salomon Brothers Extended
Market Index of the World ex-U.S. (Total), one of the principal global small
company stock benchmarks, includes 4,500 companies representing an estimated 20%
of the total value of the world's stocks.]

Over the long term, small companies have provided good returns compared to most
bonds or money-market funds. Small companies remain under-researched both in the
United States and to an even greater extent abroad, so they may offer fertile
ground for finding substantially undervalued stocks. Moreover, the Fund offers
an opportunity to invest in companies that often slip beneath the screens of the
"large-cap" mutual funds.

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

<PAGE>

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

<PAGE>

Portfolio Turnover
The annual portfolio turnover rate measures the frequency that the Portfolio
sells and replaces the value of its securities within one year. An annual
portfolio turnover rate of 100% means that the Portfolio sold and purchased
investments equal to the average value of the Portfolio for a given year. High
turnover can increase the Fund's transaction costs, thereby lowering its
returns. It may also increase your tax liability. The Fund does not have a
target portfolio turnover rate. Its turnover will depend on the Investment
Adviser's assessment of how often to trade, in light of market conditions and
the Fund's investment objective.

<PAGE>

Risks
Below we set forth some of the prominent risks associated with small company
investing and investing outside the United States, along with those of investing
in general. We also detail our methods for dealing with these risks. Although we
attempt to assess the likelihood that these risks may actually occur and to
limit them, we make no guarantee that we will succeed.

Primary Risks

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

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

<PAGE>

Political Risk
Some foreign governments have been more willing to impose high taxes on
corporate profits, to limit the outflow of profits to investors abroad, to
extend diplomatic disputes to include trade and financial relations, and to
impose high taxes on corporate profits. These political risks have not occurred
recently in the major countries in which the Fund invests. We employ exhaustive
country and regional analysis to try to anticipate such eventualities.

Information Risk
Financial reporting standards for companies based in foreign markets differ from
those in the United States. Not only do the numbers themselves sometimes mean
different things, but the information conveyed may not be as complete or
accurate as in the United States. The Investment Adviser thus devotes much of
its research effort to on-site visits and independent assessment of a company's
financial conditions and prospects.

Foreign Stock Market Risk
From time to time, foreign capital markets have exhibited more volatility than
those in the United States. Trading stocks on some foreign exchanges is
inherently more difficult than trading in the United States for reasons
including:

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

<PAGE>

o Settlement Risk. Some foreign exchanges may take longer to settle trades, and
security prices can vary substantially in the interim.

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

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

Currency Risk
The Fund invests in foreign securities denominated in foreign currencies. This
creates the possibility that changes in foreign exchange rates will affect the
value of foreign securities or the U.S. dollar amount of income or gain received
on these securities. Bankers Trust's currency management team seeks to minimize
this risk by hedging currencies that are likely to decline.

SIDEBAR: Hedging is a strategy designed to offset investment risks. Hedging
activities include the use of forward contracts and may include the use of other
instruments. The Fund uses hedging activities to reduce risk and in no case will
it acquire securities for hedging that would increase risk above the level
associated with conventional investments.

<PAGE>

Secondary Risks

Emerging Markets Risk
To the extent that the Fund invests in emerging markets to enhance overall
returns, it may face higher stock market, information and political risks. In
addition, profound social change and business practices that depart from
developed countries' economies norms have hindered the orderly growth of
emerging economies and their stock markets in the past. High levels of debt have
tended to make emerging economies heavily reliant on foreign capital and
vulnerable to capital flight. For all these reasons, the Fund carefully limits
and balances its commitment to these markets.

Euro Conversion Risk
The planned conversion by several major European nations to a single, uniform
monetary system, known by its new currency, the euro, and scheduled to begin
January 1, 1999, could conceivably cause disruptions in the smooth functioning
of the world's stock markets. With our service providers, we are jointly
addressing these problems.

Year 2000 Risk
As with most businesses, the Fund faces the risk that the computer systems of
its Investment Adviser and other companies on which it relies for services or in
which it invests will not accommodate the changeovers necessary from dates in
the year 1999 to dates in the year 2000. We are working both internally and with
our business partners and service providers to address this problem. If we - or
our business partners, service providers, government agencies or other market
participants - do not succeed, it could materially affect shareholder services
or it could affect the value of the Fund's shares.

<PAGE>

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

<PAGE>

Management of the Fund

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

<PAGE>

Investment Adviser and Sub-Adviser
Under the supervision of the Board of Trustees, Bankers Trust Company, with
headquarters at 130 Liberty Street, New York, N.Y. 10006, acts as the Fund's
investment adviser, exercises day-to-day investment oversight and assumes
responsibility for the securities the Fund owns. Bankers Trust has, in turn,
vested day-to-day investment decision-making and implementation in a
sub-adviser, the wholly owned entity BT Fund Managers (International) Limited.
Bankers Trust's and BTFMI's fee for these services is 1.10%, of the Fund's
average daily net assets.

As of September 30, 1998, Bankers Trust was the seventh largest bank holding
company in the United States with total assets of approximately $150 billion.
Bankers Trust is a worldwide merchant bank dedicated to servicing the needs of
corporations, governments, financial institutions and private clients through a
global network of over 90 offices in more than 50 countries.

Bankers Trust's officers bring wide experience to managing both the Fund and its
Portfolio. The firm's own record dates back to its founding as a trust company
in 1903. It has invested retirement assets on behalf of the nation's largest
corporations and institutions for more than 50 years. Today, the assets under
its global management exceed $350 billion. The scope of the firm's capability is
broad: It is a leader in both the active and passive quantitative investment
disciplines and maintains a major presence in stock and bond markets worldwide.
BTFMI, a subsidiary of Bankers Trust with headquarters at Level 15, The Chifley
Tower, 2 Chifley Square, Sydney, N.S.W. 2000 Australia, offers a decade of
research and investing experience in small companies worldwide to a number of
private clients. It has developed a team dedicated exclusively to the small
company discipline.

<PAGE>

Portfolio Manager
Monik Kotecha, is responsible for the day-to-day management of the Fund's
investments:

o Head Portfolio Manager BT Fund Management (International) Limited and Vice
President, BT Australia, Ltd.

o Joined Bankers Trust in 1994 as analyst for European small company
investments.

o Head of BTFMI's Global Small Company Investments and head of Global Small Cap
Equity since 1996.

o Eight years of investment management and research experience with Abu Dhabi
Investment Authority in London, U.K.

o BSc. honors degree in law and accountancy from University College, Cardiff;
MSc. from City University Business School, London, U.K.

<PAGE>

Other Services
Bankers Trust provides administrative services - such as portfolio accounting,
legal services and others - for the Fund. In addition, Bankers Trust, or your
broker or financial adviser, performs the functions necessary to establish and
maintain your account. In addition to setting up the account and processing your
purchase and sale orders, these functions include:

o keeping accurate, up-to-date records for your individual Fund account;

o implementing any changes you wish to make in your account information;

o processing your requests for cash dividends and distributions from the Fund;

o answering your questions on the Fund's investment performance or
administration;

o sending proxy reports and updated prospectus information to you; and

o collecting your executed proxies and forwarding them to the Fund's trustees.

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

<PAGE>

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

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

<PAGE>

SHAREHOLDER INFORMATION

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

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

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

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

<PAGE>

You can find the Fund's daily share price in the mutual fund listings of most
major newspapers.

<PAGE>

Dividends and Distributions
If the Fund earns investment income or recognizes taxable net capital gains, it
is the Fund's policy to distribute to shareholders substantially all of that
taxable income or capital gains on an annual basis. You may elect to receive
your distributions in cash or to reinvest them in additional shares of the Fund.

<PAGE>

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

- ------------------------------------------------------------------------------
Transaction Tax Status
- ------------------------------------------------------------------------------
Income dividends Ordinary income
- ------------------------------------------------------------------------------
Short-term capital gains distributions Ordinary income
- ------------------------------------------------------------------------------
Long-term capital gains distributions Capital gains
- ------------------------------------------------------------------------------

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

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

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

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

<PAGE>

Managing Your Account

Contacting BT Mutual Funds

by phone 1-800-368-4031
(between 10 a.m. and 6 p.m., Eastern Time)

by mail P.O. Box 419210
Kansas City, MO 64141-6210

by overnight mail 210 West 10th Street, 8th floor
Kansas City, MO 64105-1716

Minimum Account Investments

------------------------------------------------------
to open an account $5 million
------------------------------------------------------
to add to an account $100,000
------------------------------------------------------
minimum account balance $500,000
------------------------------------------------------

Opening a Fund Account

by mail Complete and sign the account application that accompanies
this prospectus. (You may obtain additional applications by
calling the BT Service Center.) Mail the completed application
along with a check payable to BT Institutional International
Small Company Equity Fund.

by wire Call the BT Service Center to set up a wire account.

Please note that your account cannot become activated until we receive a
completed application via mail or fax.

<PAGE>

Buying and Selling Shares

by phone buying or selling: Contact your investment professional or call
the BT Service Center.

by mail buying: Make your check payable to BT Institutional International
Small Company Equity Fund-810. Indicate your account number on
the check. Mail it to the address printed on your account
statement. selling: Send a signed authorization with your account
name and number and either the number of shares you wish to sell
or the dollar amount you wish to receive. Unless exchanging into
another BT Fund, you must submit a written authorization to sell
shares in a retirement account.

by wire buying: Direct your order through your investment
professional or set up a direct transaction-by-wire account with
a phone call to the BT Service Center. selling: We must receive
your order by 4:00 p.m. Eastern time to wire the proceeds of your
sale to your bank account by the next business day.

Routing No.: 021001033
Attn.: Bankers Trust/IFTC Deposit
DDA No.: 00-226-296
FBO: [complete Account name and number]
Credit: BT Institutional International Small Company Equity
Fund-810 Specify the complete name of the Fund of your choice,
and include your account name and account number.

Important information about buying and selling shares:

o We buy or sell shares on receipt of your order at the next price calculated on
a day the New York Stock Exchange is open.

o We accept payment for shares only in U.S. dollars by check, bank or Federal
funds wire transfer, or by electronic bank transfer.

o We remit proceeds from the sale of shares in U.S. dollars.

o If you pay for shares by check and the check fails to clear, or if you order
shares by phone and fail to pay for them, we have the right to cancel your
order and charge your account for any losses or fees the Fund or its agents
may have incurred.

<PAGE>

o The same terms and conditions apply when you buy and sell shares of the Fund
through authorized brokers and other investment professionals as when you buy
from or sell to BT Institutional Funds directly. Specifically, you may
consider that we have received your order once you have placed it through an
authorized party.

o We do not issue share certificates.

o We process all sales orders free of charge.

o A trustee must sign a trust account's written order before we can process it.
If the trustee's name does not appear on the account registration, we ask that
you furnish a copy of the trust document certified within the last 60 days.

o For business and organization accounts, a person authorized by corporate
resolution to act on behalf of the account must sign the written order before
we can process it.

o Unless otherwise instructed, we normally mail a check for the proceeds from a
sale of shares to the account address the next business day. In no case do we
mail the check later than seven days.

o We reserve the right to close an account on 30 days notice if it fails to meet
minimum balance requirements for any reason other than a change in market
value.

o If you sell shares by mail, you may be required to obtain a signature
guarantee. Please contact your financial advisor or the BT Service Center for
more information.

o During periods of extreme or market changes, you may have trouble reaching the
BT Service Center by telephone. If this occurs, you should make your request
by mail.

Exchange Privilege

<PAGE>

the fund's prospectus and read it carefully. Please note also that you may have
to pay taxes on the shares you sell in the exchange.

Please note the following conditions:

o The accounts between which the exchange is taking place must have the same
name, address and taxpayer ID number.

o You may make the exchange by phone, letter or wire, if your account has the
transaction-by-wire feature.

o If you are using the exchange feature to open a new account, we cannot
activate the account until we receive your completed application.

o If you are maintaining a taxable account, you may have to pay taxes on the
exchange.

o You will receive a written confirmation of each transaction from the BT
Service Center or your investment professional.

<PAGE>

Financial Highlights

The table below provides a picture of the Fund's financial performance since
inception. The information selected reflects financial results for a single Fund
share. The total returns in the table represent the rate of return that an
investor would have earned on an investment in the Fund, assuming reinvestment
of all dividends and distributions. This information has been audited by
_____________, whose report, along with the Fund's financial statements, is
included in the Fund's annual report. The annual report is available free of
charge by calling the BT Service Center at 1-800-368-4031.

- ------------------------------------
Per Share Operating 6/30/98-
Performance: 9/30/98
- ------------------------------------
Net Asset Value, beginning of period.
- ------------------------------------
Income from Investment
Operations
- ------------------------------------
Net Investment Income
- ------------------------------------
Net Realized and Unrealized
Gain (Loss) on Investment,
Foreign Currency and
Forward Foreign Currency
Contracts
- ------------------------------------
Total Loss from investment
operations
- ------------------------------------
Net Asset Value, end of period
- ------------------------------------
Total Investment Return
- ------------------------------------
Supplemental Data and Ratios:
- ------------------------------------
Net assets, End of Period
(000s omitted)
- ------------------------------------
Ratios to average net assets:
- ------------------------------------
Net Investment Income*
- ------------------------------------
Expenses, Including Expenses
of the International Equity
Portfolio*
- ------------------------------------
Decrease Reflected in Above
Expense Ratio Due to
Absorption of Expenses by
Bankers Trust*
- ------------------------------------
Portfolio Turnover+
- ------------------------------------

- -------------------
* Annualized
+ The Portfolio turnover rate is the rate for the Master Portfolio, in which the
Fund invests all its assets.

<PAGE>

BACK COVER

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

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

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

Or call our toll-free number: 1-800-368-4031

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

Institutional International Small Company Equity Fund

BT Institutional Funds

811-6071

Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may any
offers to buy be accepted prior to the time the registration statement becomes
effective. This Statement of Additional Information does not constitute a
prospectus.

Subject to Completion, STATEMENT OF
Dated November __, 1998 ADDITIONAL INFORMATION
January __, 1999

BT Institutional Funds

o International Small Company Equity Fund

BT Institutional Funds (the "Trust") is an open-end management investment
company that offers investors a selection of investment portfolios, each having
distinct investment objectives and policies. This Statement of Additional
Information ("SAI") relates to the BT Institutional Funds International Small
Company Equity Fund (the "Fund").

The Fund's investment objective is to seek long-term capital appreciation. As
described in the Fund's Prospectus, the Trust seeks to achieve the investment
objective of the Fund by investing all the investable assets ("Assets") of the
Fund in the International Small Company Equity Portfolio (the "Portfolio"), a
diversified open-end management investment company having the same investment
objectives as the Fund. The Portfolio is a series of the BT Investment
Portfolios.

Shares of the Fund are sold by ICC Distributors, Inc. ("ICC Distributors"), the
Trust's Distributor, to clients and customers (including affiliates and
correspondents) of Bankers Trust Company ("Bankers Trust"), the Portfolio's
investment adviser ("Adviser"), and to clients and customers of other
organizations.

The Fund's Prospectus is dated January __, 1999, and provides the basic
information investors should know before investing. This SAI, which is not a
Prospectus, is intended to provide additional information regarding the
activities and operations of the Trust and should be read in conjunction with
the Fund's Prospectus. You may request a copy of a Prospectus or a paper copy of
this SAI, if you have received it electronically, free of charge by calling the
Trust at the telephone number listed below or by contacting any Service Agent.
This SAI is not an offer of any Fund for which an investor has not received a
prospectus. Capitalized terms not otherwise defined in this SAI have the
meanings accorded to them in the Fund's Prospectus.

BANKERS TRUST COMPANY

Investment Adviser of the Portfolio and Administrator

ICC DISTRIBUTORS, INC.

Distributor

Two Portland Square Portland, Maine 04101 (800) 368-4031

<PAGE>

TABLE OF CONTENTS
-----------------

<TABLE>
<CAPTION>
Page
----
<S><C>
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS....................................1
Investment Objective............................................................1
Investment Policies.............................................................1
Additional Risk Factors........................................................12
Rating Services................................................................17
Investment Restrictions........................................................18
Portfolio Transactions and Brokerage Commissions...............................21

PERFORMANCE INFORMATION...........................................................22
Standard Performance Information...............................................22
Comparison of Fund Performance.................................................23
Economic and Market Information................................................24

VALUATION OF SECURITIES; REDEMPTIONS AND PURCHASES IN KIND........................25
Valuation of Securities........................................................25
Purchase of Shares.............................................................26
Redemption of Shares...........................................................27
Redemptions and Purchases in Kind..............................................29
Trading in Foreign Securities..................................................29

MANAGEMENT OF THE TRUST AND THE PORTFOLIO.........................................30
Trustees of BT Institutional Funds.............................................30
Investment Adviser.............................................................31
Sub-Investment Adviser.........................................................32
Administrator..................................................................32
Distributor....................................................................33
Service Agent..................................................................33
Custodian and Transfer Agent...................................................34
Use of Name....................................................................34
Banking Regulatory Matters.....................................................34
Counsel and Independent Accountants............................................34

ORGANIZATION OF THE TRUST.........................................................34

TAXATION..........................................................................35
Taxation of the Fund...........................................................35
Taxation of the Portfolio......................................................36
Sale of Shares.................................................................37
Foreign Withholding Taxes......................................................37
Backup Withholding.............................................................37
Foreign Shareholders...........................................................37
Other Taxation.................................................................37

FINANCIAL STATEMENTS..............................................................38

APPENDIX..........................................................................39
</TABLE>

<PAGE>

INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS

Investment Objective

The investment objective of the Fund is long-term capital appreciation. The Fund
will pursue this objective by investing primarily in stocks and other equity
securities of small companies in developed countries outside the United States.
The Fund focuses on countries domiciled in, or doing business in Canada, Japan,
the United Kingdom, Germany, France, Switzerland, the Netherlands, Sweden, Hong
Kong, Italy, Norway, Denmark and Spain. The Adviser considers "small" companies
to be those with market valuations at the time of investment generally below $1
billion in "free float" assets. Free float assets represent the portion of
uncommitted company stock that is freely traded and accessible to investors
(e.g., the company may have a market capitalization of greater than $1 billion,
but a portion of the company's shares are not tradable because of a strategic
holding by a holding company or significant family ownership). However, the
investment does not need to be sold if the free floating market capitalization
increases to more than $1 billion after purchase. There can, of course, be no
assurance that the Fund will achieve its investment objective.

Investment Policies

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

Since the investment characteristics of the Fund will correspond directly to
those of the Portfolio, the following is a discussion of the various investments
of and techniques employed by the Portfolio. There can be no assurances that the
investment objective of either the Fund or the Portfolio will be achieved. The
investment objective of the Fund and the Portfolio is not a fundamental policy
and may be changed upon notice to but without the approval of the Fund's
shareholders or the Portfolio's investors, respectively.

Generally, the Fund will focus its investments in companies with market
capitalization around $500 million. Bankers Trust will seek to identify and
invest in low capitalization equities that will grow substantially over 3 to 5
years and to provide returns in excess of the Salomon Brothers Extended Market
Index of the World ex-U.S. (Total). It is expected under normal conditions that
at least 65% of the Portfolio's assets will be invested in the equity securities
of smaller companies based in at least three countries other than the United
States.

In countries and regions where capital markets are underdeveloped or not easily
accessed and information is difficult to obtain, the Portfolio may choose to
invest only at the market level. Here, to the extent available and consistent
with applicable regulations, the Portfolio may seek to achieve country exposure
through the use of options on futures based on an established local index or
through investment in other registered investment companies.

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 restricted unlisted securities.

The Portfolio may also utilize the following investments and investment
techniques and practices.

Equity Securities. As used herein, "equity securities" are defined as common
stock, preferred stock, trust or limited partnership interests, rights and
warrants to subscribe to or purchase such securities, sponsored or unsponsored
ADRs, EDRs, GDRs, and convertible securities, consisting of debt securities or
preferred stock that may be converted into common stock or that carry the right
to purchase common stock. Common stocks, the most familiar type, represent an
equity (ownership) interest in a corporation. Although equity securities have a
history of long-term growth in value, their prices fluctuate based on changes in
a company's financial condition and on overall market and economic conditions.
Smaller companies are especially sensitive to these factors.

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

<PAGE>

changes in interest rates. Longer-term bonds are generally more sensitive to
interest rate changes than short-term bonds.

Lower-quality foreign government securities are often considered to be
speculative and involve greater risk of default or price changes, or they may
already be in default. These risks are in addition to the general risks
associated with foreign securities. The Portfolio expects to invest in debt
securities in one of the top four rating categories by Standard & Poor's Ratings
Service ("S&P") or Moody's Investors Service, Inc. ("Moody's"), or comparably
rated by another nationally recognized statistical rating organization
("NRSRO"), or, if not rated by a NRSRO, of comparable quality as determined by
the Adviser at its sole discretion.

Convertible Securities. A convertible security is a bond or preferred stock
which may be converted at a stated price within a specific period of time into a
specified number of shares of common stock of the same or different issuer.
Convertible securities are senior to common stock in a corporation's capital
structure, but usually are subordinated to non-convertible debt securities.
While providing a fixed income stream--generally higher in yield than in the
income derived from a common stock but lower than that afforded by a
non-convertible debt security--a convertible security also affords an investor
the opportunity, through its conversion feature, to participate in the capital
appreciation of common stock into which it is convertible.

In general, the market value of a convertible security is the higher of its
investment value (its value as a fixed income security) or its conversion value
(the value of the underlying shares of common stock if the security is
converted). As a fixed income security, the market value of a convertible
security generally increases when interest rates decline and generally decreases
when interest rates rise; however, the price of a convertible security generally
increases as the market value of the underlying stock increases, and generally
decreases as the market value of the underlying stock declines. Investments in
convertible securities generally entail less risk than investments in the common
stock of the same issuer.

Preferred Stock. Preferred stock has a preference in liquidation (and, generally
dividends) over common stock but is subordinated in liquidation to debt. As a
general rule the market value of preferred stocks with fixed dividend rates and
no conversion rights varies inversely with interest rates and perceived credit
risk, with the price determined by the dividend rate. Some preferred stocks are
convertible into other securities, for example common stock, at a fixed price
and ratio or upon the occurrence of certain events. The market price of
convertible preferred stocks generally reflects an element of conversion value.
Because many preferred stocks lack a fixed maturity date, these securities
generally fluctuate substantially in value when interest rates change; such
fluctuations often exceed those of long-term bonds of the same issuer. Some
preferred stocks pay an adjustable dividend that may be based on an index,
formula, auction procedure or other dividend rate reset mechanism. In the
absence of credit deterioration, adjustable rate preferred stocks tend to have
more stable market values than fixed rate preferred stocks.

All preferred stocks are also subject to the same types of credit risks of the
issuer as corporate bonds. In addition, because preferred stock is junior to
debt securities and other obligations of an issuer, deterioration in the credit
rating of the issuer will cause greater changes in the value of a preferred
stock than in a more senior debt security with similar yield characteristics.
Preferred stocks may be rated by S&P and Moody's although there is no minimum
rating which a preferred stock must have (and a preferred stock may not be
rated) to be an eligible investment for the Portfolio. The Adviser expects,
however, that generally the preferred stocks in which the Portfolio invests will
be rated at least CCC by S&P or Caa by Moody's or, if unrated, of comparable
quality in the opinion of the Adviser. Preferred stocks rated CCC by S&P are
regarded as predominantly speculative with respect to the issuer's capacity to
pay preferred stock obligations and represent the highest degree of speculation
among securities rated between BB and CCC; preferred stocks rated Caa by Moody's
are likely to be in arrears on dividend payments. Moody's rating with respect to
preferred stocks does not purport to indicate the future status of payments of
dividends.

Warrants. Warrants are instruments which entitle the holder to buy underlying
equity securities at a specific price for a specific period of time. A warrant
tends to be more volatile than its underlying securities and ceases to have
value if it is not exercised prior to its expiration date. In addition, changes
in the value of a warrant do not necessarily correspond to changes in the value
of its underlying securities.

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

<PAGE>

U.S. Treasury under certain circumstances. However, securities issued by other
agencies or instrumentalities are supported only by the credit of the entity
that issued them.

ADRs, GDRs and EDRs. American Depository Receipts ("ADRs"), Global Depository
Receipts ("GDRs"), and European Depository Receipts ("EDRs") are certificates
evidencing ownership of shares of a foreign-based issuer held in trust by a bank
or similar financial institution. Designed for use in U.S., international and
European securities markets, respectively, ADRs, GDRs and EDRs are alternatives
to the purchase of the underlying securities in their national markets and
currencies. ADRs, GDRs and EDRs are subject to the same risks as the foreign
securities to which they relate.

Sovereign and Supranational Debt Obligations. Debt instruments issued or
guaranteed by foreign governments, agencies, and supranational organizations
("sovereign debt obligations"), especially sovereign debt obligations of
developing countries, may involve a high degree of risk, and may be in default
or present the risk of default. The issuer of the obligation or the governmental
authorities that control the repayment of the debt may be unable or unwilling to
repay principal and interest when due, and may require renegotiation or
rescheduling of debt payments. In addition, prospects for repayment of principal
and interest may depend on political as well as economic factors.

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

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

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

The Portfolio may purchase securities in the United States that are not
registered for sale under federal securities laws but which can be resold to
institutions under the SEC Rule 144A. Provided that a dealer or institutional
trading market in such securities exists, these restricted securities are
treated as exempt from the Portfolio's 15% limit on illiquid securities.

Bankers Trust will monitor the liquidity of Rule 144A securities in the
Portfolio's holdings under the supervision of the Portfolio's Board of Trustees.
In reaching liquidity decisions, the Adviser will consider, among other things,
the following factors: (1) the frequency of trades and quotes for the security;
(2) the number of dealers and other potential purchasers or sellers of the
security; (3) dealer undertakings to make a market in the security and (4) the
nature of the security and of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
the

<PAGE>

transfer). If institutional trading in restricted securities were to decline,
the liquidity of the Portfolio could be adversely affected.

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

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

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

Investment Companies. With respect to certain countries in which capital markets
are either less developed or not easily accessed, investments by the Portfolio
may be made through investment in other registered investment companies that in
turn are authorized to invest in the securities of such countries. Investments
in other investment companies may also be made for other purposes, such as noted
below under "Short-Term Instruments," are limited in amount under the Investment
Company Act of 1940, as amended (the "1940 Act") (except the Portfolio may
exceed the applicable percentage limits to the extent permitted by an exemptive
order of the SEC), and will involve the indirect payment of a portion of the
expenses, including advisory fees, of such other investment companies and may
result in a duplication of fees and expenses.

<PAGE>

risks associated with those uses. Futures and options are commonly used for
traditional hedging purposes to attempt to protect a fund from exposure to
changing interest rates, securities prices, or currency exchange rates and as a
low cost method of gaining exposure to a particular securities market without
investing directly in those securities. However, some derivatives are used for
leverage, which tends to magnify the effects of an instrument's price changes as
market conditions change. Leverage involves the use of a small amount of money
to control a large amount of financial assets, and can in some circumstances,
lead to significant losses. The Adviser will use derivatives only in
circumstances where they offer the most efficient means of improving the
risk/reward profile of the Portfolio and when consistent with the Portfolio's
investment objective and policies. The use of derivatives for non-hedging
purposes may be considered speculative.

** 1 Currency Exchange Transactions. Because the Portfolio may buy and sell
securities denominated in currencies other than the U.S. dollar and receives
interest, dividends and sale proceeds in currencies other than the U.S. dollar,
the Portfolio from time to time may enter into currency exchange transactions to
convert to and from different foreign currencies and to convert foreign
currencies to and from the U.S. dollar. The Portfolio either enters into these
transactions on a spot (i.e., cash) basis at the spot rate prevailing in the
foreign currency exchange market or uses forward contracts to purchase or sell
foreign currencies.

** 2 Forward Currency Exchange Contracts. A forward currency exchange contract
is an obligation by the Portfolio to purchase or sell a specific currency at a
future date, which may be any fixed number of days from the date of the
contract. Forward currency exchange contracts establish an exchange rate at a
future date. These contracts are transferable in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. A forward currency exchange contract generally has no deposit
requirement and is traded at a net price without commission. The Portfolio
maintains with its custodian a segregated account of cash or liquid securities
in an amount at least equal to its obligations under each forward currency
exchange contract. Neither spot transactions nor forward currency exchange
contracts eliminate fluctuations in the prices of the Portfolio's securities or
in foreign exchange rates, or prevent loss if the prices of these securities
should decline.

** 3 The Portfolio may enter into currency hedging transactions in an attempt to
protect against changes in currency exchange rates between the trade and
settlement dates of specific securities transactions or changes in currency
exchange rates that would adversely affect a portfolio position or an
anticipated investment position. Since consideration of the prospect for
currency parities will be incorporated into the Adviser's long-term investment
decisions, the Portfolio will not routinely enter into currency hedging
transactions with respect to security transactions; however, the Adviser
believes that it is important to have the flexibility to enter into currency
hedging transactions when it determines that the transactions would be in the
Portfolio's best interest. Although these transactions tend to minimize the risk
of loss due to a decline in the value of the hedged currency, at the same time
they tend to limit any potential gain that might be realized should the value of
the hedged currency increase. The precise matching of the forward contract
amounts and the value of the securities involved will not generally be possible
because the future value of such securities in foreign currencies will change as
a consequence of market movements in the value of such securities between the
date the forward contract is entered into and the date it matures. The
projection of currency market movements is extremely difficult, and the
successful execution of a hedging strategy is highly uncertain.

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Options on Foreign Currencies. The Portfolio may purchase and write options on
foreign currencies for hedging purposes in a manner similar to that in which
futures contracts on foreign currencies, or forward contracts, will be utilized.
For example, a decline in the dollar value of a foreign currency in which
portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of portfolio securities,
the Portfolio may purchase put options on the foreign currency. If the value of
the currency does decline, the Portfolio will have the right to sell such
currency for a fixed amount in dollars and will thereby offset, in whole or in
part, the adverse effect on the Portfolio which otherwise would have resulted.

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

The Portfolio may write options on foreign currencies for the same types of
hedging purposes. For example, where the Portfolio anticipates a decline in the
dollar value of foreign currency denominated securities due to adverse
fluctuations in exchange rates it could, instead of purchasing a put option,
write a call option on the relevant currency. If the expected decline occurs,
the options will most likely not be exercised, and the diminution in value of
portfolio securities will be offset by the amount of the premium received.

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

The Portfolio intends to write covered call options on foreign currencies. A
call option written on a foreign currency by the Portfolio is "covered" if the
Portfolio owns the underlying foreign currency covered by the call or has an
absolute and immediate right to acquire that foreign currency without additional
cash consideration (or for additional cash consideration held in a segregated
account by its Custodian) upon conversion or exchange of other foreign currency
held in its portfolio. A call option is also covered if the Portfolio has a call
on the same foreign currency and in the same principal amount as the call
written where the exercise price of the call held (a) is equal to or less than
the exercise price of the call written or (b) is greater than the exercise price
of the call written if the difference is maintained by the Portfolio in cash or
securities acceptable to the broker in a segregated account with its custodian.

The Portfolio also intends to write call options on foreign currencies that are
not covered for cross-hedging purposes. A call option on a foreign currency is
for cross-hedging purposes if it is not covered, but is designed to provide a
hedge against a decline in the U.S. dollar value of a security which the
Portfolio owns or has the right to acquire and which is denominated in the
currency underlying the option due to an adverse change in the exchange rate. In
such circumstances, the Portfolio collateralizes the option by maintaining in a
segregated account with its custodian, cash or securities acceptable to the
broker in an amount not less than the value of the underlying foreign currency
in U.S. dollars marked to market daily.
6
<PAGE>

* 18 moved from here; text not shown * 19 moved from here; text not shown * 20
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from here; text not shown There is no assurance that a liquid secondary
market will exist for any particular option, or at any particular time. If the
Portfolio is unable to effect a closing purchase transaction with respect to
covered options it has written, the Portfolio will not be able to sell the
underlying currency or dispose of assets held in a segregated account until the
options expire or are exercised. Similarly, if the Portfolio is unable to effect
a closing sale transaction with respect to options it has purchased, it would
have to exercise the options in order to realize any profit and will incur
transaction costs upon the purchase or sale of underlying currency. The
Portfolio pays brokerage commissions or spreads in connection with its options
transactions.

As in the case of forward contracts, certain options on foreign currencies are
traded over-the-counter and involve liquidity and credit risks which may not be
present in the case of exchange-traded currency options. In some circumstances,
the Portfolio's ability to terminate over-the-counter options ("OTC Options")
may be more limited than with exchange-traded options. It is also possible that
broker-dealers participating in OTC Options transactions will not fulfill their
obligations. The Portfolio intends to treat OTC Options as not readily
marketable and therefore subject to the Portfolio's 15% limit on illiquid
securities.

Options on Securities. The Portfolio may write and purchase put and call options
on stocks. A call option gives the purchaser of the option the right to buy, and
obligates the writer to sell, the underlying stock at the exercise price at any
time during the option period. Similarly, a put option gives the purchaser of
the option the right to sell, and obligates the writer to buy, the underlying
stock at the exercise price at any time during the option period. A covered call
option, which is a call option with respect to the underlying Portfolio stock,
is sold by exposing the Portfolio during the term of the option to possible loss
of opportunity to realize appreciation in the market price of the underlying
stock or to possible continued holding of a stock which might otherwise have
been sold to protect against depreciation in the market price of the stock. The
Portfolio may also write (sell) covered call and put options to a limited extent
on its portfolio securities ("covered options") in an attempt to increase
income. However, the Portfolio may forgo the benefits of appreciation on
securities sold or may pay more than the market price on securities acquired
pursuant to call and put options written by the Portfolio.

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

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

<PAGE>

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

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

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

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

The Portfolio has adopted certain other nonfundamental policies concerning
option transactions which are discussed below under "Investment Restrictions --
Additional Restrictions."

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

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

<PAGE>

"cover" OTC Options written as not readily marketable and therefore subject to
the limitations described in "Investment Restrictions."

Options on Securities Indices. In addition to options on securities, the
Portfolio may also purchase and write (sell) call and put options on securities
indices. Such options give the holder the right to receive a cash settlement
during the term of the option based upon the difference between the exercise
price and the value of the index. Such options will be used for the purposes
described above under "Options on Securities."

The Portfolio may, to the extent allowed by federal and state securities laws,
invest in securities indices instead of investing directly in individual foreign
securities.

Options on securities indices entail risks in addition to the risks of options
on securities. The absence of a liquid secondary market to close out options
positions on securities indices is more likely to occur, although the Portfolio
generally will only purchase or write such an option if the Adviser believes the
option can be closed out.

Use of options on securities indices also entails the risk that trading in such
options may be interrupted if trading in certain securities included in the
index is interrupted. The Portfolio will not purchase such options unless the
Adviser believes the market is sufficiently developed such that the risk of
trading in such options is no greater than the risk of trading in options on
securities.

Price movements in the Portfolio's holdings may not correlate precisely with
movements in the level of an index and, therefore, the use of options on indices
cannot serve as a complete hedge. Because options on securities indices require
settlement in cash, the Adviser may be forced to liquidate portfolio securities
to meet settlement obligations.

* 1 moved from here; text not shown * 2 moved from here; text not shown * 3
moved from here; text not shown Options on Foreign Stock Indices. The
Portfolio may purchase and write put and call options on foreign stock indices
listed on domestic and foreign stock exchanges. The Portfolio may also purchase
and write OTC Options on foreign stock indices. These OTC Options would be
subject to the same liquidity and credit risks noted above with respect to OTC
Options on foreign currencies. A stock index fluctuates with changes in the
market values of the stocks included in the index.

OTC Options are purchased from or sold to securities dealers, financial
institutions or other parties (collectively referred to as "Counterparties" and
individually referred to as a "Counterparty") through direct bilateral agreement
with the Counterparty. In contrast to exchange listed options, which generally
have standardized terms and performance mechanics, all of the terms of an OTC
Option, including such terms as method of settlement, term, exercise price,
premium, guaranties and security, are set by negotiation of the parties.

Unless the parties provide for it, no central clearing or guaranty function is
involved in an OTC Option. As a result, if a Counterparty fails to make or take
delivery of the security, currency or other instrument underlying an OTC Option
it has entered into with the Portfolio or fails to make a cash settlement
payment due in accordance with the terms of that option, the Portfolio will lose
any premium it paid for the option as well as any anticipated benefit of the
transaction. Thus, Bankers Trust must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC Option will be met.

Options on stock indices are generally similar to options on stock except that
the delivery requirements are different. Instead of giving the right to take or
make delivery of stock at a specified price, an option on a stock index gives
the holder the right to receive a cash "exercise settlement amount" equal to (a)
the amount, if any, by which the fixed exercise price of the option exceeds (in
the case of a put) or is less than (in the case of a call) the closing value of
the underlying index on the date of exercise, multiplied by (b) a fixed "index
multiplier." Receipt of this cash amount will depend upon the closing level of
the stock index upon which the option is based being greater than, in the case
of a call, or less than, in the case of a put, the exercise price of the option.
The amount of cash received will be equal to such difference between the closing
price of the index and the exercise price of the option expressed in dollars or
a foreign currency, as the case may be, times a specified multiple. The writer
of the option is obligated, in return for the

<PAGE>

premium received, to make delivery of this amount. The writer may offset its
position in stock index options prior to expiration by entering into a closing
transaction on an exchange or the option may expire unexercised.

To the extent permitted by U.S. federal or state securities laws, the Portfolio
may invest in options on foreign stock indices in lieu of direct investment in
foreign securities. The Portfolio may also use foreign stock index options for
hedging purposes.

Because the value of an index option depends upon movements in the level of the
index rather than the price of a particular stock, whether the Portfolio will
realize a gain or loss from the purchase or writing of options on an index
depends upon movements in the level of stock prices in the stock market
generally or, in the case of certain indices, in an industry or market segment,
rather than movements in the price of a particular stock. Accordingly,
successful use by the Portfolio of options on stock indices will be subject to
Bankers Trust's ability to predict correctly movements in the direction of the
stock market generally or of a particular industry. This requires different
skills and techniques than predicting changes in the price of individual stocks.

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

** 5 Commercial Paper. Commercial paper consists of short-term (usually from 1
to 270 days) unsecured promissory notes issued by corporations in order to
finance their current operations. A variable amount master demand note (which is
a type of commercial paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under a letter agreement between a
commercial paper issuer and an institutional lender pursuant to which the lender
may determine to invest varying amounts.

For a description of commercial paper ratings see Appendix.

Futures Contracts and Options on Futures Contracts.

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

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

** 8 At the same time a futures contract is entered into, the Portfolio must
allocate cash or securities as a deposit payment ("initial margin"). It is
expected that the initial margin deposit would be approximately 1 1/2% to 10% of
a contract's

<PAGE>

face value. Daily thereafter, the futures contract is valued and the payment of
"variation margin" may be required, since each day the Portfolio would provide
or receive cash that reflects any decline or increase in the contract's value.

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

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

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

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

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

Options on Futures Contracts. The Portfolio may purchase and write options on
futures contracts for hedging purposes.

The purchase of a call option on a futures contract is similar in some respects
to the purchase of a call option on an
11

<PAGE>

individual security. As with the purchase of futures contracts, when the
Portfolio is not fully invested it may purchase a call option on a futures
contract to hedge against a market advance due to declining interest rates.

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

** 15 The purchase of a put option on a futures contract is similar in some
respects to the purchase of protective put options on portfolio securities. For
example, the Portfolio may purchase a put option on a futures contract to hedge
its portfolio against the risk of rising interest rates.

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

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

Futures Contracts on Foreign Stock Indices. The Portfolio may enter into
contracts providing for a cash settlement based upon changes in the value of an
index of foreign securities ("Futures Contracts"). This investment technique is
designed only to hedge against anticipated future change in general market
prices which otherwise might either adversely affect the value of securities
held by the Portfolio or adversely affect the prices of securities which are
intended to be purchased at a later date for the Portfolio. A Futures Contract
may also be entered into to close out or offset an existing futures position.

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

Although Futures Contracts would be entered into for hedging purposes only, such
transactions do involve certain risks.

These risks could include a lack of correlation between the Futures Contract and
the foreign equity market being hedged, a potential lack of liquidity in the
secondary market and incorrect assessments of market trends which may result in
poorer overall performance than if a Futures Contract had not been entered into.

Brokerage costs will be incurred and "margin" will be required to be posted and
maintained as a good-faith deposit against performance of obligations under
Futures Contracts written for the Portfolio. The Portfolio may not purchase or
sell a Futures Contract if immediately thereafter its margin deposits on its
outstanding Futures Contracts would exceed 5% of the market value of the
Portfolio's total assets.

Asset Coverage. To assure that the Portfolio's use of futures and related
options, as well as when-issued and delayed-delivery securities and foreign
currency exchange transactions, are not used to achieve investment leverage, the
Portfolio will cover such transactions, as required under applicable
interpretations of the SEC, either by owning the underlying securities or by
segregating with the Portfolio's Custodian or futures commission merchant liquid

<PAGE>

securities in an amount at all times equal to or exceeding the Portfolio's
commitment with respect to these instruments or contracts.

Additional Risk Factors

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

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

Foreign Securities. Although the Portfolio intends to invest primarily in
securities of established companies based in developed countries, investors
should realize that the value of the Portfolio's investments may be adversely
affected by changes in political or social conditions, diplomatic relations,
confiscatory taxation, expropriation, nationalization, limitation on the removal
of funds or assets, or imposition of (or change in) exchange control or tax
regulations in those foreign countries. In addition, changes in government
administrations or economic or monetary policies in the United States or abroad
could result in appreciation or depreciation of portfolio securities and could
favorably or unfavorably affect the Portfolio's operations. Furthermore, the
economies of individual foreign nations may differ from the U.S. economy,
whether favorably or unfavorably, in areas such as growth of gross national
product, rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments position; it may also be more difficult to obtain and
enforce a judgment against a foreign issuer. In general, less information is
publicly available with respect to foreign issuers than is available with
respect to U.S. companies. Most foreign companies are also not subject to the
uniform accounting and financial reporting requirements applicable to issuers in
the United States. Any foreign investments made by the Portfolio must be made in
compliance with U.S. and foreign currency restrictions and tax laws restricting
the amounts and types of foreign investments.

Because foreign securities generally are denominated and pay dividends or
interest in foreign currencies, and the Portfolio holds various foreign
currencies from time to time, the value of the net assets of the Portfolio as
measured in U.S. dollars will be affected favorably or unfavorably by changes in
exchange rates. Generally, the Portfolio's currency exchange transactions will
be conducted on a spot (i.e., cash) basis at the spot rate prevailing in the
currency exchange market. The cost of the Portfolio's currency exchange
transactions will generally be the difference between the bid and offer spot
rate of the currency being purchased or sold. In order to protect against
uncertainty in the level of future foreign currency exchange, the Portfolio is
authorized to enter into certain foreign currency exchange transactions.

In addition, while the volume of transactions effected on foreign stock
exchanges has increased in recent years, in most cases it remains appreciably
below that of the New York Stock Exchange, Inc. (the "NYSE"). Accordingly, the
Portfolio's foreign investments may be less liquid and their prices may be more
volatile than comparable investments in securities of U.S. companies. Moreover,
the settlement periods for foreign securities, which are often longer than those
for securities of U.S. issuers, may affect portfolio liquidity. In buying and
selling securities on foreign exchanges, the Portfolio normally pays fixed
commissions that are generally higher than the negotiated commissions charged in
the United States. In addition, there is generally less government supervision
and regulation of securities exchanges, brokers and issuers in foreign countries
than in the United States.

<PAGE>

Foreign Securities: Emerging Markets. The world's industrialized markets
generally include but are not limited to the following: Australia, Austria,
Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Italy,
Japan, Luxembourg, Malaysia, Netherlands, New Zealand, Norway, Portugal,
Singapore, Spain, Sweden, Switzerland, the United Kingdom, and the United
States; the world's emerging markets generally include but are not limited to
the following: Argentina, Botswana, Bolivia, Brazil, Bulgaria, Chile, China,
Colombia, Costa Rica, the Czech Republic, Ecuador, Egypt, Greece, Hungary,
India, Indonesia, Israel, the Ivory Coast, Jordan, Korea, Mexico, Morocco,
Nicaragua, Nigeria, Pakistan, Peru, Philippines, Poland, Romania, Russia,
Slovakia, Slovenia, South Africa, South Korea, Sri Lanka, Taiwan, Thailand,
Turkey, Uruguay, Venezuela, Vietnam and Zimbabwe.

In addition to brokerage commissions, custodial services and other costs
relating to investment in emerging markets are generally more expensive than in
the United States. Such markets have been unable to keep pace with the volume of
securities transactions, making it difficult to conduct such transactions. The
inability of a Portfolio to make intended securities purchases due to settlement
problems could cause the Portfolio to miss attractive investment opportunities.
Inability to dispose of a security due to settlement problems could result
either in losses to the Portfolio due to subsequent declines in the value of the
security or, if the Portfolio has entered into a contract to sell the security,
could result in possible liability to the purchaser.

Foreign Securities: Special Considerations Concerning Eastern Europe. The
Portfolio may invest in foreign securities issued by Eastern European countries.
Investments in companies domiciled in Eastern European countries may be subject
to potentially greater risks than those of other foreign issuers. These risks
include: (i) potentially less social, political and economic stability; (ii) the
small current size of the markets for such securities and the low volume of
trading, which result in less liquidity and in greater price volatility; (iii)
certain national policies which may restrict the Portfolio's investment
opportunities, including restrictions on investment in issuers or industries
deemed sensitive to national interests; (iv) foreign taxation; (v) the absence
of developed legal structures governing private or foreign investment or
allowing for judicial redress for injury to private property; (vi) the absence,
until recently in certain Eastern European countries, of a capital market
structure or market-oriented economy; and (vii) the possibility that recent
favorable economic developments in Eastern Europe may be slowed or reversed by
unanticipated political or social events in such countries, or in the
Commonwealth of Independent States (consisting of the Republics of the former
Union of Soviet Socialist Republics).

The economic situation remains difficult for Eastern European countries in
transition from central planning, following what has already been a sizable
decline in output. The contraction now appears to be bottoming out in parts of
Eastern Europe. Following three successive years of output declines, there are
preliminary indications of a turnaround in the former Czech and Slovak Federal
Republic, Hungary and Poland; growth in private sector activity and strong
exports now appear to have contained the fall in output. A number of their
governments, including those of Hungary and Poland, are currently implementing
or considering reforms directed at political and economic liberalization,
including efforts to foster multi-party political systems, decentralize economic
planning, and a move toward free-market economies. But key aspects of the reform
and stabilization efforts have not yet been fully implemented, and there remain
risks of policy slippage. At present, no Eastern European country has a
developed stock market, but Poland, Hungary and the Czech Republic have small
securities markets in operation.

In many other countries of the region, output losses have been even larger.
These declines reflect the adjustment difficulties during the early stages of
the transition, high rates of inflation, the compression of imports, disruption
in trade among the countries of the former Soviet Union, and uncertainties about
the reform process itself. Large-scale subsidies are delaying industrial
restructuring and are exacerbating the fiscal situation. A reversal of these
adverse factors is not anticipated in the near term, and output is expected to
decline further in most of these countries. In the Russian Federation and most
other countries of the former Soviet Union, economic conditions are of
particular concern because of economic instability due to political unrest and
armed conflicts in many regions. Further, no accounting standards exist in
Eastern European countries. Although certain Eastern European currencies may be
convertible into U.S. dollars, the conversion rates may be artificial to the
actual market values and may be adverse to each Fund's shareholders.

<PAGE>

Foreign Securities: Special Considerations Concerning Latin America. Investing
in securities of Latin American issuers may entail risks relating to the
potential political and economic instability of certain Latin American countries
and the risks of expropriation, nationalization, confiscation or the imposition
of restrictions on foreign investment and on repatriation of capital invested.
In the event of expropriation, nationalization or other confiscation by any
country, the Fund could lose its entire investment in any such country.

The securities markets of Latin American countries are substantially smaller,
less developed, less liquid and more volatile than the major securities markets
in the U.S. Disclosure and regulatory standards are in many respects less
stringent than U.S. standards. Furthermore, there is a lower level of monitoring
and regulation of the markets and the activities of investors in such markets.

The limited size of many Latin American securities markets and limited trading
volume in the securities of Latin American issuers compared to volume of trading
in the securities of U.S. issuers could cause prices to be erratic for reasons
apart from factors that affect the soundness and competitiveness of the
securities issuers. For example, limited market size may cause prices to be
unduly influenced by traders who control large positions. Adverse publicity and
investors' perceptions, whether or not based on in-depth fundamental analysis,
may decrease the value and liquidity of portfolio securities.

The economies of Latin American countries may be predominantly based in only a
few industries, may be highly vulnerable to changes in local or global trade
conditions, and may suffer from extreme and volatile debt burdens or inflation
rates. Securities of issuers located in Latin America may have limited
marketability and may be subject to more abrupt or erratic price movements.

The Portfolio invests in securities denominated in currencies of Latin American
countries. Accordingly, changes in the value of these currencies against the
U.S. dollar will result in corresponding changes in the U.S. dollar value of the
Portfolio's assets denominated in those currencies.

Some Latin American countries also may have managed currencies, which are not
free floating against the U.S. dollar. In addition, there is risk that certain
Latin American countries may restrict the free conversion of their currencies
into other currencies. Further, certain Latin American currencies may not be
internationally traded. Certain of these currencies have experienced a steep
devaluation relative to the U.S. dollar. Any devaluations in the currencies in
which the Portfolio's securities are denominated may have a detrimental impact
on the Fund's net asset value.

The economies of individual Latin American countries may differ favorably or
unfavorably from the U.S. economy in such respects as the rate of growth of
gross domestic product, the rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position. Certain Latin American
countries have experienced high levels of inflation which can have a
debilitating effect on an economy. Furthermore, certain Latin American countries
may impose withholding taxes on dividends payable to the Portfolio at a higher
rate than those imposed by other foreign countries. This may reduce the Fund's
investment income available for distribution to shareholders.

Certain Latin American countries such as Argentina, Brazil and Mexico are among
the world's largest debtors to commercial banks and foreign governments. At
times, certain Latin American countries have declared moratoria on the payment
of principal and/or interest on outstanding debt. Investment in sovereign debt
can involve a high degree of risk. The governmental entity that controls the
repayment of sovereign debt may not be able or willing to repay the principal
and/or interest when due in accordance with the terms of such debt. A
governmental entity's willingness or ability to repay principal and interest due
in a timely manner may be affected by, among other factors, its cash flow
situation, the extent of its foreign reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of the debt
service burden to the economy as a whole, the governmental entity's policy
towards the International Monetary Fund, and the political constraints to which
a governmental entity may be subject. Governmental entities may also be
dependent on expected disbursements from foreign governments, multilateral
agencies and others abroad to reduce principal and interest arrearage on their
debt. The commitment on the part of these governments, agencies and others to
make such disbursements may be conditioned on a governmental entity's
implementation of economic reforms and/or economic performance and the timely
service of such debtor's obligations. Failure to implement such reforms, achieve
such levels of economic performance or repay principal or interest when due may
result in the cancellation of such third parties' commitments to lend funds to
the governmental entity, which may further impair such debtor's ability or
willingness to service its debts in a timely manner. Consequently, governmental
entities may default on their sovereign debt.

<PAGE>

Holders of sovereign debt, including the Portfolio, may be requested to
participate in the rescheduling of such debt and to extend further loans to
governmental entities. There is no bankruptcy proceeding by which defaulted
sovereign debt may be collected in whole or in part.

Foreign Securities: Special Considerations Concerning the Pacific Basin. Many
Asian countries may be subject to a greater degree of social, political and
economic instability than is the case in the United States and European
countries. Such instability may result from (i) authoritarian governments or
military involvement in political and economic decision-making; (ii) popular
unrest associated with demands for improved political, economic and social
conditions; (iii) internal insurgencies; (iv) hostile relations with neighboring
countries; and (v) ethnic, religious and racial disaffection.

The economies of most of the Asian countries are heavily dependent upon
international trade and are accordingly affected by protective trade barriers
and the economic conditions of their trading partners, principally, the United
States, Japan, China and the European Community. The enactment by the United
States or other principal trading partners of protectionist trade legislation,
reduction of foreign investment in the local economies and general declines in
the international securities markets could have a significant adverse effect
upon the securities markets of the Asian countries.

The securities markets in Asia are substantially smaller, less liquid and more
volatile than the major securities markets in the United States. A high
proportion of the shares of many issuers may be held by a limited number of
persons and financial institutions, which may limit the number of shares
available for investment by the Portfolio. Similarly, volume and liquidity in
the bond markets in Asia are less than in the United States and, at times, price
volatility can be greater than in the United States. A limited number of issuers
in Asian securities markets may represent a disproportionately large percentage
of market capitalization and trading value. The limited liquidity of securities
markets in Asia may also affect the Portfolio's ability to acquire or dispose of
securities at the price and time it wishes to do so. Accordingly, during periods
of rising securities prices in the more illiquid Asian securities markets, the
Portfolio's ability to participate fully in such price increases may be limited
by its investment policy of investing not more than 15% of its net assets in
illiquid securities. Conversely, the Portfolio's inability to dispose fully and
promptly of positions in declining markets will cause the Portfolio's net asset
value to decline as the value of the unsold positions is marked to lower prices.
In addition, the Asian securities markets are susceptible to being influenced by
large investors trading significant blocks of securities.

Many stock markets are undergoing a period of growth and change which may result
in trading volatility and difficulties in the settlement and recording of
transactions, and in interpreting and applying the relevant law and regulations.

The Portfolio invests in securities denominated in currencies of Asian
countries. Accordingly, changes in the value of these currencies against the
U.S. dollar will result in corresponding changes in the U.S. dollar value of the
Portfolio's assets denominated in those currencies.

Foreign Securities: Special Considerations Concerning China and China Region.
China's economic reform plan was designed to bring in foreign investment capital
and technological skills. The result has been a move towards a more mixed
economy away from the previous centrally planned economy. The process of
devolving responsibility for all aspects of enterprise to local management and
authorities continues, even though the system of socialism with Chinese
characteristics involves considerable influence by the central government on
production and marketing.

In order to attract foreign investment, China has since 1978 designated certain
areas of the country where overseas investors can receive special investment
incentives and tax concessions. There are five Special Economic Zones (Shenzhen,
Shantou and Zhuhai in Guangdong Province, Xiamen in Fujian Province and Hainan
Island, which itself is a province). Fourteen coastal cities have been
designated as "open cities" and certain Open Economic Zones have been
established in coastal areas. Shanghai has established the Pudong New Area.
Twenty-seven High and New Technology Industrial Development Zones have been
approved where preferential treatment is given to enterprises which are
confirmed as technology intensive.

China has had for many centuries a well deserved reputation for being closed to
foreigners, with trade with the outside world being carried on under terms of
extreme restriction and under central control. Such conditions were maintained
in the first thirty years of the Communist regime which began in 1949; however,
there have been several stages of evolution, from the institution of an
industrialization program in the 1950s to a modernization policy commencing in
1978 which combined economic development with the beginnings of opening the
country.

<PAGE>

China governmental actions can have a significant effect on the economic
conditions in China, which could adversely affect the value and liquidity of the
Portfolio's investments. Although the Chinese government has recently begun to
institute economic reform policies, there can be no assurances that it will
continue to pursue such policies or, if it does, that such policies will
succeed.

The securities industry in China is not well developed. China has no securities
laws of nationwide applicability. The municipal securities regulations adopted
by Shanghai and Shenzhen municipalities are very new, as are their respective
securities exchanges and other self-regulatory organizations. In addition,
Chinese stockbrokers and other intermediaries may not perform as well as their
counterparts in the United States and other more developed securities markets.
The prices at which the Portfolio may acquire investments may be affected by
trading by persons with material non-public information and by securities
transactions by brokers in anticipation of transactions by the Portfolio in
particular securities.

China does not have a comprehensive system of laws, although substantial changes
have occurred in this regard in recent years. The corporate form of organization
has only recently been permitted in China and national regulations governing
corporations were introduced only in May 1992. Prior to the introduction of such
regulations, Shanghai had adopted a set of corporate regulations applicable to
corporations located or listed in Shanghai, and the relationship between the two
sets of regulations is not clear. Consequently, until a firmer legal basis is
provided, even such fundamental corporate law tenets as the limited liability
status of Chinese issuers and their authority to issue shares remain open to
question. Laws regarding fiduciary duties of officers and directors and the
protection of shareholders are not well developed. China's judiciary is
relatively inexperienced in enforcing the laws that exist, leading to a higher
than usual degree of uncertainty as to the outcome of any litigation. Even where
adequate law exists in China, it may be impossible to obtain swift and equitable
enforcement of such law, or to obtain enforcement of the judgment by a court of
another jurisdiction. The bankruptcy laws pertaining to state enterprises have
rarely been used and are untried in regard to an enterprise with foreign
shareholders, and there can be no assurance that such shareholders, including
the Portfolio, would be able to realize the value of the assets of the
enterprise or receive payment in convertible currency. As the Chinese legal
system develops, the promulgation of new laws, changes to existing laws and the
preemption of local laws by national laws may adversely affect foreign
investors, including the Portfolio. The uncertainties faced by foreign investors
in China are exacerbated by the fact that many laws, regulations and decrees of
China are not publicly available, but merely circulated internally.

There are currently two officially recognized securities exchanges in China --
The Shanghai Securities Exchange which opened in December 1990 and The Shenzhen
Stock Exchange which opened in July 1991. Shares traded on these Exchanges are
two types -- "A" shares which can be traded only by Chinese investors and "B"
shares which can be traded only by individuals and corporations not resident in
China.

In Shanghai, all "B" shares are denominated in Chinese renminbi ("RMB"), but all
transactions in "B" shares must be settled in U.S. dollars, and all
distributions made on "B" shares are payable in U.S. dollars, the exchange rate
being the weighted average exchange rate for the U.S. dollar as published by the
Shanghai Foreign Exchange Adjustment Centre.

In Shenzhen, the purchase and sale prices for "B" shares are quoted in Hong Kong
dollars. Dividends and other lawful revenue derived from "B" shares are
calculated in RMB but payable in Hong Kong dollars, the rate of exchange being
the average rate published by Shenzhen Foreign Exchange Adjustment Centre.

There are no foreign exchange restrictions on the repatriation of gains made on
or income derived from "B" shares, subject to the payment of taxes imposed by
China thereon.

<PAGE>

Company law relating to companies limited by shares and regulations regarding
the issuing of shares by equity joint ventures have not yet been developed on a
national basis. The Shenzhen municipality issued regulations in 1992 relating to
joint stock companies, and the Shanghai municipality has a draft joint stock
company law under review. Regulations governing the trading of securities on
both the Shenzhen and the Shanghai stock exchanges have been issued by each
municipality; there is no national securities legislation as yet.

Economies of countries in the China region may differ favorably or unfavorably
from the U.S. economy in such respects as rate of growth of gross domestic
product, rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments position. As an export-driven economy, the economy of China
is affected by developments in the economies of its principal trading partners.
Revocation by the United States of China's "Most Favored Nation" trading status,
which the U.S. President and Congress reconsider annually, would adversely
affect the trade and economic development of China and Hong Kong. Hong Kong and
Taiwan have limited natural resources, resulting in dependence on foreign
sources for certain raw materials and economic vulnerability to global
fluctuations of price and supply.

** 18 Options on Futures Contracts, Forward Contracts and Options on Foreign
Currencies. Unlike transactions entered into by the Portfolio in futures
contracts, options on foreign currencies and forward contracts are not traded on
contract markets regulated by the CFTC or (with the exception of certain foreign
currency options) by the SEC. To the contrary, such instruments are traded
through financial institutions acting as market-makers, although foreign
currency options are also traded on certain national securities exchanges such
as the Philadelphia Stock Exchange and the Chicago Board Options Exchange,
subject to SEC regulation. Similarly, options on currencies may be traded
over-the-counter. In an over-the-counter trading environment, many of the
protections afforded to exchange participants will not be available. For
example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of time.
Although the purchaser of an option cannot lose more than the amount of the
premium plus related transaction costs, this entire amount could be lost.
Moreover, the option writer and a trader of forward contracts could lose amounts
substantially in excess of their initial investments, due to the margin and
collateral requirements associated with such positions.

** 19 Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on organized
exchanges will be available with respect to such transactions. In particular,
all foreign currency option positions entered into on a national securities
exchange are cleared and guaranteed by the Options Clearing Corporation ("OCC"),
thereby reducing the risk of counterparty default. Further, a liquid secondary
market in options traded on a national securities exchange may be more readily
available than in the over-the-counter market, potentially permitting the
Portfolio to liquidate open positions at a profit prior to exercise or
expiration, or to limit losses in the event of adverse market movements.

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

** 21 As in the case of forward contracts, certain options on foreign currencies
are traded over-the-counter and involve liquidity and credit risks which may not
be present in the case of exchange-traded currency options. The Portfolio's
ability to terminate over-the-counter options will be more limited than with
exchange-traded options. It is also possible that broker-dealers participating
in over-the-counter options transactions will not fulfill their obligations.

** 22 In addition, futures contracts, options on futures contracts, forward
contracts and options on foreign currencies may be traded on foreign exchanges.
Such transactions are subject to the risk of governmental actions affecting
trading in or the prices of foreign currencies or securities. The value of such
positions also could be adversely affected by: (i) other complex foreign
political and economic factors; (ii) lesser availability than in the United
States of data on which to make trading decisions; (iii) delays in the
Portfolio's ability to act upon economic events occurring in foreign markets
during nonbusiness

<PAGE>
hours in the United States; (iv) the imposition of different exercise and
settlement terms and procedures and margin requirements than in the United
States; and (v) lesser trading volume.

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

Special Information Concerning Master-Feeder Fund Structure. Unlike other
open-end management investment companies (mutual funds) which directly acquire
and manage their own portfolio securities, the Fund seeks to achieve its
investment objective by investing all of its Assets in the Portfolio, a separate
registered investment company with the same investment objective as the Fund.
Therefore, an investor's interest in the Portfolio's securities is indirect. In
addition to selling a beneficial interest to the Fund, the Portfolio may sell
beneficial interests to other mutual funds, investment vehicles or institutional
investors. Such investors will invest in the Portfolio on the same terms and
conditions and will pay a proportionate share of the Portfolio's expenses.
However, the other investors investing in the Portfolio are not required to sell
their shares at the same public offering price as the Fund due to variations in
sales commissions and other operating expenses. Therefore, investors in the Fund
should be aware that these differences may result in differences in returns
experienced by investors in the different funds that invest in the Portfolio.
Such differences in returns are also present in other mutual fund structures.
Information concerning other holders of interests in the Portfolio is available
from Bankers Trust at 1-800-368-4031.

Smaller funds investing in the Portfolio may be materially affected by the
actions of larger funds investing in the Portfolio.

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

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

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

investment objective of the Portfolio is also not a fundamental policy.
Shareholders of the Fund will receive 30 days prior written notice with respect
to any change in the investment objective of the Fund or the Portfolio.

Investment Restrictions

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

As a matter of fundamental policy, no Portfolio (or Fund) may (except that no
investment restriction of the Fund shall prevent the Fund from investing all of
its Assets in an open-end investment company with substantially the same
investment objectives):

(1) borrow money (including through reverse repurchase agreements or
dollar roll transactions) in excess of 5% of the Portfolio's total
assets (taken at cost), except that the Portfolio may borrow for
temporary or emergency purposes up to 1/3 of its total assets. The
Portfolio may pledge, mortgage or hypothecate not more than 1/3 of
such assets to secure such borrowings provided that collateral
arrangements with respect to options and futures, including deposits
of initial deposit and variation margin, are not considered a pledge
of assets for purposes of this restriction and except that assets
may be pledged to secure letters of credit solely for the purpose of
participating in a captive insurance company sponsored by the
Investment Company Institute;

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

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

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

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

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

20
<PAGE>

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

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

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

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

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

(iv) purchase securities issued by any investment company (except when
such purchase, though not made in the open market, is part of a
plan of merger or consolidation); if such purchase at the time
thereof would cause: (a) more than 10% of the Portfolio's (Fund's)
total assets (taken at the greater of cost or market value) (except
the Portfolio may exceed the applicable percentage limits to the
extent permitted by an exemptive order of the SEC) to be invested in
the securities of such issuers; (b) more than 5% of the Portfolio's
(Fund's) total assets (taken at the greater of cost or market value)
(except the Portfolio may exceed the applicable percentage limits
to the extent permitted by an exemptive order of the SEC) to be
invested in any one investment company; or (c) more than 3% of the
outstanding voting securities of any such issuer to be held for the
Portfolio (Fund);

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

(vi) write puts and calls on securities unless each of the following
conditions are met: (a) the security underlying the put or call is
within the investment policies of the Portfolio (Fund) and the
option is issued by the OCC, except for put and call options issued
by non-U.S. entities or listed on non-U.S. securities or commodities
exchanges; (b) the aggregate value of the obligations underlying the
puts determined as of the date the options are sold shall not exceed
5% of the Portfolio's (Fund's) net assets; (c) the securities
subject to the exercise of the call written by the Portfolio (Fund)
must be owned by the Portfolio (Fund) at the time the call is sold
and must continue to be owned by the Portfolio (Fund) until the call
has been exercised, has lapsed, or the Portfolio (Fund) has
purchased a closing call, and such purchase has been confirmed,
thereby extinguishing the Portfolio's (Fund's) obligation to deliver
securities pursuant to the call it has sold; and (d) at the time a
put is written, the Portfolio (Fund) establishes a segregated
account with its custodian consisting of cash or securities
acceptable to the broker equal in value to the amount the Portfolio
(Fund) will be obligated to pay upon exercise of the put (this
account must be maintained until the put is exercised, has expired,
or the Portfolio (Fund) has purchased a closing put, which is a put
of the same series as the one previously written); and

<PAGE>

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

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

Portfolio Transactions and Brokerage Commissions

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

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

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

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

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

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

<PAGE>

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

In certain instances there may be securities which are suitable for the
Portfolio as well as for one or more of the Adviser's other clients. Investment
decisions for the Portfolio and for the Adviser's other clients are made with a
view to achieving their respective investment objectives. It may develop that a
particular security is bought or sold for only one client even though it might
be held by, or bought or sold for, other clients. Likewise, a particular
security may be bought for one or more clients when one or more clients are
selling that same security. Some simultaneous transactions are inevitable when
several clients receive investment advice from the same investment adviser,
particularly when the same security is suitable for the investment objectives of
more than one client. When two or more clients are simultaneously engaged in the
purchase or sale of the same security, the securities are allocated among
clients in a manner believed to be equitable to each. It is recognized that in
some cases this system could have a detrimental effect on the price or volume of
the security as far as the Portfolio is concerned. However, it is believed that
the ability of the Portfolio to participate in volume transactions will produce
better executions for the Portfolio. For the period June 30, 1998
(commencement of operations), to September 30, 1998, International Small Company
Equity Portfolio paid brokerage commissions in the amount of $_________.
PERFORMANCE INFORMATION

Standard Performance Information

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

Yield: Yield refers to the income generated by an investment in the Fund
over a given period of time, expressed as an annual percentage rate.
Yields are calculated according to a standard that is required for all
stock and bond funds. Because this differs from other accounting methods,
the quoted yield may not equal the income actually paid to shareholders.
This difference may be significant for the Fund investing in the Portfolio
whose investments are denominated in foreign currencies. Yields for a Fund
used in advertising are computed by dividing the Fund's interest and
dividend income for a given 30-day or one-month period, net of expenses,
by the average number of shares entitled to receive distributions during
the period, dividing this figure by the Fund's net asset value per share
at the end of the period, and annualizing the result (assuming compounding
of income) in order to arrive at an annual percentage rate. Income is
calculated for purpose of yield quotations in accordance with standardized
methods applicable to all stock and bond mutual funds. Dividends from
equity investments are treated as if they were accrued on a daily basis,
solely for the purpose of yield calculations. In general, interest income
is reduced with respect to bonds trading at a premium over their par value
by subtracting a portion of the premium from income on a daily basis, and
is increased with respect to bonds trading at a discount by adding a
portion of the discount to daily income. Capital gains and losses
generally are excluded from the calculation.

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

Total return: Total return is the change in value of an investment in the
Fund over a given period, assuming reinvestment of any dividends and
capial gains. A cumulative total return reflects actual performance over a
stated period of time. An average annual total return is a hypothetical
rate of

<PAGE>

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

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

Performance information may include the Fund's investment results and/or
comparisons of its investment results to the Salomon Brothers Extended Market
Index of the World ex-US (Total), or various other unmanaged indices or results
of other mutual funds or investment or savings vehicles. The Fund's investment
results as used in such communications will be calculated on a total rate of
return basis in the manner set forth herein. From time to time, fund rankings
may be quoted from various sources, such as Lipper Analytical Services, Inc.,
Value Line, and Morningstar, Inc.

The Trust may provide period and average annualized "total return" quotations
for the Shares. The Shares' "total return" refers to the change in the value of
an investment in the Shares over a stated period based on any change in net
asset value per Share and including the value of any Shares purchased with any
dividends or capital gains distributed during such period. Period total return
may be annualized. An annualized total return is a compounded total return which
assumes that the period total return is generated over a one-year period, and
that all dividends and capital gains distributions are reinvested. An annualized
total return will be higher than a period total return if the period is shorter
than one year, because of the compounding effect.

Unlike some bank deposits or other investments which pay a fixed yield for a
stated period of time, the total return of the Fund will vary depending upon
interest rates, the current market value of the securities held by the Portfolio
and changes in the Shares' expenses.
Comparison of Fund Performance

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

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

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

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

<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Economic and Market Information

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

<PAGE>

percent of American households are pursuing their financial goals through mutual
funds. These investors, as well as businesses and institutions, have entrusted
over $4.4 trillion to the more than 6,700 funds available.

VALUATION OF SECURITIES; REDEMPTIONS AND PURCHASES IN KIND

Valuation of Securities

The net asset value ("NAV") per Share is calculated once on each Valuation Day
as of the close of regular trading on the NYSE (the "Valuation Time"), which is
currently 4:00 p.m., Eastern time or in the event that the NYSE closes early, at
the time of such early closing. The NAV per Share is computed by dividing the
value of the Fund's assets (i.e., the value of its investment in the Portfolio
and other assets), less all liabilities attributable to the Shares, by the total
number of Shares outstanding as of the Valuation Time. The Portfolio's
securities and other assets are valued primarily on the basis of market
quotations or, if quotations are not readily available, by a method which the
Portfolio's Board of Trustees believes accurately reflects fair value.

Under procedures adopted by the Board, a NAV for a Fund later determined to have
been inaccurate for any reason will be recalculated. Purchases and redemptions
made at a NAV determined to have been inaccurate will be adjusted, although in
certain circumstances, such as where the difference between the original NAV and
the recalculated NAV divided by the recalculated is 0.005 (1/2 of 1%) or less or
shareholder transactions are otherwise insubstantially affected, further action
is not required. Equity and debt securities (other than short-term debt
obligations maturing in 60 days or less), including listed securities and
securities for which price quotations are available, will normally be valued on
the basis of market valuations furnished by a pricing service. Such market
valuations may represent the last quoted price on the securities major trading
exchange or may be determined through use of matrix pricing. In matrix pricing,
pricing services may use various pricing models, involving comparable
securities, historic relative price movements, economic factors and dealer
quotations. Over-the-counter securities will normally be valued at the bid
price. Short-term debt obligations and money market securities maturing in 60
days or less are valued at amortized cost, which approximates market.

Securities for which market quotations are not readily available are valued by
Bankers Trust pursuant to procedures adopted by the Portfolio's Board of
Trustees. It is generally agreed that securities for which market quotations are
not readily available should not be valued at the same value as that carried by
an equivalent security which is readily marketable.

The problems inherent in making a good faith determination of value are
recognized in the codification effected by SEC Financial Reporting Release No. 1
("FRR 1" (formerly Accounting Series Release No. 113)) which concludes that
there is "no automatic formula" for calculating the value of restricted
securities. It recommends that the best method simply is to consider all
relevant factors before making any calculation. According to FRR 1 such factors
would include consideration of the:

type of security involved, financial statements, cost at date of
purchase, size of holding, discount from market value of
unrestricted securities of the same class at the time of purchase,
special reports prepared by analysts, information as to any
transactions or offers with respect to the security, existence of
merger proposals or tender offers affecting the security, price and
extent of public trading in similar securities of the issuer or
comparable companies, and other relevant matters.

To the extent that the Portfolio purchases securities which are restricted as to
resale or for which current market quotations are not readily available, the
Adviser of the Portfolio will value such securities based upon all relevant
factors as outlined in FRR 1.
Purchase of Shares

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

<PAGE>

Purchase orders for Shares (including those purchased through a Service Agent)
that are transmitted to the Trust's Transfer Agent (the "Transfer Agent"), prior
to the Valuation Time on any Valuation Day will be effective at that day's
Valuation Time. The Trust and Transfer Agent reserve the right to reject any
purchase order.

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

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

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

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

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

Minimum Investments

To open an account $5 million

To add to an account $100,000

Minimum Account Balance $500,000

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

If you are new to BT Institutional Funds, complete and sign an account
application and mail it along with your check to the address listed below. For
an account application, call the BT Service Center at 1-800-368-4031.

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

Overnight mailings:

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

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

o Mail an account application with a check,

o Wire money into your account,

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

o Contact your Service Agent or Investment Professional.

<PAGE>

Additional Information About Buying Shares

<TABLE>
<CAPTION>
To Open an Account To Add to an Account
<S><C>
By Wire Call the BT Service Center at Call your Investment Professional
1-800-368-4031 to receive wire or wire additional investment to:
instructions for account
establishment. Routing No.: 021001033
Attn.: Bankers Trust/IFTC Deposit
DDA No.: 00-226-296
FBO: (Account name)
(Account Number)
Credit: BT Institutional
International Small Company
Equity Fund

By Phone Contact your Service Agent, Contact your Service Agent,
Investment Professional, or call Investment Professional, or call
BT's Service Center at BT's Service Center at
1-800-368-4031. If you are an 1-800-368-4031. If you are an
existing Shareholder, you may existing Shareholder, you may
exchange from another BT account exchange from another BT account
with the same registration, with the same registration,
including name, address, and including name, address, and
taxpayer ID number. taxpayer ID number.

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

Redemption of Shares

You can arrange to take money out of your fund account at any time by selling
(redeeming) some or all of your Shares.

Your Shares shall be sold at the next NAV calculated after an order is received
by the Transfer Agent. Redemption requests should be transmitted by customers in
accordance with procedures established by the Transfer Agent and the
shareholder's Service Agent. Redemption requests for Shares received by the
Service Agent and transmitted to the Transfer Agent prior to the Valuation Time
on each Valuation Day will be effective at that day's Valuation Time and the
redemption proceeds normally will be delivered to the shareholder's account the
next day, but in any event within seven calendar days following receipt of the
request.

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

Redemption orders are processed without charge by the Trust. The Trust reserves
the right to close investor accounts via 30 day notice in writing if the Fund
account balance falls below $100,000.

To sell Shares in a retirement account, your request must be made in writing,
except for exchanges to other eligible funds in the BT Family of Funds, which
can be requested by phone or in writing. For information on retirement
distributions, contact your Service Agent or call the BT Service Center at
1-800-368-4031.

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

28
<PAGE>

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

o Your account registration has changed within the last 30 days,

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

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

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

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

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

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

Additional Information About Selling Shares

By Wire - You must sign up for the wire feature before using it. To verify that
it is in place, call 1-800-368-4031. Minimum wire: $1,000. Your wire redemption
request must be received by the Transfer Agent before 4:00 p.m. Eastern time for
money to be wired on the next business day.

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

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

Overnight mailings:

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

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

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

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

Exchange Privilege

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

o Call your Service Agent for information and a prospectus. Read the
prospectus for relevant information.

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

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

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

29
<PAGE>

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

Redemptions and Purchases in Kind

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

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

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

The Fund may, at its own option, accept securities in payment for shares. The
securities delivered in payment for shares are valued by the method described
under "Net Asset Value" as of the day the Fund receives the securities. This may
be a taxable transaction to the shareholder. (Consult your tax adviser for
future tax guidance.) Securities may be accepted in payment for shares only if
they are, in the judgment of Bankers Trust, appropriate investments for the
Fund's portfolio. In addition, securities accepted in payment for shares must:
(i) meet the investment objective and policies of the acquiring Fund's
portfolio; (ii) be acquired by the applicable Fund for investment and not for
resale (other than for resale to the Fund's portfolio); (iii) be liquid
securities which are not restricted as to transfer either by law or liquidity of
the market; and (iv) if stock, have a value which is readily ascertainable as
evidenced by a listing on a stock exchange, over-the-counter market or by
readily available market quotations from a dealer in such securities. Each Fund
reserves the right to accept or reject at its own option any and all securities
offered in payment for its shares.]

Trading in Foreign Securities

Trading in foreign cities may be completed at times which vary from the closing
of the New York Stock Exchange ("NYSE"). In computing the net asset value, the
Fund values foreign securities at the latest closing price on the exchange on
which they are traded immediately prior to the closing of the NYSE. Similarly,
foreign securities quoted in foreign currencies are translated into U.S. dollars
at the foreign exchange rates.

Occasionally, events that affect values and exchange rates may occur between the
times at which they are determined and the closing of the NYSE. If such events
materially affect the value of portfolio securities, these securities may be
valued at their fair value as determined in good faith by the Trustees, although
the actual calculation may be done by others.

<PAGE>

MANAGEMENT OF THE TRUST AND THE PORTFOLIO

The affairs of the Trust and the Portfolio are managed under the supervision of
their respective Boards of Trustees. By virtue of the responsibilities assumed
by Bankers Trust, the administrator of the Trust and Portfolio, neither the
Trust nor the Portfolio requires employees other than its executive officers.
None of the executive officers of the Trust or the Portfolio devotes full time
to the affairs of the Trust or the Portfolio.

The Trustees of the Trust who are not "interested persons" (as defined in the
1940 Act) (the "Independent Trustees") of the Trust or of the Portfolio, as the
case may be, have adopted written procedures reasonably appropriate to deal with
potential conflicts of interest, up to and including creating separate boards of
trustees, arising from the fact that several of the same individuals are
trustees of the Trust and of the Portfolio.

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

The Trustees and officers of the Trust, their birthdate and their principal
occupations during the past five years are set forth below. Their titles may
have varied during that period. Unless otherwise indicated, the address of each
officer is P. O. Box 7558, Portland, Maine 04101.

Trustees of BT Institutional Funds

RICHARD J. HERRING (birthdate: February 18, 1946) -- Trustee; Vice Dean and
Director, Wharton Undergraduate Division, Professor, Finance Department, The
Wharton School, University of Pennsylvania. His address is 3255 Roberts Road,
Bryn Mawr, Pennsylvania 19010.

BRUCE E. LANGTON (birthdate: May 10, 1931) -- Trustee; Retired; Director, Adela
Investment Co. and University Patents, Inc.; formerly Assistant Treasurer of IBM
Corporation (until 1986). His address is 99 Jordan Lane, Stamford, Connecticut
06903.

CHARLES P. BIGGAR (birthdate: October 13, 1930) -- Trustee; Retired; Director of
Chase/NBW Bank Advisory Board; Director, Batemen, Eichler, Hill Richards Inc.;
formerly Vice President of International Business Machines and President of the
National Services and the Field Engineering Divisions of IBM. His address is 12
Hitching Post Lane, Chappaqua, New York 10514.

<PAGE>

Trustee Compensation Table

Aggregate Aggregate
Compensation Compensation Aggregate from Total
from BT from BT Compensation BT Compensation
Name of Person, Investment Institutional Investment from Fund
Position Funds* Funds* Portfolios+ Complex**
- ----------------------------------------------------------------------------------------
<S><C>
Richard J. Herring,
Trustee of
BT Investment Funds N/A $13,750 N/A $27,500

Bruce E. Langton,
Trustee of
BT Investment Funds N/A $13,750 N/A $27,500

Charles P. Biggar,
Trustee of
BT Investment Funds
and Portfolio N/A $13,750 $13,750 $27,500
- ---------------------------------------------------------------------------
</TABLE>

* The aggregate compensation is provided for the BT Institutional Funds
which is comprised of 10 funds. Information is furnished for the fiscal
year ended September 30, 1998.

+ The compensation is provided for the calendar year ended December 31,
1998.

** Aggregated information is furnished for the BT Family of Funds which
consists of the following: BT Investment Funds, BT Institutional Funds, BT
Pyramid Mutual Funds, BT Advisor Funds, BT Investment Portfolios, Cash
Management Portfolio, Treasury Money Portfolio, Tax Free Money Portfolio,
NY Tax Free Money Portfolio, International Equity Portfolio, Utility
Portfolio, Short Intermediate US Government Securities Portfolio,
Intermediate Tax Free Portfolio, Asset Management Portfolio, Equity 500
Index Portfolio, and Capital Appreciation Portfolio. The compensation is
provided for the calendar year ended December 31, 1998.

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

Investment Adviser

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

Bankers Trust Company, a New York banking corporation, is a wholly owned
subsidiary of Bankers Trust New York Corporation. Bankers Trust conducts a
variety of general banking and trust activities and is a major wholesale
supplier of financial services to the international and domestic institutional
markets. [As of March 31, 1998, Bankers Trust New York Corporation was the
seventh largest bank holding company in the United States with total assets of
over $150 billion.] [The scope of Bankers Trust's investment management
capability is unique due to its leadership positions in both active and passive
quantitative management and its presence in major equity and fixed income
markets around the world. Bankers Trust is one of the nation's largest and most
experienced investment managers with over $300 billion in assets under
management globally.]

<PAGE>

Under the terms of the Portfolio's investment advisory agreement with Bankers
Trust (the "Advisory Agreement"), Bankers Trust manages the Portfolio subject to
the supervision and direction of the Board of Trustees of the Portfolio. Bankers
Trust will: (i) act in strict conformity with the Portfolio's Declaration of
Trust, the 1940 Act and the Investment Advisers Act of 1940, as the same may
from time to time be amended; (ii) manage the Portfolio in accordance with the
Portfolio's investment objectives, restrictions and policies; (iii) make
investment decisions for the Portfolio; and (iv) place purchase and sale orders
for securities and other financial instruments on behalf of the Portfolio.

All orders for investment transactions on behalf of the Portfolio are placed by
Bankers Trust with broker-dealers and other financial intermediaries that it
selects, including those affiliated with Bankers Trust. A Bankers Trust
affiliate will be used in connection with a purchase or sale of an investment
for the Portfolio only if Bankers Trust believes that the affiliate's charge for
the transaction does not exceed usual and customary levels. The Portfolio will
not invest in obligations for which Bankers Trust or any of its affiliates is
the ultimate obligor or accepting bank. The Portfolio may, however, invest in
the obligations of correspondents and customers of Bankers Trust.

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

Under the Advisory Agreement, Bankers Trust receives a fee from the Portfolio,
computed daily and paid monthly based on a percentage of the average daily net
assets of the Portfolio. Under certain circumstances Bankers Trust has agreed to
pay fees to certain securities brokers, dealers and other entities that
facilitate the sale of Fund shares, and in connection therewith provide
administrative, shareholder or distribution related services to the Fund or its
shareholders. Fees paid to entities that administer mutual fund "supermarkets"
may be higher than fees paid for other types of services.

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

Sub-Investment Adviser

Bankers Trust has entered into a sub-investment advisory agreement (the
"Sub-Advisory Agreement") with BT Funds Management (International) Limited ("BT
Funds Management International") a wholly owned subsidiary of Bankers Trust
Australia Limited ("BTAL") in Sydney. BTAL is a wholly owned subsidiary of
Bankers Trust New York Corporation. Under the Sub-Advisory Agreement, Bankers
Trust may receive investment advice and research services with respect to
companies in which the Portfolio may invest and may grant BT Funds Management
International investment management authority as well as the authority to buy
and sell securities if Bankers Trust believes it would be beneficial to the
Portfolio. Under the Sub-Advisory Agreement for the Portfolio, BT Funds
Management International receives a fee from Bankers Trust for providing
investment advice and research services, accrued daily and paid monthly, equal
to 100% of the advisory fee earned by Bankers Trust with respect to that portion
of the Portfolio that the Sub-Adviser manages.

<PAGE>
was opened in Australia in 1966 and Australian merchant banking operations
commenced in 1969. A related organization, Bankers Trust New Zealand Limited,
was established in 1986. Although BTAL has not previously served as investment
adviser for a registered investment company, BTAL provides investment services
for a range of clients.

Administrator

Under its Administration and Services Agreement with the Trust, Bankers Trust
calculates the net asset value of the Fund and generally assists the Board of
Trustees of the Trust in all aspects of the administration and operation of the
Trust. The Administration and Services Agreement provides for the Trust to pay
Bankers Trust a fee, computed daily and paid monthly based on a percentage of
the average daily net assets of the shares.

Under an Administration and Services Agreement with the Portfolio, Bankers Trust
calculates the value of the assets of the Portfolio and generally assists the
Board of Trustees of the Portfolio in all aspects of the administration and
operation of the Portfolio. The Administration and Services Agreement provides
for the Portfolio to pay Bankers Trust a fee, computed daily and paid monthly,
at the annual rate of 0.15% of the average daily net assets of the Portfolio.
Under each Administration and Services Agreement, Bankers Trust may delegate one
or more of its responsibilities to others, including affiliates of ICC
Distributors, at Bankers Trust's expense.

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

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

For the period from June 30, 1998 (commencement of operations) to September 30,
1998, Bankers Trust received $____ in compensation for administrative and other
services provided to shares of the Fund. For the same period, Bankers Trust
reimbursed $_____ to the shares of the Fund to cover expenses.

For the fiscal period from June 30, 1998 (commencement of operations) to
September 30, 1998, Bankers Trust received $______, in compensation for
administrative and other services provided to the Portfolio.

Distributor

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

Service Agent

shareholder accounts, processing purchase and redemption transactions, arranging
for bank wires, performing shareholder sub-accounting, answering client
inquiries regarding the Trust, assisting clients in changing dividend options,
account designations and addresses, providing periodic statements showing the
client's account balance, transmitting proxy statements, periodic reports,
updated prospectuses and other communications to shareholders and, with respect
to meetings of shareholders, collecting, tabulating and forwarding to the Trust
executed proxies and obtaining such other information and performing such other
services as the Administrator or the Service Agent's clients may reasonably
request and agree upon with the Service Agent. Service Agents may separately
charge their clients additional fees only to cover provision of additional or
more comprehensive services not already provided under the "Administration and
Services Agreement with Bankers Trust, or of the type or scope not generally
offered by a mutual fund, such as cash management services or enhanced
retirement or trust reporting. In addition, investors may be charged a
transaction fee if they effect transactions in Fund shares through a broker or
agent. Each Service Agent has agreed to transmit to shareholders, who are its
customers, appropriate disclosures of any fees that it may charge them directly.

Custodian and Transfer Agent

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

Use of Name

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

The Trust may be required, on 60 days' notice from Bankers Trust at any time, to
abandon use of the acronym "BT" as part of their name. If this were to occur,
the Trustees would select an appropriate new name for the Trust, but there would
be no other material effect on the Trust, their shareholders or activities.

Banking Regulatory Matters

Bankers Trust has been advised by its counsel that in its opinion Bankers Trust
may perform the services for the Portfolio contemplated by the Advisory
Agreements and other activities for the Trust and the Portfolio described in the
Prospectuses and this SAI without violation of the Glass-Steagall Act or other
applicable banking laws or regulations. However, counsel has pointed out that
future changes in either federal or state statutes and regulations concerning
the permissible activities of banks or trust companies, as well as future
judicial or administrative decisions or interpretations of present and future
statutes and regulations, might prevent Bankers Trust from continuing to perform
those services for the Trust and the Portfolio. State laws on this issue may
differ from the interpretations of relevant Federal law and banks and financial
institutions may be required to register as dealers pursuant to state securities
law. If the circumstances described above should change, the Board of Trustees
would review the relationships with Bankers Trust and consider taking all
actions necessary in the circumstances.

Counsel and Independent Accountants

Willkie Farr & Gallagher, 787 Seventh Avenue, New York, New York 10019-6099,
serves as Counsel to the Trust and the Portfolio. PricewaterhouseCoopers L.L.P.,
1100 Main Street, Suite 900, Kansas City, Missouri 64105 acts as
Independent Accountants of the Trust and the Portfolio.

<PAGE>

ORGANIZATION OF THE TRUST

BT Institutional Funds was organized on March 26, 1990. The shares of each
series participate equally in the earnings, dividends and assets of the
particular series. The Trust may create and issue additional series of shares.
The Trust's Declaration of Trust permits the Trustees to divide or combine the
shares into a greater or lesser number of shares without thereby changing the
proportionate beneficial interest in series. Each share represents an equal
proportionate interest in a series with each other share. Shares when issued are
fully paid and non-assessable, except as set forth below. Shareholders are
entitled to one vote for each share held.

Shares of the Trust do not have cumulative voting rights, which means that
holders of more than 50% of the shares voting for the election of Trustees can
elect all Trustees. Shares are transferable but have no preemptive, conversion
or subscription rights. Shareholders generally vote by Fund, except with respect
to the election of Trustees and the ratification of the selection of independent
accountants.

The Trust is an entity commonly known as a "Massachusetts business trust."
Massachusetts law provides that shareholders could under certain circumstances
be held personally liable for the obligations of the Trust. However, each
Trust's Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of this disclaimer be given in
each agreement, obligation or instrument entered into or executed by the Trust
or a Trustee. The Declaration of Trust provides for indemnification from the
Trust's property for all losses and expenses of any shareholder held personally
liable for the obligations of the Trust. Thus, the risk of a shareholder's
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Trust itself would be unable to meet its obligations,
a possibility that the Trust believes is remote. Upon payment of any liability
incurred by the Trust, the shareholder paying the liability will be entitled to
reimbursement from the general assets of the Trust. The Trustees intend to
conduct the operations of the Trust in a manner so as to avoid, as far as
possible, ultimate liability of the shareholders for liabilities of the Trust.

Whenever the Trust is requested to vote on matters pertaining to a Portfolio,
the Trust will vote its shares without a meeting of shareholders of the
respective Fund if the proposal is one, which if made with respect to the Fund,
would not require the vote of shareholders of the Fund as long as such action is
permissible under applicable statutory and regulatory requirements. For all
other matters requiring a vote, the Trust will hold a meeting of shareholders of
the Fund and, at the meeting of the investors in the Portfolio, the Trust will
cast all of its votes in the same proportion as votes in all its shares at the
Portfolio meeting, other investors with a greater pro rata ownership of the
Portfolio could have effective voting control of the operations of the
Portfolio.
TAXATION

Taxation of the Fund

The Trust intends to qualify annually and to elect each Fund to be treated as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code").

To qualify as a regulated investment company, the Fund must, among other things:
(a) derive in each taxable year at least 90% of its gross income from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of stock, securities or foreign currencies or other income
derived with respect to its business of investing in such stock, securities or
currencies; (b) diversify its holdings so that, at the end of each quarter of
the taxable year, (i) at least 50% of the market value of the Fund's assets is
represented by cash and cash items (including receivables), U.S. government
securities, the securities of other regulated investment companies and other
securities, with such other securities of any one issuer limited for the
purposes of this calculation to an amount not greater than 5% of the value of
the Fund's total assets and not greater than 10% of the outstanding voting
securities of such issuer and (ii) not more than 25% of the value of its total
assets is invested in the securities of any one issuer (other than U.S.
government securities or the securities of other regulated investment
companies); and (c) distribute at least 90% of its investment company
36
<PAGE>

taxable income (which includes, among other items, dividends, interest and net
short-term capital gains in excess of net long-term capital losses) and its net
tax-exempt interest income, if any, each taxable year.

As a regulated investment company, the Fund will not be subject to U.S. federal
income tax on its investment company taxable income and net capital gains (the
excess of net long-term capital gains over net short-term capital losses), if
any, that it distributes to shareholders. The Fund intends to distribute to
their shareholders, at least annually, substantially all of their investment
company taxable income and net capital gains. Amounts not distributed on a
timely basis in accordance with a calendar year distribution requirement are
subject to a nondeductible 4% excise tax. To prevent imposition of the excise
tax, the Fund must distribute during each calendar year an amount equal to the
sum of: (1) at least 98% of its ordinary income (not taking into account any
capital gains or losses) for the calendar year; (2) at least 98% of its capital
gains in excess of its capital losses (adjusted for certain ordinary losses, as
prescribed by the Code) for the one-year period ending on October 31 of the
calendar year; and (3) any ordinary income and capital gains for previous years
that was not distributed during those years. A distribution will be treated as
paid on December 31 of the current calendar year if it is declared by the Fund
in October, November or December with a record date in such a month and paid by
the Fund during January of the following calendar year. Such distributions will
be taxable to shareholders in the calendar year in which the distributions are
declared, rather than the calendar year in which the distributions are received.
To prevent application of the excise tax, the Fund intends to make its
distributions in accordance with the calendar year distribution requirement.

If for any taxable year the Fund does not qualify for the special federal income
tax treatment afforded regulated investment companies, all of its taxable income
will be subject to federal income tax at regular corporate rates (without any
deduction for distributions to its shareholders). In such event, dividend
distributions would be taxable to shareholders to the extent of current and
accumulated earnings and profits, and would be eligible for the dividends
received deduction for corporations in the case of corporate shareholders.

Each Fund shareholder will also receive, if appropriate, various written notices
after the close of the Fund's prior taxable year as to the federal income status
of his dividends and distributions which were received from the Fund during the
Fund's prior taxable year. Shareholders should consult their tax advisers as to
any state and local taxes that may apply to these dividends and distributions.

Foreign Securities. Income from investments in foreign stocks or securities may
be subject to foreign taxes. Tax conventions between certain countries and the
United States may reduce or eliminate such taxes. It is impossible to determine
the effective rate of foreign tax in advance since the amount of the Portfolio's
assets to be invested in various countries will vary.

If the Portfolio is liable for foreign taxes, and if more than 50% of the value
of the Portfolio's total assets at the close of its taxable year consists of
stocks or securities of foreign corporations (including foreign governments), it
may make an election pursuant to which certain foreign taxes paid by it would be
treated as having been paid directly by shareholders of the entities, such as
the corresponding Fund, which have invested in the Portfolio. Pursuant to such
election, the amount of foreign taxes paid will be included in the income of the
corresponding Fund's shareholders, and such Fund shareholders (except tax-exempt
shareholders) may, subject to certain limitations, claim either a credit or
deduction for the taxes. Each such Fund shareholder will be notified after the
close of the Portfolio's taxable year whether the foreign taxes paid will "pass
through" for that year and, if so, such notification will designate (a) the
shareholder's portion of the foreign taxes paid to each such country and (b) the
portion which represents income derived from sources within each such country.

The amount of foreign taxes for which a shareholder may claim a credit in any
year will generally be subject to a separate limitation for "passive income,"
which includes, among other items of income, dividends, interest and certain
foreign currency gains. Because capital gains realized by the Portfolio on the
sale of foreign securities will be treated as U.S. source income, the available
credit of foreign taxes paid with respect to such gains may be restricted by
this limitation.

Distributions

Federal Taxes. The Fund intends to qualify as a regulated investment company, as
defined in the Internal Revenue Code of 1986, as amended (the "Code"). Provided
the Fund meets the requirements imposed by the Code and distributes all of its
income and gains, the Fund will not pay any federal income or excise taxes.

<PAGE>

record in October, November or December and paid in January are taxable as if
paid on December 31. The Fund will send each shareholder a tax statement by
January 31 showing the tax status of the distributions received on the past
year.

"Buying a Dividend." On the ex-date for a distribution from capital gains, the
Fund's Share value is reduced by the amount of the distribution. If you buy
Shares just before the ex-date ("buying a dividend"), you will pay the full
price for the Shares and then receive a portion of the price back as a taxable
distribution.

Taxation of the Portfolio

The Portfolio is not subject to federal income taxation. Instead, the Fund and
other investors investing in the Portfolio must take into account, in computing
their federal income tax liability, their share of the Portfolio's income,
gains, losses, deductions, credits and tax preference items, without regard to
whether they have received any cash distributions from the Portfolio.

Distributions received by a Fund from the Portfolio generally will not result in
the Fund recognizing any gain or loss for federal income tax purposes, except
that: (1) gain will be recognized to the extent that any cash distributed
exceeds a Fund's basis in its interest in the Portfolio prior to the
distribution; (2) income or gain may be realized if the distribution is made in
liquidation of a Fund's entire interest in the Portfolio and includes a
disproportionate share of any unrealized receivables held by the Portfolio; and
(3) loss may be recognized if the distribution is made in liquidation of a
Fund's entire interest in the Portfolio and consists solely of cash and/or
unrealized receivables. A Fund's basis in its interest in the Portfolio
generally will equal the amount of cash and the basis of any property which the
Fund invests in the Portfolio, increased by the Fund's share of income from the
Portfolio, and decreased by the amount of any cash distributions and the basis
of any property distributed from the Portfolio.

Sale of Shares

Any gain or loss realized by a shareholder upon the sale or other disposition of
Shares of the Fund, or upon receipt of a distribution in complete liquidation of
a Fund, generally will be a capital gain or loss which will be long-term or
short-term, generally depending upon the shareholder's holding period for the
Shares. Any loss realized on a sale or exchange will be disallowed to the extent
the Shares disposed of are replaced (including Shares acquired pursuant to a
dividend reinvestment plan) within a period of 61 days beginning 30 days before
and ending 30 days after disposition of the Shares. In such a case, the basis of
the Shares acquired will be adjusted to reflect the disallowed loss. Any loss
realized by a shareholder on a disposition of Fund Shares held by the
shareholder for six months or less will be treated as a long-term capital loss
to the extent of any distributions of net capital gains received by the
shareholder with respect to such Shares.

Foreign Withholding Taxes

Income received by the Portfolio from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries.

Backup Withholding

The Fund may be required to withhold U.S. Federal income tax at the rate of 31%
of all taxable distributions payable to shareholders who fail to provide the
Fund with their correct taxpayer identification number or to make required
certifications, or who have been notified by the Internal Revenue Service that
they are subject to backup withholding. Corporate shareholders and certain other
shareholders specified in the Code generally are exempt from such backup
withholding. Backup withholding is not an additional tax. Any amounts withheld
may be credited against the shareholder's U.S. Federal income tax liability.

<PAGE>

Foreign Shareholders

The tax consequences to a foreign shareholder of an investment in the Fund may
be different from those described herein.

Foreign shareholders are advised to consult their own tax advisers with respect
to the particular tax consequences to them of an investment in the Fund.

Other Taxation

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

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

Fund shareholders may be subject to state and local taxes on their Fund
distributions. Shareholders are advised to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in a Fund.

FINANCIAL STATEMENTS

The financial statements for the Fund and the Portfolio for the fiscal period
ended September 30, 1998, are incorporated herein by reference to the Annual
Report to shareholders for the Fund and Portfolio dated September 30, 1998. A
copy of the Fund's and the Portfolio's Annual Report may be obtained without
charge by contacting the Fund.

<PAGE>

APPENDIX

Description of Moody's Corporate Bond Ratings:

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

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

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

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

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

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

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

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

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

Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating
classification from Aa through B in its corporate bond system. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic rating category.

Description of S&P Corporate Bond Ratings:

AAA - Debt rated AAA has the highest rating assigned by Standard & Poor's to a
debt obligation. Capacity to pay interest and repay principal is extremely
strong.

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

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

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

BB - Debt rate BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments.

<PAGE>

B - Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB- rating.

CCC - Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal.

CC - Debt rated CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating.

C - The rating C is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed but debt service
payments are continued.

CI - The rating CI is reserved for income bonds on which no interest is being
paid.

D - Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating will also be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.

Description of S&P commercial paper ratings:

Commercial paper rated A-1 by S&P indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted A-1+.

Description of Moody's commercial paper ratings:

The rating Prime-1 is the highest commercial paper rating assigned by Moody's.
Issuers rated Prime-1 (or related supporting institutions) are considered to
have a superior capacity for repayment of short-term promissory obligations.

Description of S&P Municipal Bond Ratings:

AAA - Prime - These are obligations of the highest quality. They have the
strongest capacity for timely payment of debt service.

General Obligations Bonds - In a period of economic stress, the issuers will
suffer the smallest declines in income and will be least susceptible to
autonomous decline. Debt burden is moderate. A strong revenue structure appears
more than adequate to meet future expenditure requirements. Quality of
management appears superior.

Revenue Bonds - Debt service coverage has been, and is expected to remain,
substantial, stability of the pledged revenues is also exceptionally strong due
to the competitive position of the municipal enterprise or to the nature of the
revenues. Basic security provisions (including rate covenant, earnings test for
issuance of additional bonds and debt service reserve requirements) are
rigorous. There is evidence of superior management.

AA - High Grade - The investment characteristics of bonds in this group are only
slightly less marked than those of the prime quality issues. Bonds rated AA have
the second strongest capacity for payment of debt service.

<PAGE>

A - Good Grade - Principal and interest payments on bonds in this category are
regarded as safe although the bonds are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds in higher
rated categories. This rating describes the third strongest capacity for payment
of debt service. Regarding municipal bonds, the rating differs from the two
higher ratings because:

General Obligation Bonds - There is some weakness, either in the local economic
base, in debt burden, in the balance between revenues and expenditures, or in
quality of management. Under certain adverse circumstances, any one such
weakness might impair the ability of the issuer to meet debt obligations at some
future date.

Revenue Bonds - Debt service coverage is good, but not exceptional. Stability of
the pledged revenues could show some variations because of increased competition
or economic influences on revenues. Basic security provisions, while
satisfactory, are less stringent. Management performance appearance appears
adequate.

S&P's letter ratings may be modified by the addition of a plus or a minus sign,
which is used to show relative standing within the major rating categories,
except in the AAA rating category.

Description of Moody's Municipal Bond Ratings:

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

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

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

Moody's may apply the numerical modifier in each generic rating classification
from Aa through B. The modifier 1 indicates that the security within its generic
rating classification possesses the strongest investment attributes.

Description of S&P Municipal Note Ratings:

Municipal notes with maturities of three years or less are usually given note
ratings (designated SP-1, or -2) to distinguish more clearly the credit quality
of notes as compared to bonds. Notes rated SP-1 have a very strong or strong
capacity to pay principal and interest. Those issues determined to possess
overwhelming safety characteristics are given the designation of SP-1. Notes
rates SP-2 have a satisfactory capacity to pay principal and interest.

Description of Moody's Municipal Note Ratings:

Moody's ratings for state and municipal notes and other short-term loans are
designated Moody's Investment Grade (MIG) and for variable rate demand
obligations are designated Variable Moody's Investment Grade (VMIG). This
distinction recognizes the differences between short-term credit risk and
long-term risk. Loans bearing the designation MIG 1/VMIG 1 are of the best
quality, enjoying strong protection from established cash flows of funds for
their servicing or from established cash flows of funds for their servicing or
from established and broad-based access to the market for refinancing, or both.
Loans bearing the designation MIG2/VMIG2 are of high quality, with ample margins
of protection, although not as large as the preceding group.

S&P's Commercial Paper Ratings:

A is the highest commercial paper rating category utilized by S&P, which uses
the numbers 1, 1, 2 and 3 to denote relative strength within its A
classification. Commercial paper issues rated A by S&P have the following
characteristics: Liquidity ratios are better than industry average. Long-term
debt ratings is A or better. The issuer has access to at least two additional
channels of borrowing. Basic earnings and cash flow are in an upward tread.
Typically, the issuer is a strong company in a well-established industry and has
superior management.

Moody's Commercial Paper Ratings:

<PAGE>

Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics: leasing
market positions in well-established industries; high rates of return on funds
employed; conservative capitalization structures with moderate reliance on debt
and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; well-established access to
a range of financial markets and assured sources of alternate liquidity.

Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rates Prime-3 (or related supporting institutions) have an acceptable
capacity for repayment of short-term promissory obligations. The effect of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.

<PAGE>

STATEMENT OF
ADDITIONAL INFORMATION

January __, 1999

BT Institutional Funds

o International Small Company Equity Fund

Investment Adviser of the Portfolio and Administrator
BANKERS TRUST COMPANY

Distributor

ICC DISTRIBUTORS, INC.

Custodian and Transfer Agent
BANKERS TRUST COMPANY

Independent Accountants

PRICEWATERHOUSECOOPERS LLP

Counsel
WILLKIE FARR & GALLAGHER

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

No person has been authorized to give any information or to make any
representations other than those contained in the Trust's Prospectus, its SAI or
the Trust's official sales literature in connection with the offering of the
Trust's shares and, if given or made, such other information or representations
must not be relied on as having been authorized by the Trust. Neither the
Prospectus nor this Statement of Additional Information constitutes an offer in
any state in which, or to any person to whom, such offer may not lawfully be
made.

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

Cusip# 055922686
Cusip# 055924831

SAI808/810400 (6/98)

BT Institutional Funds

Information About Investing in the

Global Emerging Markets Equity Fund

With the goal of achieving long-term capital growth primarily through investment
in the stocks and other equity securities of companies in the world's emerging
markets

Prospectus

January 31, 1999

Bankers Trust Company

Investment Adviser

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

<PAGE>

TABLE OF CONTENTS

INSTITUTIONAL GLOBAL EMERGING MARKETS EQUITY FUND OVERVIEW
Goal...........................................................3
Core Strategy..................................................4
Principal Risks of Investing in the Fund.......................5
Who Should Consider Investing in the Fund......................6
Annual Fund Operating Expenses.................................7
INSTITUTIONAL GLOBAL EMERGING MARKETS EQUITY FUND IN DETAIL
Objective......................................................9
The Case for Emerging Markets..................................10
Strategy.......................................................11
Past Investment Performance....................................12
Principal Investments..........................................14
Investment Process.............................................15
Risks..........................................................17
Management of the Fund.........................................21
Board of Trustees........................................21
Investment Adviser and Sub-Adviser.......................22
Portfolio Manager........................................23
Administrator............................................24
Organizational Structure.................................25
SHAREHOLDER INFORMATION
Calculating the Fund's Share Price...................................26
Dividends and Distributions..........................................27
Tax Considerations...................................................28
Managing Your Account................................................29
Contacting BT Institutional Funds........................29

<PAGE>

Minimum Account Investments..............................29
Opening a Fund Account...................................30
Buying and Selling Shares................................30
Exchange Privilege.......................................32
Financial Highlights.................................................33

<PAGE>

GLOBAL EMERGING MARKETS EQUITY FUND OVERVIEW

Goal

The Fund invests for long-term capital growth.

<PAGE>

Core Strategy

The Fund invests in stocks and other equity securities of companies in the
world's emerging markets.

<PAGE>

Principal Risks of Investing in the Fund

An investment in the Fund could lose money, or the Fund's performance could
trail that of other investments. For example,

o Stocks that the Investment Sub-Adviser has selected could perform
poorly; or

o The stock market could perform poorly or could under perform other
investments in one or more of the countries in which the Fund has
invested.

Beyond the risks common to all stock investing, an investment in the Fund could
also lose money or under perform alternative investments as a result of risks in
the foreign countries in which the Fund invests:

o Economies in emerging markets are more volatile than developed
countries' and are subject to sudden reversals;

o Adverse political or social developments could undermine the value of
the Fund's investments or prevent the Fund from realizing their full
value;

o Different accounting and financial reporting standards, or less
stringent enforcement of these standards, could convey incomplete or
inaccurate information about a Fund investment; or

o The currency of a country in which the Fund invests may decline in
value relative to the U.S. dollar, which could affect the value of the
investment itself to U.S. investors.

<PAGE>

Who Should Consider Investing in the Fund

The Institutional Global Emerging Markets Equity Fund requires a minimum
investment of $5 million. You should consider investing in the Fund if you are
seeking long-term capital growth. There is, of course, no guarantee that the
Fund will realize its goal. The Fund is designed for investors who are willing
to accept the extreme fluctuation in short-term investment values that have
often accompanied this long-term growth.

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

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

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

<PAGE>

Annual Fund Operating Expenses (expenses paid from Fund assets)

This table describes the fees and expenses you may pay if you buy and hold
shares of the Institutional Global Emerging Markets Equity Fund.

- ----------------------------------------------------------------------
percentage of average
daily net assets*
- ----------------------------------------------------------------------
Management Fees 1.10%
- ----------------------------------------------------------------------
Distribution and Service (12b-1) Fees None
- ----------------------------------------------------------------------
Other Expenses 868.91%
- ----------------------------------------------------------------------
Total Fund Operating Expenses 870.01%+
- ----------------------------------------------------------------------
Less: Fee Waivers or Expense
Reimbursements (868.56%)**
- ----------------------------------------------------------------------
Net Expenses 1.45%
- ----------------------------------------------------------------------

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

**Bankers Trust has agreed, for the 16-month period from the Fund's fiscal year
end of September 30, 1998, to waive its fees and reimburse expenses so that
expenses will not exceed 1.45%.

+ This Fund has been in operation for six months. Generally, when a fund begins
operations, its expenses are relatively high and its assets are relatively
small, which makes its total fund operating expenses (expressed as a
percentage of average daily net assets) relatively high compared to funds with
longer operating histories and greater assets.

<PAGE>

Expense Example

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

Expense Example

- -------------------
1 year 3 years
- -------------------
$148 $459
- -------------------

You may use this hypothetical example to compare the Fund's expense ratio with
other funds.* It does not represent an estimate of future returns or expenses.
Actual costs may be higher or lower.

- --------
*Information on the annual operating expenses of the Fund reflects the expenses
of both the Fund and the Global Emerging Markets Equity Portfolio, the master
fund in which the Institutional Global Emerging Markets Equities Fund invests.
(A further discussion of the relationship between the Fund and the Portfolio
appears in the "Organizational Structure" section of this prospectus.)

<PAGE>

GLOBAL EMERGING MARKETS EQUITY FUND IN DETAIL

Objective

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

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

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

<PAGE>

The Case for Emerging Markets

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

<PAGE>

Strategy

The Fund invests for the long term. We employ a strategy of growth at a
reasonable price. We seek to identify companies in the emerging markets that
combine strong potential for earnings growth with reasonable investment value.
Such companies typically exhibit increasing rates of profitability and cash
flow. Yet their prices compare favorably to other stocks in a given market
measured by factors such as earnings, cash flow and replacement value -- the
cost per share of replacing their physical assets at current prices. Together,
the indicators of growth and value may identify companies with improving
prospects before the market in general has taken notice.

<PAGE>

Prior Performance of a Composite Portfolio Managed by the same Adviser or
Sub-Adviser

The information below compares the performance of a composite of five funds (the
"Related Funds") managed by the same investment team that manages the Fund. The
investment objectives, policies and strategies of the Related Funds are
substantially the same as the Fund, but are only offered to retirement and
institutional investors in the United States and Australia. The Related Funds
also differ from the Fund because:

o They are not subject to the restrictions, including diversification and
investment limitations and restrictions, to which the Fund is subject.

o Their performance was not adjusted by the fees and expenses the Fund pays.

These factors may affect the performance of the Fund and cause it to differ from
that of the composite of the Related Funds.

Returns of the composite of the Related Funds are compared to the Morgan Stanley
Capital International (MSCI) Emerging Markets Free Total Return Index. The Index
is a passive model of combined national stock returns. It does not measure the
costs of buying, holding and selling stock, which are reflected in the composite
of the Related Funds.

[SIDEBAR: The MSCI Emerging Markets Free Total Return Index is a widely
accepted benchmark of emerging market stock performance. It covers stock
markets in 29 emerging market countries and tracks only those stocks within the
markets that a non-resident national can buy and sell freely.]

<PAGE>

Average Annual Returns as of December 31, 1998
- ---------------------------------------------------------------------------
1 year 2 years 3 years
- ---------------------------------------------------------------------------
Global Emerging Markets
Equity Composite
- ---------------------------------------------------------------------------
MSCI Emerging Markets
Free Total Return Index
- ---------------------------------------------------------------------------

Performance information for the five funds shows the combined performance of the
funds added over various time periods. The funds were added to the composite
either at their inception, which ranges form 1994 through 1997, or at the time
when their investment objectives became substantially similar to those of the
Fund, also from 1994 through 1997.

The performance of two of the Related Funds was converted into U.S. dollars from
Australian dollars as of the last day of each month using the London Close
exchange rate. The other three Related Funds are U.S. dollar denominated.
Performance figures of the Index and the Related Funds reflect the reinvestment
of all investment income, including dividends and capital gains.

The performance data represents the prior performance of the composite of the
Related Funds, not the prior performance of the Fund, and should not be
considered an indication of future performance of the Fund.

<PAGE>

Principal Investments

The Fund invests in companies across the full geographic spectrum of emerging
markets: Asia, Latin America, Eastern Europe, the Mediterranean basin and
Africa. It looks for businesses that meet critical "investable" criteria:

o solid management and finances that, according to our research, show signs
of being able to withstand any turmoil affecting the emerging markets;

o exporters able to take advantage of a favorable cost structure compared to
developed-world competition; and

o domestic providers of goods and services positioned to benefit from the
emerging markets' opportunity for long-term growth.

<PAGE>

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

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

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

<PAGE>

Investment Process

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

<PAGE>

Portfolio Turnover

The annual portfolio turnover rate measures the frequency that the Portfolio
sells and replaces the value of its securities within one year. An annual
portfolio turnover rate of 100% means that the Portfolio sold and purchased
investments equal to the average value of the Portfolio for a given year. High
turnover can increase the Fund's transaction costs, thereby lowering its
returns. It may also increase your tax liability. The Fund does not have a
target portfolio turnover rate. Its turnover will depend on the Investment
Adviser's assessment of how often to trade, in light of market conditions and
the Fund's investment objective.

<PAGE>

Risks

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

Primary Risks

Market Risk

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

Emerging Market Risk

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

<PAGE>

Political Risk

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

Information Risk

Emerging-market accounting, auditing, and financial reporting and disclosure
standards tend to be far less stringent than those of developed markets. And the
risks of investors acting on incomplete, inaccurate or deliberately misleading
information are correspondingly greater. Compounding the problem, local
investment research often lacks the sophistication to spot potential pitfalls.
Thus, a linchpin in the Fund's investment process is acquiring first-hand,
independently verified knowledge of prospective investments.

<PAGE>

Foreign Stock Market Risk

Buying and selling shares on emerging-market stock exchanges is more difficult
and costly than on U.S. and developed-market exchanges because of low daily
trading volume. The low volume also leads to greater price fluctuation, and in
times of stress may make it difficult or impossible to sell shares. The Fund
addresses these risks by limiting its investments in a particular market to the
market's capacity to absorb them. In cases where appreciation in a Fund's
investment may strain a market's capacity, the Fund may trim the investment to
keep the risks in line.

<PAGE>

Currency Risk

The Fund invests in foreign securities denominated in foreign currencies. This
creates the possibility that changes in foreign exchange rates will affect the
value of foreign securities or the U.S. dollar amount of income or gain received
on these securities. Bankers Trust's currency management team seeks to minimize
this risk by hedging currencies that are likely to decline.

[Sidebar: Hedging is a strategy designed to offset investment risks. Hedging
activities include the use of forward contracts and may include the use of other
instruments. The Fund uses hedging activities to reduce risk and in no case will
it acquire securities for hedging that would increase risk above the level
associated with conventional investments.]

Secondary Risks

Small Company Risk

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

<PAGE>

Risks Associated with Debt Securities

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

Risks Associated with Lower Quality Debt Securities ("Junk Bonds")

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

<PAGE>

Euro Conversion Risk

The planned conversion by several major European nations to a single, uniform
monetary system, known by its new currency, the euro, and scheduled to begin
January 1, 1999, could conceivably cause disruptions in the smooth functioning
of the world's stock markets. With our service providers, we are jointly
addressing these problems.

Year 2000 Risk

As with most businesses, the Fund faces the risk that the computer systems of
its Investment Adviser and other companies on which it relies for services or in
which it invests will not accommodate the changeovers necessary from dates in
the year 1999 to dates in the year 2000. We have long recognized this problem
and are working both internally and with our business partners and service
providers to address it. If we - or our business partners, service providers,
government agencies or other market participants - do not succeed, it could
materially affect shareholder services or it could affect the value of the
Fund's shares.

Temporary Defensive Position

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

<PAGE>

Management of the Fund

Board of Trustees

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

<PAGE>

Investment Adviser and Sub-Adviser

Under the supervision of the Board of Trustees, Bankers Trust Company, with
headquarters at 130 Liberty Street, New York, NY 10006, acts as the Fund's
investment adviser, exercises day-to-day investment oversight and assumes
responsibility for the securities the Fund owns. It buys and sells securities
for the Fund and conducts the research that leads to purchase and sale
decisions. Bankers Trust has, in turn, vested day-to-day investment
decision-making and implementation in a Sub-Adviser, the wholly owned entity BT
Funds Management (International) Limited. Bankers Trust's and BTFMI's fee for
these services is 1.10% of the Fund's average daily net assets.

As of September 30, 1998, Bankers Trust was the seventh largest bank holding
company in the United States with total assets of approximately $150 billion.
Bankers Trust is a worldwide merchant bank dedicated to servicing the needs of
corporations, government, financial institutions and private clients through a
global network of over 90 offices in more than 50 countries.

Bankers Trust's officers bring wide experience to managing both the Fund and its
Portfolio. The firm's own record dates back to its founding as a trust company
in 1903. It has invested retirement assets on behalf of the nation's largest
corporations and institutions for more than 50 years. Today, the assets under
its global management exceed $350 billion. The scope of the firm's capability is
broad: It is a leader in both the active and passive quantitative investment
disciplines and maintains a major presence in stock and bond markets worldwide.
BTFMI, a subsidiary of Bankers Trust with headquarters at Level 15, The Chifley
Tower, 2 Chifley Square, Sydney, N.S.W. 2000 Austalia, offers a decade of
research and investing experience in emerging markets worldwide to a number of
private clients. It has developed a team dedicated exclusively to emerging
markets research.

<PAGE>

Portfolio Manager

Paul Durham, is responsible for the day-to-day management of the Fund's
investments:

o Managing Director of BT Fund Management (International) Limited and
Lead Portfolio Manager

o Head of global emerging markets investing since 1996.

o Joined Bankers Trust in 1988 and served as a stock analyst in Australia
and the U.S.

o 10 years of investment management experience.

o First-class honors degree in accounting and finance from University of
Sydney, Australia.

Other Services

Bankers Trust provides administrative services - such as portfolio accounting,
legal services and others - for the Fund. In addition, Bankers Trust -- or your
broker or financial advisor -- performs the functions necessary to establish and
maintain your account. In addition to setting up the account and processing your
purchase and sale orders, these functions include:

o keeping accurate, up-to-date records for your individual Fund account;

o implementing any changes you wish to make in your account information;

o processing your requests for cash dividends and distributions from the
Fund;

o answering your questions on the Fund's investment performance or
administration;

o sending proxy reports and updated prospectus information to you; and

<PAGE>

o collecting your executed proxies.

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

<PAGE>

Organizational Structure

The Global Emerging Markets Equity Fund is a "feeder fund" that invests all of
its assets in a "master portfolio," the Global Emerging Markets Equity
Portfolio. The Fund and the Master Portfolio have the same investment objective.
The Master Portfolio is advised by Bankers Trust.

<PAGE>

SHAREHOLDER INFORMATION

Calculating the Fund's Share Price

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

<PAGE>

not receive the full market value for your Fund shares when you sell. You can
find the Fund's daily share price in the mutual fund listing of most major
newspapers.

<PAGE>

Dividends and Distributions

If the Fund earns investment income or recognizes taxable net capital gains, it
is the Fund's policy to distribute to shareholders substantially all of that
taxable income or capital gain on an annual basis. You may elect to receive your
distributions in cash or to reinvest them in additional shares of the Fund.

<PAGE>

Tax Considerations

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

- ---------------------------------------------------------------------
Transaction Tax Status
- ---------------------------------------------------------------------
Income dividends Ordinary income
- ---------------------------------------------------------------------
Short-term capital gains distributions Ordinary income
- ---------------------------------------------------------------------
Long-term capital gains distributions Capital gains
- ---------------------------------------------------------------------

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

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

<PAGE>

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

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

<PAGE>

Managing Your Account

Contacting BT Mutual Funds

by phone 1-800-368-4031
(between 10 a.m. and 6 p.m., Eastern Time)

by mail P.O. Box 419210
Kansas City, MO 64141-6210

by overnight mail 210 West 10th Street, 8th floor
Kansas City, MO 64105-1716

Minimum Account Investments

To open an account $5 million
To add to an account $100,000
Minimum account balance $500,000

<PAGE>

Opening a Fund Account

by mail Complete and sign the account application that
accompanies this prospectus. (You may obtain
additional applications by calling the BT
Service Center.) Mail the completed application
along with a check payable to Institutional
Global Emerging Markets Equity Fund - 811.

by wire Call the BT Service Center to set up a wire by
wire account.

Please note that your account cannot become activated until we receive a
completed application via mail or fax.

Buying and Selling Shares

by phone buying or selling: Contact your investment
professional or call the BT Service Center.

<PAGE>

by mail buying: Make your check payable to BT
Institutional Global Emerging Markets Equity
Fund-811. Indicate your account number on the
check. Mail it to the address printed on your
account statement.

selling: Send a signed authorization with your
account name and number and either the number of
shares you wish to sell or the dollar amount you
wish to receive. Unless exchanging into another
BT Fund, you must submit a written authorization
to sell shares in a retirement account.

by wire buying: Direct your order through your
investment professional or set up a direct
transaction-by-wire account with a phone call to
the BT Service Center.

selling: We must receive your order by 4:00 p.m.
Eastern time to wire the proceeds of your sale
to your bank account by the next business day.

<PAGE>

Routing No.: 021001033
Attn.: Bankers Trust/IFTC Deposit
DDA No.: 00-226-296
FBO: [complete Account name and number]
Credit: Institutional Global Emerging
Markets Equity Fund - 811
Specify the complete name of the Fund of
your choice, and include your account
name and account number.

Important information about buying and selling shares:

o We buy or sell shares on receipt of your order at the next price
calculated on a day the New York Stock Exchange is open.

o We accept payment for shares only in U.S. dollars by check, bank or
Federal funds wire transfer, or by electronic bank transfer.

o We remit proceeds from the sale of shares in U.S. dollars.

o If you pay for shares by check and the check fails to clear, or if you
order shares by phone and fail to pay for them, we have the right to
cancel your order and charge your account for any losses or fees the
Fund or its agents may have incurred.

<PAGE>

o The same terms and conditions apply when you buy and sell shares of the
Fund through authorized brokers and other investment professionals as
when you buy from or sell to BT Institutional Funds directly.
Specifically, you may consider that we have received your order once
you have placed it through an authorized party.

o We do not issue share certificates.

o We process all sales orders free of charge.

o A trustee must sign a trust account's written order before we can
process it. If the trustee's name does not appear on the account
registration, we ask that you furnish a copy of the trust document
certified within the last 60 days.

o For business and organization accounts, a person authorized by
corporate resolution to act on behalf of the account must sign the
written order before we can process it.

o Unless otherwise instructed, we normally mail a check for the proceeds
from a sale of shares to the account address the next business day. In
no case do we mail the check later than seven days.

o We reserve the right to close an account on 30 days notice if it fails
to meet minimum balance requirements for any reason other than a change
in market value.

o If you sell shares by mail, you may be required to obtain a signature
guarantee. Please contact your financial advisor or the BT Service
Center for more information.

<PAGE>

o During periods of extreme economic or market changes, you may have
trouble reaching the BT Service Center by telephone. If this occurs,
you should make your request by mail.

Exchange Privilege

You can exchange all or part of your shares for shares in certain other BT
Mutual Funds. When you exchange shares, you are selling shares in one Fund to
purchase shares in another. Before buying shares through an exchange you should
be sure to get a copy of the fund's prospectus and read it carefully. Please
note also that you may have to pay taxes on the shares you sell in the exchange.

Please note the following conditions:

o The accounts between which the exchange is taking place must have the same
name, address and taxpayer ID number.

o You may make the exchange by phone, letter or wire, if your account has the
transaction-by-wire feature.

o If you are using the exchange feature to open a new account, we cannot
activate the account until we receive your completed application.

<PAGE>

o If you are maintaining a taxable account, you may have to pay taxes on the
exchange.

o You will receive a written confirmation of each transaction from the BT
Service Center or your investment professional.

<PAGE>

Financial Highlights

The table below provides a picture of the Fund's financial performance since
inception. The information selected reflects financial results for a single Fund
share. The total returns in the table represent the rate of return that an
investor would have earned on an investment in the Fund (assuming reinvestment
of all interest income and distributions). This information has been audited by
______________, whose report, along with the Fund's financial statements, is
included in the Fund's annual report. The annual report is available free of
charge by calling the BT Service Center at 1-800-368-4031.

<PAGE>

- ----------------------------------------------------------
Per Share Operating Performance: 6/30/98-9/30/98
- ----------------------------------------------------------
Net Asset Value, Beginning of Period
- ----------------------------------------------------------
Income from Investment Operations
- ----------------------------------------------------------
Net Investment Income
- ----------------------------------------------------------
Net Realized and Unrealized Gain on
Investment, Foreign Currency and
Forward Foreign Currency Contracts
- ----------------------------------------------------------
Total Loss from Investment
Operations
- ----------------------------------------------------------
Distributions to Shareholders
- ----------------------------------------------------------
Net Investment Income
- ----------------------------------------------------------
Net Realized Gain from Investment
Transactions
- ----------------------------------------------------------
Total Distributions
- ----------------------------------------------------------
Net Asset Value, End of Period
- ----------------------------------------------------------
Total Investment Return
- ----------------------------------------------------------
Supplement Data and Ratios:

Net assets, End of Period (000s
omitted)
- ----------------------------------------------------------
Ratios to Average Net Assets:
- ----------------------------------------------------------
Net Investment Income*
- ----------------------------------------------------------
Expenses, Including Expenses of the
Global Emerging Markets Equity
Portfolio*
- ----------------------------------------------------------
Decrease Reflected in Above Expense
Ratio Due to Absorption of Expenses
by Bankers Trust*
- ----------------------------------------------------------
Portfolio Turnover Rate**
- ----------------------------------------------------------

<PAGE>

* Annualized
** The portfolio turnover rate is for the Master Portfolio, into which the Fund
invests all of its assets.

<PAGE>

BACK COVER

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

or call our toll-free number: 1-800-368-4031

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

<PAGE>

Institutional Global Emerging Markets Equity Fund
BT Institutional Funds

811-6071

Subject to Completion, Dated November __, 1998
STATEMENT OF
ADDITIONAL INFORMATION

January ___, 1999

BT Institutional Funds

o Global Emerging Markets Equity Fund

BT Institutional Funds (the "Trust") is an open-end management investment
company that offers investors a selection of investment portfolios, each having
distinct investment objectives and policies. This Statement of Additional
Information ("SAI") relates to the BT Institutional Funds' Global Emerging
Markets Equity Fund (the "Fund").

The Fund's investment objective is to seek long-term capital growth. The Fund
will attempt to outperform the return of the Morgan Stanley Capital
International Emerging Markets Free Total Return Index before expenses, although
there is no assurance that it will be able to do so. The Trust seeks to achieve
the investment objective of the Fund by investing all the investable assets
("Assets") of the Fund in the Global Emerging Markets Equity Portfolio (the
"Portfolio"), a diversified open-end management investment company having the
same investment objectives as the Fund. The Portfolio is a series of the BT
Investment Portfolios.

Shares of the Funds are sold by ICC Distributors, Inc. ("ICC Distributors"), the
Trust's Distributor, to clients and customers (including affiliates and
correspondents) of Bankers Trust Company ("Bankers Trust"), the Portfolio's
investment adviser (the "Adviser"), and to clients and customers of other
organizations.

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

BANKERS TRUST COMPANY

Investment Adviser of the Portfolio and Administrator

ICC DISTRIBUTORS, INC.

Distributor

Two Portland Square Portland, Maine 04101 1-800-368-4031

<PAGE>

TABLE OF CONTENTS
-----------------

<TABLE>
<S><C>
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS....................................1
Investment Objective............................................................1
Investment Policies.............................................................1
Additional Risk Factors........................................................13
Investment Restrictions........................................................19

PERFORMANCE INFORMATION...........................................................23
Standard Performance Information...............................................23
Prior Performance of BT Funds Management (International) Limited and BT Funds
Management Limited.............................................................24
Expenses.......................................................................25
Comparison of Fund Performance.................................................25
Economic and Market Information................................................26

VALUATION OF SECURITIES;REDEMPTIONS AND PURCHASES IN KIND.........................27
Purchase of Shares.............................................................27
Redemption of Shares...........................................................29
Redemptions and Purchases in Kind..............................................31
Trading in Foreign Securities..................................................31

MANAGEMENT OF THE TRUST AND THE PORTFOLIO.........................................31
Trustees of the Trust..........................................................32
Trustees of the Portfolio......................................................32
Officers of the Trust and the Portfolio........................................32
Trustee Compensation Table.....................................................33
Investment Adviser.............................................................33
Sub-Investment Adviser.........................................................35
Administrator..................................................................35
Distributor....................................................................36
Service Agent..................................................................36
Custodian and Transfer Agent...................................................36
Use of Name....................................................................36
Banking Regulatory Matters.....................................................36
Counsel and Independent Accountants............................................37

ORGANIZATION OF THE TRUST.........................................................37

TAXATION..........................................................................38
Taxation of the Fund...........................................................38
Foreign Securities.............................................................38
Distributions..................................................................39
Taxation of the Portfolio......................................................39
Sale of Shares.................................................................39
Foreign Withholding Taxes......................................................40
Backup Withholding.............................................................40
Foreign Shareholders...........................................................40
Other Taxation.................................................................40

FINANCIAL STATEMENTS..............................................................40
</TABLE>

<PAGE>
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS

Investment Objective

The investment objective of the Fund is long-term capital growth. The Fund will
pursue this objective through investment in stocks and other equity securities
of companies in the world's emerging markets. There can, of course, be no
assurance that the Fund will achieve its investment objective.

Investment Policies

Since the investment characteristics of each Fund will correspond directly to
those of the Portfolio, the following is a discussion of the various investments
of and techniques employed by the Portfolio. It is expected under normal
conditions that at least 65% of the Portfolio's assets will be invested in the
equity securities of issuers based in at least three emerging market countries.
Investment in such securities involves certain considerations that are not
normally present in investments in securities of U.S. issuers and an investment
in the Fund may be considered speculative. The Fund will attempt to outperform
the return of the Morgan Stanley Capital International Emerging Markets Free
Total Return Index before expenses, although there is no assurance it will be
able to do so.

In selecting securities for investment, the Adviser employs a research-driven
process that emphasizes proprietary economic and stock specific analysis. The
Adviser's process is geared to identifying those companies whose growth
prospects and/or risk profile has been incorrectly analyzed and priced by the
market as a whole. The Adviser's process concentrates on understanding the
relevant industry dynamics in terms of the risks and opportunities that may
arise, and then focusing on the comparative strengths and weaknesses of the
individual constituent companies. The Adviser then combines this fundamental
assessment with a valuation analysis which establishes a "fair value" for each
stock. This is calculated after considering the above factors, as well as local
and international peer comparisons.

The Adviser uses asset allocation, country selection and currency selection
primarily as risk management tools. That is, the Adviser seeks to identify and
underweight or eliminate those markets that research shows as offering poor
return opportunities or relatively high risks, and focus the Portfolio in those
markets where the risk/return profile is more favorable. Country and cash
exposure is managed within predetermined ranges around the Morgan Stanley
Capital International Emerging Markets Free Total Return Index. The Adviser's
macro research is coordinated around the consistent analysis of five key
investment indicators. These indicators capture the essential risk/return
characteristics of each market. They include earnings, liquidity, politics,
supply and demand, and valuation.

While currency management draws heavily on this macro analysis, currency
decisions themselves are taken separately to the asset decision, as once again
the Portfolio seeks to eliminate or reduce exposure to those currencies that
research indicates to be most at risk of depreciation, and to concentrate
exposure in those currencies that will be stable or even appreciate against the
U.S. dollar.

<PAGE>

Brady Bonds. The Portfolio may invest in "Brady bonds," which have been issued
by the governments of Argentina, Brazil, Costa Rica, Mexico, Nigeria,
Philippines, Uruguay and Venezuela. Most Brady bonds are currently rated below
BBB by S&P or Baa by Moody's. "Brady bonds" are bonds issued as a result of a
restructuring of a country's debt obligations to commercial banks under the
"Brady plan." While the Adviser is not aware of the occurrence of any payment
defaults on Brady bonds, investors should recognize that these debt securities
have been issued only recently and, accordingly, do not have a long payment
history. Brady bonds may be collateralized or uncollateralized, are issued in
various currencies (primarily the U.S. dollar) and are actively traded in the
secondary market for Latin American debt.

The Brady Plan was conceived by the U.S. Treasury in the 1980's in an attempt to
produce a debt restructuring program which would enable a debt country to (i)
reduce the absolute level of debt of its creditor banks, and (ii) reschedule its
external debt repayments, based upon its ability to service such debts by
persuading its creditor banks to accept a debt write-off by offering them a
selection of options, each of which represented an attractive substitute for the
nonperforming debt. Although it was envisioned that each debtor country would
agree to a unique package of options with its creditor banks, the plan was that
these options would be based upon the following:(i) a discount bond carrying a
market rate of interest (whether fixed or floating), with principal
collateralized by the debtor country with cash or securities in an amount equal
to at least one year of rolling interest; (ii) a par bond carrying a low rate of
interest (whether fixed or floating), collateralized in the same way as in (i)
above; and (iii) retention of existing debt (thereby avoiding a debt write-off)
coupled with an advance of new money or subscription of new bonds.

The Portfolio may invest in either collateralized or uncollateralized Brady
bonds. U.S. dollar-denominated, collateralized Brady bonds, which may be fixed
rate par bonds or floating rate discount bonds, are collateralized in full as to
principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds. Interest payments on such bonds generally are collateralized by cash or
securities in an amount that in the case of fixed rate bonds, is equal to at
least one year of rolling interest payments or, in the case of floating rate
bonds, initially is equal to at least one year's rolling interest payments based
on the applicable interest rate at the time and is adjusted at regular intervals
thereafter.

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

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

<PAGE>

settlement of unregistered securities of domestic and foreign issuers, such as
the PORTAL System sponsored by the National Association of Securities Dealers,
Inc.

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

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

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

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

Investment Companies. With respect to certain countries in which capital markets
are either less developed or not easily accessed, investments by the Portfolio
may be made through investment in other registered investment companies that in
turn are authorized to invest in the securities of such countries. Investments
in other investment companies may also be made for other purposes, such as noted
below under "Short-Term Instruments," are limited in amount by the Investment
Company Act of 1940, as amended ("1940 Act") (except the Portfolio may exceed
the applicable percentage limits to the extent permitted by an exemptive order
of the SEC), and will involve the indirect payment of a portion of the expenses,
including advisory fees, of such other investment companies and may result in a
duplication of fees and expenses.

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

<PAGE>

Lending of Portfolio Securities. The Portfolio has the authority to lend up to
30% of the total value of its securities to brokers, dealers and other financial
organizations. These loans must be secured continuously by cash or securities
issued or guaranteed by the United States government, its agencies or
instrumentalities or by a letter of credit at least equal to the market value of
the securities loaned plus accrued income. The Portfolio will not lend
securities to the Adviser, ICC Distributors or their affiliates. By lending its
securities, the Portfolio may increase its income by continuing to receive
payments in respect of dividends and interest on the loaned securities as well
as by either investing the cash collateral in short-term securities or obtaining
yield in the form of a fee interest paid by the borrower when irrevocable
letters of credit and U.S. government obligations are used as collateral. During
the term of the loan, the Portfolio continues to bear the risk of fluctuations
in the price of the loaned securities. There may be risks of delay in receiving
additional collateral or risks of delay in recovery of the securities or even
loss of rights in the collateral should the borrower of the securities fail
financially. The Portfolio will adhere to the following conditions whenever its
securities are loaned: (i) the Portfolio must receive at least 100% cash
collateral or equivalent securities from the borrower; (ii) the borrower must
increase this collateral whenever the market value of the securities including
accrued interest rises above the level of the collateral; (iii) the Portfolio
must be able to terminate the loan at any time; (iv) the Portfolio must receive
substitute payments in respect of all dividends, interest or other distributions
on the loaned securities, and (v) voting rights on the loaned securities may
pass to the borrower; provided, however, that if a material event adversely
affecting the investment occurs, the Board of Trustees must retain the right to
terminate the loan and recall and vote the securities. In accordance with
approval received from the SEC, cash collateral may be invested in a money
market fund managed by Bankers Trust (or its affiliates) and Bankers Trust may
serve as the Portfolio's lending agent and may share in revenue received from
the securities lending transactions as compensation for this service.

Currency Exchange Transactions. Because the Portfolio may buy and sell
securities denominated in currencies other than the U.S. dollar and receives
interest, dividends and sale proceeds in currencies other than the U.S. dollar,
the Portfolio from time to time may enter into currency exchange transactions to
convert to and from different foreign currencies and to convert foreign
currencies to and from the U.S. dollar. The Portfolio either enters into these
transactions on a spot (i.e., cash) basis at the spot rate prevailing in the
foreign currency exchange market or uses forward contracts to purchase or sell
foreign currencies.

Forward Currency Exchange Contracts. A forward currency exchange contract is an
obligation by the Portfolio to purchase or sell a specific currency at a future
date, which may be any fixed number of days from the date of the contract.
Forward foreign currency exchange contracts establish an exchange rate at a
future date. These contracts are transferable in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. A forward foreign currency exchange contract generally has no deposit
requirement and is traded at a net price without commission. The Portfolio
maintains with its custodian a segregated account of cash or liquid securities
in an amount at least equal to its obligations under each forward foreign
currency exchange contract. Neither spot transactions nor forward foreign
currency exchange contracts eliminate fluctuations in the prices of the
Portfolio's securities or in foreign exchange rates, or prevent loss if the
prices of these securities should decline.

<PAGE>

currency hedging transactions with respect to security transactions; however,
the Adviser believes that it is important to have the flexibility to enter into
currency hedging transactions when it determines that the transactions would be
in the Portfolio's best interest. Although these transactions tend to minimize
the risk of loss due to a decline in the value of the hedged currency, at the
same time they tend to limit any potential gain that might be realized should
the value of the hedged currency increase. The precise matching of the forward
contract amounts and the value of the securities involved will not generally be
possible because the future value of such securities in foreign currencies will
change as a consequence of market movements in the value of such securities
between the date the forward contract is entered into and the date it matures.
The projection of currency market movements is extremely difficult, and the
successful execution of a hedging strategy is highly uncertain.

While these contracts are not presently regulated by the CFTC, the CFTC may in
the future assert authority to regulate forward contracts. In such event the
Portfolio's ability to utilize forward contracts in the manner set forth in the
Prospectus may be restricted. Forward contracts may reduce the potential gain
from a positive change in the relationship between the U.S. dollar and foreign
currencies. Unanticipated changes in currency prices may result in poorer
overall performance for the Portfolio than if it had not entered into such
contracts. The use of foreign currency forward contracts may not eliminate
fluctuations in the underlying U.S. dollar equivalent value of the prices of or
rates of return on the Portfolio's foreign currency denominated portfolio
securities and the use of such techniques will subject the Portfolio to certain
risks.

The matching of the increase in value of a forward contract and the decline in
the U.S. dollar equivalent value of the foreign currency denominated asset that
is the subject of the hedge generally will not be precise. In addition, the
Portfolio may not always be able to enter into foreign currency forward
contracts at attractive prices and this will limit the Portfolio's ability to
use such contract to hedge or cross-hedge its assets. Also, with regard to the
Portfolio's use of cross-hedges, there can be no assurance that historical
correlations between the movement of certain foreign currencies relative to the
U.S. dollar will continue. Thus, at any time poor correlation may exist between
movements in the exchange rates of the foreign currencies underlying the
Portfolio's cross-hedges and the movements in the exchange rates of the foreign
currencies in which the Portfolio's assets that are the subject of such
cross-hedges are denominated.

The purchase of an option on foreign currency may be used to hedge against
fluctuations in exchange rates although, in the event of exchange rate movements
adverse to the Portfolio's position, it may forfeit the entire amount of the
premium plus related transaction costs. In addition, the Portfolio may purchase
call options on a foreign currency when the Adviser anticipates that the
currency will appreciate in value.

<PAGE>

of the premium, and only if rates move in the expected direction. If this does
not occur, the option may be exercised and the Portfolio would be required to
purchase or sell the underlying currency at a loss which may not be offset by
the amount of the premium. Through the writing of options on foreign currencies,
the Portfolio also may be required to forego all or a portion of the benefits
which might otherwise have been obtained from favorable movements in exchange
rates.

There is no assurance that a liquid secondary market will exist for any
particular option, or at any particular time. If the Portfolio is unable to
effect a closing purchase transaction with respect to covered options it has
written, the Portfolio will not be able to sell the underlying currency or
dispose of assets held in a segregated account until the options expire or are
exercised. Similarly, if the Portfolio is unable to effect a closing sale
transaction with respect to options it has purchased, it would have to exercise
the options in order to realize any profit and will incur transaction costs upon
the purchase or sale of underlying currency. The Portfolio pays brokerage
commissions or spreads in connection with its options transactions.

A put option sold by the Portfolio is covered when, among other things, cash or
securities acceptable to the broker are placed in a segregated account to
fulfill the obligations undertaken.

When the Portfolio writes a covered put option, it gives the purchaser of the
option the right to sell the underlying security to the Portfolio at the
specified exercise price at any time during the option period. If the option
expires unexercised, the Portfolio will realize income in the amount of the
premium received for writing the option. If the put option is exercised, a
decision over which the Portfolio has no control, the Portfolio must purchase
the underlying security from the option holder at

<PAGE>

the exercise price. By writing a covered put option, the Portfolio, in exchange
for the net premium received, accepts the risk of a decline in the market value
of the underlying security below the exercise price. The Portfolio will only
write put options involving securities for which a determination is made at the
time the option is written that the Portfolio wishes to acquire the securities
at the exercise price.

<PAGE>

monitor the creditworthiness of dealers with which the Portfolio enters into
such options transactions under the general supervision of the Portfolio's
Trustees. The Portfolio intends to treat OTC Options purchased and the assets
used to "cover" OTC Options written as not readily marketable and therefore
subject to the limitations described in "Investment Restrictions."

The Portfolio may, to the extent allowed by federal and state securities laws,
invest in securities indices instead of investing directly in individual foreign
securities.

Options on Foreign Securities Indices. The Portfolio may purchase and write put
and call options on foreign stock indices listed on domestic and foreign stock
exchanges. The Portfolio may also purchase and write OTC Options on foreign
stock indices. These OTC Options would be subject to the same liquidity and
credit risks noted above with respect to OTC Options on foreign currencies. A
stock index fluctuates with changes in the market values of the stocks included
in the index.

Unless the parties provide for it, no central clearing or guaranty function is
involved in an OTC Option. As a result, if a Counterparty fails to make or take
delivery of the security, currency or other instrument underlying an OTC Option
it has entered into with the Portfolio or fails to make a cash settlement
payment due in accordance with the terms of that option, the Portfolio will lose
any premium it paid for the option as well as any anticipated benefit of the
transaction. Thus, the Adviser must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC Option will be met.

<PAGE>

Because the value of an index option depends upon movements in the level of the
index rather than the price of a particular stock, whether the Portfolio will
realize a gain or loss from the purchase or writing of options on an index
depends upon movements in the level of stock prices in the stock market
generally or, in the case of certain indices, in an industry or market segment,
rather than movements in the price of a particular stock. Accordingly,
successful use by the Portfolio of options on stock indices will be subject to
the Adviser's ability to predict correctly movements in the direction of the
stock market generally or of a particular industry. This requires different
skills and techniques than predicting changes in the price of individual stocks.

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

Commercial Paper. Commercial paper consists of short-term (usually from 1 to 270
days) unsecured promissory notes issued by corporations in order to finance
their current operations. A variable amount master demand note (which is a type
of commercial paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under a letter agreement between a
commercial paper issuer and an institutional lender pursuant to which the lender
may determine to invest varying amounts.

For a description of commercial paper ratings, see Appendix.

Futures Contracts and Options on Futures Contracts.

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

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

At the same time a futures contract is entered into, the Portfolio must allocate
cash or securities as a deposit payment ("initial margin"). It is expected that
the initial margin deposit would be approximately 1 1/2% to 10% of a contract's
face value. Daily thereafter, the futures contract is valued and the payment of
"variation margin" may be required, since each day the Portfolio would provide
or receive cash that reflects any decline or increase in the contract's value.

Although futures contracts (other than those that settle in cash) by their terms
call for the actual delivery or acquisition of the instrument underlying the
contract, in most cases the contractual obligation is fulfilled before the date
of the contract without having to make or take delivery of the instrument
underlying the contract. The offsetting of a contractual obligation is
accomplished by entering into an opposite position on a commodities exchange in
the identical futures contract. Such a transaction, which is effected through a
member of an exchange, cancels the obligation to make or take delivery of the
instrument underlying the contract. Since all transactions in the futures market
are made, offset or fulfilled through a

<PAGE>

clearinghouse associated with the exchange on which the contracts are traded,
the Portfolio will incur brokerage fees when it purchases or sells futures
contracts.

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

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

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

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

Options on Futures Contracts. The Portfolio may purchase and write options on
futures contracts for hedging purposes. The purchase of a call option on a
futures contract is similar in some respects to the purchase of a call option on
an individual security. As with the purchase of futures contracts, when the
Portfolio is not fully invested it may purchase a call option on a futures
contract to hedge against a market advance due to declining interest rates.

The writing of a call option on a futures contract constitutes a partial hedge
against declining prices of the security or foreign currency which is
deliverable upon exercise of the futures contract. If the futures price at
expiration of the option is below the exercise price, the Portfolio will retain
the full amount of the option premium which provides a partial hedge against any
decline that may have occurred in the Portfolio's portfolio holdings. The
writing of a put option on a futures contract constitutes a partial hedge
against increasing prices of the security or foreign currency which is
deliverable upon exercise of the futures contract. If the futures price at
expiration of the option is higher than the exercise price, the Portfolio will
retain the full amount of the option premium which provides a partial hedge
against any increase in the price of securities which the

<PAGE>

Portfolio intends to purchase. If a put or call option the Portfolio has written
is exercised, the Portfolio will incur a loss which will be reduced by the
amount of the premium it receives. Depending on the degree of correlation
between changes in the value of its portfolio securities and changes in the
value of its futures positions, the Portfolio's losses from existing options on
futures may to some extent be reduced or increased by changes in the value of
portfolio securities.

The purchase of a put option on a futures contract is similar in some respects
to the purchase of protective put options on portfolio securities. For example,
the Portfolio may purchase a put option on a futures contract to hedge its
portfolio against the risk of rising interest rates.

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

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

Futures Contracts on Foreign Securities Indices. The Portfolio may enter into
contracts providing for cash settlement based upon changes in the value of an
index of foreign securities ("Futures Contracts"). This investment technique is
designed only to hedge against anticipated future change in general market
prices which otherwise might either adversely affect the value of securities
held by the Portfolio or adversely affect the prices of securities which are
intended to be purchased at a later date for the Portfolio. A Futures Contract
may also be entered into to close out or offset an existing futures position.

Although Futures Contracts would be entered into for hedging purposes only, such
transactions do involve certain risks. Futures may fail as hedging techniques in
cases where the price movements of the securities underlying the futures do not
follow the price movements of the portfolio securities subject to the hedge. The
loss from investing in futures transactions is potentially unlimited. Gains and
losses on investments in futures depend on the portfolio manager's ability to
predict correctly the direction of stock prices, interest rates, and other
economic factors. The Portfolio will likely be unable to control losses by
closing its position where a liquid secondary market does not exist.

Brokerage costs will be incurred and "margin" will be required to be posted and
maintained as a good-faith deposit against performance of obligations under
Futures Contracts written for the Portfolio. The Portfolio may not purchase or
sell a Futures Contract if immediately thereafter its margin deposits on its
outstanding Futures Contracts, for other than bona fide hedging transactions,
would exceed 5% of the market value of the Portfolio's net assets.

Additional Risk Factors

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

Investing in Foreign Securities. Investors should realize that investing in
securities of foreign issuers involves considerations not typically associated
with investing in securities of companies organized and operated in the United
States. Investors should realize that the value of the Portfolio's foreign
investments may be adversely affected by changes in political or social
conditions, diplomatic relations, confiscatory taxation, expropriation,
nationalization, limitation on the removal of funds or assets, or imposition or
(or change in) exchange control or tax regulations in foreign countries. In
addition, changes in government administrations or economic or monetary policies
in the United States or abroad could result in appreciation or

<PAGE>

depreciation of portfolio securities and could favorably or unfavorably affect
the Portfolio's operations, Furthermore, the economies of individual foreign
nations may differ from the U.S. economy, whether favorably or unfavorably, in
areas such as growth or gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency or balance of payments position; it may
also be more difficult to obtain and enforce a judgment against a foreign
issuer. In general, less information is publicly available with respect to
foreign issuers than is available with respect to U.S. companies. Most foreign
companies are also not subject to the uniform accounting and financial reporting
requirements applicable to issuers in the Untied States. Any foreign investments
made by the Portfolio must be made in compliance with U.S. and foreign currency
restrictions and tax laws restricting the amounts and types of foreign
investments.

Because foreign securities generally are denominated and pay dividends or
interest in foreign currencies, the value of the net assets of the Portfolio as
measured in U.S. dollars will be affected favorably or unfavorably by changes in
exchange rates. In order to protect against uncertainty in the level of future
foreign currency exchange rates, the Portfolio is also authorized to enter into
certain foreign currency exchange transactions. Furthermore, the Portfolio's
foreign investments may be less liquid and their prices may be more volatile
than comparable investments in securities of U.S. companies. The settlement
periods for foreign securities, which are often longer than those for securities
of U.S. issuers, may affect portfolio liquidity. Finally, there may be less
government supervision and regulation of securities exchanges, brokers and
issuers in foreign countries than in the United States.

Investing in Emerging Markets. The risks involved when investing in emerging
markets are of a nature generally not encountered when investing in securities
traded on major international markets.

The world's industrialized markets generally include but are not limited to the
following: Australia, Austria, Belgium, Canada, Denmark, Finland, France,
Germany, Hong Kong, Ireland, Italy, Japan, Luxembourg, the Netherlands, New
Zealand, Norway, Singapore, Spain, Sweden, Switzerland, the United Kingdom, and
the United States; the world's emerging markets generally include but are not
limited to the following: Argentina, Bolivia, Brazil, Bulgaria, Chile, China,
Colombia, Costa Rica, the Czech Republic, Ecuador, Egypt, Greece, Hungary,
India, Indonesia, Israel, the Ivory Coast, Jordan, Malaysia, Mexico, Morocco,
Nicaragua, Nigeria, Pakistan, Peru, the Philippines, Poland, Portugal, Romania,
Russia, Slovakia, Slovenia, South Africa, South Korea, Sri Lanka, Taiwan,
Thailand, Turkey, Uruguay, Venezuela, Vietnam and Zimbabwe.

Investment in securities of issuers based in underdeveloped emerging markets
entails all of the risks of investing in securities of foreign issuers outlined
in the above section to a heightened degree. These heightened risks include: (i)
greater risks of expropriation, confiscatory taxation, nationalization, and less
social, political and economic stability; (ii) the smaller size of the market
for such securities and a low or nonexistent volume of trading, resulting in
lack of liquidity and in price volatility; (iii) certain national policies which
may restrict the Portfolio's investment opportunities including restrictions on
investing in issuers or industries deemed sensitive to relevant national
interests; (iv) accounting, auditing and financial reporting standards
applicable can be less demanding than the levels acceptable in the United States
which can result in incomplete company information; and (v) in the case of
Eastern Europe and in China and other Asian countries, the absence of developed
capital markets and legal structures governing private or foreign investment and
private property and the possibility that recent favorable economic and
political developments could be slowed or reversed by unanticipated events.

Although external debt in most emerging markets is generally falling, it remains
at high levels. This acts as a depressant on economic growth and limits access
to global savings. As a result, many emerging markets are reliant on foreign
capital inflows for fund development. During periods of uncertainty, foreign
capital may be withdrawn from these economies, causing financial market
weakness.

Investments in certain countries may require government approval which may
restrict the size and nature of investments. These restrictions may limit the
Portfolio's access to certain emerging markets. Additionally, the Adviser may be
required to obtain government consent to redeem the Portfolio's capital and
profits. Therefore, the Portfolio could encounter delays or refusals to grant
permission for money to be removed from the country. This could impact the
amount of cash available to meet shareholder redemptions.

In addition to brokerage commissions, custodial services and other costs
relating to investment in emerging markets are generally more expensive than in
the United States. Such markets have been unable to keep pace with the volume of
securities transactions, making it difficult to conduct such transactions. The
inability of the Portfolio to make intended security purchases due to settlement
problems could cause the Portfolio to miss attractive investment opportunities.
Inability to dispose of a security due to settlement problems could result
either in losses to the Portfolio due to subsequent declines in

<PAGE>

the value of the security or, if the Portfolio has entered into a contract to
sell the security, could result in possible liability to the purchaser.

It should be noted that developments affecting investments cannot always be
foreseen. Therefore, a shareholder may find it difficult to protect their
investments against risk.

<PAGE>

Securities of issuers located in Latin America may have limited marketability
and may be subject to more abrupt or erratic price movements.

<PAGE>

capitalization and trading value. The limited liquidity of securities markets in
Asia may also affect the Portfolio's ability to acquire or dispose of securities
at the price and time it wishes to do so. Accordingly, during periods of rising
securities prices in the more illiquid Asian securities markets, the Portfolio's
ability to participate fully in such price increases may be limited by its
investment policy of investing not more than 15% of its net assets in illiquid
securities. Conversely, the Portfolio's inability to dispose fully and promptly
of positions in declining markets will cause the Portfolio's net asset value to
decline as the value of the unsold positions is marked to lower prices. In
addition, the Asian securities markets are susceptible to being influenced by
large investors trading significant blocks of securities.

<PAGE>

receive payment in convertible currency. As the Chinese legal system develops,
the promulgation of new laws, changes to existing laws and the preemption of
local laws by national laws may adversely affect foreign investors, including
the Portfolio. The uncertainties faced by foreign investors in China are
exacerbated by the fact that many laws, regulations and decrees of China are not
publicly available, but merely circulated internally.

There are no foreign exchange restrictions on the repatriation of gains made on
or income derived from "B" shares, subject to the payment of taxes imposed by
China thereon.

Company laws relating to companies limited by shares and regulations regarding
the issuing of shares by equity joint ventures have not yet been developed on a
national basis. The Shenzhen municipality issued regulations in 1992 relating to
joint stock companies, and the Shanghai municipality has a draft joint stock
company law under review. Regulations governing the trading of securities on
both the Shenzhen and the Shanghai stock exchanges have been issued by each
municipality; there is no national securities legislation as yet.

Options on Futures Contracts, Forward Contracts and Options on Foreign
Currencies. Unlike transactions entered into by the Portfolio in futures
contracts, options on foreign currencies and forward contracts are not traded on
contract markets regulated by the CFTC or (with the exception of certain foreign
currency options) by the SEC. To the contrary, such instruments are traded
through financial institutions acting as market-makers, although foreign
currency options are also traded on certain national securities exchanges such
as the Philadelphia Stock Exchange and the Chicago Board Options Exchange,
subject to SEC regulation. Similarly, options on currencies may be traded
over-the-counter. In an over-the-counter trading environment, many of the
protections afforded to exchange participants will not be available. For
example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of time.
Although the purchaser of an option cannot lose more than the amount of the
premium plus related transaction costs, this entire amount could be lost.
Moreover, the option writer and a trader of forward contracts could lose amounts
substantially in excess of their initial investments, due to the margin and
collateral requirements associated with such positions.

Options on foreign currencies traded on national securities exchanges are within
the jurisdiction of the SEC, as are other securities traded on such exchanges.
As a result, many of the protections provided to traders on organized exchanges
will be available with respect to such transactions. In particular, all foreign
currency option positions entered into on a national securities exchange are
cleared and guaranteed by the Options Clearing Corporation ("OCC"), thereby
reducing the risk of counterparty default. Further, a liquid secondary market in
options traded on a national securities exchange may be more readily available
than in the over-the-counter market, potentially permitting the Portfolio to
liquidate open positions at a profit prior to exercise or expiration, or to
limit losses in the event of adverse market movements.

The purchase and sale of exchange-traded foreign currency options, however, is
subject to the risks of the availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options

<PAGE>

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

As in the case of forward contracts, certain options on foreign currencies are
traded over-the-counter and involve liquidity and credit risks which may not be
present in the case of exchange-traded currency options. The Portfolio's ability
to terminate over-the-counter options will be more limited than with
exchange-traded options. It is also possible that broker-dealers participating
in over-the-counter options transactions will not fulfill their obligations.

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

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

<PAGE>

investment entity having the same investment objective as the Fund or the
retaining of an investment adviser to manage the Fund's assets in accordance
with the investment policies described herein with respect to the Portfolio.

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

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

<PAGE>

Investment Restrictions

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

As a matter of fundamental policy, no Portfolio (or Fund) may (except that no
investment restriction of a Fund shall prevent a Fund from investing all of its
Assets in an open-end investment company with substantially the same investment
objectives):

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

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

<PAGE>

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

(iv) purchase securities issued by any investment company (except when
such purchase, though not made in the open market, is part of a plan
of merger or consolidation); if such purchase at the time thereof
would cause: (a) more than 10% of the Portfolio's (Fund's) total
assets (taken at the greater of cost or market value) (except the
Portfolio may exceed the applicable percentage limits to the extent
permitted by an exemptive order of the SEC) to be invested in the
securities of such issuers; (b) more than 5% of the Portfolio's
(Fund's) total assets (taken at the greater of cost or market value)
(except the Portfolio may exceed the applicable percentage limits to
the extent permitted by an exemptive order of the SEC) to be
invested in any one investment company; or (c) more than 3% of the
outstanding voting securities of any such issuer to be held for the
Portfolio (Fund);

<PAGE>

Portfolio Transactions and Brokerage Commissions

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

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

<PAGE>

when one or more clients are selling that same security. Some simultaneous
transactions are inevitable when several clients receive investment advice from
the same investment adviser, particularly when the same security is suitable for
the investment objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed to be equitable to
each. It is recognized that in some cases this system could have a detrimental
effect on the price or volume of the security as far as the Portfolio is
concerned. However, it is believed that the ability of the Portfolio to
participate in volume transactions will produce better executions for the
Portfolio.

PERFORMANCE INFORMATION

Standard Performance Information

From time to time, quotations of the Fund's performance may be included in
advertisements, sales literature or shareholder reports. Performance information
may include the Fund's investment results and/or comparisons of its investment
results to the Morgan Stanley Capital International Emerging Markets Free Total
Return Index or to various other unmanaged indices or results of other mutual
funds or investment or savings vehicles. From time to time, Fund rankings may be
quoted from various sources, such as Lipper Analytical Services, Inc., Value
Line, and Morningstar, Inc.

Mutual fund performance is commonly measured as total return and/or yield. The
Fund's performance is affected by its expenses. These performance figures are
calculated in the following manner:

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

Income calculated for the purposes of calculating a Fund's yield differs
from income as determined for other accounting purposes. Because of the
different accounting methods used, and because of the compounding assumed
in yield calculations, the yield quoted for the Fund may differ from the
rate of distributions of the Fund paid over the same period or the rate of
income reported in the Fund's financial statements. This difference may be
significant for the Fund investing in the Portfolio whose investments are
denominated in foreign currencies.

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

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

Performance Results: Total returns and yields are based on past results
and are not an indication of future performance. Any total return
quotation provided for the Fund should not be considered as representative
of the

<PAGE>
performance of a Fund in the future since the net asset value and public
offering price of shares of a Fund will vary based not only on the type,
quality and maturities of the securities held in the corresponding
Portfolio, but also on changes in the current value of such securities and
on changes in the expenses of a Fund and the corresponding Portfolio.
These factors and possible differences in the methods used to calculate
total return should be considered when comparing the total return of the
Fund to total returns published for other investment companies or other
investment vehicles. Total return reflects the performance of both
principal and income.

Prior Performance of BT Fund Managers (International) Limited and
BT Funds Management Limited

Set forth below is certain composite information regarding the performance for
certain periods through March 31, 1998, of five funds each of which is advised
or sub-advised by either BT Fund Managers (International) Limited ("BT Fund
Managers International") or BT Funds Management Limited ("BT Funds Management").
Although the investment objectives, policies and strategies of these funds are
substantially the same as those of the Fund, it should be noted that none of
these funds are registered as investment companies under the 1940 Act or subject
to the provisions of the Code governing "regulated investment companies," nor
are any of them subject to investment restrictions that are identical to those
that apply to the Fund. The funds are not subject to certain investment
limitations, diversification requirements, and other restrictions imposed by the
1940 Act and the Internal Revenue Code, which, if applicable, may have adversely
affected the performance results of the composite funds set forth herein.
Therefore, the performance of the funds set forth herein may be better or worse
than it would have been had all of the funds been subject to such requirements.

The composite table below reflects the performance of the following types of
funds: two bank commingled funds which are primarily available to U.S.
retirement plans that are subject to ERISA ("BT Pyramid Global Emerging Markets
Fund" and "BT Pyramid Emerging Markets Equity Fund"); one offshore fund which is
available to non-U.S. and non-Australian institutions ("BT Global Series
Emerging Markets Equity Fund"); one offshore fund which is available to
Australian institutions ("BT Emerging Markets Fund"); and the emerging markets
portfolio of an investment vehicle established for Australian pension money ("BT
Retirement Fund-Emerging Markets Portfolio"). Although (1) the two bank
commingled funds are managed by the Adviser and are sub-advised by BT Fund
Managers International, (2) the offshore fund that is available to non-U.S. and
non-Australian institutions is advised by BT Fund Managers International and (3)
the other two funds are managed by BT Funds Management, all five funds are
managed by the same investment personnel that will manage the Fund, and they
will have the same degree of discretion in managing the Fund as they did with
the composite funds (subject to limitations imposed by applicable U.S.
regulations, including the 1940 Act).

Performance information for the five funds described above is provided below on
a composite basis, showing the combined performance of the funds over various
periods of time up to three years (the first full calendar year of operations
for the oldest of the funds included in the composite was 1995). Of the funds
that comprise the composite, only one fund has been operational for the three
year period indicated. The other funds were added to the composite at their
inception or at the time when their investment objectives became substantially
similar to those of the Fund. BT Pyramid Global Emerging Markets Fund commenced
operations on October 31, 1996, but took until January 31, 1997 to be in a
structure that was substantially similar to the other funds in the composite. As
such, its performance is included in the composite as of January 31, 1997. For
the same reason, performance of the following funds has been included as of a
date after their inception. BT Global Series Emerging Markets Equity Fund
commenced operations on March 31, 1995 and its performance is included as of
April 31, 1995. BT Emerging Markets Fund commenced operations on June 13, 1997
and its performance is included as of July 31, 1997.

BT Pyramid Emerging Markets Equity Fund commenced operations as at March 31,
1996. Its performance is included in the composite as of July 31, 1997 due to
the fact that prior to that date, the portfolio structure of the fund was not
substantially similar to those of the other four funds in the composite. In
addition, prior to March 31, 1997 the fund was not managed by BT Fund Managers
International and BT Funds Management personnel but rather by different
personnel within the Bankers Trust Group. The fund underwent portfolio
reconstruction during the period from March 31 to July 31, 1997.

The prior performance information below is presented net of (or after payment
of) fees and expenses by the relevant funds. These fees and expenses averaged
approximately 0.88% per year of the average assets under management. It
24
<PAGE>

is anticipated that the Fund, during its initial period of operation, will incur
expenses at an annualized rate of 1.70% of its average daily net assets (which
the Adviser has undertaken to reduce to 1.45% through fee waivers and/or expense
reimbursements). Had the funds reflected in the table below been subject to fees
and expenses at the higher level expected to be incurred by the Fund, the
performance shown below would be reduced by an amount approximately equal to the
difference between the Fund's anticipated expenses and the approximate expenses
incurred by the funds included in the table.

The performance below is compared to the Morgan Stanley Capital International
("MSCI") Emerging Markets Free Total Return Index which is an index of
securities of companies domiciled in countries determined by MSCI to be emerging
markets. Since the index reflects the performance of unmanaged portfolio of
securities, the performance of the index is not subject to any fees or expenses,
nor is it subject to any brokerage fees or other transaction costs.

The prior performance shown below should not be considered a representation of
future performance of the Fund.

Performance (net of fees and expenses) through March 31, 1998 (% in US dollars)
- -------------------------------------------------------------------------------
Annualized
- -------------------------------------------------------------------------------
1 year 2 years 3 years
- -------------------------------------------------------------------------------
BT Emerging Market Equities
Composite -6.53% 4.60% 11.73%

MSCI Emerging Markets Free Total
Return Index -13.44% -3.19% 2.50%
- -------------------------------------------------------------------------------

Performance figures above represent the asset-weighted composite of five global
emerging markets portfolios with investment objectives substantially similar to
those of the Fund. The performance presented herein for two of the portfolios
has been converted into U.S. dollars from Australian dollars as of the last day
of each month using the London Close exchange rate. The other three portfolios
are U.S. dollar denominated. Performance figures are net of fees and reflect the
reinvestment of all investment income, including dividends and capital gains.

Expenses

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

Comparison of Fund Performance

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

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

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

25
<PAGE>