DIVERSIFIED INVESTORS FUNDS GROUP, 485BPOS, 1997-04-30

DIVERSIFIED INVESTORS FUNDS GROUP
485BPOS, 1997-04-30

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File Nos. 33-61810, 811-7674
As filed with the Securities and Exchange Commission on April 29, 1997

U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-1A
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 / /
POST-EFFECTIVE AMENDMENT NO. 8 /X/

and

REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. 9 /X/

THE DIVERSIFIED INVESTORS
FUNDS GROUP
(Exact Name of Registrant as Specified in Charter)

Four Manhattanville Road, Purchase, New York 10577
(Address of Principal Executive Offices)

Registrant's Telephone Number, including Area Code: 914-697-8000

Robert F. Colby
Diversified Investment Advisors, Inc.
Four Manhattanville Road
Purchase, New York 10577
(Name and Address of Agent for Service)

Copy to:
Roger P. Joseph
Bingham, Dana & Gould LLP
150 Federal Street
Boston, Massachusetts 02110

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

[ ] immediately upon filing pursuant to paragraph (b).
[X] on April 30, 1997 pursuant to paragraph (b).
[ ] 60 days after filing pursuant to paragraph (a)(1).
[ ] on (date) pursuant to paragraph (a)(1) of Rule 485.
[ ] 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.

The Registrant has previously registered an indefinite amount of
securities pursuant to Rule 24f-2 under the Investment Company Act of 1940. The
Rule 24f-2 Notice with respect to each series of the Registrant for the
Registrant's most recently completed fiscal year ended December 31, 1996 was
filed on February 25, 1997. Diversified Investors Portfolios has also executed
this registration statement.

<PAGE>

<TABLE>
<CAPTION>
THE DIVERSIFIED INVESTORS FUNDS GROUP
FORM N-1A
CROSS REFERENCE SHEET

Part A
Item No. Prospectus Headings

<S> <C> <C>
1. Cover Page Cover Page

2. Synopsis Expense Summary

3. Condensed Financial Information Condensed Financial
Information

4. General Description of Registrant Cover Page; Management of the Trust and
Portfolio Series

5. Management of the Fund Management of the Trust and Portfolio Series;
Other Information

5A. Management's Discussion of Fund Performance Not applicable

6. Capital Stock and other Securities Cover Page; Purchases and Redemptions of
Shares; Management of the Trust and
Portfolio Series; Other Information

7. Purchase of Securities Being Offered Purchases and Redemptions of Shares;
Other Information

8. Redemption or Repurchase Purchases and Redemptions
of Shares

9. Pending Legal Proceedings Not applicable

Part B Statement of Additional
Item No. Information Headings

10. Cover Page Cover Page

11. Table of Contents Table of Contents

12. General Information and History Not Applicable

13. Investment Objectives and Policies Investment Objectives,
Policies and Restrictions

14. Management of the Fund Management of the Trust and
Portfolio Series

15. Control Persons and Principal Holders of
Securities See Prospectus--"Management
of the Trust and Portfolio Series"

16. Investment Advisory and Other Services Management of the Trust and Portfolio
Series; see Prospectus--"Management of
the Trust and Portfolio Series"

<PAGE>

17. Brokerage Allocation and Other Practices Investment Objectives,
Policies and Restrictions

18. Capital Stock and Other Securities Taxation; Description of the Trust; Fund
Shares; see Prospectus--"Management of
the Trust and Portfolio Series" and
"Other Information"

19. Purchase, Redemption and Pricing of
Securities Being Offered Determination of Net Asset Value;
Valuation of Securities; see Prospectus-
-"Purchases and Redemptions of Shares"

20. Tax Status Taxation; see Prospectus--
"Other Information"

21. Underwriters See Prospectus--"Management of the Trust
and Portfolio Series" and "Purchases and
Redemptions of Shares"

22. Calculations of Yield Quotations of Money
Market Funds Performance Information

23. Financial Statements Experts; Statements of Assets and
Liabilities; Reports of Independent
Accountants
</TABLE>

Part C

Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this registration statement.

<PAGE>

PROSPECTUS Dated May 1, 1997

THE DIVERSIFIED INVESTORS FUNDS GROUP

The Diversified Investors Funds Group (the "Trust") is an open-end
management investment company that seeks to provide investors with a broad
range of investment alternatives. Thirteen series of shares, or Funds, are
offered for sale by this Prospectus:

o Diversified Investors Money Market Fund
o Diversified Investors High Quality Bond Fund
o Diversified Investors Intermediate Government Bond Fund
o Diversified Investors Government/Corporate Bond Fund
o Diversified Investors High-Yield Bond Fund
o Diversified Investors Balanced Fund
o Diversified Investors Equity Income Fund
o Diversified Investors Equity Value Fund
o Diversified Investors Growth & Income Fund
o Diversified Investors Equity Growth Fund
o Diversified Investors Special Equity Fund
o Diversified Investors Aggressive Equity Fund
o Diversified Investors International Equity Fund

Each Fund is a separate diversified mutual fund issuing its own shares.
Shares of beneficial interest ("Shares") of each Fund are offered for sale
by this Prospectus. Diversified Investment Advisors, Inc. ("Diversified") is
the investment adviser to each Fund and selects, subject to shareholder
approval, separate investment subadvisers that provide investment advice for
the Funds. The Trust seeks to achieve each Fund's investment objective by
investing all of the investable assets ("Assets") of that Fund in a
corresponding series of Diversified Investors Portfolios (the "Portfolio
Series"). The Portfolio Series (like the Trust) is a diversified, open-end
management investment company with separate series (the "Portfolios") which
have the same investment objectives as their corresponding Funds.

UNLIKE OTHER MUTUAL FUNDS WHICH DIRECTLY ACQUIRE AND MANAGE THEIR OWN
PORTFOLIOS OF SECURITIES, THE TRUST SEEKS TO ACHIEVE EACH FUND'S INVESTMENT
OBJECTIVES BY INVESTING ALL OF THAT FUND'S ASSETS IN A CORRESPONDING PORTFOLIO.
SEE "CORE-FEEDER STRUCTURE" ON PAGE [___].

<PAGE>

This Prospectus sets forth information about the Trust and the Funds that
a prospective investor should consider before investing. Investors should read
this Prospectus and retain it for future reference. Additional information
about the Funds, contained in a Statement of Additional Information, has been
filed with the Securities and Exchange Commission and is available without
charge upon request by calling the Trust at (914) 697-8000. The Statement of
Additional Information, which has the same date as this Prospectus, is
incorporated by reference into this Prospectus.

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

The Money Market Fund's net asset value per share will fluctuate. Many
money market funds declare a dividend of all investment income each day in
order to maintain a stable net asset value of $1.00 per share. The Money Market
Fund intends to declare dividends of all investment income and to distribute
all net realized capital gains only once a year in December. Undeclared
investment income may cause the Money Market Fund's net asset value per share
to fluctuate. INVESTMENTS IN THE MONEY MARKET FUND ARE NEITHER INSURED NOR
GUARANTEED BY THE U.S. GOVERNMENT.

The High-Yield Bond Fund may invest significantly in lower rated bonds,
commonly referred to as "junk bonds". Bonds of this type are considered to be
speculative with regard to the payment of interest and return of principal.
Investments in these types of securities have special risks and therefore may
not be suitable for all investors. Investors should carefully assess the risks
associated with an investment in this Fund.

<PAGE>

EXPENSE SUMMARY

The following tables provide (i) a summary of estimated expenses relating
to purchases and sales of Shares of each Fund, and the estimated aggregate
annual operating expenses for each Fund and its corresponding Portfolio, as a
percentage of average net assets of the Fund and as adjusted to give effect to
anticipated fee waivers, and (ii) an example illustrating the dollar cost of
such estimated expenses on a $1,000 investment in Shares of each Fund. Except
as otherwise noted, the information concerning annual operating expenses and in
the example is based on the fiscal year ended December 31, 1996.

SHAREHOLDER TRANSACTION EXPENSES

Maximum Sales Load Imposed on Purchases..................None
Sales Load Imposed on Reinvested Dividends...............None
Deferred Sales Load......................................None
Redemption Fee...........................................None
Exchange Fee.............................................None

<TABLE>
<CAPTION>
ANNUAL OPERATING EXPENSES

HIGH INTERMEDIATE GOVERNMENT/
MONEY QUALITY GOVERNMENT CORPORATE
MARKET BOND BOND BOND HIGH-YIELD BALANCED
FUND FUND FUND FUND BOND FUND FUND

<S> <C> <C> <C> <C> <C> <C>
Investment Advisory Fees (After Waivers) 0.25% 0.35% 0.32% 0.35% .0.00% 0.45%
Distribution (Rule 12b-1) Fees 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%
Other Expenses:
Administrative Services Fees (After Waivers) 0.00% 0.30% 0.00% 0.30% 0.00% 0.00%
Miscellaneous Expenses(1) 0.30% 0.10% 0.43% 0.10% 0.85% 0.40%
---- ---- ---- ---- ---- ----
Total Operating Expenses (After Reimbursements
and Waivers)(2) 0.80% 1.00% 1.00% 1.00% 1.10% 1.10%
==== ==== ==== ==== ==== ====
</TABLE>

<PAGE>

ANNUAL OPERATING EXPENSES

EQUITY EQUITY GROWTH & EQUITY SPECIAL AGGRESSIVE INTERNATIONAL
INCOME VALUE INCOME GROWTH EQUITY EQUITY EQUITY
FUND FUND FUND FUND FUND FUND FUND

<S> <C> <C> <C> <C> <C> <C> <C>
Investment Advisory Fees (After Waivers) 0.45% 0.45% 0.58% 0.69% 0.79% 0.72% 0.68%
Distribution (Rule 12b-1) Fees 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%
Other Expenses:
Administrative Services Fees 0.00% 0.00% 0.00% 0.00% 0.30% 0.00% 0.00%
(After Waivers)
Miscellaneous Expenses(1) 0.30% 0.40% 0.32% 0.31% 0.16% 0.53% 0.47%
---- ---- ---- ----- ----- ----- ----
Total Operating
Expenses (After 1.00% 1.10% 1.15% 1.25% 1.50% 1.50% 1.40%
==== ==== ==== ==== ==== ==== ====
Reimbursements and Waivers)(2)
</TABLE>

(1) "Miscellaneous Expenses" have been estimated for the Equity Value and
Aggressive Equity Funds based on a projected level of average daily net
assets of $10 million per Fund.

(2) Diversified has indefinitely agreed to waive its investment
advisory fees and administrative fees and to reimburse other
operating expenses that would cause Total Operating Expenses of the
Funds to exceed the amounts set forth herein. Such expense limitations
are voluntary and may be removed at any time without prior notice to
existing shareholders (although the Prospectus will be revised
accordingly). Without the voluntary expense reimbursements and fee
waivers reflected in the table, Total Operating Expenses would be as
follows: 4.35% for the Money Market Fund, 12.60% for the High Quality
Bond Fund, 17.46% for the Intermediate Government Bond Fund, 7.50% for
the Government/Corporate Bond Fund, 25.60% for the High-Yield Bond Fund,
3.08% for the Balanced Fund, 3.22% for the Equity Income Fund, 3.99% for
the Growth & Income Fund, 4.34% for the Equity Growth Fund, 3.63% for the
Special Equity Fund, and 9.79% for the International Equity Fund. Because
the Equity Value and Aggressive Equity Funds are newly organized, their
expenses are estimated for the current fiscal year and assume voluntary
expense reimbursements and fee waivers. Without the voluntary expense
reimbursements and fee waivers reflected in the table, estimated Total
Operating Expenses would be 56.35% for the Equity Value Fund and 64.34%
for the Aggressive Equity Fund.

<PAGE>

EXAMPLE

A shareholder in a Fund would pay the following estimated expenses on a
$1,000 investment in Shares assuming (i) a 5% annual return on assets and (ii)
redemption at the end of each time period.

FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---- ------ ------- -------- --------

Money Market Fund $ 8 $26 $44 $99
High Quality Bond Fund 10 32 55 122
Intermediate Government Bond Fund 10 32 55 122
Government/Corporate Bond Fund 10 32 55 122
High-Yield Bond Fund 11 35 61 134
Balanced Fund 11 35 61 134
Equity Income Fund 10 32 55 122
Equity Value Fund 11 35 -- --
Growth & Income Fund 12 37 63 140
Equity Growth Fund 13 40 69 151
Special Equity Fund 15 47 82 179
Aggressive Equity Fund 15 47 -- --
International Equity Fund 14 44 77 168

THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR RETURNS, AND ACTUAL EXPENSES AND RETURNS MAY BE GREATER OR LESSER
THAN THOSE SHOWN.

The purpose of the table is to assist investors in understanding the
various costs and expenses that shareholders will bear directly and indirectly.
The expense table and example reflect a voluntary undertaking by Diversified to
waive a portion of its investment advisory and administrative services fees.
Without such waivers, the annual investment advisory fee would be 0.25% for the
Money Market Fund, 0.35% for the High Quality Bond Fund, 0.35% for the
Intermediate Government Bond Fund, 0.35% for the Government/Corporate Bond
Fund, 0.55% for the High-Yield Bond Fund, 0.45% for the Balanced Fund, 0.45%
for the Equity Income Fund, 0.57% for the Equity Value Fund, 0.60% for the
Growth & Income Fund, 0.70% for the Equity Growth Fund, 0.80% for the Special
Equity Fund, 0.97% for the Aggressive Equity Fund and 0.75% for the
International Equity Fund, and the annual administrative services fee would be
0.30% for each Fund.

The Trust has adopted a distribution plan (the "Distribution Plan")
pursuant to Rule 12b-1 under the Investment Company Act of 1940 for the Shares.
Under the Distribution Plan, the Trust may pay the Distributor in anticipation
of, or as reimbursement for, expenses incurred by the Distributor in connection
with the sale of Shares, a fee not to exceed on an annual basis 0.25% of the

<PAGE>

average daily net assets of each Fund for the current fiscal year. Long term
shareholders may pay more than the economic equivalent of the maximum charges
permitted by the National Association of Securities Dealers, Inc.

For more information on the expenses of the Trust and the Portfolio
Series, see "Management of the Trust and Portfolio Series" herein.

The Trustees of the Trust believe that the aggregate per share expenses of
each Fund and its corresponding Portfolio will be less than or approximately
equal to the expenses which such Fund would incur if the Trust retained the
services of an investment adviser and the assets of such Fund were invested
directly in the types of securities being held by its corresponding Portfolio.

THE DIVERSIFIED INVESTORS FUNDS GROUP

PROSPECTUS SUMMARY

Shares of beneficial interest ("Shares") of the Funds are sold
continuously without a sales load by the Trust's distributor, Diversified
Investors Securities Corp. (the "Distributor"). Shares are offered for sale at
net asset value to individual and institutional investors and as funding
vehicles for certain employee or qualified retirement plans. Shares are subject
to an annual distribution fee of 0.25% of the average daily net assets of the
Funds. See "Purchases and Redemptions of Shares" herein.

Investors should contact the Distributor at (914) 697-8000 to obtain more
information on how to purchase and redeem shares of the Funds.

The Funds, their investment objectives and their Subadvisers are set forth
below. Diversified Investment Advisors, Inc. ("Diversified") is the investment
adviser.

MONEY MARKET FUND. The investment objective of the Money Market Fund is to
provide liquidity and as high a level of income as is consistent with the
preservation of capital. Through the Money Market Portfolio, the Fund invests
in domestic and foreign U.S. dollar-denominated money market obligations with
maturities of 397 days or less. The Subadviser to this Fund is Capital
Management Group (a division of 1740 Advisers, Inc.). An investor's interest in
the Money Market Fund is neither insured nor guaranteed by the U.S. Government.

<PAGE>

HIGH QUALITY BOND FUND. The investment objective of the High Quality Bond
Fund is to provide as high a level of current income as is consistent with the
preservation of capital. Through the High Quality Bond Portfolio, the Fund
invests in high quality debt securities with short and intermediate maturities.
The Subadviser to this Fund is Merganser Capital Management Corporation.

INTERMEDIATE GOVERNMENT BOND FUND. The investment objective of the
Intermediate Bond Fund is to provide as high a level of current income as is
consistent with the preservation of capital. Through the Intermediate
Government Bond Portfolio, the Fund invests in U.S. Government and U.S.
Government and U.S. Government agency and instrumentality securities with
intermediate maturities and high quality short-term obligations. The Subadviser
to this Fund is Capital Management Group (a division of 1740 Advisers, Inc.).

GOVERNMENT/CORPORATE BOND FUND. The investment objective of the
Government/Corporate Bond Fund is to achieve maximum total return. Through the
Government/Corporate Bond Portfolio, the Fund invests in investment grade debt
securities, U.S. Government and U.S. Government agency and instrumentality
securities, collateralized mortgage obligations guaranteed by these agencies
and instrumentalities and high quality short-term obligations. The Subadviser
to this Fund is Capital Management Group (a division of 1740 Advisers, Inc.).

HIGH-YIELD BOND FUND. The investment objective of the High-Yield Bond Fund
is to provide a high level of current income. Through the High-Yield Bond
Portfolio, the Fund invests in a diversified portfolio consisting primarily of
high-yielding, fixed-income and zero coupon securities, such as bonds,
debentures and notes, convertible securities and preferred stocks. The
Subadviser to this Fund is Delaware Investment Advisers (a division of Delaware
Management Company, Inc.).

BALANCED FUND. The investment objective of the Balanced Fund is to provide
a high total investment return consistent with a broad diversified mix of
stocks, bonds and money market instruments. Through the Balanced Portfolio, the
Fund invests in a managed mix of common and preferred stocks, debt securities,
U.S. government securities, commercial paper and bank obligations. The
Subadviser to this Fund is Institutional Capital Corporation.

EQUITY INCOME FUND. The investment objective of the Equity Income Fund is
to provide a high level of current income through investment in a diversified
portfolio of common stocks with relatively high current yields; capital
appreciation is a secondary objective. Though the Equity Income Portfolio, the
Fund invests primarily in exchange-listed and, to a lesser extent, over-the

<PAGE>

counter common and preferred stock. The Subadviser to this Fund is Asset
Management Group (a division of 1740 Advisers, Inc.).

EQUITY VALUE FUND. The investment objective of the Equity Value Fund is to
provide a high total investment return through investment primarily in a
diversified portfolio of common stocks. Through the Equity Value Portfolio, the
Fund emphasizes stocks which, in the opinion of the Fund's Advisers, are
trading at low valuations relative to market and/or historical levels. The
Subadviser to this Fund is Ark Asset Management Co., Inc.

GROWTH & INCOME FUND. The investment objective of the Growth & Income Fund
is to provide current income and capital appreciation. Through the Growth and
Income Portfolio, the Fund invests primarily in a diversified portfolio of
securities selected for their potential to generate current income or long term
capital appreciation. The Subadviser to this Fund is The Putnam Advisory
Company, Inc.

EQUITY GROWTH FUND. The investment objective of the Equity Growth Fund is
to provide a high level of capital appreciation through investment in a
diversified portfolio of common stocks with potential for above-average growth
in earnings; current income is a secondary objective. Through the Equity Growth
Portfolio, the Fund invests primarily in stocks of companies with market
capitalizations of $10 to $15 billion. The Subadviser to this Fund is
Chancellor LGT Asset Management, Inc.

SPECIAL EQUITY FUND. The investment objective of the Special Equity Fund
is to provide a high level of capital appreciation through investment in a
diversified portfolio of common stocks of small to medium size companies.
Through the Special Equity Portfolio, the Fund emphasizes stocks which, in the
opinion of the Fund's Advisers, will present an opportunity for significant
increases in earnings and/or value, without consideration for current income.
Multiple managers are used to control the volatility often associated with
investments in small to medium size companies and to maximize opportunities in
positive markets. The Subadvisers to this Fund are Ark Asset Management Co.,
Inc., Liberty Investment Management (a division of Goldman Sachs Asset
Management), Pilgrim Baxter & Associates, Ltd. and Westport Asset Management,
Inc.

AGGRESSIVE EQUITY FUND. The investment objective of the Aggressive Equity
Fund is to provide a high level of capital appreciation through investment
primarily in a diversified portfolio of common stocks of small to medium size
companies. Through the Aggressive Equity Portfolio, the Fund emphasizes stocks
which, in the opinion of the Fund's Advisers, present an opportunity for
significant increases in earnings and/or value, without consideration for

<PAGE>

current income. Unlike the Special Equity Fund, the volatility of this Fund is
not mitigated through the use of multiple investment managers. The Subadviser
to this Fund is McKinley Capital Management, Inc.

INTERNATIONAL EQUITY FUND. The investment objective of the International
Equity Fund is to provide a high level of long-term capital appreciation
through investment in a diversified portfolio of securities of foreign issuers.
Through the International Equity Portfolio, the Fund invests in securities of
companies in a minimum of three countries outside the United States. The
Subadviser to this Fund is Capital Guardian Trust Company.

There can, of course, be no assurance that any Fund will achieve its
investment objective.

CONDENSED FINANCIAL INFORMATION

FINANCIAL HIGHLIGHTS

The following table provides financial highlights for a Share of each Fund
outstanding during the periods indicated. The information below should be read
in conjunction with the financial statements appearing in the Annual Report to
Shareholders of the Funds, which is incorporated by reference in the Statement
of Additional Information. The financial statements and notes, as well as the
table below, covering periods through December 31, 1996 have been audited by
Coopers & Lybrand L.L.P., independent accountants, whose report is included in
such Annual Report. A copy of the Annual Report may be obtained without charge
from the Funds' Distributor.

<PAGE>

Intermediate
Government Government/
Money Market High Quality Bond Bond (1) Corporate Bond
------------------------ ------------------------ ----------- -----------------------

For the For the For the For the
Year Ended Year Ended Year Ended Year Ended
------------------------ ------------------------ ----------- -------------------------
1996 1995 1994** 1996 1995 1994** 1996 1996 1995 1994**
---- ---- ------ ---- ---- ------ ---- ---- ---- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period........................... $ 9.83 $ 9.61 $10.00 $10.61 $ 9.87 $10.00 $10.00 $11.60 $ 9.91 $10.00
------ ------ ------ ------ ------ ------ ------ ------ ------ ------

Income from investment operations:
Net investment income.............. 0.19 0.31 0.66 0.20 0.42 0.18 0.14 0.22 0.30 0.19
Net gains on investments
(both realized and unrealized)... 0.30 0.22 (0.39) 0.28 0.74 (0.12) 0.22 0.10 1.71 (0.09)
------ ------ ------- ---- ------ ------- ---- ------ ----- -----

Total from investment
operations....................... 0.49 0.53 0.27 0.48 1.16 0.06 0.36 0.32 2.01 0.10
------ ------ ------ ---- ----- ----- ----- ----- ----- -----

Less: Dividends and distributions
from:
Net investment income............ (0.19) (0.31) (0.66) (0.20) (0.42) (0.18) (0.14) (0.23) (0.28) (0.19)
In excess of investment income... __ __ __ __ __ __ __ __ __ __
Net realized gain on investments. __ __ __ __ __ __ __ __ (0.04) __
In excess of investment income... __ __ __ __ __ __ __
Tax return of capital............ (0.02) -- -- -- -- (0.01) (0.01) -- -- --
------ ---- ---- ---- ---- ------- ------ ---- ---- ----
Total from dividends and (0.21) (0.31) (0.66) (0.20) (0.42) (0.19) (0.15) (0.23) (0.32) (0.19)
distributions................... ------ ------ ------- ------- ------ ------- ------ ------ ------ ------

Net asset value, end of period..... $10.11 9.83 $ 9.61 $10.89 $10.61 $9.87 $10.21 $11.69 $11.60 $ 9.91
====== ====== ====== ====== ====== ====== ====== ====== ====== ======

Ratios/supplemental data:
Net assets end of period........ $3,783,802 113,491 $25,092 $966,031 $71,167 $20,872 $893,261 $2,056,127 $175,079 $22,937
Ratio of expenses to to average
net assets..................... 4.35% 67.48% 59.21% 12.60% 91.16% 284.62% 17.46%* 7.50% 56.91% 257.24%
Ratio of expenses to average net
assets (net of reimbursement) 0.80% 0.76% 0.51% 0.98% 1.00% 0.55% 0.94%* 0.99% 0.85% 0.54%
Ratio of net investment income to
average net assets.............. 1.20% (61.47)% (55.80)% 6.03% (83.53)% (279.12)% (11.28)%* 0.66% (50.11)%(251.51)%
Ratio of net investment income
to average net assets (net of
reimbursement).................. 4.76% 5.24% 2.90% 5.58% 6.63% 4.96% 5.24%* 5.85% 5.92% 5.18%
Total return....................... 4.87% 5.50% 3.45% 4.51% 11.85% 0.67% 4.15%* 2.74% 20.30% 1.10%
Turnover Rate of corresponding
Portfolio.......................... N/A N/A N/A 66% 25% 37% 60% 146% 122% 122%

</TABLE>

<PAGE>

Equity Growth &
Balanced Equity Income Value(2) Income
--------------------------- -------------------------- ------------ -------------------------

For the For the For the For the
Year Ended Year Ended Year Ended Year Ended
--------------------------- --------------------------- ------------ -------------------------
1996 1995 1994** 1996 1995 1994** 1996 1996 1995 1994**
---- ---- ------ ---- ---- ------ ---- ---- ---- ------

Net asset value, beginning of
period............................ $12.04 $ 10.05 $ 10.00 $13.09 $ 9.93 $ 10.00 $10.00 $11.47 $10.22 $ 10.00
------ ------- ------- ------ ------ ------- ------ ------ ------ -------

Income from investment operations:
Net investment income.............. 0.21 0.24 0.07 0.16 0.16 0.09 0.02 0.19 0.06 0.03
Net gains on investments
(both realized and unrealized).... 1.77 2.61 0.07 2.18 3.28 (0.07) 0.86 2.29 3.18 0.22
----- ---- ---- ---- ---- ------ ---- ---- ---- ----
Total from investment
operations........................ 1.98% 2.85 0.14 2.34 3.44 0.02 0.88 2.48 3.24 0.25
----- ---- ---- ---- ---- ---- ---- ---- ---- ----
Less: Dividends and distributions
from:
Net investment income........... (0.21) (0.24) (0.07) (0.14) (0.16) (0.09) (0.01) (0.15) (0.06) (0.03)
In excess of investment income. __ __ __ __ __ __ __ __ __ __
Net realized gain on investments (0.54) (0.51) __ (0.04) (0.04) __ (0.12) (0.02) (0.95) __
In excess of net realized gains. __ __ __ __ __ __ __ __ __ __
Tax return of capital -- (0.11) (0.02) -- (0.08) -- -- -- (0.98) --
---- ------- ------- ---- ------- ---- ---- ---- ------- ----
Total from dividends and
distributions................... (0.75) (0.86) (0.09) (0.18) (0.28) (0.09) (0.13) (0.17) (1.99) (0.03)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------

Net asset value, end of period..... $13.27 $12.04 $10.05 $15.25 $13.09 $9.93 $10.75 $13.78 $11.47 $10.22
====== ====== ====== ====== ====== ===== ====== ====== ====== ======
Ratios/supplemental data:
Net assets end of period....... $5,182,113 $895,351 $151,629 $7,455,379 $590,381 $70,855 $385,208 5,483,747 $443,638 $60,475
Ratio of expenses to average
net assets...................... 3.08% 9.95% 71.47% 3.22% 17.88% 106.54% 56.35%* 3.99% 21.71% 140.33%
Ratio of expenses to average net
assets (net of reimbursement) 0.97% 0.87% 0.49% 1.00% 0.90% 0.42% 1.07%* 1.14% 1.03% 0.43%
Ratio of net investment income to
average net assets.............. 0.78% (5.68)% (68.13)% 0.11% (14.15) (103.39)% (54.60)%* (2.38)% (19.66)%(138.93)%
Ratio of net investment income
to average net assets (net of
reimbursment.................... 2.98% 3.40% 2.86% 2.33% 2.82% 2.74% 1.09%* 0.47% 1.02% 0.97%
Total return....................... 16.39% 28.47% 1.43% 17.91% 34.62% 0.24% 16.61%* 21.61% 32.11% 2.49%
Turnover Rate of corresponding
Portfolio.......................... 113% 124% 118% 26% 23% 30% 65% 142% 155% 21%

</TABLE>

<PAGE>

Equity Growth Special Equity Aggressive High-Yield International
Equity(3) Bond(4) Equity(5)
------------------------------ --------------------------

For the For the For the
For the For the Year Year Year
Year Ended Year Ended Ended Ended Ended
------------------------------ --------------------------
1996 1995 1994** 1996 1995 1994** 1996 1996 1996
---- ---- ------ ---- ---- ------ ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period............................ $13.36 $11.35 $10.00 $13.95 $10.75 $10.00 $10.00 $10.00 $10.00

Income from investment operations:
Net investment income.............. __ 0.01 (0.01) __ __ __ 0.05 0.21 0.01
Net gains on investments
(both realized and unrealized...... 2.41 2.09 1.36 3.58 4.43 0.84 (0.58) 0.66 1.37
---- ---- ---- ---- ---- ---- ------ ---- ----
Total from investment
operations........................ 2.41 2.10 1.35 3.58 4.43 0.84 (0.53) 0.87 1.38
---- ---- ---- ---- ---- ---- ------ ---- ----
Less: Dividends and distributions
from:
Net investment income.............. __ (0.01) __ __ __ __ (0.04) (0.19) (0.01)
In excess of investment income..... __ __ __ (0.03) __ __ __ __ __
Net realized gain on investments... (1.18) __ __ (0.38) (0.89) (0.09) __ __ (0.04)
In excess of net realized gains.... __ __ __ __ __ __ __ __ (0.04)
Tax return of capital.............. (0.09) (0.08) -- (0.03) (0.34) -- -- -- (0.02)
------ ------ ---- ------ ------ ---- ---- ---- ------
Total from dividends and
distributions...................... (1.27) (0.09) -- (0.44) (1.23) (0.09) (0.04) (0.19) (0.11)
------ ------ ---- ------ ------ ------ ------ ------ ------

Net asset value, end of period..... $14.50 $13.36 $11.35 $17.09 $13.95 $10.75 $9.43 $10.68 $11.27
====== ====== ====== ====== ====== ====== ===== ====== ======

Ratios/supplemental data:
Net assets end of period.........$3,859,931 $618,317 $120,370 $7,736,347 $600,294 $87,705 $326,476 $738,100 2,398,279
Ratio of expenses to average
net assets...................... 4.34% 14.34% 70.79% 3.63% 15.76% 99.91% 64.34%* 25.60%* 9.79%*
Ratio of expenses to average net
assets (net of reimbursement)... 1.20% 1.01% 0.42% 1.49% 1.33% 0.54% 1.41%* 1.10%* 1.41%*
Ratio of net investment income to
average net assets.............. (3.64)% (13.13)% (71.00)% (2.48)% (14.58)% (99.33)% (64.36)%* (16.15)%* (7.91)%*
Ratio of net investment income
to average net assets (net of
reimbursement).................. (0.50)% 0.20% (0.21)% (0.34)% (0.18)% 0.04% (1.05)%* 8.35%* 0.48%*
Total return....................... 17.93% 18.50% 13.58% 25.76% 41.50% 8.54% (9.51)%* 9.50%* 14.59%*
Turnover Rate of corresponding
Portfolio.......................... 133% 62% 75% 140% 155% 90% 186% 107% 29%

</TABLE>

<PAGE>

FOOTNOTES
- ---------

(1) Commencement of operations, February 22, 1996.
(2) Commencement of operations, June 13, 1996.
(3) Commencement of operations, June 11, 1996.
(4) Commencement of operations, January 30, 1996.
(5) Commencement of operations, January 18, 1996.
* All figures annualized.
** Commencement of operations, July 1, 1994.

INVESTMENT OBJECTIVES AND PRINCIPAL POLICIES

The Funds seek to achieve their respective investment objectives by
investing all of their Assets in Portfolios with investment objectives the same
as their own. Each Fund has a different investment objective which it pursues
through the investment policies described below. Since each Fund has a
different investment objective, each can be expected to have different
investment results and to be subject to different market and financial risks.

Diversified as Adviser has contracted with one or more Subadvisers for
each Portfolio for certain investment advisory services. Diversified and the
Subadviser or Subadvisers for a particular Portfolio are referred to herein
collectively as the "Advisers."

The investment objective of a Fund or a Portfolio may be changed without
the vote of the holders of the outstanding voting securities of that Fund or
Portfolio. Shareholders of a Fund will receive 30 days' prior written notice of
any change in the investment objective of that Fund or its corresponding
Portfolio. There can be no assurance that any investment objective of any Fund
or Portfolio will be met.

MONEY MARKET FUND. The investment objective of the Money Market Fund and
the Money Market Portfolio is to provide liquidity and as high a level of
current income as is consistent with the preservation of capital. The Money
Market Fund seeks to achieve its investment objective by investing all of its
Assets in the Money Market Portfolio.

The Money Market Portfolio invests in high quality short-term money market
instruments. Securities in which the Money Market Portfolio invests may not
earn as high a level of current income as long-term or lower quality
securities, which generally have less liquidity, greater market risk and more
fluctuation in market value.

<PAGE>

To achieve its investment objective, the Money Market Portfolio invests in
U.S. dollar-denominated short-term money market obligations, including
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, certificates of deposit, time deposits, bankers' acceptances
and other short-term obligations issued by domestic banks and foreign banks,
and high quality commercial paper and other short-term corporate obligations,
including those with floating or variable rates of interest. In addition, the
Money Market Portfolio may lend its portfolio securities, enter into repurchase
agreements and reverse repurchase agreements, and invest in securities issued
by foreign banks and corporations outside the United States. The Money Market
Portfolio reserves the right to concentrate 25% or more of its total assets in
obligations of domestic banks.

In accordance with Rule 2a-7 under the Investment Company Act, the Money
Market Portfolio will maintain a dollar-weighted average portfolio maturity of
90 days or less, purchase only instruments having remaining maturities of 397
days or less and invest only in U.S. dollar-denominated securities determined
in accordance with procedures established by the Board of Trustees of the
Portfolio Series (the "Board of Trustees") to present minimal credit risks and
which are rated in one of the two highest rating categories for debt
obligations by at least two nationally recognized statistical rating
organizations (an "NRSRO") (or one NRSRO if the instrument was rated by only
one such organization) or, if unrated, are of comparable quality as determined
in accordance with procedures established by the Board of Trustees
(collectively, "Eligible Securities").

Eligible Securities include "First Tier Securities" and "Second Tier
Securities". First Tier Securities include those that possess a rating in the
highest category in the case of a single-rated security or at least two ratings
in the highest rating category in the case of multiple-rated securities or, if
the securities do not possess a rating, are determined to be of comparable
quality by the Advisers pursuant to the guidelines adopted by the Board of
Trustees. All other Eligible Securities are Second Tier Securities. The Money
Market Portfolio will invest at least 95% of its total assets in First Tier
Securities.

The NRSROs currently rating instruments of the type the Portfolio may
purchase are Moody's Investors Service, Inc., Standard & Poor's Rating
Services, Duff & Phelps, Inc., Fitch Investors Service, Inc., IBCA Limited,
IBCA Inc. and Thomson BankWatch, Inc., and their rating criteria are described
in the Appendix to the Statement of Additional Information. The Statement of
Additional Information contains further information concerning the rating
criteria and other requirements governing the Portfolio's investments,
including information relating to the treatment of securities subject to a

<PAGE>

tender or demand feature and securities deemed to possess a rating based on
comparable rated securities of the same issuer.

In addition, the Portfolio will not invest more than 5% of its total
assets in the securities (including the securities collateralizing a repurchase
agreement) of, or subject to puts (including letters of credit, guaranties or
other credit support) issued by, a single issuer, except that (i) the Portfolio
may invest more than 5% of its total assets in a single issuer for a period of
up to three business days in certain limited circumstances, (ii) the Portfolio
may invest in obligations issued or guaranteed by the U.S. Government without
any such limitation, and (iii) the limitation with respect to puts does not
apply to unconditional puts if no more than 10% of the Portfolio's total assets
is invested in securities issued or guaranteed by the issuer of the
unconditional put. Investments in Second Tier Securities will be limited to 5%
of the Portfolio's total assets, with the investment in any one such issuer
being limited to no more than the greater of 1% of the Portfolio's total assets
or $1,000,000. As to each security, these percentages are measured at the time
the Portfolio purchases the security.

The Money Market Portfolio seeks to achieve its investment objective
through investments in the following types of U.S. dollar-denominated money
market instruments.

BANK OBLIGATIONS. The Portfolio may invest in U.S.
dollar-denominated certificates of deposit, time deposits, bankers'
acceptances and other short-term obligations issued by domestic banks and
domestic branches and subsidiaries of foreign banks. Certificates of
deposit are certificates evidencing the obligation of a bank to repay
funds deposited with it for a specified period of time. Such instruments
include Yankee Certificates of Deposit, which are certificates of deposit
denominated in U.S. dollars and issued in the United States by the
domestic branch of a foreign bank. Time deposits are non-negotiable
deposits maintained in a banking institution for a specified period of
time at a stated interest rate. Time deposits which may be held by the
Portfolio are not insured by the Federal Deposit Insurance Corporation or
any other agency of the U.S. Government. The Portfolio will not invest
more than 10% of the value of its net assets in time deposits maturing in
longer than seven days and other instruments which are illiquid or not
readily marketable. The Portfolio may also invest in certificates of
deposit and time deposits issued by foreign banks outside the United
States.

<PAGE>

The Portfolio may also invest in bankers' acceptances and other
short-term obligations. Bankers' acceptances are credit instruments
evidencing the obligation of a bank to pay a draft drawn on it by a
customer. These instruments reflect the obligation both of the bank and
of the drawer to pay the face amount of the instrument upon maturity. The
other short-term obligations may include uninsured, direct obligations
which have either fixed, floating or variable interest rates.

To the extent the Portfolio's investments are concentrated in the
banking industry, the Portfolio will have correspondingly greater
exposure to the risk factors which are characteristic of such
investments. Sustained increases in interest rates can adversely affect
the availability or liquidity and cost of capital funds for a bank's
lending activities, and a deterioration in general economic conditions
could increase the exposure to credit losses. In addition, the value of
and the investment return on the Fund's shares could be affected by
economic or regulatory developments in or related to the banking
industry, which industry also is subject to the effects of the
concentration of loan portfolios in leveraged transactions and in
particular businesses, and competition within the banking industry, as
well as with other types of financial institutions. The Portfolio,
however, will seek to minimize its exposure to such risks by investing
only in debt securities which are determined to be of high quality.

U.S. GOVERNMENT AND AGENCY SECURITIES. Securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities
include U.S. Treasury securities, which differ only in their interest
rates, maturities and times of issuance: Treasury Bills have initial
maturities of one year or less; Treasury Notes have initial maturities of
one to ten years; and Treasury Bonds generally have initial maturities of
greater than ten years. Some obligations issued or guaranteed by U.S.
Government agencies and instrumentalities, for example, Government
National Mortgage Association pass-through certificates, are supported by
the full faith and credit of the U.S. Treasury; others, such as those of
the Federal Home Loan Banks, by the right of the issuer to borrow from
the Treasury; others, such as those issued by the Federal National
Mortgage Association, by discretionary authority of the U.S. Government
to purchase certain obligations of the agency or instrumentality; and
others, such as those issued by the Student Loan Marketing Association,
only by the credit of the agency or instrumentality. While the U.S.
Government provides financial support to such U.S. Government-sponsored
agencies or instrumentalities, no assurance can be given that it will
always do so, since it is not so obligated by law. The Portfolio will

<PAGE>

invest in such securities only when the Advisers are satisfied that the
credit risk with respect to the issuer is minimal.

COMMERCIAL PAPER. Commercial paper consists of short-term, unsecured
promissory notes issued to finance short-term credit needs. The
commercial paper purchased by the Portfolio will consist only of U.S.
dollar-denominated direct obligations issued by domestic and foreign
entities. The other corporate obligations in which the Portfolio may
invest consist of high quality, U.S. dollar-denominated short-term bonds
and notes issued by domestic corporations.

The Portfolio may invest in commercial paper issued by major
corporations in reliance on the exemption from registration afforded by
Section 3(a)(3) of the Securities Act of 1933. Such commercial paper may
be issued only to finance current transactions and must mature in nine
months or less. Trading of such commercial paper is conducted primarily
by institutional investors through investment dealers, and individual
investor participation in the commercial paper market is very limited.

UNSECURED PROMISSORY NOTES. The Portfolio also may purchase
unsecured promissory notes ("Notes") which are not readily marketable and
have not been registered under the Securities Act of 1933, provided such
investments are consistent with the Portfolio's investment objective. The
Notes purchased by the Portfolio will have remaining maturities of 13
months or less and will be deemed by the Board of Trustees, or by the
Advisers on behalf of the Board, to present minimal credit risks and will
meet the quality criteria set forth above. The Portfolio will invest no
more than 10% of its net assets in such Notes and in other securities
that are not readily marketable (which securities would include floating
and variable rate demand obligations as to which the Portfolio cannot
exercise the demand feature described in the Statement of Additional
Information and as to which there is no secondary market).

RESTRICTED SECURITIES. The Portfolio may invest in securities that
are subject to legal or contractual restrictions on resale. These
securities may be illiquid and, thus, the Portfolio may not purchase them
to the extent that more than 10% of the value of its net assets would be
invested in illiquid securities. However, if a substantial market of
qualified institutional buyers develops pursuant to Rule 144A under the
Securities Act of 1933 for such securities held by the Portfolio, the
Portfolio intends to treat such securities as liquid securities in
accordance with procedures approved by the Board of Trustees. To the
extent that for a period of time qualified institutional buyers cease
purchasing such restricted securities pursuant to Rule 144A, the
Portfolio's investing in such securities may have the effect of
increasing the level of illiquidity in the Portfolio during such period.

<PAGE>

REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS. Repurchase
agreements involve the acquisition by the Portfolio of an underlying debt
instrument subject to an obligation of the seller to repurchase, and the
Portfolio to resell, the instrument at a fixed price usually not more
than one week after its purchase. The Portfolio's custodian or a
sub-custodian will have custody of securities acquired by the Portfolio
under a repurchase agreement.

Repurchase agreements usually are entered into for the Portfolio
with sellers which are member banks of the Federal Reserve System or
member firms of the New York Stock Exchange (or a subsidiary thereof).
Such transactions afford an opportunity for the Portfolio to earn a
return on available cash with minimal market risk. Certain costs may be
incurred by the Portfolio in connection with the sale of the securities
if the seller does not repurchase them in accordance with the repurchase
agreement. In addition, if bankruptcy proceedings are commenced with
respect to the seller of the securities, realization on the securities by
the Portfolio may be delayed or limited. Repurchase agreements are
considered collateralized loans under the Investment Company Act.

The Portfolio may borrow funds for temporary or emergency purposes,
such as meeting larger than anticipated redemption requests, and not for
leverage, and by agreeing to sell portfolio securities to financial
institutions such as banks and broker-dealers and to repurchase them at a
mutually agreed date and price (a "reverse repurchase agreement"). At the
time the Portfolio enters into a reverse repurchase agreement it will
place in a segregated custodial account cash, U.S. Government securities
or high-grade debt obligations having a value equal to the repurchase
price, including accrued interest. Reverse repurchase agreements involve
the risk that the market value of the securities sold by the Portfolio
may decline below the repurchase price of those securities. Reverse
repurchase agreements are considered to be borrowings by the Portfolio.

FOREIGN SECURITIES. The Portfolio may invest in U.S.
dollar-denominated foreign securities issued outside the United States,
such as obligations of foreign branches and subsidiaries of domestic

<PAGE>

banks and foreign banks, including Eurodollar certificates of deposit,
Eurodollar time deposits and Canadian time deposits, commercial paper of
Canadian and other foreign issuers, and U.S. dollar-denominated
obligations issued or guaranteed by one or more foreign governments or
any of their agencies or instrumentalities. Foreign securities may
represent a greater degree of risk than do securities of domestic issuers
due to possible exchange rate fluctuations, possible exchange controls,
less publicly available information, more volatile markets, less
securities regulation, less favorable tax provisions (including possible
withholding taxes), changes in governmental administration or economic or
monetary policy (in the United States or abroad), war or expropriation.
For a complete description of foreign securities the Portfolio may
purchase, see "Investment Policies" in the Statement of Additional
Information.

CERTAIN OTHER OBLIGATIONS. In order to allow for investments in new
instruments that may be created in the future, upon the Trust
supplementing this Prospectus, the Portfolio may invest in obligations
other than those listed previously, provided such investments are
consistent with the Portfolio's investment objective, policies and
restrictions.

The Statement of Additional Information includes a discussion of
additional investment techniques such as zero coupon obligations,
variable rate and floating rate securities, participation interests,
guaranteed investment contracts and when-issued and forward commitment
securities. The Statement of Additional Information also includes a
discussion of nonfundamental investment policies, as well as a listing of
specific investment restrictions which constitute fundamental policies of
the Fund or the Portfolio and cannot be changed without the approval of
the holders of a "majority of the outstanding voting securities" (as
defined in the Investment Company Act) of the Fund or the Portfolio,
respectively. See "Investment Restrictions" in the Statement of
Additional Information.

HIGH QUALITY BOND FUND. The investment objective of the High Quality Bond
Fund and the High Quality Bond Portfolio is to provide as high a level of
current income as is consistent with the preservation of capital. The yield of
the High Quality Bond Fund normally is expected to be higher than a money
market fund but lower than a longer-term or lower quality bond fund. Unlike a
money market fund, the Fund does not seek to maintain a stable net asset value
and may not be able to return dollar-for-dollar the money invested. The High
Quality Bond Fund seeks to achieve its investment objective by investing all of
its Assets in the High Quality Bond Portfolio.

<PAGE>

The High Quality Bond Portfolio pursues its investment objective by
investing at least 65% of its assets under normal circumstances in high quality
debt securities with short and intermediate maturities (including repurchase
agreements and reverse repurchase agreements).

The Advisers attempt to maintain the Portfolio's "duration" between one
and four years, which means that the Portfolio's overall sensitivity to
interest rates should be slightly more than that of bonds and notes with
remaining average maturities from one to four years. The Portfolio's
dollar-weighted average maturity (or dollar-weighted average life in the case
of asset-backed and mortgage-backed securities) may be longer than four years
from time to time, but will not exceed five years under normal conditions. The
Portfolio may hold individual securities with remaining maturities of up to
thirty years.

The Portfolio seeks consistency of return with minimal exposure to
negative total returns on an annual basis. The Advisers' strategy is to
position the Portfolio in those high quality sectors of the fixed income market
that offer the most attractive yields on a risk-adjusted basis. The duration of
the Portfolio will be a function of the security and sector selection process
and market conditions in general. Since the value of fixed income securities
generally fluctuates inversely with changes in interest rates, the value of
securities held by the Fund will tend to decline during periods of rising
interest rates.

The Advisers normally will select only securities having a minimum
long-term quality rating of A- by Standard & Poor's Rating Services ("S&P") or
A3 by Moody's Investors Service, Inc. ("Moody's") at the time of purchase, or,
in the case of instruments that are not rated or are rated by other agencies
(i.e., Fitch Investors Service, Inc., Duff & Phelps, Inc., etc.) are deemed by
the Advisers to be of similar quality. Money market securities will have a
minimum short-term rating of at least A-1 or P-1 by S&P or Moody's,
respectively, or an equivalent rating by other agencies. The Portfolio may
continue to hold such securities if their ratings are reduced after purchase.

The High Quality Bond Portfolio seeks to achieve its investment objective
through investments in the following types of instruments.

U.S. GOVERNMENT AND AGENCY SECURITIES. The Portfolio may invest in
U.S. Government securities and securities issued or guaranteed by its
agencies or instrumentalities. See "U.S. Government and Agency
Securities" above under Money Market Portfolio. These securities have
varying degrees of government backing. They may be backed by the credit

<PAGE>

of the government as a whole or only by the issuing agency. For example,
securities issued by the Federal Home Loan Mortgage Corporation and the
Federal National Mortgage Association are supported by the agency's right
to borrow money from the U.S. Treasury under certain circumstances. U.S.
Treasury bonds, notes and bills, and some agency securities, such as
those issued by the Government National Mortgage Association, are backed
by the full faith and credit of the U.S. Government as to payment of
principal and interest and are the highest quality government securities.
There is no assurance that the U.S. Government will support obligations
of its agencies unless it is required to do so by law. The Fund itself,
and its share price and yield, are not guaranteed by the U.S. Government.
For additional information on U.S. Government securities, see the
Statement of Additional Information.

The Portfolio may invest a portion of its assets in short-term U.S.
Government securities with remaining maturities of one year or less and
repurchase agreements relating thereto. When the Advisers believe market
conditions warrant a temporary defensive position, the Portfolio may
invest up to 100% of its assets in these instruments.

CORPORATE BONDS. The Portfolio may purchase public or private
corporate bonds, issued by domestic or foreign issuers, that meet the
Portfolio's minimum credit quality criteria at the time of purchase. The
corporate bond market is customarily subdivided into several segments,
which include industrial, public utility, rail and transportation bonds,
and bonds issued by banks and other financial institutions.

YANKEE BONDS AND EURODOLLAR BONDS. The Portfolio may purchase Yankee
and Eurodollar issues that meet its minimum credit quality standards.
Yankee issues are U.S. dollar denominated bonds issued in the United
States market by foreign issuers and are, therefore, subject to SEC
regulations. Issuers of Yankee bonds include, among others, foreign
corporations, foreign governments and agencies, and multilateral lending
institutions. Eurodollar bonds are fixed income securities that are
denominated in U.S. dollars, are underwritten by an international
syndicate, and are sold upon issuance to non-U.S. investors. U.S.-based
investors may purchase eurodollar bonds in the secondary market after a
seasoning period. Eurodollar bonds are not subject to SEC regulations.

MORTGAGE PASS-THROUGHS AND COLLATERALIZED MORTGAGE OBLIGATIONS. The
Portfolio may purchase mortgage and mortgage-related securities such as
pass-throughs, collateralized mortgage obligations, and mortgage

<PAGE>

derivatives that meet the Portfolio's minimum credit quality criteria
(collectively, "Mortgage Securities"). Mortgage pass-throughs are
securities that pass through to investors an undivided interest in a pool
of underlying mortgages. These may be issued or guaranteed by U.S.
government agencies, or may consist of whole loans originated and issued
by private limited purpose corporations or conduits.

Collateralized mortgage obligation bonds and mortgage derivatives
are obligations of special purpose corporations that are collateralized
or supported by mortgages or mortgage securities such as pass-throughs.
Principal prepayments on the underlying mortgages or loans may cause the
Mortgage Securities to be retired substantially earlier than their stated
maturities or final distribution dates, resulting in a loss to the
Portfolio of all or part of the premium, if any, which the Portfolio may
pay when investing in Mortgage Securities.

Even if the U.S. government or one of its agencies guarantees
principal and interest payments of a mortgage-backed security, the market
price of a mortgage-backed security is not insured and may be subject to
market volatility. When interest rates decline, mortgage-backed
securities experience higher rates of prepayment because the underlying
mortgages are refinanced to take advantage of the lower rates. The prices
of mortgage-backed securities may not increase as much as prices of other
debt obligations when interest rates decline, and mortgage-backed
securities may not be an effective means of locking in a particular
interest rate. In addition, any premium paid for a mortgage-backed
security may be lost when it is prepaid. When interest rates go up,
mortgage-backed securities experience lower rates of prepayment. This has
the effect of lengthening the expected maturity of a mortgage-backed
security. As a result, prices of mortgage-backed securities may decrease
more than prices of other debt obligations when interest rates go up.

ASSET-BACKED SECURITIES. The Portfolio may purchase public or
private asset-backed securities of various types, which are fixed income
securities that are collateralized or "backed" by installment receivables
(usually consumer loans) for which some type of credit enhancement is
provided. Asset-backed securities that are eligible for purchase by the
Portfolio include securities backed by automobile receivables, credit
card receivables, home equity loans, manufactured housing loans, business
and recreational vehicle loans, computer leases, and agricultural
equipment loans.

<PAGE>

SHORT-TERM INSTRUMENTS. Cash, commercial paper, short-term
obligations, repurchase agreements or other forms of debt securities may
be held to provide a reserve for future purchases of securities or
liquidity, in order to reduce volatility, or as a temporary defensive
measure when the Advisers determine securities markets to be overvalued.
The Portfolio limits its short-term investments to those U.S.
dollar-denominated instruments which are determined by or on behalf of
the Board of Trustees to present minimal credit risks and which are of
"high quality" as determined by a major rating service (i.e., rated P-1
by Moody's or A-1 by S&P) or, in the case of instruments which are not
rated, are of comparable quality pursuant to procedures established by
the Board of Trustees. Investments in high quality short-term instruments
may, in many circumstances, result in a lower yield than would be
available from investments in instruments with a lower quality or longer
term.

REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS. The
Portfolio may enter into repurchase agreements and reverse repurchase
agreements. See "Repurchase Agreements and Reverse Repurchase Agreements"
under Money Market Fund. The Portfolio may borrow funds for temporary or
emergency purposes, such as meeting larger than anticipated redemption
requests, and not for leverage.

ILLIQUID AND RESTRICTED SECURITIES. The Portfolio may invest up to
15% of its net assets in securities that are subject to legal or
contractual restrictions on resale or for which there is no readily
available market. These illiquid securities may include privately placed
restricted securities for which no institutional market exists. The
absence of a trading market can make it difficult to ascertain a market
value for illiquid investments. Disposing of illiquid investments may
involve time-consuming negotiation and legal expenses, and it may be
difficult or impossible for the Portfolio to sell them promptly at an
acceptable price. The Portfolio may also purchase securities in the
United States that are not registered for sale under federal securities
laws but which can be resold to institutions pursuant to Rule 144A under
the Securities Act of 1933. 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.
Under the supervision of the Board of Trustees, the Advisers determine
the liquidity of restricted securities and, through reports from the
Advisers, the Board of Trustees will monitor trading activity in
restricted securities. Because Rule 144A is relatively new, it is not
possible to predict how these markets will develop. If institutional
trading in restricted securities were to decline, the liquidity of the
Portfolio could be adversely affected.

<PAGE>

OPTIONS AND FUTURES CONTRACTS. The Portfolio may buy and sell
options and futures contracts to manage its exposure to changing interest
rates and securities prices. Some options and futures strategies,
including selling futures, buying puts, and writing calls, hedge the
Portfolio's investments against price fluctuations. Other strategies,
including buying futures, writing puts and buying calls, tend to increase
market exposure. The Portfolio may invest in options (including
over-the-counter options) and futures contracts based on any type of
security or index related to its investments.

Options and futures can be volatile investments, and involve certain
risks. If the Advisers apply a hedge at an inappropriate time or judge
interest rates incorrectly, options and futures strategies may lower the
Fund's return. The costs of hedging are not reflected in the Fund's yield
but are reflected in the Fund's total return. The Fund could also
experience losses if the Portfolio's options and futures positions were
poorly correlated with its other investments, or if it could not close
out its positions because of an illiquid secondary market.

The Portfolio currently does not intend to engage in the writing of
options, except for the purpose of terminating an existing position or
under the limited circumstances described in the Statement of Additional
Information. Nevertheless, the Portfolio has the authority to write
options and may do so in the future if the Advisers determine that such
transactions are in the best interests of the Portfolio.

DELAYED DELIVERY TRANSACTIONS. In order to help ensure the
availability of suitable securities for the Portfolio, the Advisers may
purchase securities for the Portfolio on a "when-issued" or on a "forward
delivery" basis, which means that the obligations would be delivered to
the Portfolio at a future date beyond customary settlement time. Under
normal circumstances, the Portfolio would take delivery of such
securities. In general, the Portfolio would not pay for the securities
until they are received, and would not start earning interest on the
obligations until the contractual settlement date. While awaiting
delivery of the obligations purchased on such basis, the Portfolio would
establish a segregated account consisting of cash, cash equivalents or
high grade liquid debt securities equal to the amount of its commitments
to purchase "when-issued" securities. An increase in the percentage of
the Portfolio's assets committed to the purchase of securities on a
"when-issued" basis may increase the volatility of the Fund's net asset
value.

OTHER INVESTMENTS AND INVESTMENT TECHNIQUES. The Portfolio may also
utilize the following investments and investment techniques and

<PAGE>

practices: investments in foreign securities, investments in securities
denominated in foreign currencies, options on futures contracts, foreign
currency exchange transactions and options on foreign currencies. The
Portfolio does not intend to utilize any of these investments or
practices to the extent of more than 5% of its assets.
See the Statement of Additional Information for further information.

INTERMEDIATE GOVERNMENT BOND FUND. The investment objective of the
Intermediate Government Bond Fund is to provide as high a level of current
income as is consistent with the preservation of capital. The yield of the
Intermediate Government Bond Fund normally is expected to be higher than a
money market fund but lower than a longer-term or lower quality bond fund. The
Intermediate Government Bond Fund pursues its investment objective by investing
all of its Assets in the Intermediate Government Bond Portfolio.

The Intermediate Government Bond Portfolio pursues its investment
objective by investing in high quality U.S. Government obligations and high
quality short-term obligations (including repurchase agreements and reverse
repurchase agreements). The Intermediate Government Bond Portfolio normally
will invest at least 65% of its assets in U.S. Government obligations. The
Advisers attempt to maintain the Intermediate Government Bond Portfolio's
"duration" between one and five years, which means that the Intermediate
Government Bond Portfolio's overall sensitivity to interest rates should be
similar to that of bonds and notes with remaining average maturities from one
to five years. The Intermediate Government Bond Portfolio's dollar-weighted
average maturity (or dollar-weighted average life in the case of
mortgage-backed securities) may be longer than five years from time to time,
but will not exceed ten years or be less than 3 years under normal conditions.
The Intermediate Government Bond Portfolio may hold individual securities with
remaining maturities of up to thirty years.

Since the value of fixed-income securities generally fluctuates inversely
with changes in interest rates, the duration of the Intermediate Government
Bond Portfolio will vary to reflect the Advisers' assessments of prospective
changes in interest rates. The Advisers' strategy will be to adjust the
duration of the Intermediate Government Bond Portfolio so that the Intermediate
Government Bond Portfolio may benefit from relative price appreciation when
interest rates decline and may protect capital value when interest rates rise.
The success of this strategy will depend on the Advisers' ability to manage the
Intermediate Government Bond Portfolio through changes in interest rates, and
there is a risk that the value of the securities held by the Intermediate
Government Bond Portfolio will decline.

<PAGE>

The following is a discussion of the various investments of and techniques
employed by the Intermediate Government Bond Portfolio. Additional information
about the investment policies of the Intermediate Government Bond Portfolio
appears under "Diversified Investors Portfolios" in the Statement of Additional
Information.

U.S. GOVERNMENT AND AGENCY SECURITIES. The Intermediate Government
Bond Portfolio may invest in U.S. Government securities. See "U.S.
Government and Agency Securities" above under Money Market Fund. The
Intermediate Government Bond Portfolio may invest a portion of its assets
in short-term U.S. Government securities with remaining maturities of one
year or less and repurchase agreements relating thereto. When the
Advisers believe market conditions warrant a temporary defensive
position, the Portfolio may invest up to 100% of its assets in these
instruments.

REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS. Repurchase
agreements and reverse repurchase agreements may be entered into by the
Intermediate Government Bond Portfolio. See "Repurchase Agreements and
Reverse Repurchase Agreements" above under Money Market Fund. The
Intermediate Government Bond Portfolio may borrow funds for temporary or
emergency purposes, such as meeting larger than anticipated redemption
requests, and not for leverage.

ILLIQUID AND RESTRICTED SECURITIES. The Intermediate Government Bond
Portfolio may invest not more than 15% of its net assets in securities
that are subject to legal or contractual restrictions on resale or for
which there is no readily available market. See "Illiquid and Restricted
Securities" above under High Quality Bond Fund.

OPTIONS AND FUTURES CONTRACTS. The Intermediate Government Bond
Portfolio may buy and sell options and futures contracts to manage its
exposure to changing interest rates and securities prices. See "Options
and Futures Contracts" above under High Quality Bond Fund.

<PAGE>

The Intermediate Government Bond Portfolio currently does not intend
to engage in the writing of options, except for the purpose of
terminating an existing position or under the limited circumstances
described under "Diversified Investors Portfolios" in the Statement of
Additional Information. Nevertheless, the Intermediate Government Bond
Portfolio has the authority to write options and may do so in the future
if the Advisers determine that such transactions are in the best
interests of the Intermediate Government Bond Portfolio.

DELAYED DELIVERY TRANSACTIONS. In order to help ensure the
availability of suitable securities for the Intermediate Government Bond
Portfolio, the Advisers may purchase securities for the Intermediate
Government Bond Portfolio on a "when-issued" or on a "forward delivery"
basis, which means that the obligations would be delivered to the
Intermediate Government Bond Portfolio at a future date beyond customary
settlement time. See "Delayed Delivery Transactions" above under the High
Quality Bond Fund.

OTHER INVESTMENT AND INVESTMENT TECHNIQUES. The Intermediate
Government Bond Portfolio may, in each case up to 5% of the Portfolio's
assets, also utilize the following investments and investment techniques
and practices: investments in foreign securities, options on futures
contracts, foreign currency exchange transactions and options on foreign
currencies. See "Diversified Investors Portfolios" in the Statement of
Additional Information for further information.

GOVERNMENT/CORPORATE BOND FUND. The investment objective of the
Government/Corporate Bond Fund and the Government/Corporate Bond Portfolio is
to achieve the maximum total return. The Government/Corporate Bond Fund yield
normally is expected to be higher than a money market fund but lower than a
longer-term or lower quality bond fund. The Government/Corporate Bond Fund
seeks to achieve its investment objective by investing all of its Assets in the
Government/Corporate Bond Portfolio.

The Government/Corporate Bond Portfolio pursues its investment objective
by investing in investment grade debt securities, U.S. Government obligations,
including U.S. Government agency and instrumentality obligations and
collateralized mortgage obligations guaranteed by these agencies and
instrumentalities, and high quality short-term obligations (including
repurchase agreements and reverse repurchase agreements). At least 65% of the
Portfolio's assets is invested in U.S. Government securities, corporate bonds
and short-term instruments.

<PAGE>

The Advisers attempt to maintain the Government/Corporate Bond Portfolio's
"duration" between three and ten years, which means that the Portfolio's
overall sensitivity to interest rates should be slightly more than that of
bonds and notes with remaining average maturities from three to fifteen years.
The Government/Corporate Bond Portfolio's dollar-weighted average maturity (or
dollar-weighted average life in the case of mortgage-backed securities) may be
longer than fifteen years from time to time, but will not exceed thirty years
under normal conditions. The Government/Corporate Bond Portfolio may hold
individual securities with remaining maturities of up to thirty years.

Since the value of fixed income securities generally fluctuates inversely
with changes in interest rates, the duration of the Portfolio will vary to
reflect the Advisers' assessments of prospective changes in interest rates. The
Advisers' strategy will be to adjust the duration of the Portfolio so that the
Government/Corporate Bond Portfolio may benefit from relative price
appreciation when interest rates decline and may protect capital value when
interest rates rise. The success of this strategy will depend on the Advisers'
ability to manage the Portfolio through changes in interest rates, and there is
a risk that the value of the securities held by the Portfolio will decline.

The Government/Corporate Bond Portfolio seeks to achieve its investment
objective through investments in the following types of instruments.

U.S. GOVERNMENT AND AGENCY SECURITIES. The Government/Corporate Bond
Portfolio may invest in U.S. Government securities. See "U.S. Government
and Agency Securities" above under Money Market Fund. The Portfolio may
invest a portion of its assets in short-term U.S. Government securities
with remaining maturities of one year or less and repurchase agreements
relating thereto. When the Advisers believe market conditions warrant a
temporary defensive position, the Portfolio may invest up to 100% of its
assets in these instruments.

CORPORATE BONDS. The Government/Corporate Bond Portfolio may
purchase debt securities of United States corporations only if they carry
a rating of at least Baa from Moody's or BBB from S&P or are judged by
the Advisers to be of comparable quality. Securities rated Baa by Moody's
or BBB by S&P may have speculative characteristics. Changes in economic
condition or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than is the case for
higher grade securities. See the Appendix to the Statement of Additional
Information for an explanation of these ratings.

<PAGE>

FOREIGN SECURITIES. The Government/Corporate Bond Portfolio may
invest in securities of foreign issuers. The Fund's investments in
unlisted foreign securities are subject to the overall restrictions
applicable to investments in illiquid securities. The Advisers do not
intend to concentrate more than 25% of foreign investments in any one
type of instrument or in any one foreign country. Foreign securities may
present a greater degree of risk than do securities of domestic issuers
due to possible exchange rate fluctuations, possible exchange controls,
less publicly available information, more volatile markets, less
securities regulation, less favorable tax provisions (including possible
withholding taxes), changes in governmental administration or economic or
monetary policy (in the United States or abroad), war or expropriation.
Forward foreign currency exchange contracts may also be entered into for
the purchase or sale of foreign currency solely for hedging purposes
against adverse rate changes. A currency exchange contract allows a
definite price in dollars to be fixed for foreign securities that have
been purchased or sold (but not settled) for the Portfolio. Entering into
such exchange contracts may result in the loss of all or a portion of the
benefits which otherwise could have been obtained from favorable
movements in exchange rates. In addition, entering into such contracts
means incurring certain transaction costs and bearing the risks of
incurring losses if rates do not move in the direction anticipated.

SHORT-TERM INSTRUMENTS. Cash, commercial paper, short-term
obligations, repurchase agreements, bank certificates of deposit or other
forms of debt securities may be held to provide a reserve for future
purchases of securities or liquidity, in order to reduce volatility, or
as a temporary defensive measure when the Advisers determine securities
markets to be overvalued. See "Short Term Instruments" above under High
Quality Bond Fund.

REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS. The
Government/Corporate Bond Portfolio may enter into repurchase agreements
and reverse repurchase agreements. See "Repurchase Agreements and Reverse
Repurchase Agreements" above under Money Market Fund. The Portfolio may
borrow funds for temporary or emergency purposes, such as meeting larger
than anticipated redemption requests, and not for leverage.

ILLIQUID AND RESTRICTED SECURITIES. The Government/Corporate Bond
Portfolio may invest not more than 15% of its net assets in securities
that are subject to legal or contractual restrictions on resale or for
which there is no readily available market. See "Illiquid and Restricted
Securities" above under High Quality Bond Fund.

<PAGE>

OPTIONS AND FUTURES CONTRACTS. The Government/Corporate Bond Series
may buy and sell options and futures contracts to manage its exposure to
changing interest rates and securities prices. See "Options and Futures
Contracts" above under High Quality Bond Fund.

Nevertheless, the Portfolio has the authority to write options and
may do so in the future if the Advisers determine that such transactions
are in the best interests of the Portfolio.

DELAYED DELIVERY TRANSACTIONS. In order to help ensure the
availability of suitable securities for the Government/Corporate Bond
Portfolio, the Advisers may purchase securities for the Portfolio on a
"when-issued" or on a "forward delivery" basis which means that the
securities would be delivered to the Portfolio at a future date beyond
customary settlement times. See "Delayed Delivery Transactions" above
under High Quality Bond Fund.

OTHER INVESTMENTS AND INVESTMENT TECHNIQUES. The
Government/Corporate Bond Portfolio may also utilize the following
investments and investment techniques and practices: options on futures
contracts and options on foreign currencies. The Portfolio does not
intend to utilize any of these investments or techniques to the extent of
more than 5% of its assets.
See the Statement of Additional Information for further information.

HIGH-YIELD BOND FUND. The investment objective of the High-Yield Bond Fund
is to seek a high level of current income. The High-Yield Bond Fund seeks to
achieve its investment objective by investing all of its Assets in the
High-Yield Bond Portfolio.

The High-Yield Bond Portfolio pursues its investment objective by
investing in a diversified portfolio consisting primarily of high-yielding,
fixed-income and zero coupon securities, such as bonds, debentures and notes,
convertible securities and preferred stocks. The Portfolio may invest all or a
substantial portion of its assets in lower-rated debt securities, commonly
referred to as "junk bonds". Such investments may include foreign securities
and obligations issued or guaranteed by the U.S. government, any of its states
or territories, any foreign government or any of their respective subdivisions,
agencies or instrumentalities.

<PAGE>

The High-Yield Bond Portfolio normally will invest at least 65% of its
assets in high-yielding, income producing debt securities and preferred stocks,
including convertible and zero coupon securities. Zero coupon securities are
debt securities that pay no cash income but are sold at substantial discounts
from their face value. Certain zero coupon securities also are sold at
substantial discounts but provide for the commencement of regular interest
payments at a deferred date. The Portfolio may invest up to 35% of its assets
in equity securities, including common stocks, warrants and rights.

Lower-rated debt securities usually are defined as securities rated Ba or
lower by Moody's or BB or lower by S&P. Lower-rated debt securities are
considered speculative and involve greater risk of default or price changes due
to changes in the issuer's creditworthiness than higher-rated securities and
are more sensitive to changes in the issuer's capacity to pay. Investing in
lower-rated debt securities is an aggressive approach to income investing. The
1980s saw a dramatic increase in the use of lower-rated debt securities to
finance highly leveraged corporate acquisitions and restructurings. Past
experience may not provide an accurate indication of future performance of
lower-rated debt securities, especially during periods of economic recession.
In fact, from 1989 to 1991, the percentage of lower-rated debt securities that
defaulted rose significantly above prior levels.

Lower-rated debt securities may be thinly traded, which can adversely
affect the prices at which they can be sold and can result in high transaction
costs. If market quotations are not available, these lower-rated debt
securities will be valued in accordance with standards set by the Board of
Trustees, including the use of outside pricing services. Judgment plays a
greater role in valuing lower-rated debt securities than securities for which
more extensive quotations and last-sale information are available. Adverse
publicity and changing investor perceptions may affect the ability of outside
pricing services used by the Portfolio to value its portfolio securities, and
the Portfolio's ability to dispose of the lower-rated bonds. The market prices
of lower-rated debt securities may decline significantly in periods of general
economic difficulty, which may follow periods of rising interest rates. During
an economic downturn or a prolonged period of rising interest rates, the
ability of issuers of lower-rated debt to service their payment obligations,
meet projected goals, or obtain additional financing may be impaired. The
Portfolio may choose, at its own expense or in conjunction with others, to
pursue litigation or otherwise exercise its rights as a security holder to seek
to protect the interests of security holders if it determines this to be in the
interest of Portfolio investors.

The considerations discussed above for lower-rated debt securities also
are applicable to lower quality unrated debt instruments of all types,

<PAGE>

including loans and other direct indebtedness of businesses with poor credit
standing. Unrated debt instruments are not necessarily of lower quality than
rated securities but they may not be attractive to as many buyers.

The High-Yield Bond Portfolio may also seek to achieve its investment
objective through investments in the following types of instruments.

REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS. The
High-Yield Bond Portfolio may enter into repurchase agreements and
reverse repurchase agreements. See "Repurchase Agreements and Reverse
Repurchase Agreements" above under Money Market Fund. The Portfolio may
borrow funds for temporary or emergency purposes, such as meeting larger
than anticipated redemption requests, and not for leverage.

ILLIQUID AND RESTRICTED SECURITIES. The High-Yield Bond Portfolio
may not invest more than 15% of its net assets in securities that are
subject to legal or contractual restrictions on resale or for which there
is no readily available market. See "Illiquid and Restricted Securities"
above under High Quality Bond Fund.

OPTIONS AND FUTURES CONTRACTS. The High-Yield Bond Portfolio may buy
and sell options and futures contracts to manage its exposure to changing
interest rates and securities prices. See "Options and Futures Contracts"
above under High Quality Bond Fund.

The Portfolio currently does not intend to engage in the writing of
options, except under the limited circumstances described in the
Statement of Additional Information. Nevertheless, the Portfolio has the
authority to write options and may do so in the future if the Advisers
determine that such transactions are in the best interests of the
Portfolio.

DELAYED DELIVERY TRANSACTIONS. In order to help ensure the
availability of suitable securities for the High-Yield Bond Portfolio,
the Advisers may purchase securities for the Portfolio on a "when-issued"
or on a "forward delivery" basis which means that the securities would be

<PAGE>

delivered to the Portfolio at a future date beyond customary settlement
times. See "Delayed Delivery Transactions" above under High Quality Bond
Fund.

OTHER INVESTMENTS AND INVESTMENT TECHNIQUES. The High-Yield Bond
Portfolio may also utilize the following investments and investment
techniques and practices: options on futures contracts and options on
foreign currencies. The Portfolio does not intend to utilize any of these
investments or techniques to the extent of more than 5% of its assets.
See the Statement of Additional Information for further information.

BALANCED FUND. The investment objective of the Balanced Fund and the
Balanced Portfolio is to provide a high total investment return consistent with
a broad mix of stocks, bonds and money market instruments. The Balanced Fund
seeks to achieve its investment objective by investing all of its Assets in the
Balanced Portfolio.

The Balanced Portfolio pursues its investment objective by investing in a
managed mix of common stocks (and/or equivalents including American Depository
Receipts), preferred stocks, debt securities of U.S. domiciled corporations,
U.S. government securities, commercial paper of U.S. corporations, and bank
obligations. The Advisers will determine the proportions of each type of
investment to achieve an asset mix they believe appropriate for an investor who
desires diversification of investment. The Balanced Portfolio will vary the
proportion of each type of asset purchased according to the Advisers'
interpretations of changes in economic conditions and the sensitivity of each
type of investment to those changes. The Advisers seek to shift emphasis among
stocks, bonds and short-term instruments to maximize participation in positive
markets and preservation of capital in negative markets and otherwise in
response to market conditions.

The Balanced Portfolio's policy is to invest its assets in a broad list of
equity and fixed-income securities, such as common stocks, preferred stocks and
bonds, including short-term obligations. The list may be diversified not only
by companies and industries, but also by type of security. Some fixed-income
securities may also have a right to purchase common stock by means of a
conversion privilege or attached warrants. The Balanced Portfolio may vary the
percentage of assets invested in any one type of security in accordance with
the Advisers' interpretation of economic and market conditions, fiscal and
monetary policy, and underlying securities values. However, at least 25% of the
total assets of the Balanced Portfolio are always invested in fixed-income
senior securities including debt securities and preferred stock. In selecting

<PAGE>

common stocks, emphasis is placed on investing in established companies with
market capitalizations of $100,000,000 or more and seasoned management teams.
Most of the Balanced Portfolio's non-convertible long-term debt investments
consist of "investment grade" securities (rated Baa or better by Moody's or BBB
or better by S&P), although unrated debt securities may be purchased and held
if they are judged by the Advisers to be of equivalent quality. Securities
rated Baa by Moody's or BBB by S&P may have speculative characteristics.
Changes in economic conditions or other circumstances may weaken more severely
the capacity of issuers of Baa or BBB securities to make principal and interest
payments than is the case for issuers of higher grade bonds. Less than 5% of
the Balanced Portfolio's investments consist of securities rated Baa by Moody's
or BBB by S&P. For a description of these ratings, see the Appendix to the
Statement of Additional Information.

The Balanced Portfolio may invest a portion of its assets in short-term
U.S. Government securities with remaining maturities of one year or less and
repurchase agreements relating thereto. When the Advisers believe market
conditions warrant a temporary defensive position, the Portfolio may invest up
to 100% of its assets in these instruments or other money market instruments.

EQUITY INCOME FUND. The investment objective of the Equity Income Fund and
the Equity Income Portfolio is to provide a high level of current income
through investment in a diversified portfolio of common stocks with relatively
high current yields; capital appreciation is a secondary objective. The Equity
Income Fund seeks to achieve its investment objective by investing all of its
Assets in the Equity Income Portfolio.

The Equity Income Portfolio seeks to achieve its investment objective by
investing primarily in a diversified portfolio of stocks of companies which, in
the opinion of the Advisers, are fundamentally sound financially and which pay
relatively high dividends on a consistent basis. The Advisers attempt to manage
the Portfolio so that it will outperform other equity income funds in negative
markets. As a result of this objective, the Portfolio may underperform relative
to other equity income funds in positive markets. The Portfolio invests
primarily in common stocks and preferred stocks listed on the New York Stock
Exchange and on other national securities exchanges and, to a lesser extent, in
stocks that are traded over-the-counter. The Portfolio also invests in bonds
and short-term obligations as well as securities convertible into common
stocks, preferred stocks, debt securities and short-term obligations. The
Portfolio allocates its investments among different industries and companies,
and changes its portfolio securities for investment considerations and not for
trading purposes.

<PAGE>

The Equity Income Portfolio's policy is to invest in a broad list of
equity and fixed-income securities, including short-term obligations. The list
may be diversified not only by companies and industries, but also by type of
security. Some fixed-income securities may also have a call on common stock by
means of a conversion privilege or attached warrants. The Portfolio may vary
the percentage of assets invested in any one type of security in accordance
with the Advisers' interpretation of economic and market conditions, fiscal and
monetary policy, and underlying security values.

EQUITY VALUE FUND. The investment objective of the Equity Value Fund and
the Equity Value Portfolio is to provide a high total investment return through
investment primarily in a diversified portfolio of common stocks. The Equity
Value Fund seeks to achieve its investment objective by investing all of its
Assets in the Equity Value Portfolio.

The Equity Value Portfolio seeks to achieve its investment objective by
investing primarily in a diversified portfolio of stocks of companies which, in
the opinion of the Advisers, are trading at low valuations relative to market
and/or historical levels. These stocks tend to have relatively low
price/earnings ratios and/or relatively low price/book value ratios. Low
price/earnings ratios or price/book value ratios means that the stock is less
expensive than average relative to the company's earnings or book value,
respectively. The Portfolio invests primarily in common stocks listed on the
New York Stock Exchange and on other national securities exchanges and, to a
lesser extent, in stocks that are traded over-the-counter. The Portfolio may
also invest in bonds and short-term obligations as well as securities
convertible into common stocks, preferred stocks, debt securities and
short-term obligations. The Portfolio allocates its investments among different
industries and companies, and changes its portfolio securities for investment
considerations and not for trading purposes.

The Equity Value Portfolio may invest in a broad list of equity and
fixed-income securities, including short-term obligations. The list may be
diversified not only by companies and industries, but also by type of security.
Some fixed-income securities may also have a call on common stock by means of a
conversion privilege or attached warrants. The Portfolio may vary the
percentage of assets invested in any one type of security in accordance with
the Advisers' interpretation of economic and market conditions, fiscal and
monetary policy, and underlying security values.

GROWTH & INCOME FUND. The investment objective of the Growth & Income Fund
and the Growth & Income Portfolio is to provide current income and capital

<PAGE>

appreciation. The Growth & Income Fund seeks to achieve its investment
objective by investing all of its Assets in the Growth & Income Portfolio.

The Growth & Income Portfolio seeks to achieve its investment objective by
investing primarily in a diversified portfolio of securities selected for their
potential to generate current income or long term capital appreciation. In
general, the objective of the Portfolio is to achieve greater potential for
capital appreciation than an income fund and less price volatility than a
growth fund. The Growth & Income Portfolio invests primarily in common stocks
and preferred stocks listed on the New York Stock Exchange and on other
national securities exchanges and, to a lesser extent, in stocks that are
traded over-the-counter. The Portfolio also invests in bonds and short-term
obligations as well as securities convertible into common stocks, preferred
stocks, debt securities and short-term obligations. The Portfolio allocates its
investments among different industries and companies and changes its portfolio
securities for investment considerations and not for trading purposes. In
general, the Portfolio seeks to invest in growing, financially stable and
undervalued companies.

The Growth & Income Portfolio's policy is to invest in a broad list of
equity and fixed income securities, including short-term obligations. The list
may be diversified not only by companies and industries, but also by type of
security. Some fixed income securities may also have a call on common stock by
means of a conversion privilege or attached warrants. The Portfolio may vary
the percentage of assets invested in any one type of security in accordance
with the Advisers' interpretation of economic and market conditions, fiscal and
monetary policy, and underlying securities values.

EQUITY GROWTH FUND. The investment objective of the Equity Growth Fund and
the Equity Growth Portfolio is to provide a high level of capital appreciation
through investment in a diversified portfolio of common stocks with potential
for above average growth in earnings and dividends; current income is a
secondary objective. The Equity Growth Fund seeks to achieve its investment
objective by investing all of its Assets in the Equity Growth Portfolio.

The Equity Growth Portfolio seeks to achieve its investment objective by
investing primarily in a diversified portfolio of common stocks, but may also
invest in other types of securities such as preferred stocks, convertible and
non-convertible bonds, warrants and foreign securities including American
Depository Receipts ("ADRs"). Under normal circumstances, at least 65% of the
assets of the Portfolio are invested in equity securities. This is a
fundamental investment policy and may not be changed without investor approval.
The Equity Growth Portfolio invests primarily in stocks of companies that have
a market value of all their issued and outstanding common stock of $10 to $15
billion and preferred stocks listed on the New York Stock Exchange and on other

<PAGE>

national securities exchanges and, to a lesser extent, in stocks that are
traded over-the-counter. The Portfolio also invests in bonds and short-term
obligations as well as securities convertible into common stocks, preferred
stocks, debt securities and short-term obligations. The Portfolio allocates its
investments among different industries and companies, and changes its portfolio
securities for investment considerations and not for trading purposes.

The Equity Growth Portfolio's policy is to invest in a broad list of
equity and fixed-income securities, including short-term obligations. The list
may be diversified not only by companies and industries, but also by type of
security. Some fixed-income securities may also have a call on common stock by
means of a conversion privilege or attached warrants. The Portfolio may vary
the percentage of assets invested in any one type of security in accordance
with the Adviser's interpretation of economic and market conditions, fiscal and
monetary policy, and underlying security values.

SPECIAL EQUITY FUND. The investment objective of the Special Equity Fund
and the Special Equity Portfolio is to provide a high level of capital
appreciation through investment in a diversified portfolio of common stocks of
small to medium size companies. The Special Equity Fund is designed for
investors in search of substantial long-term growth who can accept
above-average stock market risk and little or no current income. The Special
Equity Fund seeks to achieve its investment objective by investing all of its
Assets in the Special Equity Portfolio.

The Special Equity Portfolio seeks to achieve its investment objective by
investing primarily in a diversified portfolio of stocks of small to medium
size companies which, in the opinion of the Advisers, will present an
opportunity for significant increases in earnings and/or value, without
consideration for current income. The Portfolio's primary equity investments
will be common stocks of small and medium sized U.S. companies with market
capitalizations of less than $2 billion. Multiple managers are used to control
the volatility often associated with investments in small to medium size
companies and to maximize opportunities in positive markets. The Portfolio may
also invest in bonds and short-term obligations as well as securities
convertible into common stocks, preferred stocks, debt securities and
short-term obligations. The Special Equity Portfolio allocates its investments
among different industries and companies, and changes its portfolio securities
for investment considerations and not for trading purposes.

While the Special Equity Portfolio's policy is to invest its assets
primarily in common stocks with potential for above average growth in earnings,
appreciation may be sought in other types of securities such as preferred

<PAGE>

stocks, convertible and non-convertible bonds, warrants and foreign securities
including American Depository Receipts. The Special Equity Portfolio may vary
the percentage of assets invested in any one type of security in accordance
with the Advisers' interpretation of economic and market conditions, fiscal and
monetary policy, and underlying securities values. In selecting stocks,
emphasis is placed on investing in companies with small to medium market
capitalizations, i.e., the market value of all issued and outstanding common
stock of the company will be less than $2 billion. Investing in equity
securities of small to medium companies involves risks not typically associated
with investment in comparable securities of large companies. Such smaller and
medium companies may have narrow product lines and limited financial and
managerial resources. Since the market for the equity securities of small and
medium companies is often characterized by less information and liquidity than
that for the equity securities of large companies, securities of such small and
medium companies may be subject to more abrupt or erratic market movements than
securities of large companies or market averages in general. Therefore, an
investment in the Special Equity Fund may be subject to greater declines in
value than an investment in an equity fund investing in the equity securities
of large companies.

AGGRESSIVE EQUITY FUND. The investment objective of the Aggressive Equity
Fund and the Aggressive Equity Portfolio is to provide a high level of capital
appreciation through investment primarily in a diversified portfolio of common
stocks of small to medium size companies. The Aggressive Equity Fund is
designed for investors in search of substantial long-term growth who can accept
above-average stock market risk and little or no current income. The Aggressive
Equity Fund seeks to achieve its investment objective by investing all of its
Assets in the Aggressive Equity Portfolio.

The Aggressive Equity Portfolio seeks to achieve its investment objective
by investing primarily in a diversified portfolio of stocks of small to medium
size companies which, in the opinion of the Advisers, present an opportunity
for significant increases in earnings, revenue and/or value, without
consideration for current income. The Portfolio's primary equity investments
are common stocks of small and medium sized U.S. companies with market
capitalizations between $750 million and $2.5 billion. The Portfolio may also
invest in bonds and short-term obligations as well as securities convertible
into common stocks, preferred stocks, debt securities and short-term
obligations. The Aggressive Equity Portfolio allocates its investments among
different industries and companies, and changes its portfolio securities for
investment considerations and not for trading purposes.

<PAGE>

While the Aggressive Equity Portfolio's policy is to invest its assets
primarily in common stocks with potential for above average growth in earnings
and/or revenue, appreciation may be sought in other types of securities such as
preferred stocks, convertible and non-convertible bonds, warrants and foreign
securities including American Depository Receipts. The Aggressive Equity
Portfolio may vary the percentage of assets invested in any one type of
security in accordance with the Advisers' interpretation of economic and market
conditions, fiscal and monetary policy, and underlying securities values.

In selecting stocks, emphasis is placed on investing in companies with
consistent, above-average and accelerating profitability and growth. These
companies tend to have higher price/earnings ratios which means that the stock
is more expensive than average relative to the company's earnings. Investing in
equity securities of small to medium companies involves risks not typically
associated with investment in comparable securities of large companies. Such
smaller and medium companies may have narrow product lines and limited
financial and managerial resources. Since the market for the equity securities
of small and medium companies is often characterized by less information and
liquidity than that for the equity securities of large companies, securities of
such small and medium companies may be subject to more abrupt or erratic market
movements than securities of large companies or market averages in general.
Therefore, an investment in the Aggressive Equity Fund may be subject to
greater declines in value than an investment in an equity fund investing in the
equity securities of large companies.

INTERNATIONAL EQUITY FUND. The investment objective of the International
Equity Fund is to provide a high level of long-term capital appreciation
through investment in a diversified portfolio of securities of foreign issuers.
The International Equity Fund seeks to achieve its investment objective by
investing all of its Assets in the International Equity Portfolio.

The International Equity Portfolio seeks to achieve its investment
objective by investing primarily in foreign securities. Foreign securities are
defined as securities of issuers, wherever organized, which trade solely on a
foreign exchange or over-the-counter market, or, of issuers which in the
judgment of the Advisers, have their principal activities outside of the United
States. In determining whether an issuer's principal activities and interests
are outside the United States, the Advisers will look at such factors as the
location of the issuer's assets, operations, facilities, personnel, sales and
earnings. Under normal circumstances, at least 65% of the assets of the
Portfolio are invested in foreign equity securities. The Advisers will purchase
securities of companies in a minimum of 3 countries outside the United States.

<PAGE>

The Advisers use an approach to investing looking to identify fundamental
values in stocks they select. Further, when allocating the Portfolio's
investments among geographic regions and individual countries, the Advisers
consider various criteria, such as prospects for relative economic growth among
countries, expected levels of inflation, government policies influencing
business conditions, and the outlook for currency relationships. The Portfolio
invests most of its assets in securities of issuers located in developed
countries in these geographic areas: Canada, the Far East, Australia and
Europe.

The International Equity Portfolio may invest up to 10% of its assets in
securities of issuers in the world's emerging markets. Countries with emerging
markets include those that have an emerging stock market as defined by the
International Finance Corporation, those with low- to middle-income economies
according to the World Bank, and those listed in World Bank publications as
developing. While the Advisers believe that these investments present the
possibility for significant growth over the long-term, they also entail
significant risks. Many investments in emerging markets can be considered
speculative, and their prices can be much more volatile than those in the more
developed nations of the world. This difference reflects the greater
uncertainties of investing in less established markets and economies.

The International Equity Portfolio may invest in all types of securities,
most of which are denominated in foreign currencies. While the Advisers expect
that opportunities for long term capital appreciation will come primarily from
common stocks, securities convertible into common stock, non-convertible
preferred stocks and depository receipts for these securities, the Portfolio
may also invest in any type or quality of debt securities if the Advisers
believe that doing so may result in long term growth. In addition, the
Portfolio may invest in high-yielding, lower rated debt securities. See the
discussion of lower rated debt securities above under High-Yield Bond Fund
above. Forward foreign currency exchange contracts may also be entered into for
the purchase or sale of foreign currency solely for hedging purposes against
adverse rate changes on both a long and short term basis. A currency exchange
contract allows a definite price in dollars to be fixed for foreign securities
that have been purchased or sold (but not settled) for the Portfolio. Entering
into such exchange contracts may result in the loss of all or a portion of the
benefits which otherwise could have been obtained from favorable movements in
exchange rates. In addition, entering into such contracts means incurring
certain transaction costs and bearing the risk of incurring losses if rates do
not move in the direction anticipated.

Investments in foreign equity and debt securities involve increased or
additional risks from those encountered when investing in securities of

<PAGE>

domestic issuers. The Advisers evaluate the risks and opportunities when
investing in particular foreign securities. Such risks include (1) currency
fluctuations; (2) restrictions on, and costs associated with, the exchange of
currencies; (3) the difficulty in obtaining or enforcing a court judgment
abroad; (4) reduced levels of publicly available information concerning
issuers; (5) restrictions on foreign investment in other jurisdictions; (6)
reduced levels of governmental regulation of foreign securities markets; (7)
difficulties in effecting the repatriation of capital invested abroad; (8)
difficulties in transaction settlements and the effect of this delay on
shareholder equity; (9) foreign withholding taxes; (10) political, economic,
and similar risks, including expropriation and nationalization; (11) different
accounting, auditing, and financial standards; (12) price volatility; and (13)
the diverse structure and liquidity of various countries and regions.

CERTAIN ADDITIONAL INVESTMENT TECHNIQUES,
RESTRICTIONS AND POLICIES

Following is a description of certain investment techniques employed by
the Portfolios.

OPTIONS AND FUTURES CONTRACTS. Each of the Balanced Portfolio, Equity
Income Portfolio, Equity Value Portfolio, Growth & Income Portfolio, Equity
Growth Portfolio, Special Equity Portfolio, Aggressive Equity Portfolio and
International Equity Portfolio may enter into transactions in futures
contracts, options on futures contracts, options on securities indexes and
options on securities, for the purpose of hedging each Portfolio's securities,
which would have the effect of reducing the volatility of its net asset value.
In general, each such transaction involves the establishment of a position
which is expected to move in a direction opposite to that of the security or
securities being hedged.

For example, each Portfolio may sell futures contracts, or purchase put
options on futures contracts, securities indexes or securities for the purpose
of protecting against an anticipated decline in the value of securities held by
that Portfolio. In the event that such decline occurs, and the hedging
transaction is successful, the reduced value of portfolio securities will be
offset, in whole or in part, by a corresponding gain on the futures or option
position. Conversely, when the Portfolio is not fully invested in the
securities market, and it expects a significant market advance, it may purchase
futures contracts or call options on futures contracts, securities indexes or
securities in order to gain rapid market exposure that may in part or entirely
offset increases in the cost of securities that Portfolio intends to purchase.

<PAGE>

The Statement of Additional Information includes further information about
the transactions in futures and option contracts that may be entered into by
each Portfolio.

Gain or loss to each Portfolio on transactions in security index futures
or options will depend on price movements in the stock market generally (or in
a particular industry or segment of the market), rather than price movements of
individual securities. A securities index assigns relative values to the
securities included in the index and the index fluctuates with changes in the
market values of the securities so included. Some securities index futures or
options are based on broad market indexes, such as the Standard & Poor's 500 or
the New York Stock Exchange Composite Index. In contrast, certain exchanges
offer futures or options on narrower market indexes, such as the Standard &
Poor's 100 or indexes based on an industry or market segment, such as oil and
gas stocks. Options on indexes and options on securities are traded on
securities exchanges regulated by the SEC. Futures contracts and options on
futures contracts are traded only on designated contract markets regulated by
the Commodity Futures Trading Commission and through a registered futures
commission merchant which is a member of such contract market. A commission
must be paid on each completed purchase and sale transaction. Transactions on
such exchanges are cleared through a clearing corporation, which guarantees
performance between the clearing members which are parties to each contract.

Each Portfolio currently does not intend to engage in the writing of
options, except for the purpose of terminating an existing position or under
the limited circumstances described in the Statement of Additional Information.
Nevertheless, each Portfolio has the authority to write options and may do so
in the future if the Advisers determine that such transactions are in the best
interests of the Fund.

SHORT-TERM INSTRUMENTS. Each of the Balanced Portfolio, Equity Income
Portfolio, Equity Value Portfolio, Growth & Income Portfolio, Equity Growth
Portfolio, Special Equity Portfolio, Aggressive Equity Portfolio and
International Equity Portfolio may invest in cash, commercial paper, short-term
obligations, repurchase agreements or other forms of debt securities
(including, without limitation, a short-term investment fund investing in any
of such securities). See "Short-Term Instruments" above under High Quality Bond
Fund.

REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS. Each of the
Balanced Portfolio, Equity Income Portfolio, Equity Value Portfolio, Growth &
Income Portfolio, Equity Growth Portfolio, Special Equity Portfolio, Aggressive
Equity Portfolio and International Equity Portfolio may enter into repurchase

<PAGE>

agreements and reverse repurchase agreements and may borrow funds for temporary
or emergency purposes, such as meeting larger than anticipated redemption
requests, and not for leverage. See "Repurchase Agreements and Reverse
Repurchase Agreements" above under Money Market Fund.

ILLIQUID AND RESTRICTED SECURITIES. Each of the Balanced Portfolio, Equity
Income Portfolio, Equity Value Portfolio, Growth & Income Portfolio, Equity
Growth Portfolio, Special Equity Portfolio, Aggressive Equity Portfolio and
International Equity Portfolio may not invest more than 15% of its net assets
in securities that are subject to legal or contractual restrictions on resale
or for which there is no readily available market. See "Illiquid and Restricted
Securities" above under High Quality Bond Fund.

DELAYED DELIVERY TRANSACTIONS. In order to help insure the availability of
suitable securities for each of the Balanced Portfolio, Equity Income
Portfolio, Equity Value Portfolio, Growth & Income Portfolio, Equity Growth
Portfolio, Special Equity Portfolio, Aggressive Equity Portfolio and
International Equity Portfolio, the Advisers may purchase securities for each
such Portfolio on a "when-issued" or on a "forward delivery" basis. See
"Delayed Delivery Transactions" above under High Quality Bond Fund.

FOREIGN SECURITIES. Each of the Balanced Portfolio, Equity Income
Portfolio, Equity Value Portfolio, Growth & Income Portfolio, Equity Growth
Portfolio, Special Equity Portfolio and Aggressive Equity Portfolio has a
current policy not to invest more than 25% of its assets in securities of
foreign issuers, including investments in sponsored American Depository
Receipts ("ADRs"). ADRs are receipts typically issued by an American Bank or
trust company evidencing ownership of the underlying foreign securities. The
Advisers do not intend to concentrate more than 25% of such foreign investments
in any one type of instrument or in any foreign country. Each Portfolio's
investments in unlisted foreign securities, not including ADRs, are subject to
the overall restrictions applicable to investments in illiquid securities.
Foreign securities, including ADRs, may represent a greater degree of risk than
do securities of domestic issuers due to possible exchange rate fluctuations,
possible exchange controls, less publicly available information, more volatile
markets, less securities regulation, less favorable tax provisions (including
possible withholding taxes), changes in governmental administration or economic
or monetary policy (in the United States or abroad), war or expropriation. Each
Portfolio may invest up to 5% of its assets in closed-end investment companies
which primarily hold foreign securities. Forward foreign currency exchange
contracts may also be entered into for the purchase or sale of foreign currency
solely for hedging purposes against adverse rate changes. A currency exchange
contract allows a definite price in dollars to be fixed for foreign securities

<PAGE>

that have been purchased or sold (but not settled) for each Portfolio. Entering
into such exchange contracts may result in the loss of all or a portion of the
benefits which otherwise could have been obtained from favorable movements in
exchange rates. In addition, entering into such contracts means incurring
certain transaction costs and bearing the risk of incurring losses if rates do
not move in the direction anticipated.

LENDING OF PORTFOLIO SECURITIES. Each of the Portfolios may lend its
portfolio securities to brokers, dealers and other financial organizations. By
lending its securities, a Portfolio can increase its income by continuing to
receive 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
interest paid when U.S. Government obligations are used as collateral. 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. A 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 loaned securities including accrued interest exceeds the level of
the collateral; (iii) the Portfolio must be able to terminate the loan at any
time; (iv) the Portfolio must receive reasonable interest on the loan, as well
as any dividends, interest or other distributions on the loaned securities, and
any increase in market value; (v) the Portfolio may pay only reasonable
custodian fees in connection with the loan; and (vi) voting rights on the
loaned securities may pass to the borrower. However, if a material event
adversely affecting the loaned securities were to occur, the Portfolio would
terminate the loan and regain the right to vote the securities.

* * *

PORTFOLIO TURNOVER. Changes to the securities of each Portfolio are
generally made without regard to the length of time a security has been held,
or whether a sale would result in the recognition of a profit or loss.
Therefore, the rate of portfolio turnover is not a limiting factor to trading
when such trading is deemed appropriate. Each Portfolio engages in trading if
it believes a transaction net of costs (including custodian charges) will help
it achieve its investment objective. The portfolio turnover rate for each
Portfolio in 1996 is set forth above under "Condensed Financial Information".
The amount of brokerage commissions and realized capital gains will tend to
increase as the level of portfolio activity increases.

BROKERAGE TRANSACTIONS. The primary consideration in placing portfolio
security transactions with broker-dealers for execution is to obtain, and

<PAGE>

maintain the availability of, execution at the most favorable prices and in the
most effective manner possible. See "Portfolio Transactions and Brokerage
Commissions" in the Statement of Additional Information.

INVESTMENT RESTRICTIONS. As "diversified" funds, no more than 5% of the
assets of any Portfolio may be invested in the securities of one issuer (other
than U.S. Government securities), except that up to 25% of each Portfolio's
assets may be invested without regard to this limitation. No Portfolio will
invest more than 25% of its assets in the securities of issuers in any one
industry. These are fundamental investment policies which may not be changed
without investor approval. Additional fundamental investment restrictions of
the Portfolios are contained in the Statement of Additional Information. Except
as stated otherwise, all investment objectives, policies and restrictions
described herein and in the Statement of Additional Information are
nonfundamental and may be changed without investor approval.

CORE-FEEDER STRUCTURE

The Funds do not invest directly in securities. Instead, each Fund invests
its Assets in a corresponding Portfolio, a mutual fund having the same
investment objectives and policies as that Fund. The Portfolio, in turn, buys,
holds and sells securities in accordance with its investment objectives and
policies. Of course, there can be no assurance that a Fund or its corresponding
Portfolio will achieve their objectives. The Trust may withdraw a Fund's
investment in its Portfolio at any time, and will do so if the Trust's Trustees
believe it to be in the best interest of the Fund's shareholders. If the Trust
were to withdraw a Fund's investment in its Portfolio, the Trust could either
invest the Fund's assets directly in securities in accordance with the
investment policies described above or invest in another mutual fund or pooled
investment vehicle having the same investment objectives and policies. If the
Trust were to withdraw a Fund's investment in its Portfolio, the Fund could
receive securities from the Portfolio instead of cash, causing the Fund to
incur brokerage, tax and other charges or leaving it with securities which may
or may not be readily marketable or widely diversified.

Each Portfolio may change its investment objective and certain of its
investment policies and restrictions without approval by its investors, but the
Portfolio will notify its corresponding Fund (which in turn will notify its
shareholders) and its other investors at least 30 days before implementing any
change in its investment objective. A change in investment objective, policies
or restrictions may cause the Trust to withdraw a Fund's investment in its
Portfolio.

<PAGE>

Subject to exceptions that are not inconsistent with applicable rules or
policies of the Securities and Exchange Commission, whenever the Trust is asked
to vote on matters concerning one or more Portfolios, the Trust will hold a
shareholder meeting of the appropriate Fund(s) and vote in accordance with
shareholder instructions. Fund shareholders who do not vote will not affect the
Trust's votes at a 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. Of
course, a Fund could be outvoted, or otherwise adversely affected, by other
investors in its Portfolio.

Each Portfolio may sell interests to other investors in addition to its
corresponding Fund. These investors may be mutual funds which offer shares to
their shareholders with different costs and expenses than the Fund. Therefore,
the investment returns for all investors in funds investing in a Portfolio may
not be the same. These differences in returns are also present in other mutual
fund structures. Information concerning other holders of interests in the
Portfolios is available from Diversified at (914) 697-8000.

MANAGEMENT OF THE TRUST AND PORTFOLIO SERIES

The Trust has not retained the services of an investment adviser since the
Trust seeks to achieve the investment objective of each Fund by investing all
of the Assets of each Fund in a corresponding Portfolio. The respective Boards
of Trustees of the Trust and of the Portfolio Series provide broad supervision
over the affairs of the Trust and of the Portfolio Series, respectively. The
Trustees of the Trust who are not "interested persons" of the Trust are
separate from and independent from the Trustees of the Portfolio Series who are
not "interested persons" of the Portfolio Series. For further information about
the Trustees and officers of the Trust and the Portfolio Series, see
"Management of the Trust and Portfolio Series" in the Statement of Additional
Information. A majority of each of the Trust's and the Portfolio Series'
Trustees are not affiliated with the Advisers.

INVESTMENT ADVISORY SERVICES

Subject to such investment policies as the Board of Trustees of the
Portfolio Series may determine and pursuant to Investment Advisory Agreements
with the Portfolio Series with respect to each Portfolio, Diversified manages
the assets of each Portfolio. For its services under the Investment Advisory
Agreements, Diversified receives from each Portfolio fees accrued daily and
paid monthly at an annual rate equal to the percentages specified in the table
below of the Portfolios' average daily net assets. Diversified is currently
waiving a portion of its investment advisory fees. The principal business

<PAGE>

address of Diversified is Four Manhattanville Road, Purchase, New York 10577.
Investment management decisions are taken by a committee of Diversified's
personnel and not by a particular individual.

For each Portfolio, Diversified has entered into an Investment Subadvisory
Agreement with the Subadvisers listed in the table below. For its services
under each Subadvisory Agreement, the Subadvisers receive a fee from
Diversified at an annual rate equal to the percentages specified in the table
below of the corresponding Portfolio's average net assets. Each fee will be
accrued monthly by multiplying the arithmetic average of the beginning and
ending monthly net assets in the Portfolio by the fee schedule and dividing by
12. Each fee will be paid on a quarterly basis.

<PAGE>

COMPENSATION(%) COMPENSATION(%)
PORTFOLIO SUBADVISERS TO ADVISER(1) TO SUBADVISERS

<S> <C> <C> <C>
Money Market Portfolio Capital Management Group 0.25 0.05

High Quality Bond Portfolio Merganser Capital
Management Corporation 0.35 (2)

Intermediate Government Capital Management Group 0.35 0.15
Bond Portfolio

Government/Corporate Bond Capital Management Group 0.35 0.15
Portfolio

High-Yield Bond Portfolio Delaware Investment Advisers 0.55 (3)

Balanced Portfolio Institutional Capital Corporation 0.45 (4)

Equity Income Portfolio Asset Management Group 0.45 0.25

Equity Value Portfolio Ark Asset Management Co., Inc. 0.57 (5)

Growth & Income Portfolio Putnam Advisory Company, Inc. 0.60 (6)

Equity Growth Portfolio Chancellor LGT Asset Management, Inc. 0.62 (7)

Special Equity Portfolio (8) 0.80 0.50

Aggressive Equity Portfolio McKinley Capital Management 0.97 (9)

International Equity Portfolio Capital Guardian Trust Company 0.75 (10)

</TABLE>

(1) The Adviser is currently waiving a portion of its fees. See "Expense
Summary" on page [ ] for a review of the fee waivers currently in effect.

(2) 0.50% on the first $10,000,000 of average net assets of the High
Quality Bond Portfolio, 0.375% on the next $15,000,000 in assets, 0.25% on the
next $75,000,000 in assets and 0.1875% on all assets in excess of $100,000,000.

(3) 0.40% on the first $20,000,000 of average net assets of the
High-Yield Bond Portfolio, 0.30% on the next $20,000,000 in assets and 0.20% on
assets in excess of $40,000,000.

(4) 0.55% on the first $25,000,000 of average net assets of the Balanced
Portfolio, 0.45% on the next $25,000,000 in assets and 0.35% on assets in
excess of $50,000,000.

<PAGE>

(5) 0.45% on the first $100,000,000 of average net assets of the Equity
Value Portfolio, 0.40% on the next $50,000,000 in assets and 0.35% on the next
$50,000,000 in assets; when the Portfolio achieves $200,000,000 in assets, the
rate shall be 0.40% on assets up to $200,000,000 and 0.35% on assets in excess
of $200,000,000 so long as the Portfolio continues to have more than
$200,000,000 in assets.

(6) 0.30% on the first $100,000,000 of average net assets of the Growth
& Income Portfolio, 0.20% on assets in excess of $100,000,000.

(7) 0.50% on the first $50,000,000 of average net assets of the Equity
Growth Portfolio, 0.30% on the next $75,000,000 in assets, 0.25% on the next
$75,000,000 in assets and 0.20% on all assets in excess of $200,000,000.

(8) The Special Equity Portfolio has four Subadvisers: Pilgrim Baxter &
Associates, Ltd., Ark Asset Management Co., Liberty Investment Management, a
division of Goldman Sachs Asset Management, and Westport Asset Management, Inc.

(9) 0.90% on the first $10,000,000 of average net assets of the
Aggressive Equity Portfolio, 0.80% on the next $15,000,000 in assets, 0.60% on
the next $25,000,000 in assets, 0.40% on the next $50,000,000 in assets and
0.35% on assets in excess of $100,000,000.

(10) 0.75% on the first $25,000,000 of average net assets of the
International Equity Portfolio, 0.60% on the next $25,000,000 in assets, 0.425%
from $50,000,000 in assets to $250,000,000 in assets, and 0.375% on all assets
in excess of $250,000,000.

Diversified is an indirect, wholly-owned subsidiary of AEGON USA, Inc.
("AEGON"), a financial services holding company whose primary emphasis is life
and health insurance and annuity and investment products. AEGON is an indirect,
wholly-owned subsidiary of AEGON nv, a Netherlands corporation which is a
publicly traded international insurance group. Diversified was incorporated in
1992 for the purpose of acting as investment adviser to the Portfolio and other
series of the Trust. It is the Adviser's responsibility to select, subject to
the review and approval of the Board of Trustees, appropriate subadvisers with
a distinguished background and to review each subadviser's continued
performance.

Management's discussion of the Funds' performance for the fiscal year
ended December 31, 1996 is included in the Funds' Annual Report to
Shareholders, a copy of which may be obtained free of charge upon request from
the Funds' Distributor.

<PAGE>

It is the responsibility of a Subadviser to make the day-to-day investment
decisions of the Portfolio and to place the purchase and sales orders for
securities transactions of such Portfolio, subject in all cases to the general
supervision of Diversified. Each Subadviser makes the investment selections for
its respective Portfolio consistent with the guidelines and directions set by
Diversified and the Board of Trustees of the Portfolio Series. Each Subadviser
furnishes at its own expense all services, facilities and personnel necessary
in connection with managing the corresponding Portfolio's investments and
effecting securities transactions for a Portfolio.

Diversified has entered into separate Investment Subadvisory Agreements
with respect to each of the Money Market Portfolio, Intermediate Government
Bond Portfolio and Government/Corporate Bond Portfolio, with Capital Management
Group, a division of 1740 Advisers, Inc., a wholly-owned subsidiary of The
Mutual Life Insurance Company of New York ("MONY"). The address of Capital
Management Group is 1740 Broadway, New York, New York 10019. Total assets under
management by Capital Management Group at December 31, 1996 were approximately
$890 million, all of which were assets of registered investment companies. The
following representatives of MONY are primarily responsible for the day-to-day
management of the Portfolios (the inception date of each such person's
responsibility for the Portfolios and each such person's business experience
for the past five years is indicated parenthetically): Money Market Portfolio
- -- David E. Wheeler, Investment Vice President and Portfolio Manager (since
1997, employed by Capital Management Group since 1994; previously employed at
AIG Investment Advisers; Intermediate Government Bond Portfolio and
Government/Corporate Bond Portfolio -- Gregory Staples, Vice President (since
1996 and 1994, respectively, employed by Capital Management Group since 1987).

Diversified has entered into an Investment Subadvisory Agreement with
respect to the High Quality Bond Portfolio with Merganser Capital Management
Corporation ("Merganser"). Merganser was formed in September 1987 and is owned
by certain of its employees. Total assets under management for all
institutional bond clients at December 31, 1996 were approximately $2.1
billion, $197.3 million of which were assets of registered investment
companies. The principal business address of Merganser is One Cambridge Center,
Cambridge, Massachusetts 02142. Investment management decisions of Merganser
are made by committee and not by managers individually.

<PAGE>

Diversified has entered into an Investment Subadvisory Agreement with
respect to the High-Yield Bond Portfolio with Delaware Investment Advisers
("Delaware"), a division of Delaware Management Company, Inc. Delaware was
formed in February 1985 and is owned by Lincoln National Corp. Total assets
under management for all high-yield bond clients at December 31, 1996 were
approximately $1.9 billion, $1.3 billion of which were assets of registered
investment companies. The principal business address of Delaware is 2005 Market
Street, Philadelphia, Pennsylvania 19103. The following representative of
Delaware is primarily responsible for the day-to-day management of the
High-Yield Bond Portfolio (the inception date of such person's business
experience for the past five years is indicated parenthetically): Paul Matlack,
Vice President/Senior Portfolio Manager (since 1996, employed by Delaware since
1989).

Diversified has entered into an Investment Subadvisory Agreement with
respect to the Balanced Portfolio with Institutional Capital Corporation
("Institutional Capital"). Institutional Capital was formed in January 1970 and
is owned by certain of its employees. Total assets under management for all
balanced clients at December 31, 1996 were approximately $579 million, $183
million of which were assets of registered investment companies. The principal
business address of Institutional Capital is 303 West Madison Street, Chicago,
Illinois 60606. Investment management decisions of Institutional Capital are
made by committee and not by managers individually.

Diversified has entered into an Investment Subadvisory Agreement with
respect to the Equity Income Portfolio with Asset Management Group, a division
of 1740 Advisers, Inc., which is a wholly-owned subsidiary of MONY. The address
of Asset Management Group is 1740 Broadway, New York, New York 10019. Total
assets under management by Asset Management Group at December 31, 1996 were
approximately $1.3 billion, $1.1 billion of which were assets of registered
investment companies. Investment management decisions of Asset Management Group
are made by committee and not by managers individually.

Diversified has entered into an Investment Subadvisory Agreement with
respect to the Equity Value Portfolio with Ark Asset Management Co., Inc.
("Ark"). Ark was formed in July 1989 and is owned by Ark Asset Holdings, Inc.
Ark Asset Holdings, Inc. is owned by certain of its employees. The principal
address of Ark is 55 Water Street, New York, New York 10041. Total assets under
management for equity value clients at December 31, 1996 were approximately
$14.4 billion, $150 million of which were assets of registered investment
companies. Investment management decisions of Ark are made by committee and not
by managers individually.

Diversified has entered into an Investment Subadvisory Agreement with
respect to the Growth & Income Portfolio with Putnam Advisory Company, Inc.
("Putnam"). Putnam was formed in 1937 and is owned by Marsh & McLennon
Companies, Inc. The principal address of Putnam is One Post Office Square,
Boston, Massachusetts 02109. Total assets under management for growth and
income clients at December 31, 1996 were approximately $6.0 billion, $1.8
billion of which were assets of registered investment companies. Investment
management decisions of Putnam are made by committee and not by managers
individually.

<PAGE>

Diversified has entered into an Investment Subadvisory Agreement with
respect to the Equity Growth Portfolio with Chancellor LGT Asset Management,
Inc. ("Chancellor"). Chancellor was formed in 1996 as a result of the merger
between LGT Asset Management, Inc., a wholly-owned subsidiary of Liechtenstein
Global Trust AG ("LGT"), and Chancellor Capital Management, Inc., a
wholly-owned subsidiary of LGT which was acquired by LGT in 1996. Chancellor is
a wholly-owned subsidiary of LGT. LGT is controlled by the Prince of
Liechtenstein Foundation, which serves as the parent organization for the
various business enterprises of the Princely Family of Liechtenstein. Total
assets under management for all equity growth clients at December 31, 1996 were
approximately $2.1 billion, none of which were assets of registered investment
companies. The principal business address of Chancellor is 1166 Avenue of the
Americas, New York, New York 10036. Investment management decisions of
Chancellor are made by committee and not by managers individually.

With respect to the Special Equity Portfolio, Diversified has entered into
Investment Subadvisory Agreements with four Subadvisers as follows:

o Ark Asset Management Co., Inc. ("Ark") was formed in July 1989 and
is owned by Ark Asset Holdings, Inc. Ark Asset Holdings, Inc. is owned by
certain of its employees. The principal business address of Ark is 55
Water Street, New York, New York 10041. Total assets under management for
all small capitalization clients at December 31, 1996 were approximately
$1.9 billion, $75 million of which were assets of registered investment
companies. The following representative of Ark is primarily responsible
for the day-to-day management of the Special Equity Portfolio on behalf of
Ark (the inception date of such person's responsibility for the Portfolio
and such person's business experience for the past five years is indicated
parenthetically): Ronald Wiener, Vice Chairman and Portfolio Manager
(since 1994, employed by Ark since 1986; previously employed at Lehman
Management Co., Inc. as Senior Vice President and Senior Portfolio
Manager, Specialty Growth Equity Management, 1989-1995).

o Liberty Investment Management ("Liberty"), a division of Goldman
Sachs Asset Management ("GSAM"), was established in January 1997 when
Goldman, Sachs and Co. acquired Liberty Investment Management, Inc. GSAM
is a separate operating division of Goldman, Sachs & Co., a worldwide
investment banking firm. Total assets under management for all equity
clients of Liberty at January 27, 1997 were approximately $37.8 billion,
$5.2 billion of which were assets of registered investment companies. The
principal business address of Liberty is 2502 Rocky Point Drive, Suite
500, Tampa, Florida 33607. The following representatives of Liberty are

<PAGE>

primarily responsible for the day-to-day management of the Special Equity
Portfolio on behalf of Liberty (the inception date of each person's
responsibility for the Portfolio and such person's business experience for
the past five years is indicated parenthetically): Herbert E. Ehlers,
Managing Director (since 1994, employed by Liberty or its predecessor
Liberty Investment Management, Inc. since 1988) and Timothy G. Ebright,
Portfolio Manager (since 1994, employed by Liberty or its predecessor
Liberty Investment Management, Inc. since 1988).

o Pilgrim Baxter & Associates, Ltd. ("Pilgrim") was formed in 1995
and is owned by United Asset Management, Inc., a publicly-owned
corporation. Pilgrim succeeded to certain of the investment management
businesses, and acquired the corporate name of, Pilgrim Baxter &
Associates, Ltd. in April 1995. Total assets under management for all
equity clients at December 31, 1996 were approximately $3.2 billion,
$463.7 million of which were assets of registered investment companies.
The principal business address of Pilgrim is 1255 Drummers Lanes, Wayne,
Pennsylvania 19087. The following representative of Pilgrim is primarily
responsible for the day-to-day management of the Special Equity Portfolio
on behalf of Pilgrim (the inception date of such person's responsibility
for the Portfolio and such person's business experience for the past five
years is indicated parenthetically): John Force, Portfolio Manager (since
1994, employed by Pilgrim since 1992).

o Westport Asset Management, Inc. ("Westport") was formed in July
1993 and is owned by certain of its employees. Total assets under
management for all equity clients at December 31, 1996 were approximately
$860 million, $278 million of which were assets of registered investment
companies. The principal business address of Westport is 253 Riverside
Avenue, Westport, Connecticut 06880. The following representative of
Westport is primarily responsible for the day-to-day management of the
Special Equity Portfolio on behalf of Westport (the inception date of such
person's responsibility for the Portfolio and such person's business
experience for the past five years is indicated parenthetically): Andrew
Knuth, Portfolio Manager (since 1994, employed by Westport since 1983).

Diversified has entered into an Investment Subadvisory Agreement with
respect to the Aggressive Equity Portfolio with McKinley Capital Management,
Inc. ("McKinley"). McKinley was formed in March 1991 and is owned by Robert
Gilliam. Total assets under management for all aggressive equity clients at
December 31, 1996 were approximately $814 million, $16 million of which were
assets of registered investment companies. The principal business address of
McKinley is 3301 C Street, Anchorage, Alaska 99503. The following

<PAGE>

representative of McKinley is primarily responsible for the day-to-day
management of the Aggressive Equity Portfolio (the inception date of such
person's responsibility for the Portfolio and such person's business experience
for the past five years is indicated parenthetically): Robert Gilliam,
Portfolio Manager (since 1996, employed by McKinley since 1991).

Diversified has entered into an Investment Subadvisory Agreement with
respect to the International Equity Portfolio with Capital Guardian Trust
Company ("CGTC"). CGTC was formed in 1968 and is owned by The Capital Group
Companies, Inc. The principal address of CGTC is 333 South Hope Street, Los
Angeles, California 90071. Total assets under management for all international
equity clients by CGTC at December 31, 1996 were approximately $21.8 billion,
and total assets under management of registered investment companies for which
CGTC acts as subadviser were $472 million as of that date. CGTC uses a system
of multiple portfolio managers pursuant to which the Portfolio is divided into
segments that are assigned to individual portfolio managers. Within investment
guidelines, each portfolio manager makes individual decisions as to company,
country, industry, timing and percentage based on extensive field research and
direct company contact.

For the fiscal year ended December 31, 1996, the compensation paid to the
Adviser after any applicable fee waivers as a percentage of each Portfolio's
average daily net assets was as follows:

Adviser's
Portfolio(1) compensation(1)(2)

Money Market Portfolio 0.25%
High Quality Bond Portfolio 0.35%
Intermediate Government Bond Portfolio 0.32%
Government/Corporate Bond Portfolio 0.35%
High-Yield Bond Portfolio 0.00%
Balanced Portfolio 0.45%
Equity Income Portfolio 0.45%
Equity Value Portfolio 0.10%
Growth & Income Portfolio 0.58%
Equity Growth Portfolio 0.69%
Special Equity Portfolio 0.79%
Aggressive Equity Portfolio 0.37%
International Equity Portfolio 0.68%

(1) As of December 31, 1996, the Equity Value and Aggressive Equity Portfolios
had been in operation for less than a full fiscal year; the Adviser's
compensation rates with respect to these Portfolios represent annualized fees
in effect for their respective initial fiscal periods ended December 31, 1996.
The Adviser's annual compensation rate with respect to the Equity Growth
Portfolio was reduced from 0.70% to 0.62% of the Portfolio's average daily net
assets, effective November 15, 1996.

(2) The Adviser is currently waiving a portion of its fees. See "Expense
Summary" on page [ ] for a review of the fee waivers currently in effect.

DISTRIBUTION PLAN AND AGREEMENT

The Trustees of the Trust have adopted a Distribution Plan for the Shares
of each Fund in accordance with Rule 12b-1 under the Investment Company Act
after having concluded that there is a reasonable likelihood that the

<PAGE>

Distribution Plan will benefit the Funds and their shareholders. As
contemplated by the Distribution Plan, the Distributor acts as the agent of the
Funds in connection with the offering of Shares pursuant to a Distribution
Agreement.

Under the Distribution Plan, the Distributor may receive a fee from each
Fund at an annual rate not to exceed 0.25% of the average daily net assets of
that Fund in anticipation of, or as reimbursement for, expenses incurred in
connection with the sale of Shares of each Fund, such as (i) payments of
quarterly trail or maintenance commissions to registered representatives of the
Distributor or other broker-dealers in an amount not to exceed on an annual
basis 0.25% of the average daily net assets maintained in the Fund by their
customers, (ii) reimbursements of sales commissions advanced by the Distributor
to sales brokers, and (iii) advertising expenses and the expenses of printing
(excluding typesetting) and distributing prospectuses and reports used for
sales purposes, expenses of preparing and printing sales literature and other
distribution- related expenses. The Distributor provides to the Trustees of the
Trust a quarterly written report of amounts expended by it and the purposes for
which such expenditures were made.

ADMINISTRATOR

Pursuant to an Administrative and Transfer Agency Services Agreement with
the Trust and under the Advisory Agreement with the Portfolio Series,
Diversified, as Administrator, provides the Trust and the Portfolio Series with
general office facilities and supervises the overall administration of the
Trust and the Portfolio Series, including, among other responsibilities, the
negotiation of contracts and fees with, and the monitoring of performance and
billings of, the independent contractors and agents of the Trust or the
Portfolio Series; the preparation and filing of all documents required for
compliance by the Trust or the Portfolio Series with applicable laws and
regulations; providing equipment and clerical personnel necessary for
maintaining the organization of the Trust or the Portfolio Series; preparation
of certain documents in connection with meetings of Trustees and shareholders
of the Trust and investors in the Portfolio Series; and the maintenance of
books and records of the Trust and the Portfolio Series. Diversified provides
persons satisfactory to the Board of Trustees of each of the Trust and the
Portfolio Series to serve as officers of the Trust or the Portfolio Series, as
the case may be. Such officers, as well as certain other employees and Trustees
of the Trust or the Portfolio Series, may be directors, officers or employees
of Diversified or its affiliates. In addition, Diversified provides transfer
agency services to the Trust. For providing these services and facilities and
for bearing the related expenses, Diversified, as Administrator, receives a fee

<PAGE>

from each Fund accrued daily and paid monthly at an annual rate equal to 0.30%
of the average daily net assets of the Fund. The Administrator is currently
waiving a portion of its administrative services fee. Diversified acts as
Administrator to the Portfolios pursuant to the Advisory Agreement and receives
no additional compensation for providing such administrative services.

CUSTODIAN

The Trust and Portfolio Series have each entered into separate Custodian
Agreements with Investors Bank & Trust Company ("IBT"), pursuant to which IBT
acts as custodian of the assets of each series of the Trust and the Portfolio
Series. Securities may be held by subcustodians approved by the Board of
Trustees.

SERVICE AGENTS

All shareholders must be represented by Diversified or another Service
Agent that has entered into a Service Agreement with Diversified. Diversified
acts as a Service Agent pursuant to its Administrative Services Agreement with
the Trust and receives no additional compensation from the Funds for such
shareholder services. The service fees of any other Service Agents will be paid
by Diversified from its administrative services fees. The services provided by
a Service Agent may include establishing and maintaining shareholder accounts,
processing purchase and redemption transactions, arranging for bank wires,
answering client inquiries regarding the Trust, assisting clients in changing
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 Diversified 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 Administrative Services
Agreement with Diversified, or of the type or scope not generally offered by a
mutual fund, such as enhanced retirement or trust reporting. Any Service Agent
must agree to transmit to shareholders who are its customers appropriate
disclosures of any fees that it may charge them directly.

PURCHASES AND REDEMPTIONS OF SHARES

PURCHASES

Shares of the Funds are available to individual and institutional
investors. Shares of the Funds are also available as funding vehicles for (i)
certain employee retirement plans of for-profit and not-for-profit entities
including those having cash or deferred arrangements and those covering
self-employed individuals and owner-employees (such as 401(k) Plans, 403(b)
Plans, 457 Plans, Money Purchase Plans, Profit Sharing Plans, Simplified
Employee Pension Plans and Keogh Plans), and (ii) qualified personal
retirement plans such as IRAs and rollover IRAs (collectively, the
"Qualified Investors").

The retirement plans which may invest in Shares of the Funds are
hereinafter referred to as "Plans" and the employees, self-employed persons or
individuals participating in such Plans are hereinafter referred to as "Plan

<PAGE>

Participants". With respect to these Plans, the employer and/or the Plan
Participants will make contributions which may be invested in Shares of the
Funds pursuant to the terms and conditions of the underlying Plan.

Shares may be purchased without a sales charge on any day on which the
Adviser and applicable Subadviser or Subadvisers are open for business ("Fund
Business Day") at the net asset value next determined after an order in proper
form is transmitted to and accepted by the Distributor. The minimum initial
investment is $5,000 (the Trust is currently waiving its minimum initial
investment requirement). There is no minimum for subsequent investments.
However, a particular Plan may impose different minimum subsequent investment
requirements. Purchases will be effected on the same day the purchase order is
received by the Distributor provided such order is received in good order prior
to 4:00 p.m. New York time on any day on which the New York Stock Exchange is
open for trading. Shares earn dividends from and including the day the purchase
is effected, but not on the day of redemption. While there is no sales charge
on purchases of Shares, the Distributor receives distribution fees from the
Funds. See "Management of the Trust and Portfolio Series -- Distribution Plan
and Agreement" herein. An investor may purchase Shares through the Distributor
directly or by authorizing a Plan to purchase such Shares on his or her behalf
through the Distributor.

Checks received from an investor are invested in full and fractional
Shares. If Shares are purchased with a check that does not clear, the purchase
will be canceled and any losses or fees incurred in the transaction will be the
responsibility of such investor. Checks must be drawn on or payable through a
U.S. bank and be in U.S. dollars. If Shares are purchased by check and a
redemption request relating to such Shares is received within 15 days of a
purchase, the Trust will release such redemption proceeds when the check
clears. It is possible, although unlikely, that this could take up to 15 days.

<PAGE>

Each Fund reserves the right to cease offering its Shares for sale at any
time or to reject any order for the purchase of its Shares.

DIRECT PURCHASES. For each shareholder who purchases Shares directly
through the Distributor, the Trust establishes an open account to which all
Shares purchased are credited together with any dividends and capital gains
distributions which are paid in additional Shares. See "Other Information --
Distributions" herein. Initial and subsequent purchases may be made by writing
a check (in U.S. dollars) payable to The Diversified Investors Funds Group and
mailing such payment to:

The Diversified Investors Funds Group
Four Manhattanville Road
Purchase, New York 10577

In the case of an initial purchase, the check must be accompanied by a
completed Account Application.

An investor desiring to purchase Shares by a wire transfer of funds should
request its bank to transmit immediately available funds. The information
transmitted with the funds must include the investor's name and address and a
statement indicating whether a new account is being established by such wire
transfer or whether such wire transfer is being made by a shareholder with an
account with the Trust. If the initial purchase by an investor is by a wire
transfer of funds, an account number will be assigned to such investor and an
Account Application must be subsequently completed and mailed to the Trust. For
purchases by wire transfer, please call [_____________] at [____________] to
obtain wire instructions.

For further information on how to purchase Shares from the Distributor, an
investor should contact the Distributor directly at (914) 697-8000.

PURCHASES THROUGH PLANS. Participants in group employee retirement plans
should obtain directly from their plan administrator, and should read in
conjunction with this Prospectus, the materials provided by their plan
administrator describing the procedures by which Fund Shares may be purchased
and redeemed and any other conditions for participation in such plan.
Underlying Plans which include fixed investment options issued by insurance
companies may restrict or prohibit the purchase of Shares of certain of the
Funds with monies withdrawn from any such fixed interest investment option.

<PAGE>

REDEMPTIONS

An investor may redeem all or any portion of the Shares in its account at
any time at the net asset value next determined after a redemption request in
proper form is received and accepted by the Distributor. Investment return and
principal value of an investment in the Funds will fluctuate, so that the value
of Shares redeemed may be more or less than the investor's cost.

Redemption proceeds normally will be paid or mailed within seven days
following receipt of a redemption request in good order; however, when the New
York Stock Exchange is closed, when trading on the Exchange is restricted, or
when the SEC determines that an emergency exists to warrant such an action, the
Trust may suspend redemption rights or postpone the date of payment.

The Trust reserves the right to redeem Shares in the account of any
investor if at any time the total value of such account falls below $1,000 for
any reason other than a decrease in the net asset value of its Shares. An
investor will be notified that the value of its account is less than the
minimum amount and allowed 15 days to make an additional investment before the
redemption is processed. Shares will be redeemed at the net asset value on the
date of redemption.

Investors subject to federal income tax who redeem Shares may recognize
capital gain or loss for federal income tax purposes. Redemptions of Shares may
be taxable events to Qualified Investors otherwise subject to tax on which a
Qualified Investor may realize a gain or loss. See "Other Information--Tax
Matters" below for a description of certain tax consequences of an investment
in the Trust.

Investors should be aware that redemptions may not be processed if a
redemption request is not submitted in proper form. To be in proper form, the
Trust must have received the shareholder's taxpayer identification number and
address. As discussed under "Other Information--Tax Matters" below, the Trust
may be required to impose "back-up" withholding of federal income tax on
dividends, distributions and redemption proceeds when non-corporate investors
have not provided a certified taxpayer identification number.

REDEMPTIONS OF SHARES PURCHASED DIRECTLY THROUGH THE DISTRIBUTOR

<PAGE>

Redemptions by Mail. Redemption requests may be mailed to the Distributor
specifying the dollar amount or number of Shares to be redeemed, account number
and the name of the Fund. The letter must be signed in exactly the same way the
account is registered (if there is more than one owner of the Shares, each
owner must sign).

An investor may redeem Shares in any amount by written request mailed to
The Diversified Investors Funds Group at the following address:

The Diversified Investors Fund Group
Four Manhattanville Road
Purchase, New York 10577

Redemptions by Wire or Telephone. An investor may redeem Shares by wire or
by telephone if it has checked the appropriate box on the Account Application.
These redemptions may be paid from the Trust by check or wire transfer. The
Trust reserves the right to refuse telephone wire redemptions and may limit the
amount involved or the number of telephone redemptions. The telephone
redemption procedure may be modified or discontinued at any time by the Trust.
Instructions for wire redemptions are set forth in the Purchase Application.

REDEMPTION OF SHARES PURCHASED BY PLAN PARTICIPANTS. For investors who are
Plan Participants, the proper form for a redemption request may vary in
accordance with the terms of the underlying Plan through which a Qualified
Investor or Plan Participant invests in the Trust. Plan Participants should
contact their Plan administrator, if appropriate, or the Distributor at for
further information on how to redeem Shares of a Fund.

SIGNATURE GUARANTEES

To protect investors and the Trust from fraud, signature guarantees are
required for certain redemptions. Signature guarantees enable the Trust to be
sure that the entity requesting redemption is the entity that is authorized to
request redemption from that account. Signature guarantees are required for:
(1) any redemptions by mail if the proceeds are to be paid to someone else or
are to be sent to an address other than an investor's address as shown on the
Trust's records; (2) any redemptions by mail which request that the proceeds be
wired to a bank, (3) redemption requests for more than $50,000; and (4)
requests to transfer the registration of shares to another owner. These
requirements may be waived in certain instances.
<PAGE>

The Trust will accept signature guarantees from all institutions which are
eligible to provide them under federal or state law, provided the individual
giving the signature guarantee is authorized to do so. Institutions which
typically are eligible to provide signature guarantees include commercial
banks, trust companies, brokers, dealers, national securities exchanges,
savings and loan associations and credit unions. A signature guarantee is not
the same as a notarized signature.

EXCHANGE PRIVILEGES

Subject to applicable legal constraints, investors may exchange their
Shares in a Fund for Shares of the other Funds offered by this Prospectus, in
each case at net asset value without a sales charge.

An exchange may result in a change in the number of shares held, but not
in the value of such shares immediately after the exchange. Each exchange
involves the redemption of the shares to be exchanged and the purchase of the
shares of the other series of the Trust. Plan Participants should contact their
Plan administrator, if appropriate, for further information regarding
exchanges. Investors should call the Distributor at (914) 697-8000 to effect
exchanges. Some underlying Plans may provide for exchange privileges with other
investment options available under such Plans. Underlying Plans which include
fixed investment options issued by insurance companies may restrict or prohibit
exchanges of Shares of certain of the Funds for shares of other series of the
Trust if the Shares of the Fund to be exchanged have been purchased with monies
withdrawn from any such fixed interest investment option. Some Plans may impose
charges and additional restrictions.

Investors subject to federal income tax who exchange Shares in one Fund
for Shares in another Fund may recognize capital gain or loss for federal
income tax purposes.

The Trust reserves the right to terminate or modify the exchange privilege
in the future. An investor considering an exchange should carefully read the
Prospectus with respect to the Fund(s) being purchased in the exchange and
consider the differences in investment objectives and policies before making an
exchange.

All investors and Plan Participants should be aware that redemption or
exchange transactions authorized by telephone and reasonably believed to be
genuine by the Trust or the Distributor may subject the investor or Plan
Participant to risk of loss if such instruction is subsequently found not to be
genuine. The Trust and the Distributor will employ reasonable procedures,

<PAGE>

including requiring investors to give certain identification information and
tape recording of telephone instructions, to confirm that instructions
communicated by telephone are genuine. To the extent that the Trust or the
Distributor fail to use reasonable procedures to verify the genuineness of
telephone instructions, they may be liable for any losses due to telephone
instructions that prove to be fraudulent or unauthorized.

PERFORMANCE INFORMATION

From time to time, the Trust may provide yield and/or total return
quotations for any of the Funds and may also quote fund rankings in the
relevant fund category from various sources, such as Russell Data Services (a
division of Frank Russell Company), Lipper Analytical Services, Inc.,
Weisenberger Investment Company Service, Morningstar, Inc. and CDA. The current
yield for a Fund will be calculated by dividing net investment income per share
during a recent 30-day period by the net asset value per share on the last day
of the period and annualizing the resulting quotient. Total return quotations
will reflect the annual percentage change over stated periods in the value of
an investment in a Fund. Yield reflects only net income as of a stated time,
while total return reflects all components of investment return over a stated
period of time. A Fund's quotations may from time to time be used in
advertisements, shareholder reports or other communications to shareholders.
For a discussion of the manner in which a Fund will calculate its yield and
total return, see the Statement of Additional Information.

Investors should note that the investment results of a Fund will fluctuate
over time, and any presentation of a Fund's current yield or total return for
any prior period should not be considered a representation of what an
investment may earn or what an investor's yield or total return may be in any
future period.

Total returns calculated for any of the following Funds for any period
which includes a period prior to the "reorganization date" will reflect the
performance of the corresponding Pooled Separate Account. The "reorganization
date" is the date on which the corresponding Pooled Separate Account of The
Mutual Life Insurance Company of New York ("MONY") set forth below contributed
all of its assets to the corresponding Portfolio of Diversified Investors
Portfolios in which the corresponding Fund invests its assets:

FUND MONY POOLED SEPARATE ACCOUNT

Money Market...................... Pooled Account No. 4
High Quality Bond................. Pooled Account No. 15

<PAGE>

Intermediate Government Bond...... Pooled Account No. 10d
Government/Corporate Bond......... Pooled Account No. 5
Balanced.......................... Pooled Account No. 14
Equity Income..................... Pooled Account No. 6
Growth & Income................... Pooled Account No. 10a
Equity Growth..................... Pooled Account No. 1
Special Equity.................... Pooled Account No. 10b
International Equity.............. Pooled Account No. 12

Such total returns calculated for each of the Funds listed above will
reflect the performance of the corresponding Pooled Separate Account only from
the date that such corresponding Pooled Separate Account adopted investment
objectives, policies and practices substantially similar to those of the
corresponding Portfolio of the Fund. All total return percentages for such
periods will reflect the historical rates of return of the corresponding Pooled
Separate Account for such period adjusted to assume that all charges, expenses
and fees of the applicable Fund which are presently in effect were deducted
during such period. The corresponding Pooled Separate Accounts were not
registered under the Investment Company Act of 1940 and, therefore, were not
subject to certain investment restrictions imposed by that Act. If the
corresponding Pooled Separate Accounts had been registered under that Act,
investment performance might have been adversely affected.

<PAGE>

As of December 31, 1996, the average annual total returns for each of the
following Funds, including the pooled accounts noted above, were as follows:
<TABLE>
<CAPTION>

FOR THE
FOR THE FOR THE FOR THE FOR THE PERIOD SINCE
YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION
ENDED ENDED ENDED ENDED THROUGH
FUND 12/31/96 12/31/96 12/31/96 12/31/96 12/31/96

<S> <C> <C> <C> <C> <C>
Money Market................. 4.87% 4.61% 3.90% 5.50% 7.81%
High Quality Bond............ 4.51% 5.54% 5.64% N/A 6.73%
Intermediate Government Bond. 3.61% 4.82% 5.67% N/A 7.18%
Government/Corporate Bond.... 2.74% 6.07% 7.35% 8.00% 8.85%
High Yield Bond.............. N/A N/A N/A N/A 9.50%
Balanced..................... 16.39% 13.98% N/A N/A 13.76%
Equity Income................ 17.91% 16.47% 14.71% 13.08% 13.87%
Equity Value................. N/A N/A N/A N/A 16.61%
Growth & Income.............. 21.61% 15.75% 13.17% 13.53% 13.52%
Equity Growth................ 17.93% 13.40% N/A N/A 12.20%
Special Equity............... 25.76% 21.17% 16.81% 17.01% 16.13%
Aggressive Equity............ N/A N/A N/A N/A 9.51%
International Equity......... 15.24% 10.87% N/A N/A 15.73%
</TABLE>

Composite Performance of Subadvisers. The following table sets forth the
average annual total returns of all institutional private accounts and
collective investment vehicles managed by the Subadvisers to the Portfolios
corresponding to the High-Yield Bond Fund, Equity Value Fund, Equity Growth
Fund and Aggressive Equity Fund with investment objectives, policies and
restrictions substantially similar to each such Fund and its corresponding
Portfolio and which have been managed as each Portfolio is expected to be
managed. The data is provided to illustrate the past performance of the
Subadvisers in managing substantially similar accounts as measured against
specified market indices and does not represent the performance of such Funds.
Investors should not consider this performance data as an indication of future
performance of the Funds or their corresponding Subadvisers.

The institutional private accounts and collective investment vehicles that
are included in the Subadvisers' composites are not subject to the
diversification requirements, specific tax restrictions and investment

<PAGE>

limitations imposed on the Funds or the Portfolios by the Investment Company
Act or Subchapter M of the Code. Consequently, the performance results of the
Subadvisers' composites could have been adversely affected if the institutional
private accounts and collective investment vehicles included in the composites
had been regulated as investment companies under the federal securities laws.
The investment results of the Subadvisers' composites presented below are
unaudited and are not intended to predict or suggest the returns that might be
experienced by the Funds or an individual investing in any of the Funds.
Investors should also be aware that the use of a methodology different from
that used to calculate the performance data set forth below could result in
different performance data. The Subadvisers' composite performance data shown
below were calculated in accordance with recommended standards of the
Association for Investment Management and Research, retroactively aplied to all
time periods. All returns presented were calculated on a total return basis
and include all dividends and interest, accrued income and realized and
unrealized gains and losses, and deductions for brokerage commissions and
execution costs. Returns for each period are adjusted to assume that all
charges, expenses and fees of each Fund and its corresponding Portfolio which
are presently in effect were deducted during such periods.

<PAGE>

Since
1 Year 5 Years 10 Years Inception
-------- -------- -------- ---------

Delaware Investment Advisers,
Subadviser to High-Yield Bond
Portfolio (1)
Subadviser's composite (2).... 9.25% 10.06% 9.56% _____
Benchmark Index (3)........... 10.85% 12.73% _____ _____
Ark Asset Management Co.,Inc.,
Subadviser to Equity Value
Portfolio (4)
Subadviser's composite (5).... 23.23% 18.47% 15.82% 17.06%
Benchmark Index (6)........... 21.64% 17.26% 14.69% 15.93%
Chancellor LGT Asset Management
Inc., Subadviser to Equity Growth
Portfolio (7)
Subadviser's composite (8)..... 19.60% 11.84% 17.55% 17.93%
Benchmark Index (9)............ 23.12% 13.38% 15.43% 15.43%
McKinley Capital Management,
Inc., Subadviser to Aggressive
Equity Portfolio (10)
Subadviser's composite (11).... 16.22% 20.23% n/a 27.38%
Benchmark Index (12)........... 11.26% 11.69% n/a 12.09%
Putnam Advisory Company, Inc.,
Subadviser to Growth & Income
Portfolio (13)
Subadviser's composite (14).... 19.60% 11.84% 17.55% 17.93%
Benchmark Index (15)........... 23.12% 13.38% 15.43% 15.43%
- -----------------

(1) Performance through December 31, 1996.
(2) Commencement of investment operations is June 30, 1985 for the
Subadviser's composite.
(3) The Benchmark Index is the Salomon Brothers High-Yield Market Index. The
Salomon Brothers High-Yield Market Index tracks the performance of below
investment-grade corporate bonds issued in the United States. The index
includes cash-pay and deferred-interest bonds that are public, have a fixed
coupon and are non convertible. To enter the index, bonds must also have $50
million or more in face value outstanding, one year or more left to maturity,
and one high-yield rating by Moody's or Standard & Poor's. The index excludes
bonds of bankrupt issuers.
(4) Performance through December 31, 1996.
(5) Commencement of investment operations is June 30, 1985 for the
Subadviser's composite.
(6) The Benchmark Index is the Russell 1000 Value Index. The Russell
1000 Value Index measures the performance of those companies included in the
Russell 1000 Index with lower price-to-book ratios and lower forecasted growth
values. The Russell 1000 Index measures the performance of the one thousand
largest U.S. companies based on total market capitalization, which represents
approximately 88% of the investable U.S. equity market.
(7) Performance through December 31, 1996.
(8) Commencement of investment operations is [**March 31, 1989**] for the
Subadviser's composite.

<PAGE>

(9) The Benchmark Index is the Russell 1000 Growth Index. The Russell 1000
Growth Index measures the performance of those companies included in the
Russell 1000 Index with higher price-to-book ratios and higher forecasted
growth values. The Russell 1000 Index measures the performance of the one
thousand largest U.S. companies based on total market capitalization,
which represents approximately 88% of the investable U.S. equity market.
(10) Performance through December 31, 1996.
(11) Commencement of investment operations is September 30, 1990 for the
Subadviser's composite.
(12) The Benchmark Index is the Russell 2000 Growth Index. The Russell 2000
Growth Index measures the performance of those companies included in the
Russell 2000 Index with higher price-to-book ratios and higher forecasted
growth values. The Russell 2000 Index measures the performance of the two
thousand smallest companies in the Russell 3000 Index, which represents
approximately 10% of the total market capitalization of the Russell 3000 Index
(the Russell 3000 Index represents approximately 98% of the investable U.S.
equity market)
(13) Performance through December 31, 1996.
(14) Commencement of investment operations is March 31, 1989 for the
Subadviser's composite.
(15) The Benchmark Index is the Standard & Poor's 500 Composite Stock Price
Index (the "S&P 500"). The S&P 500 is used as a broad-based measurement of
changes in domestic stock market conditions and is based on the average
performance of 500 widely held common stocks traded in the United States.

OTHER INFORMATION

NET ASSET VALUE

The net asset value of Shares of the Funds is determined each Fund
Business Day. This determination is made once each day as of the close of
regular trading on the New York Stock Exchange, currently 4:00 p.m., New York
time, unless the Exchange closes earlier, by dividing the value of a Fund's net
assets (i.e., the value of that Fund's investment in its Portfolio and other
assets less its liabilities, including expenses payable or accrued) by the
number of Shares of the Fund outstanding at the time the determination is made.

Each Portfolio values its assets based on their current market value when
market quotations are available. Where market quotations are not available,
assets are valued at fair value as determined in good faith under the direction
of the Portfolio Series' Board of Trustees. Debt obligations with 60 days or

<PAGE>

less remaining to maturity may be valued by the amortized cost method which the
Portfolio Series' Trustees have determined to constitute fair value for such
securities.

DISTRIBUTIONS

The Funds intend to distribute all net investment income and net capital
gains (i.e., the excess of net long-term capital gains over net short-term
capital losses) to shareholders. Dividends from net investment income (which
may include net short-term capital gains) and distributions from net capital
gains, if any, are normally declared and paid once a year in December. "Net
investment income" includes all dividends, interest and other income earned by
a Fund, net of a Fund's expenses.

Investors may elect to receive dividends and distributions declared by a
Fund either in cash or additional Shares of that Fund at the net asset value
determined on the business day immediately following the record date of the
distribution. A Fund may make additional distributions if necessary to avoid a
4% federal excise tax on certain undistributed income and capital gains.

TAX MATTERS

The following discussion is for general information only and,
specifically, does not purport to address the taxation of investors in all
circumstances or of contributors to, participants in, and beneficiaries under
any Qualified Investor. A prospective investor should consult with its own
adviser as to the tax consequences of an investment in the Trust, including the
state and local tax treatment of distributions from a Fund.

Each Fund intends to elect to be, and to qualify to be treated as, a
separate "regulated investment company" under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). To so qualify, the Funds
(through their interest in the Portfolios) must meet certain income,
distribution and diversification requirements. Provided a Fund meets all such
requirements, no entity level federal income or excise taxes will be required
to be paid by that Fund on that part of its investment company taxable income
(consisting generally of net income and net short-term capital gain, if any)
and net capital gain that is distributed to shareholders. A Fund's foreign
source income may, however, be subject to foreign taxes withheld at the source.
The Trust is organized as a Massachusetts business trust, and under current law
the Funds will not be liable for any income or franchise tax in the
Commonwealth of Massachusetts as long as the Funds qualify as regulated
investment companies under the Code. The Portfolios will also not be required
to pay any federal income or excise taxes.

<PAGE>

Retirement plans satisfying all conditions applicable to them under the
Code which invest in the Fund generally will not be subject to federal tax
liability on either distributions from the Funds or redemptions of shares of
the Funds. Rather, participants in such Plans will be taxed when they begin
taking distributions from the investing Plan in accordance with the rules under
the Code governing the taxation of such distributions. Qualified Investors
otherwise generally exempt from federal taxation of their income might
nevertheless be taxed on distributions of the Funds, and on any gain realized
on redemption of Fund shares, where the Qualified Investor is subject to the
unrelated business taxable income provisions of the Code with respect to its
investment in the Funds because, e.g., its acquisition of shares in a Fund was
financed with debt.

Individual and institutional investors, and Qualified Investors which for
any reason prove not to be exempt from federal income taxation, will be subject
to tax on distributions received from the Funds irrespective of the fact that
such distributions are reinvested in additional Shares. Distributions to such
investors, other than of net capital gains, will be taxable as ordinary income;
distributions of net capital gains would be taxable to such investors as
long-term capital gain without regard to the length of time they have held
Shares in a Fund. A portion of the dividends received from a Fund investing in
corporate stocks (but none of that Fund's capital gain distributions) may
qualify for the dividends-received deduction for corporations. Certain
distributions declared in October, November or December of a calendar year and
paid to an investor which is subject to tax on the distribution in January of
the succeeding calendar year are taxable to such investor as if paid on
December 31 of the year in which they were declared. Fund distributions will
reduce a Fund's net asset value per share. Shareholders who buy Shares shortly
before a Fund makes a distribution may thus pay the full price for the Shares
and then effectively receive a portion of the purchase price back as a
distribution, subject to tax in the case of investors otherwise subject to
income taxation.

Shortly after the end of each calendar year, each investor other than a
Qualified Investor will receive a statement setting forth the federal income
tax status of all distributions for that year, including the portion taxable as
ordinary income, the portion taxable as long-term capital gain, the portion, if
any, representing return of capital (which is free of current taxes but results
in a basis reduction) and the amount, if any, of federal income tax withheld.
Each Fund intents to withhold U.S. federal income tax at the rate of 30% on
distributions and other payments that are subject to such withholding and that

<PAGE>

are made to persons who are neither citizens nor residents of the U.S.,
regardless of whether a lower rate may be permitted under an applicable treaty.
Each fund is also required in certain circumstances to apply backup withholding
at the rate of 31% on taxable distributions and redemption proceeds paid to any
investor (including investors who are neither citizens nor residents of the
U.S.) who does not furnish to the Fund certain information and certifications
or is otherwise subject to backup withholding. Backup withholding will not,
however, be applied to payments which have been subject to 30% withholding.

The foregoing is only a summary of some of the important federal tax
considerations generally affecting the Trust and its shareholders. Please refer
to the Statement of Additional Information for a more extensive discussion. In
addition, there may be other federal, state or local tax considerations
applicable to a particular investor. Prospective shareholders are urged to
consult their own tax advisers concerning the tax consequences of an investment
in the Trust.

EXPENSES

The respective expenses of the Trust and the Portfolio Series include the
compensation of their respective Trustees who are not affiliated with the
Adviser or any Subadviser; governmental fees; interest charges; taxes; fees and
expenses of independent auditors, of legal counsel and of any transfer agent,
custodian, registrar or dividend disbursing agent of the Trust or the Portfolio
Series; insurance premiums; and expenses of calculating the net asset value of,
and the net income on, interests in the Portfolios and shares of the Funds.

Expenses of the Trust also include all fees under its Administrative
Services Agreement; expenses of distributing and redeeming shares and servicing
shareholder accounts; expenses of preparing, printing and mailing prospectuses,
reports, notices, proxy statements and reports to shareholders and to
governmental officers and commissions; expenses of shareholder and Trustee
meetings; expenses relating to the issuance, registration and qualification of
shares of the Funds and the preparation, printing and mailing of prospectuses
for such purposes; and membership dues in the Investment Company Institute
allocable to the Trust.

Expenses of the Portfolio Series also include expenses connected with the
execution, recording and settlement of security transactions; fees and expenses
of the Portfolio Series' custodian for all services to the Portfolios,
including safekeeping of funds and securities and maintaining required books
and accounts; expenses of preparing and mailing reports to investors and to
governmental officers and commissions; expenses of meetings of investors and
Trustees; and the advisory fees payable to the Adviser under the Investment
Advisory Agreements.

<PAGE>

In the event a particular expense is not reasonably allocable by class or
to a particular class, it shall be treated as a Fund expense or a Trust
expense. Trust expenses directly attributable to a Fund are charged to the
Fund; other expenses are allocated proportionately among all the series in the
Trust in relation to the net assets of each series.

The total expenses for each Fund for the fiscal year ended December 31,
1996 (expressed as a percentage of average daily net assets) are set forth in
the following table:

Fund(1) Total expenses(1)(2)

Money Market Fund 0.80%
High Quality Bond Fund 0.98%
Intermediate Government Bond Fund 0.94%
Government/Corporate Bond Fund 0.99%
High-Yield Bond Fund 1.10%
Balanced Fund 0.97%
Equity Income Fund 1.00%
Equity Value Fund 1.07%
Growth & Income Fund 1.14%
Equity Growth Fund 1.20%
Special Equity Fund 1.49%
Aggressive Equity 1.41%
International Equity Fund 1.41%

(1) As of December 31, 1996, the Intermediate Government Bond, High-Yield Bond,
Equity Value, Aggressive Equity and Intermediate Equity Funds had been in
operation for less than a full year; total expenses represent annualized total
expenses for their respective initial fiscal periods ended December 31, 1996.
The types of expenses for which these Funds will be responsible are listed
above under "Expenses".

(2) The Adviser is currently waiving a portion of its fees and reimbursing
certain expenses. See "Expense Summary" on page [ ] for a discussion of the fee
waivers and expense reimbursements currently in effect.

DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES

The Trust's Declaration of Trust permits the Trustees to issue an
unlimited number of full and fractional Shares of Beneficial Interest (par
value $0.00001 per share) and to divide or combine the shares into a greater or
lesser number of shares without thereby changing the proportionate beneficial
interests in the Trust. The Trust reserves the right to create and issue
additional series of shares, in which case the shares of each series would
participate equally in the earnings, dividends and assets of the particular
series.

<PAGE>

The Trust may establish classes of shares within each series at any time.
Shares of each class of a Fund represent an equal pro rata interest in such
Fund and, generally, have identical voting, dividend, liquidation, and other
rights, preferences, powers, terms and conditions, except that: (a) each class
has a different designation; (b) each class of shares bears any class expenses;
(c) each class has exclusive voting rights on any matter submitted to
shareholders that related solely to its distribution arrangement, and (d) each
class has separate voting rights on any matter submitted to shareholders in
which the interests of one class differ from the interests of any other class.

As noted above, the Funds' shares may be divided into classes. If the
Funds' shares are so divided, this Prospectus will relate to the Funds' initial
class of shares. Classes will have different expenses; these differences will
affect performance. Invesors should call the Distributor at (914) 697-8000 for
more information.

Shares have no preference, preemptive, conversion or similar rights.
Shares when issued are fully paid and nonassessable, except as set forth below.
Shareholders are entitled to one vote for each share held on matters on which
they are entitled to vote. The Trust is not required to hold, and has no
current intention of holding, annual meetings of shareholders, although the
Trust will hold special meetings of Fund shareholders when in the judgment of
the Trustees of the Trust it is necessary or desirable to submit matters for a
shareholder vote. Shares of each Fund or class are entitled to vote separately
to approve amendments to the Trust's distribution plan applicable to that Fund
or class or changes in fundamental investment policies or restrictions for that
Fund, but shares of all Funds will vote together in the election or selection
of Trustees and independent accountants for the Trust. If requested to do so by
10% of the Trust's outstanding shares, a meeting of Trust shareholders will be
called for the purpose of voting on the removal of a Trustee or Trustees. The
Trust will assist in shareholder communications as required by Section 16(c) of
the Investment Company Act.

The Trust is an entity of the type commonly known as a "Massachusetts
business trust". Under Massachusetts law, shareholders of such a business trust
may, under certain circumstances, be held personally liable as partners for its
obligations. However, the Trustees of the Trust believe that the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which both inadequate insurance existed and a Fund
itself was unable to meet its obligations.

<PAGE>

The Portfolio Series is organized as a trust under the laws of the State
of New York. The Portfolio Series' Declaration of Trust provides that each Fund
and other entities investing in a Portfolio (e.g., other investment companies,
insurance company separate accounts and common and commingled trust funds) will
each be liable for all obligations of that Portfolio. The risk of a Fund
incurring financial loss on account of such liability is limited to
circumstances in which both inadequate insurance existed and the Portfolio
itself was unable to meet its obligations. For more information regarding the
Trustees of the Trust and the Portfolio Series, see "Management of the Trust
and Portfolio Series" in the Statement of Additional Information. The interests
in the Portfolio Series are divided into the separate Portfolios. Investors in
each Portfolio will vote separately or together in the same manner as
shareholders of the Funds will vote with respect to the Trust.

Each investor in a Portfolio, including the Trust, may add to or reduce
its investment in a Portfolio on each day the Adviser and applicable Subadviser
or Subadvisers are open for business ("Portfolio Business Day"). As of the
close of regular trading on the NYSE, currently 4:00 p.m., New York time, on
each such day, the value of each investor's beneficial interest in a 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
reductions, which are to be effected as of 4:00 p.m., New York time, on such
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 4:00 p.m., New York time, on such
day plus or minus, as the case may be, the amount of net additions to or
reductions in the investor's investment in the Portfolio effected as of 4:00
p.m., New York time, on such day, and (ii) the denominator of which is the
aggregate net asset value of the Portfolio as of 4:00 p.m., New York time, on
such day, plus or minus, as the case may be, the amount of net additions to or
reductions in 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 of 4:00 p.m., New York
time, on the following Portfolio Business Day.

* * *

The Trust's Statement of Additional Information, dated 1, 1997, contains
more detailed information about the Trust and the Portfolio Series, including

<PAGE>

information related to (i) investment policies and restrictions, (ii) the
Trustees, officers, Adviser, Subadvisers and Administrator, (iii) portfolio
transactions and brokerage commissions, (iv) the Funds' shares, including
rights and liabilities of shareholders, (v) additional performance information,
including the method used to calculate yield and total rate of return and (vi)
the determination of the net asset value of shares of the Funds.

<PAGE>

TABLE OF CONTENTS PAGE

Expense Summary ____

Prospectus Summary ____

Condensed Financial Information ____

Investment Objectives and Principal Policies ____

Certain Additional Investment Techniques,
Restrictions and Policies ____

Core-Feeder Structure ____

Management of the Trust and Portfolio Series ____

Purchases and Redemptions of Shares ____

Performance Information ____

Other Information ____

No person has been authorized to give any information or to make any
representations other than those contained in the Trust's Prospectus, Statement
of Additional Information or official sales literature in connection with the
offering of the Funds' shares and, if given or made, such other information or
representations must not be relied on as having been authorized by the Trust or
the Distributor. This Prospectus does not constitute an offer in any state in
which, or to any person to whom, such offer may not lawfully be made.

<PAGE>

THE DIVERSIFIED INVESTORS FUNDS GROUP

Four Manhattanville Road, Purchase, New York 10577
(914) 697-8000

STATEMENT OF ADDITIONAL INFORMATION
DATED May 1, 1997

THE DIVERSIFIED INVESTORS FUNDS GROUP

Diversified Investors Money Market Fund
Diversified Investors High Quality Bond Fund
Diversified Investors Intermediate Government Bond Fund
Diversified Investors Government/Corporate Bond Fund
Diversified Investors High-Yield Bond Fund
Diversified Investors Balanced Fund
Diversified Investors Equity Income Fund
Diversified Investors Equity Value Fund
Diversified Investors Growth & Income Fund
Diversified Investors Equity Growth Fund
Diversified Investors Special Equity Fund
Diversified Investors Aggressive Equity Fund
Diversified Investors International Equity Fund

The Diversified Investors Funds Group (the "Trust") is comprised of
thirteen funds. This Statement of Additional Information describes the shares
of each such fund, including Diversified Investors Money Market Fund (the
"Money Market Fund"), Diversified Investors High Quality Bond Fund (the "High
Quality Bond Fund"), Diversified Investors Intermediate Government Bond Fund
(the "Intermediate Government Bond Fund"), Diversified Investors
Government/Corporate Bond Fund (the "Government/Corporate Bond Fund"),
Diversified Investors High-Yield Bond Fund (the "High-Yield Bond Fund"),
Diversified Investors Balanced Fund (the "Balanced Fund"), Diversified
Investors Equity Income Fund (the "Equity Income Fund"), Diversified Investors
Equity Value Fund (the "Equity Value Fund"), Diversified Investors Growth &
Income Fund (the "Growth & Income Fund"), Diversified Investors Equity Growth
Fund (the "Equity Growth Fund"), Diversified Investors Special Equity Fund (the
"Special Equity Fund"), Diversified Investors Aggressive Equity Fund
("Aggressive Equity Fund") and Diversified Investors International Equity Fund
(the "International Equity Fund") (each a "Fund", and collectively the
"Funds").

TABLE OF CONTENTS PAGE

The Trust..................................................... __
Investment Objective, Policies and Associated Risk Factors
of the Funds.................................................. __
Performance Information....................................... __
Determination of Net Asset Value; Valuation of Securities .... __
Management of the Trust and Portfolio Series.................. __
Taxation...................................................... __
Distribution Plan............................................. __
Independent Accountants....................................... __
Description of the Trust; Fund Shares......................... __
Experts....................................................... __
Financial Statements.......................................... __
Appendix...................................................... __

<PAGE>

The Diversified Investors Funds Group
Four Manhattanville Road
Purchase, New York 10577
914-697-8000

This Statement of Additional Information sets forth information which may
be of interest to investors but which is not necessarily included in the Funds'
Prospectus dated May 1, 1997, as amended from time to time (the
"Prospectus"). This Statement of Additional Information should be read only in
conjunction with the Prospectus, a copy of which may be obtained by an investor
without charge by contacting Diversified Investors Securities Corp. ("DISC"),
the Funds' Distributor, at the address and telephone number shown above for The
Diversified Investors Funds Group. Terms used but not defined herein, which are
defined in the Prospectus, are used herein as defined in the Prospectus.

THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.

<PAGE>

THE DIVERSIFIED INVESTORS FUNDS GROUP

THE TRUST

The Trust is an open-end diversified management investment company which
was organized as a business trust under the laws of the Commonwealth of
Massachusetts on April 23, 1993. Shares of the Trust are divided into thirteen
separate series described herein. Each such series or Fund seeks to achieve its
investment objective by investing all of its Assets in a corresponding
Portfolio, as follows:

CORRESPONDING NAME OF PORTFOLIO
DIVERSIFIED INVESTORS FUND NAME IN DIVERSIFIED INVESTORS PORTFOLIOS

Money Market Fund................. Money Market Portfolio
High Quality Bond Fund............ High Quality Bond Portfolio
Intermediate Government Bond Fund. Intermediate Government Bond Portfolio
Government/Corporate Bond Fund.... Government/Corporate Bond Portfolio
High-Yield Bond Fund.............. High-Yield Bond Portfolio
Balanced Fund..................... Balanced Portfolio
Equity Income Fund................ Equity Income Portfolio
Equity Value Fund................. Equity Value Portfolio
Growth & Income Fund.............. Growth & Income Portfolio
Equity Growth Fund................ Equity Growth Portfolio
Special Equity Fund............... Special Equity Portfolio
Aggressive Equity Fund............ Aggressive Equity Portfolio
International Equity Fund......... International Equity Portfolio

As of the date hereof, there are no other active series of the Trust.
However, additional series may be added from time to time. Each of the
Portfolios is a series of Diversified Investors Portfolios (the "Portfolio
Series").

<PAGE>

The investment adviser of each Portfolio is Diversified Investment
Advisors, Inc. ("Diversified" or the "Adviser"). The subadviser (the
"Subadviser") of each Portfolio is set forth in the table below.

CORRESPONDING
FUND PORTFOLIO SUBADVISER

Money Market Fund................. 1740 Advisers, Inc.
High Quality Bond Fund............ Merganser Capital Management Corporation
Intermediate Government Bond Fund. 1740 Advisers, Inc.
Government/Corporate Bond Fund.... 1740 Advisers, Inc.
High-Yield Bond Fund.............. Delaware Investment Advisers
Balanced Fund..................... Institutional Capital Corporation
Equity Value Fund................. ARK Asset Management Co., Inc.
Equity Income Fund................ 1740 Advisers, Inc.
Growth & Income Fund.............. Putnam Advisory Company, Inc.
Equity Growth Fund................ Chancellor LGT Asset Management, Inc.
Special Equity Fund............... (1)
Aggressive Equity Fund............ McKinley Capital Management, Inc.
International Equity Fund......... Capital Guardian Trust Company
- --------------------
(1)Special Equity Portfolio has four Subadvisers: Pilgrim Baxter
& Associates; Ark Asset Management Co., Inc.; Liberty Investment
Management, a division of Goldman Sachs Asset Management; and
Westport Asset Management, Inc.

As to each Portfolio, the Adviser and its Subadviser or
Subadvisers are referred to herein collectively as the "Advisers."

INVESTMENT OBJECTIVE, POLICIES AND
ASSOCIATED RISK FACTORS

INVESTMENT OBJECTIVES

The investment objective of each Fund and Portfolio is described in the
Funds' Prospectus. There can, of course, be no assurance that a Fund or its
corresponding Portfolio will achieve their investment objective.

INVESTMENT POLICIES

Each Fund seeks to achieve its investment objective by investing all of
its Assets in its corresponding Portfolio, as shown above. The Trust may
withdraw a Fund's investment from its 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 each Fund correspond directly to
those of its corresponding Portfolio, the following supplements the discussion
of the various investments of and techniques employed by the Portfolios set
forth in the Prospectus of the Funds.

<PAGE>

BANK OBLIGATIONS

Domestic commercial banks organized under federal law are supervised and
examined by the Comptroller of the Currency and are required to be members of
the Federal Reserve System. Domestic banks organized under state law are
supervised and examined by state banking authorities but are members of the
Federal Reserve System only if they elect to join. In addition, state banks are
subject to federal examination and to a substantial body of federal law and
regulation. As a result of federal or state laws and regulations, domestic
banks, among other things, generally are required to maintain specified levels
of reserves, are limited in the amounts which they can loan to a single
borrower, and are subject to other regulations designed to promote financial
soundness. However, not all of such laws and regulations apply to the foreign
branches of domestic banks.

Obligations of foreign branches and subsidiaries of domestic banks and
domestic and foreign branches of foreign banks, such as certificates of deposit
("CDs") and time deposits ("TDs"), may be general obligations of the parent
banks in addition to the issuing branch, or may be limited by the terms of a
specific obligation and governmental regulation. Such obligations are subject
to different risks than are those of domestic banks. These risks include
foreign economic and political developments, foreign governmental restrictions
that may adversely affect payment of principal and interest on the obligations,
foreign exchange controls and foreign withholding and other taxes on interest
income. These foreign branches and subsidiaries are not necessarily subject to
the same or similar regulatory requirements that apply to domestic banks, such
as mandatory reserve requirements, loan limitations, and accounting, auditing
and financial record keeping requirements. In addition, less information may be
publicly available about a foreign branch of a domestic bank or about a foreign
bank than about a domestic bank.

Obligations of United States branches of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by federal or state
regulation as well as governmental action in the country in which the foreign
bank has its head office. A domestic branch of a foreign bank with assets in
excess of $1 billion may be subject to reserve requirements imposed by the
Federal Reserve System or by the state in which the branch is located if the
branch is licensed in that state.

In addition, branches licensed by the Comptroller of the Currency and
branches licensed by certain states may be required to: (1) pledge to the
regulator, by depositing assets with a designated bank within the state, a
certain percentage of their assets as fixed from time to time by the
appropriate regulatory authority; and (2) maintain assets within the state in
an amount equal to a specified percentage of the aggregate amount of
liabilities of the foreign bank payable at or through all of its agencies or
branches within the state.

In view of the foregoing factors associated with the purchase of
certificates of deposit and time deposits issued by foreign branches of
domestic banks, by foreign subsidiaries of domestic banks, by foreign branches
of foreign banks or by domestic branches of foreign banks, the Advisers
carefully evaluate such investments on a case-by-case basis.

U.S. GOVERNMENT AND AGENCY SECURITIES

Securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities include U.S. Treasury securities, which differ only in their
interest rates, maturities and times of issuance. Treasury Bills have initial
maturities of one year or less; Treasury Notes have initial maturities of one
to ten years; and Treasury Bonds generally have initial maturities of greater
than ten years. Some obligations issued or guaranteed by U.S. Government
agencies and instrumentalities, for example, Government National Mortgage
Association pass-through certificates, are supported by the full faith and
credit of the U.S. Treasury; others, such as those of the Federal Home Loan

<PAGE>

Banks, by the right of the issuer to borrow from the Treasury; others, such as
those issued by the Federal National Mortgage Association, by discretionary
authority of the U.S. Government to purchase certain obligations of the agency
or instrumentality; and others, such as those issued by the Student Loan
Marketing Association, only by the credit of the agency or instrumentality.
While the U.S. Government provides financial support to such U.S.
Government-sponsored agencies or instrumentalities, no assurance can be given
that it will always do so, since it is not so obligated by law. A Portfolio
will invest in such securities only when the Advisers are satisfied that the
credit risk with respect to the issuer is minimal.

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 an agreement between a
commercial paper issuer and an institutional lender pursuant to which the
lender may determine to invest varying amounts.

The Portfolios may purchase three types of commercial paper, as
classified by exemption from registration under the Securities Act of 1933, as
amended (the "1933 Act"). The three types include open market, privately
placed, and letter of credit commercial paper. Trading of such commercial paper
is conducted primarily by institutional investors through investment dealers or
directly through the issuers. Individual investor participation in the
commercial paper market is very limited.

OPEN MARKET. "Open market" commercial paper refers to the commercial
paper of any industrial, commercial, or financial institution which is openly
traded, including directly issued paper. "Open market" paper's 1933 Act
exemption is under Section 3(a)(3) which limits the use of proceeds to current
transactions, limits maturities to 270 days and requires that the paper contain
no provision for automatic rollovers.

PRIVATELY PLACED. "Privately placed" commercial paper relies on the
exemption from registration provided by Section 4(2), which exempts
transactions by an issuer not involving any public offering. The commercial
paper may only be offered to a limited number of accredited investors.
"Privately placed" commercial paper has no maturity restriction.

LETTER OF CREDIT. "Letter of credit" commercial paper is exempt from
registration under Section 3(a)(2) of the 1933 Act. It is backed by an
irrevocable or unconditional commitment by a bank to provide funds for
repayment of the notes. Unlike "open market" and "privately placed" commercial
paper, "letter of credit" paper has no limitations on purchases.

VARIABLE RATE AND FLOATING RATE SECURITIES

The Portfolios may purchase floating and variable rate demand notes and
bonds, which are obligations ordinarily having stated maturities in excess of
397 days, but which permit the holder to demand payment of principal at any
time, or at specified intervals not exceeding 397 days, in each case upon not
more than 30 days' notice. Variable rate demand notes include master demand
notes which are obligations that permit a Portfolio to invest fluctuating

<PAGE>

amounts, which may change daily without penalty, pursuant to direct
arrangements between the Portfolio, as lender, and the borrower. The interest
rates on these notes fluctuate from time to time. The issuer of such
obligations normally has a corresponding right, after a given period, to prepay
in its discretion the outstanding principal amount of the obligations plus
accrued interest upon a specified number of days' notice to the holders of such
obligations. The interest rate on a floating rate demand obligation is based on
a known lending rate, such as a bank's prime rate, and is adjusted
automatically each time such rate is adjusted. The interest rate on a variable
rate demand obligation is adjusted automatically at specified intervals.
Frequently, such obligations are collateralized by letters of credit or other
credit support arrangements provided by banks. Because these obligations are
direct lending arrangements between the lender and borrower, it is not
contemplated that such instruments generally will be traded, and there
generally is no established secondary market for these obligations, although
they are redeemable at face value. Accordingly, where these obligations are not
secured by letters of credit or other credit support arrangements, a
Portfolio's right to redeem is dependent on the ability of the borrower to pay
principal and interest on demand. Such obligations frequently are not rated by
credit rating agencies and a Portfolio may invest in obligations which are not
so rated only if the Advisers determine that at the time of investment the
obligations are of comparable quality to the other obligations in which the
Portfolio may invest. The Advisers, on behalf of a Portfolio, will consider on
an ongoing basis the creditworthiness of the issuers of the floating and
variable rate demand obligations held by the Portfolio. The Portfolios will not
invest more than 15% (10% in the case of the Money Market Portfolio) of the
value of their net assets in floating or variable rate demand obligations as to
which they cannot exercise the demand feature on not more than seven days'
notice if there is no secondary market available for these obligations, and in
other securities that are not readily marketable. See "Investment Restrictions"
below.

PARTICIPATION INTERESTS

A Portfolio may purchase from financial institutions participation
interests in securities in which such Portfolio may invest. A participation
interest gives a Portfolio an undivided interest in the security in the
proportion that the Portfolio's participation interest bears to the total
principal amount of the security. These instruments may have fixed, floating or
variable rates of interest, with remaining maturities of 13 months or less. If
the participation interest is unrated, or has been given a rating below that
which is permissible for purchase by the Portfolio, the participation interest
will be backed by an irrevocable letter of credit or guarantee of a bank, or
the payment obligation otherwise will be collateralized by U.S. Government
securities, or, in the case of unrated participation interests, the Advisers
must have determined that the instrument is of comparable quality to those
instruments in which a Portfolio may invest. For certain participation
interests, a Portfolio will have the right to demand payment, on not more than
seven days' notice, for all or any part of the Portfolio's participation
interest in the security, plus accrued interest. As to these instruments, a
Portfolio intends to exercise its right to demand payment only upon a default
under the terms of the security, as needed to provide liquidity to meet
redemptions, or to maintain or improve the quality of its investment portfolio.
A Portfolio will not invest more than 15% (10% in the case of the Money Market
Portfolio) of its net assets in participation interests that do not have this
demand feature, and in other securities that are not readily marketable. See
"Investment Restrictions" below.

ILLIQUID SECURITIES

Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the 1933 Act, securities which are otherwise not readily
marketable and repurchase agreements having a maturity of longer than seven
days. Securities which have not been registered under the 1933 Act are referred
to as private placements or restricted securities and are purchased directly
from the issuer or in the secondary market. Mutual funds do not typically hold
a significant amount of these restricted or other illiquid securities because

<PAGE>

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 which, if possible at all, would result 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 recently adopted
Rule 144A, which allows a broader institutional trading market for securities
otherwise subject to restriction on their resale to the general public. Rule
144A establishes a "safe harbor" from the registration requirements of the 1933
Act for resales of certain securities to qualified institutional buyers.

The Advisers will monitor the liquidity of Rule 144A securities for each
Portfolio under the supervision of the Portfolio Series' Board of Trustees. In
reaching liquidity decisions, the Advisers 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 wishing to purchase or
sell 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).

UNSECURED PROMISSORY NOTES

A Portfolio also may purchase unsecured promissory notes ("Notes") which
are not readily marketable and have not been registered under the 1933 Act,
provided such investments are consistent with the Portfolio's investment
objective. The Notes purchased by the Portfolio will have remaining maturities
of 13 months or less and will be deemed by the Board of Trustees of the
Portfolio Series to present minimal credit risks and will meet the quality
criteria set forth above under "Investment Policies." The Portfolio will invest
no more than 15% (10% in the case of the Money Market Portfolio) of its net
assets in such Notes and in other securities that are not readily marketable
(which securities would include floating and variable rate demand obligations
as to which the Portfolio cannot exercise the demand feature described above
and as to which there is no secondary market). See "Investment Restrictions"
below.

REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS

Repurchase agreements are agreements by which a person purchases a
security and simultaneously commits to resell that security to the seller
(which is usually a member bank of the Federal Reserve System or a member firm
of the New York Stock Exchange (or a subsidiary thereof)) at an agreed-upon
date within a number of days (usually not more than seven) from the date of
purchase. The resale price reflects the purchase price plus an agreed-upon
market rate of interest which is unrelated to the coupon rate or maturity of
the purchased security. A repurchase agreement involves the obligation of the
seller to pay the agreed-upon price, which obligation is in effect secured by
the value of the underlying security, usually U.S. Government or government

<PAGE>

agency issues. Under the Investment Company Act of 1940, as amended (the "1940
Act"), repurchase agreements may be considered to be loans by the buyer. A
Portfolio's risk is limited to the ability of the seller to pay the agreed upon
amount on the delivery date. If the seller defaults, the underlying security
constitutes collateral for the seller's obligation to pay although a Portfolio
may incur certain costs in liquidating this collateral and in certain cases may
not be permitted to liquidate this collateral. All repurchase agreements
entered into by the Portfolios are fully collateralized, with such collateral
being marked to market daily.

The Portfolios may borrow funds for temporary or emergency purposes, such
as meeting larger than anticipated redemption requests, and not for leverage.
One means of borrowing is by agreeing to sell portfolio securities to financial
institutions such as banks and broker-dealers and to repurchase them at a
mutually agreed date and price (a "reverse repurchase agreement"). At the time
a Portfolio enters into a reverse repurchase agreement it will place in a
segregated custodial account cash, U.S. Government securities or high-grade
debt obligations having a value equal to the repurchase price, including
accrued interest. Reverse repurchase agreements involve the risk that the
market value of the securities sold by the Portfolio may decline below the
repurchase price of those securities.

FOREIGN SECURITIES--ALL PORTFOLIOS

The Portfolios may invest their assets in securities of foreign issuers.
Investing in securities issued by companies whose principal business activities
are outside the United States may involve significant risks not present in
domestic investments. For example, there is generally less publicly available
information about foreign companies, particularly those not subject to the
disclosure and reporting requirements of the U.S. securities laws. Foreign
issuers are generally not bound by uniform accounting, auditing and financial
reporting requirements comparable to those applicable to domestic issuers.
Investments in foreign securities also involve the risk of possible adverse
changes in investment or exchange control regulations, expropriation or
confiscatory taxation, brokerage or other taxation, limitation on the removal
of funds or other assets of a Portfolio, political or financial instability or
diplomatic and other developments which would affect such investments. Further,
economies of particular countries or areas of the world may differ favorably or
unfavorably from the economy of the United States.

It is anticipated that in most cases the best available market for
foreign securities would be on exchanges or in over-the-counter markets located
outside the United States. Foreign stock markets, while growing in volume and
sophistication, are generally not as developed as those in the United States,
and securities of some foreign issuers (particularly those located in
developing countries) may be less liquid and more volatile than securities of
comparable United States companies. Foreign security trading practices,
including those involving securities settlement where a Portfolio's assets may
be released prior to receipt of payment, may expose a Portfolio to increased
risk in the event of a failed trade or the insolvency of a foreign
broker-dealer. In addition, foreign brokerage commissions are generally higher
than commissions on securities traded in the United States and may be
non-negotiable. In general, there is less overall governmental supervision and
regulation of foreign securities exchanges, brokers and listed companies than
in the United States.

<PAGE>

FOREIGN SECURITIES--MONEY MARKET PORTFOLIO

The Money Market Portfolio may invest in the following foreign securities:
(i) U.S. dollar-denominated obligations of foreign branches and subsidiaries of
domestic banks and foreign banks (such as Eurodollar CDs, which are U.S.
dollar-denominated CDs issued by branches of foreign and domestic banks located
outside the United States; Eurodollar TDs ("ETDs"), which are U.S.
dollar-denominated deposits in a foreign branch of a foreign or domestic bank;
and Canadian TDs, which are essentially the same as ETDs except they are issued
by branches of major Canadian banks), (ii) high quality, U.S.
dollar-denominated short-term bonds and notes (including variable amount master
demand notes) issued by foreign corporations, (including Canadian commercial
paper, which is commercial paper issued by a Canadian corporation or a Canadian
counterpart of a U.S. corporation, and Europaper, which is U.S.
dollar-denominated commercial paper of a foreign issuer) and (iii) U.S.
dollar-denominated obligations issued or guaranteed by one or more foreign
governments or any of their political subdivisions, agencies or
instrumentalities that are determined by the Advisers to be of comparable
quality to the other obligations in which the Money Market Portfolio may
invest. Such securities also include debt obligations of supranational
entities. Supranational entities include international organizations designated
or supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the World Bank), the European Coal and Steel Community, the Asian
Development Bank and the InterAmerican Development Bank.

FOREIGN SECURITIES--PORTFOLIOS OTHER THAN MONEY MARKET PORTFOLIO

Not more than 5% of a Portfolio's assets may be invested in closed-end
investment companies which primarily hold foreign securities. Investments in
such companies may entail the risk that the market value of such investments
may be substantially less than their net asset value and that there would be
duplication of investment management and other fees and expenses. Securities of
foreign issuers include investments in sponsored American Depository Receipts
("ADRs"). ADRs are depository receipts for securities of foreign issuers and
provide an alternative method for a Portfolio to make foreign investments.
These securities will not be denominated in the same currency as the securities
into which they may be converted. Generally, ADRs, in registered form, are
designed for use in U.S. securities markets. ADRs are receipts typically issued
by a U.S. bank or trust company evidencing ownership of the underlying
securities.

The Portfolios may invest in foreign securities that impose restrictions
on transfer within the United States or to United States persons. Although
securities subject to such transfer restrictions may be marketable abroad, they
may be less liquid than foreign securities of the same class that are not
subject to such restrictions.

FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS

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

<PAGE>

A forward foreign currency exchange contract is an obligation by a
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. A Portfolio maintains with its
custodian a segregated account of high grade liquid assets 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.

The Portfolios may enter into foreign currency hedging transactions in an
attempt to protect against changes in foreign currency exchange rates between
the trade and settlement dates of specific securities transactions or changes
in foreign currency exchange rates that would adversely affect a portfolio
position or an anticipated investment position. With respect to Portfolios
other than the International Equity Portfolio consideration of the prospect for
currency parities will be incorporated into the Advisers' long-term investment
decisions. Therefore these Portfolios will not routinely enter into foreign
currency hedging transactions with respect to security transactions; however,
the Advisers believe that it is important to have the flexibility to enter into
foreign currency hedging transactions when they determine that the transactions
would be in a 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 Commodity
Futures Trading Commission ("CFTC"), the CFTC may in the future assert
authority to regulate forward contracts. In such event a 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 a 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
a 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, a Portfolio may not always be able to enter into foreign currency
forward contracts at attractive prices and this will limit a Portfolio's
ability to use such contract to hedge or cross-hedge its assets. Also, with
regard to a 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 a 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.

<PAGE>

GUARANTEED INVESTMENT CONTRACTS

The Portfolios may invest in guaranteed investment contracts ("GICs")
issued by insurance companies. Pursuant to such contracts, a Portfolio makes
cash contributions to a deposit fund of the insurance company's general
account. The insurance company then credits to the fund guaranteed interest.
The GICs provide that this guaranteed interest will not be less than a certain
minimum rate. The insurance company may assess periodic charges against a GIC
for expenses and service costs allocable to it, and the charges will be
deducted from the value of the deposit fund. Because a Portfolio may not
receive the principal amount of a GIC from the insurance company on seven days'
notice or less, the GIC is considered an illiquid investment and, together with
other instruments in a Portfolio which are not readily marketable, will not
exceed 15% (10% in the case of the Money Market Portfolio) of the Portfolio's
net assets. The term of a GIC will be 13 months or less. In determining average
weighted portfolio maturity, a GIC will be deemed to have a maturity equal to
the longer of the period of time remaining until the next readjustment of the
guaranteed interest rate or the period of time remaining until the principal
amount can be recovered from the issuer through demand.

WHEN-ISSUED SECURITIES

The Portfolios may purchase securities on a "when-issued" or on a
"forward delivery" basis. It is expected that, under normal circumstances, the
Portfolios would take delivery of such securities. When a Portfolio commits to
purchase a security on a "when-issued" or on a "forward delivery" basis, the
Portfolio establishes procedures consistent with the relevant policies of the
SEC. Since those policies currently recommend that an amount of a Portfolio's
assets equal to the amount of the purchase be held aside or segregated to be
used to pay for the commitment, the Portfolio expects always to have cash, cash
equivalents, or high quality debt securities sufficient to cover any
commitments or to limit any potential risk. However, although a Portfolio does
not intend to make such purchases for speculative purposes and intends to
adhere to the provisions of SEC policies, purchases of securities on such bases
may involve more risk than other types of purchases. For example, a Portfolio
may have to sell assets which have been set aside in order to meet redemptions.
Also, if a Portfolio determines it is advisable as a matter of investment
strategy to sell the "when-issued" or "forward delivery" securities, a
Portfolio would be required to meet its obligations from the then available
cash flow or the sale of securities, or, although it would not normally expect
to do so, from the sale of the "when-issued" or "forward delivery" securities
themselves (which may have a value greater or less than the Portfolio's payment
obligation).

ZERO COUPON OBLIGATIONS

A Portfolio may acquire zero coupon obligations when consistent with its
investment objective and policies. Such obligations have greater price
volatility than coupon obligations and will not result in payment of interest
until maturity. Since dividend income is accrued throughout the term of the
zero coupon obligation but is not actually received until maturity, a Portfolio
may have to sell other securities to pay said accrued dividends prior to
maturity of the zero coupon obligation.

FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS--
PORTFOLIOS OTHER THAN MONEY MARKET PORTFOLIO

General. The successful use of such instruments draws upon the Advisers'
skill and experience with respect to such instruments. Should interest or

<PAGE>

exchange rates move in an unexpected manner, a 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. A Portfolio may enter into contracts for the purchase
or sale for future delivery of fixed-income securities or 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 CFTC, and must be executed through a futures
commission merchant, or brokerage firm, which is a member of the relevant
contract market. Futures contracts trade on a number of exchange markets, and,
through their clearing corporations, the exchanges guarantee performance of the
contracts as between the clearing members of the exchange. A 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
modified pass-through mortgage-backed securities and three-month U.S. Treasury
Bills. A Portfolio may also enter into futures contracts which are based on
bonds issued by entities other than the U.S. Government.

Purchases or sales of stock index futures contracts are used to attempt
to protect the Portfolio's current or intended stock investments from broad
fluctuations in stock prices. For example, the Portfolio may sell stock index
futures contracts in anticipation of or during a decline in the market value of
the Portfolio's securities. If such decline occurs, the loss in value of
portfolio securities may be offset, in whole or part, by gains on the futures
position. When a Portfolio is not fully invested in the securities market and
anticipates a significant market advance, it may purchase stock index futures
contracts in order to gain rapid market exposure that may, in part or entirely,
offset increases in the cost of securities that the Portfolio intends to
purchase. As such purchases are made, the corresponding positions in stock
index futures contracts will be closed out. In a substantial majority of these
transactions, the Portfolio will purchase such securities upon termination of
the futures position, but under unusual market conditions, a long futures
position may be terminated without a related purchase of securities.

At the same time a futures contract is purchased or sold, the Portfolio
must allocate cash or securities as a deposit payment ("initial deposit"). It
is expected that the initial deposit would be approximately 1/2% to 5% 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.

At the time of delivery of securities pursuant to such a contract,
adjustments are made to recognize differences in value arising from the
delivery of securities with a different interest rate from that specified in
the contract. In some (but not many) cases, securities called for by a futures
contract may not have been issued when the contract was written.

Although futures contracts by their terms call for the actual delivery or
acquisition of securities, 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 buying (or selling, as the case may be) on a commodities
exchange an 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 securities. 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, a

<PAGE>

Portfolio will incur brokerage fees when it purchases or sells futures
contracts.

The purpose of the acquisition or sale of 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 or foreign
exchange rates without actually buying or selling fixed-income securities or
foreign currencies. For example, if interest rates were expected to increase, a
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 a 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 a 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, a 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 a 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, cash equivalents or high quality liquid debt
securities 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 deposit
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 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 Advisers may still not
result in a successful transaction.

In addition, futures contracts entail risks. Although the Advisers
believe that use of such contracts will benefit the Portfolios, if the
Advisers' investment judgment about the general direction of interest rates is
incorrect, a Portfolio's overall performance would be poorer than if it had not
entered into any such contract. For example, if a Portfolio has hedged against
the possibility of an increase in interest rates which would adversely affect
the price of debt securities held by it 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 a Portfolio has

<PAGE>

insufficient cash, it may have to sell debt securities 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. A Portfolio may have to
sell securities at a time when it may be disadvantageous to do so.

Options on Futures Contracts. The Portfolios intend to 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. Depending on the pricing of the option
compared to either the price of the futures contract upon which it is based or
the price of the underlying debt securities, it may or may not be less risky
than ownership of the futures contract or underlying debt securities. As with
the purchase of futures contracts, when a 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, a 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.

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, a 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 a 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 Series has adopted the requirement
that futures contracts and options on futures contracts be used either (i) as a
hedge without regard to any quantitative limitation, or (ii) for other purposes
to the extent that immediately thereafter the aggregate amount of margin
deposits on all (non-hedge) futures contracts of the Portfolio and premiums
paid on outstanding (non-hedge) options on futures contracts owned by the
Portfolio does not exceed 5% of the market value of the total assets of the
Portfolio. In addition, the aggregate market value of the outstanding futures
contracts purchased by the Portfolio may not exceed 50% of the market value of
the total assets of the Portfolio. Neither of these restrictions will be
changed by the Portfolio Series' Board of Trustees without considering the
policies and concerns of the various applicable federal and state regulatory
agencies.

Options on Foreign Currencies. A Portfolio may purchase and write options
on foreign currencies for hedging purposes in a manner similar to that in which

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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, a 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 its 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.

A Portfolio may write options on foreign currencies for the same types of
hedging purposes. For example, where a 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 Portfolios intend that any call options on foreign currencies that
they write will be covered. A call option written on a foreign currency by a
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, U.S. Government securities and other high
quality liquid debt securities in a segregated account with its custodian.

The Portfolios may also write call options on foreign currencies that are
not covered for cross-hedging purposes. A call option on a foreign currency is

<PAGE>

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 U.S. Government securities
or other high quality liquid debt securities in an amount not less than the
value of the underlying foreign currency in U.S. dollars marked to market
daily.

Additional Risks of Options on Futures Contracts, Forward Contracts and
Options on Foreign Currencies. Unlike transactions entered into by a 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 a 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 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. A
Portfolio's ability to terminate over-the-counter options will be more limited

<PAGE>

than with exchange-traded options. It is also possible that broker-dealers
participating in over-the-counter options transactions will not fulfill their
obligations. Until such time as the staff of the SEC changes its position, each
Portfolio will treat purchased over-the-counter options and assets used to
cover written over-the-counter options as illiquid securities. With respect to
options written with primary dealers in U.S. Government securities pursuant to
an agreement requiring a closing purchase transaction at a formula price, the
amount of illiquid securities may be calculated with reference to the
repurchase formula.

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 non-business hours in the United States, (iv) the imposition of
different exercise and settlement terms and procedures and margin requirements
than in the United States, and (v) lesser trading volume.

OPTIONS ON SECURITIES--PORTFOLIOS OTHER THAN MONEY MARKET PORTFOLIO

The Portfolios may write (sell) covered call and put options to a limited
extent on their portfolio securities ("covered options"). However, a Portfolio
may forego 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 a 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 a 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, a 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.

When a 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 a 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, a 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. A 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.

A 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." Where a 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.

<PAGE>

When a 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.

A Portfolio may purchase call and put options on any securities in which
it may invest. A 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. A 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.

A 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 a Portfolio, in exchange for the premium paid, to sell
a security, which may or may not be held in the Portfolio's portfolio, 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 portfolio securities. Put options also may be purchased by a
Portfolio for the purpose of affirmatively benefiting from a decline in the
price of securities which the Portfolio does not own. A 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 Portfolios have adopted certain other nonfundamental policies
concerning option transactions which are discussed below. A Portfolio's
activities in options may also be restricted by the requirements of the
Internal Revenue Code of 1986, as amended (the "Code"), for qualification as a
regulated investment company.

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 Portfolios 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

<PAGE>

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
Portfolios 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 Advisers will monitor
the creditworthiness of dealers with whom a Portfolio enters into such options
transactions under the general supervision of the Portfolio Series' Trustees.

OPTIONS ON SECURITIES INDICES--PORTFOLIOS OTHER THAN MONEY MARKET
PORTFOLIO

In addition to options on securities, the Portfolios 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."

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
Portfolios generally will only purchase or write such an option if the Advisers
believe 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 Portfolios will not purchase such options unless
the Advisers believe 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 Portfolios' securities 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 Advisers may be forced to liquidate portfolio
securities to meet settlement obligations.

SHORT SALES "AGAINST THE BOX"--PORTFOLIOS OTHER THAN MONEY MARKET
PORTFOLIO

In a short sale, a fund sells a borrowed security and has a corresponding
obligation to the lender to return the identical security. A Portfolio may
engage in short sales only if at the time of the short sale it owns or has the
right to obtain, at no additional cost, an equal amount of the security being
sold short. This investment technique is known as a short sale "against the
box".

In a short sale, the seller does not immediately deliver the securities
sold and is said to have a short position in those securities until delivery
occurs. If a Portfolio engages in a short sale, the collateral for the short
position will be maintained by its custodian or qualified sub-custodian. While
the short sale is open, a Portfolio maintains in a segregated account an amount
of securities equal in kind and amount to the securities sold short or
securities convertible into or exchangeable for such equivalent securities.
These securities constitute the Portfolio's long position.

The Portfolios will not engage in short sales against the box for
investment purposes. A Portfolio may, however, make a short sale as a hedge,
when it believes that the price of a security may decline, causing a decline in
the value of a security (or a security convertible or exchangeable for such
security), or when a Portfolio wants to sell the security at an attractive
current price, but also wishes to defer recognition of gain or loss for federal
income tax purposes or for purposes of satisfying certain tests applicable to

<PAGE>

regulated investment companies under the Code. In such case, any future losses
in a Portfolio's long position should be reduced by a gain in the short
position. Conversely, any gain in the long position should be reduced by a loss
in the short position. The extent to which such gains or losses are reduced
depends upon the amount of the security sold short relative to the amount a
Portfolio owns. There are certain additional transaction costs associated with
short sales against the box, but the Portfolios endeavor to offset these costs
with the income from the investment of the cash proceeds of short sales.

As a nonfundamental operating policy, the Advisers do not expect that
more than 40% of a Portfolio's total assets would be involved in short sales
against the box. The Advisers do not currently intend to engage in such sales.

CERTAIN OTHER OBLIGATIONS

In order to allow for investments in new instruments that may be created
in the future, upon the Trust supplementing the Prospectus, a Portfolio or
Portfolios may invest in obligations other than those listed previously,
provided such investments are consistent with a Fund's and its corresponding
Portfolio's investment objective, policies and restrictions.

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 Advisers also make their own
evaluations of these securities, subject to review by the Board of Trustees of
the Portfolio Series. After purchase by a 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 a Portfolio to dispose of the
obligation, but the Advisers will consider such an event in their determination
of whether a Portfolio should continue to hold the obligation. A description of
the ratings used herein and in the Funds' Prospectus is set forth in the
Appendix to this Statement of Additional Information.

Except as stated otherwise, all investment policies and restrictions
described herein are nonfundamental, and may be changed without prior
shareholder approval.

INVESTMENT RESTRICTIONS

The following investment restrictions are "fundamental policies" of each
Fund and each 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 Statement
of Additional Information 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
a Portfolio, the Trust will hold a meeting of the corresponding Fund's
shareholders and will cast its vote as instructed by that Fund's shareholders.
If a percentage or a rating restriction on investment or utilization of assets
is adhered to at the time an investment is made or assets are so utilized, a
later change in such percentage resulting from changes in a Portfolio's total

<PAGE>

assets or the value of a Portfolio's securities, or a later change in the
rating of a portfolio security, will not be considered a violation of the
relevant policy.

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 objective as that Fund):

(1) borrow money or mortgage or hypothecate assets of the Portfolio
(Fund), except that in an amount not to exceed 1/3 of the current value
of the Portfolio's (Fund's) assets (including such borrowing) less
liabilities (not including such borrowing), it may borrow money and enter
into reverse repurchase agreements, and except that it may pledge,
mortgage or hypothecate not more than 1/3 of such assets to secure such
borrowings or reverse repurchase agreements, 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 Series or the Portfolio (the 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 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 (the Portfolio Series (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 (except
that the Money Market Portfolio (Money Market Fund) reserves the freedom
of action to concentrate 25% or more of its assets in obligations of
domestic branches of domestic banks); or

(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.

Non-Fundamental Restrictions. Each Portfolio (or the Trust, on behalf of
each Fund) will not as a matter of operating policy (except that no operating

<PAGE>

policy shall prevent a Fund from investing all of its assets in an open-end
investment company with substantially the same investment objective as that
Fund):

(i) borrow money for any purpose in excess of 10% of the Portfolio's
(Fund's) total assets (taken at cost), except that the Portfolio (Fund)
may borrow for temporary or emergency purposes up to 1/3 of its assets;

(ii) pledge, mortgage or hypothecate for any purpose in excess of
10% of the Portfolio's (Fund's) net assets (taken at market value),
provided that collateral arrangements with respect to options and
futures, including deposits of initial deposit and variation margin,
reverse repurchase agreements, when-issued securities and other similar
investment techniques are not considered a pledge of assets for purposes
of this restriction;

(iii)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;

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

(v) purchase securities issued by any other investment company
except by purchase in the open market where no commission or profit to a
sponsor or dealer results from such purchase other than the customary
broker's commission, or except when such purchase, though not made in the
open market, is part of a plan of merger or consolidation; provided,
however, that securities of any investment company will not be purchased
for the Portfolio (Fund) 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) to be invested in the securities of such
issuers; (b) more that 5% of the Portfolio's (Fund's) total assets (taken
at the greater of cost or market value) 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); and
provided further that the Portfolio (Fund) may not purchase any security
from any open-end investment company;

(vi) purchase securities of any issuer if such purchase at the time
thereof would cause the Portfolio (Fund) to hold more than 10% of any
class of securities of such issuer, for which purposes all indebtedness
of an issuer shall be deemed a single class and all preferred stock of an
issuer shall be deemed a single class, except that futures or option
contracts shall not be subject to this restriction;

(vii)purchase or retain in the Portfolio's (Fund's) portfolio any
securities issued by an issuer any of whose officers, directors, trustees
or security holders is an officer or Trustee of the Portfolio Series
(Trust), or is an officer or partner of the Adviser or Subadviser, if
after the purchase of the securities of such issuer for the Portfolio
(Fund) one or more of such persons owns beneficially more than 1/2 of 1%
of the shares or securities, or both, all taken at market value, of such
issuer, and such persons owning more than 1/2 of 1% of such shares or
securities together own beneficially more than 5% of such shares or
securities, or both, all taken at market value;

(viii) invest more than 5% of the Portfolio's (Fund's) net assets in
warrants or rights (valued at the lower of cost or market), but not more

<PAGE>

than 2% of the Portfolio's (Fund's) net assets may be invested in
warrants not listed on the New York Stock Exchange or the American Stock
Exchange;

(ix) make short sales of securities or maintain a short position
(excluding short sales if the Portfolio (Fund) owns an equal amount of
such securities or securities convertible into or exchangeable for,
without payment of any further consideration, securities of equivalent
kind and amount) if such short sales represent more than 25% of the
Portfolio's (Fund's) net assets (taken at market value); provided,
however, that the value of the Portfolio's (Fund's) short sales of
securities (excluding U.S. Government securities) of any one issuer may
not be greater than 2% of the value (taken at market value) of the
Portfolio's (Fund's) net assets or more than 2% of the securities of any
class of any issuer; or

(x) enter into repurchase agreements providing for settlement in
more than seven days after notice or purchase securities which are not
readily marketable (which securities would include participation
interests that are not subject to the demand feature described in the
Fund's then-current Prospectus and floating and variable rate demand
obligations as to which no secondary market exists and the Portfolio
cannot exercise the demand feature described in the Fund's then-current
Prospectus on not more than seven days' notice), if, in the aggregate,
more than 15% (10% in the case of the Money Market Portfolio(Fund)) of
its net assets would be so invested. A Portfolio (Fund) may not invest in
TDs maturing in more than seven days.

Policies (i) through (x) may be changed by the Board of Trustees of the
Portfolio Series or the Trust.

PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS

Except as may be required to ensure satisfaction of certain tests
applicable to regulated investment companies under the Code, portfolio changes
are made without regard to the length of time a security has been held, or
whether a sale would result in the recognition of a profit or loss. Therefore,
the rate of portfolio turnover is not a limiting factor when changes are
appropriate. Portfolio trading is engaged in for a Portfolio if the Advisers
believe that a transaction net of costs (including custodian charges) will help
achieve the Portfolio's investment objective.

A Portfolio's purchase and sales of securities may be principal
transactions, that is, securities may be purchased directly from the issuer or
from an underwriter or market maker for the securities. There usually are no
brokerage commissions paid for such purchases and, therefore, the Portfolios do
not anticipate paying brokerage commissions in such transactions. Any
transactions for which a Portfolio pays a brokerage commission will be effected
at the best price and execution available. Purchases from underwriters of
securities include a commission or concession paid by the issuer to the
underwriter, and purchases from dealers serving as market makers include the
spread between the bid and the asked price.

Allocations of transactions, including their frequency, to various
dealers is determined by the Subadvisers in their best judgment and in a manner
deemed to be in the best interest of the investors in a Portfolio rather than
by any formula. The primary consideration is prompt execution of orders in an
effective manner at the most favorable price.

Investment decisions for a Portfolio will be made independently from
those for any other account or investment company that is or may in the future
become managed by the Advisers or their affiliates. If, however, a Portfolio
and other investment companies or accounts managed by the Subadvisers are
contemporaneously engaged in the purchase or sale of the same security, the

<PAGE>

transactions may be averaged as to price and allocated equitably to each
account. In some cases, this policy might adversely affect the price paid or
received by a Portfolio or the size of the position obtainable for the
Portfolio. In addition, when purchases or sales of the same security for a
Portfolio and for other investment companies managed by the Subadvisers occur
contemporaneously, the purchase or sale orders may be aggregated in order to
obtain any price advantages available to large denomination purchases or sales.
Furthermore, in certain circumstances affiliates of the Subadvisers whose
investment portfolios are managed internally, rather than by the Subadvisers,
might seek to purchase or sell the same type of investments at the same time as
a Portfolio. Such an event might also adversely affect that Portfolio.

The following Portfolios paid the approximate brokerage commissions
indicated for the fiscal years noted below:

Balanced Portfolio:
Fiscal year ended December 31, 1994: $245,752.
Fiscal year ended December 31, 1995: $199,128.
Fiscal year ended December 31, 1996: $317,179.

Equity Income Portfolio
Fiscal year ended December 31, 1994: $487,599.
Fiscal year ended December 31, 1995: $377,904.
Fiscal year ended December 31, 1996: $565,943.

Equity Value Portfolio
Fiscal year ended December 31, 1996: $64,207.

Growth & Income Portfolio
Fiscal year ended December 31, 1994: $64,869.
Fiscal year ended December 31, 1995: $348,828.
Fiscal year ended December 31, 1996: $397,075.

Equity Growth Portfolio
Fiscal year ended December 31, 1994: $162,258.
Fiscal year ended December 31, 1995: $174,716.
Fiscal year ended December 31, 1996: $670,631.

Special Equity Portfolio
Fiscal year ended December 31, 1994: $308,251.
Fiscal year ended December 31, 1995: $425,803.
Fiscal year ended December 31, 1996: $678,431.

Aggressive Equity Portfolio
Fiscal year ended December 31, 1996: $15,490.

International Equity Portfolio
Fiscal year ended December 31, 1995: $38,261.
Fiscal year ended December 31, 1996: $211,629.

<PAGE>

PERFORMANCE INFORMATION

MONEY MARKET FUND

For the Money Market Fund, yield is computed in accordance with a
standardized method which involves determining the net change in the value of a
hypothetical pre-existing Money Market Fund account having a balance of one
share at the beginning of a seven calendar day period for which yield is to be
quoted, dividing the net change by the value of the account at the beginning of
the period to obtain the base period return, and annualizing the results (i.e.,
multiplying the base period return by 365/7). The net change in the value of
the account reflects the value of additional shares purchased with dividends
declared on the original share and any such additional shares and fees that may
be charged to shareholder accounts, in proportion to the length of the base
period and the Money Market Fund's average account size, but does not include
realized gains and losses or unrealized appreciation and depreciation.
Effective annualized yield is computed by adding 1 to the base period return
(calculated as described above), raising that sum to a power equal to 365
divided by 7, and subtracting 1 from the result.

Yields will fluctuate and are not necessarily representative of future
results. The investor should remember that yield is a function of the type and
quality of the instruments held by the Money Market Portfolio, portfolio
maturity and operating expenses. An investor's principal in the Money Market
Fund is not guaranteed. See "Determination of Net Asset Value" for a discussion
of the manner in which the Money Market Fund's price per share is determined.

From time to time, the Money Market Fund in its advertising and sales
literature may refer to the growth of assets managed or administered by the
Adviser over certain time periods.

Comparative performance information may be used from time to time in
advertising or marketing the Money Market Fund's shares, including data from
Lipper Analytical Services, Inc., IBC/Donoghue's Money Fund Report.
Morningstar, Inc., CDA and other publications.

The annualized current seven-day yield of the Money Market Fund for the
year ended December 31, 1996 was 5.16%. For the same period the annualized
effective seven-day yield, based upon dividends declared daily and reinvested
monthly, of the Money Market Fund was 5.30%.

ALL FUNDS

STANDARD PERFORMANCE INFORMATION

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

TOTAL RETURN: The Fund's total return will be calculated for certain
periods by determining the average annual compounded rates of return over
those periods that would cause an investment of $1,000 (with all
distributions reinvested) to reach the value of that investment at the
end of the periods. The Fund may also calculate (i) a total return
assuming an initial account value of $1,000 and/or (ii) total rates of
return which represent aggregate performance over a period of
year-by-year performance.
<PAGE>

YIELD: The Fund's yield quotation will be based on the annualized
net investment income per share of the Fund over a 30-day period. The
current yield for the Fund is calculated by dividing the net investment
income per share of the Fund earned during the period by the net asset
value per share of the Fund on the last day of that period. The resulting
figure is then annualized. Net investment income per share is determined
by dividing (i) the dividends and interest earned during the period,
minus accrued expenses for the period, by (ii) the average number of Fund
shares entitled to receive dividends during the period multiplied by the
net asset value per share on the last day of the period.

Any yield or 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 of shares of the Fund will vary based not only on the type,
quality and maturities of the securities held in the Portfolio, but also on
changes in the current value of such securities and on changes in the expenses
of the Fund and the Portfolio. These factors and possible differences in the
methods used to calculate yields and total return should be considered when
comparing the yield and total return of the Fund to yields and total rates of
return published for other investment companies or other investment vehicles.
Total return reflects the performance of both principal and income.

COMPARISON OF FUND PERFORMANCE

Comparison of the quoted non-standardized performance of various
investments is valid only if performance is calculated in the same manner.
Since there are different methods of calculating performance, investors should
consider the effect of the methods used to calculate performance when comparing
performance of 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. A Portfolio may
invest in some instruments not eligible for inclusion in such an index, and may
be prohibited from investing in some instruments included in this index.
Evaluations of a Fund's performance made by independent sources may also be
used in advertisements concerning a Fund. Sources for a Fund's performance
information may include, but are not limited to, 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.

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.

<PAGE>

Donoghue's Money Fund Report, a weekly publication of the Donoghue
Organization, Inc., of Holliston, Massachusetts, reporting on the
performance of the nation's money market funds, summarizing money market
fund activity, and including certain averages as performance benchmarks,
specifically "Donoghue's Money Fund Average" and "Donoghue's Government
Money Fund Average."

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.

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.

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.

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.
<PAGE>

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

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

DETERMINATION OF NET ASSET VALUE; VALUATION OF SECURITIES

The Trust determines the net asset value of the shares of each Fund each
day that the Advisers of the corresponding Portfolio are open for business. (As
a result, a Fund will normally determine its net asset value every weekday
except for the following holidays: New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas.) This daily determination of net asset value is made as of the close
of regular trading on the New York Stock Exchange, currently 4:00 p.m., New
York time unless the Exchange closes earlier, by dividing the total assets of a
Fund less all of its liabilities, by the total number of shares of a Fund
outstanding at the time the determination is made. Purchases and redemptions
will be effected at the time of determination of net asset value next following
the receipt of any purchase or redemption order deemed to be in good order.
(See "Purchases and Redemptions of Shares" in the Prospectus.)

Trading in securities on most non-U.S. exchanges and over-the-counter
markets is normally completed before the close of regular trading on the New
York Stock Exchange and may also take place on days on which the New York Stock
Exchange is closed. If events materially affecting the value of non-U.S.
securities occur between the time when the exchange on which they are traded
closes and the time when a Fund's net asset value is calculated, such
securities will be valued at fair value in accordance with procedures
established by and under the general supervision of the Board of Trustees of
the Portfolio Series.

Equity securities are valued at the last sale price on the exchange on
which they are primarily traded or at the ask price on the NASDAQ system for
unlisted national market issues, or at the last quoted bid price for securities
in which there were no sales during the day or for unlisted securities not
reported on the NASDAQ system. Bonds and other fixed income securities (other
than short-term obligations, but including listed issues) are valued on the
basis of valuations furnished by a pricing service, the use of which has been
approved by the Board of Trustees. In making such valuations, the pricing
service utilizes both dealer-supplied valuations and electronic data processing
techniques that take into account appropriate factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data, without exclusive reliance upon quoted prices or exchange or
over-the-counter prices, since such valuations are believed to reflect more
accurately the fair value of such securities. Short-term obligations which
mature in 60 days or less are valued at amortized cost, which approximates fair
value as determined by the Board of Trustees. Futures and option contracts that
are traded on commodities or securities exchanges are normally valued at the
settlement price on the exchange on which they are traded. Portfolio securities
(other than short-term obligations) for which there are no such quotations or
valuations are valued at fair value as determined in good faith by or at the
direction of the Board of Trustees.

Interest income on long-term obligations is determined on the basis of
interest accrued plus amortization of discount (generally, the difference
between issue price and stated redemption price at maturity) and premiums
(generally, the excess of purchase price over stated redemption price at
maturity). Interest income on short-term obligations is determined on the basis
of interest and discount accrued less amortization of premium.

<PAGE>

Any assets or liabilities initially denominated in terms of foreign
currencies are translated into U.S. dollars at the official exchange rate or,
alternatively, at the mean of the current bid and asked prices of such
currencies against the U.S. dollar last quoted by a major bank that is a
regular participant in the foreign exchange market or on the basis of a pricing
service that takes into account the quotes provided by a number of such major
banks. If neither of these alternatives is available or both are deemed not to
provide a suitable methodology for converting a foreign currency into U.S.
dollars, the Board of Trustees, in good faith, will establish a conversion rate
for such currency.

A determination of value used in calculating net asset value must be a
fair value determination made in good faith utilizing procedures approved by
the Portfolio Series' Board of Trustees. While no single standard for
determining fair value exists, as a general rule, the current fair value of a
security would appear to be the amount which a Portfolio could expect to
receive upon its current sale. Some, but not necessarily all, of the general
factors which may be considered in determining fair value include: (i) the
fundamental analytical data relating to the investment; (ii) the nature and
duration of restrictions on disposition of the securities; and (iii) an
evaluation of the forces which influence the market in which these securities
are purchased and sold. Without limiting or including all of the specific
factors which may be considered in determining fair value, some of the specific
factors include: type of security, financial statements of the issuer, cost at
date of purchase, size of holding, discount from market value, 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 securities, price and extent of public trading in similar
securities of the issuer or comparable companies, and other relevant matters.

Each investor in each Portfolio, including the corresponding Fund, may
add to or reduce its investment in the Portfolio on each day that the Adviser
and the Subadviser of the Portfolio are open for business. As of 4:00 p.m. (New
York time) (or any earlier close of regular trading on the Exchange) on each
such day, the value of each investor's interest in a Portfolio will be
determined by multiplying the net asset value of the Portfolio by the
percentage representing that investor's share of the aggregate beneficial
interests in the Portfolio. Any additions or reductions which are to be
effected 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 4:00 p.m. on such day plus or
minus, as the case may be, the amount of net additions to or reductions in the
investor's investment in the Portfolio effected on such day, and (ii) the
denominator of which is the aggregate net asset value of the Portfolio as of
4:00 p.m. on such day plus or minus, as the case may be, the amount of the net
additions to or reductions in 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 a Portfolio as of 4:00
p.m. on the following day the New York Stock Exchange is open for trading.

MANAGEMENT OF THE TRUST AND PORTFOLIO SERIES

The respective Trustees and officers of the Trust and the Portfolio
Series and their principal occupations during the past five years are set forth
below. Their titles may have varied during that period. Asterisks indicate
those Trustees who are "interested persons" (as defined in the 1940 Act) of the
Trust or the Portfolio Series, as the case may be. Unless otherwise indicated,
the address of each Trustee and officer of the Trust and the Portfolio Series
is Four Manhattanville Road, Purchase, New York 10577.
<PAGE>

TRUSTEES OF THE TRUST

Donald E. Flynn*........ Vice President, AEGON USA, Inc., 1988 to present;
Executive Vice President, AEGON USA Investment
Management, Inc., 1988 to present; Vice President,
AEGON USA Managed Portfolios, Inc., 1988 to present.
Age: 56.

Robert Lester Lindsay... Retired; Executive Vice President, The Mutual Life
Insurance Company of New York (prior to July 1989);
His address is Two Huguenot Center, Tenafly,
New Jersey 07670-2520. Age: 62.

Nikhil Malvania......... Partner, Deaner-Malvania Associates (since 1991);
Manager and Vice President, Strategic Planning
Associates (prior to 1991). His address is 88
Perry Street, New York, New York 10014. Age: 45.

Joyce Galpern Norden.... 5/95 to present--Co-Director, Urman's Health
Clinical Research Program Medical Center, University
of Pennsylvania. 10/93 to 5/95--Foundations Director,
American Jewish Committee. 2/91 to 9/93--Executive
Director, Food-People Allied to Combat Hunger Inc.
Her address is Nine Evergreen Way, North Tarrytown,
New York 10591. Age: 57.

Tom A. Schlossberg*..... President, Diversified, 10/92 to present; Executive
Vice President and Head of Pension Operations,
The Mutual Life Insurance Company of New York, 1/93
to 12/93. Age: 47.

TRUSTEES OF THE PORTFOLIO SERIES

In addition to the Trustees below, Messrs. Schlossberg and Flynn serve as
Trustees of the Portfolio Series.

Neal M. Jewell.......... 1/95 to present--Consultant. 11/91 to 1/95,
Executive Vice President, 1/90 to 10/91--Director
of Overseas Pensions, American International Group
Asset Management. His address is 355 Thornridge
Drive, Stamford, Connecticut 06903. Age: 62.

<PAGE>

Eugene M. Mannella...... Vice President, Investment Management Services, Inc.
(since August 1993); Senior Vice President, Lehman
Brothers Inc. (May 1986 to August 1993). His address
is Two Orchard Neck Road, Center Moriches,
New York 11934. Age: 43.

Patricia L. Sawyer...... Executive Vice President and Director, Robert L.
Smith & Co. (since July 1990); Vice President,
American Express (September 1988 to July 1990). Her
address is 256 West 10th Street, New York,
New York 10014. Age: 46.

OFFICERS

Mr. Schlossberg is President, Chief Executive Officer and Chairman of the
Board and Mr. Flynn is Vice President of the Trust and the Portfolio Series.
Each other officer also holds the same position indicated with the Trust and
the Portfolio Series.

Robert F. Colby......... Secretary; Vice President and Chief Corporate
Counsel, Mutual Life Insurance Company of New York,
4/93 to 12/93; Vice President and General Counsel,
Diversified, 11/93 to present; Vice President of
DISC, 11/93 to present. Age: 41.

Alfred C. Sylvain....... Treasurer and Assistant Secretary; Vice President
and Treasurer of Diversified, 11/93 to present;
Treasurer of DISC., 11/93 to present; Vice President,
Mutual Life Insurance Company of New York, 1/91
to present. Age: 45.

John F. Hughes.......... Assistant Secretary; Senior Counsel, Mutual Life
Insurance Company of New York, 1/88 to present; Vice
President and Senior Counsel, Diversified, 11/93
to present; Assistant Secretary, DISC. 11/93 to
present. Age: 56.

The Declaration of Trust provides that the Trust will indemnify its
Trustees and officers as described below under "Description of the Trust; Fund
Shares."

PRINCIPAL HOLDERS OF SECURITIES

At April 1, 1997, the Trustees and officers of the Trust and the Portfolio
Series as a group held less than 1% of the outstanding shares of each Fund. As
of the same date, the following investors held more than 5% of the outstanding
shares of the following Funds.

Money Market Fund: ___.

Government/Corporate Bond Fund: ____.

<PAGE>

Balanced Fund: ___.

Equity Income Fund: ___.

Growth & Income Fund: ___.

Special Equity Fund: ___.

At March 31, 1997, AUSA Life Insurance Company, Inc. ("AUSA"), Four
Manhattanville Road, Purchase, New York 10577 and The Mutual Life Insurance
Company ("MONY"), 1740 Broadway, New York, New York 10019 owned the following
percentage interests of the outstanding beneficial interests of the Portfolios
indicated (all such interests being held in separate accounts of AUSA and MONY,
respectively):

AUSA MONY

Money Market 36.87% 41.93%
High Quality Bond 41.32% 46.33%
Intermediate Government Bond 59.26% 20.96%
Government/Corporate Bond 26.00% 63.80%
High-Yield Bond 33.16% 37.13%
Balanced 77.05% 2.18%
Equity Income 66.14% 27.65%
Equity Value 34.50% 18.22%
Growth & Income 63.14% 10.75%
Equity Growth 79.20% 7.00%
Special Equity 57.22% 31.69%
Aggressive Equity 38.53% 24.21%
International Equity 36.70% 45.35%

<PAGE>

COMPENSATION

For the fiscal year ended December 31, 1996, the Trust provided the
following compensation to its Trustees.

TOTAL
COMPENSATION
AGGREGATE FROM THE TRUST AND
NAME OF COMPENSATION FUND COMPLEX
PERSON, FROM PAID TO
POSITION THE TRUST TRUSTEES

Tom A. Schlossberg -0- -0-
Trustee
Donald E. Flynn -0- -0-
Trustee
Robert L. Lindsay $9,750 $9,750
Trustee
Nikhil Malvania $9,750 $9,750
Trustee
Joyce Galpern Norden $9,750 $9,750
Trustee

For the fiscal year ended December 31, 1996, the Portfolio Series
provided the following compensation to its Trustees.

TOTAL
COMPENSATION
FROM THE PORTFOLIO
AGGREGATE SERIES AND
NAME OF COMPENSATION FUND COMPLEX
PERSON, FROM PAID TO
POSITION THE PORTFOLIO SERIES DIRECTORS

Tom A. Schlossberg None None
Trustee
Donald E. Flynn None None
Trustee
Neal M. Jewell $9,750 $9,750
Trustee
Eugene M. Manella $9,750 $9,750
Trustee
Patricia L. Sawyer $9,750 $9,750
Trustee

INVESTMENT ADVISORY SERVICES

The Adviser manages the assets of each Portfolio pursuant to an
Investment Advisory Agreement (the "Advisory Agreement") with the Portfolio
Series with respect to that Portfolio and the investment policies described
herein and in the Prospectus for the corresponding Fund. Subject to such
further policies as the Portfolio Series' Board of Trustees may determine, the
Adviser provides general investment advice to each Portfolio.
<PAGE>

For each Portfolio, the Adviser has entered into an Investment
Subadvisory Agreement (each a "Subadvisory Agreement") with each Subadviser.

Each Advisory Agreement provides that the Adviser or a Subadviser, as the
case may be, may render services to others. Each agreement is terminable
without penalty on not more than 60 days' nor less than 30 days' written notice
by a Portfolio when authorized either by majority vote of the investors in the
Portfolio (with the vote of each being in proportion to the amount of its
investment) or by a vote of a majority of the Board of Trustees of the
Portfolio Series, or by the Adviser or a Subadviser on not more than 60 days'
nor less than 30 days' written notice, as the case may be, and will
automatically terminate in the event of its assignment. Each agreement provides
that neither the Adviser nor Subadviser nor their personnel shall be liable for
any error of judgment or mistake of law or for any loss arising out of any
investment or for any act or omission in the execution of security transactions
for the corresponding Portfolio, except for willful misfeasance, bad faith,
gross negligence or reckless disregard of its or their obligations and duties
under the Advisory Agreement and the Subadvisory Agreement, as the case may be.

The Adviser's and Subadviser's fees are described in the Funds'
Prospectus.

Diversified is an investment firm dedicated to meeting the complete needs
of retirement plan sponsors and participants from pre- through post-retirement.
Diversified provides flexible, high-quality services coupled with the
employment of independent investment managers in an innovative investment
structure.

Diversified services over $8 billion in retirement plan assets and has
offices in Boston, Charlotte, Chicago, Cincinnati, Dallas, Houston, New
Orleans, New York, Philadelphia, Portland and San Francisco. It maintains
recordkeeping for 300,000 participants and has 490 employees dedicated to
retirement plan investment and administration. Its employees average more than
seven years of retirement plan experience.

As experts in customizing retirement solutions, Diversified offers
comprehensive programs of high-quality investments and administrative services
to defined benefit, defined contribution and not-for-profit pension plan
sponsors. Diversified forms a partnership with its clients to provide
exceptional plan design, participant communication programs, recordkeeping
services and technical guidance.

Diversified's investment structure provides access to an array of
complementary investment alternatives representing the major asset classes
along the risk/reward spectrum. Subadvisers are selected from more than 2,000
highly accomplished independent firms. Each subadviser's performance is
carefully monitored by Diversified taking into consideration fund performance
in light of investment objectives and policies and level of risk.

Through a rigorous portfolio manager selection process which includes
researching each subadviser's asset class, track record, organizational
structure, management team, consistency of performance and assets under
management, five to ten subadvisers are chosen. Out of that group, Diversified
then carefully chooses the three most qualified subadvisers based on
performance evaluation, ownership structure, personnel and philosophy to return
for an on-site visit and a quantitative and qualitative analysis by the
investment committee. Out of those three subadvisers, Diversified then hires
the most qualified, independent subadviser for each Portfolio, subject to
approval by the Portfolio Series' Board of Trustees including a majority of the
Trustees who are not "interested persons" of the Portfolio Series.
<PAGE>

Diversified brings comprehensive monitoring and control to the investment
management process. It seeks superior portfolio management and moves
purposefully in replacing managers when warranted. From a plan sponsor's
perspective, replacing a manager, and not the investment fund, is a key
advantage in avoiding the expense and difficulty of re-enrolling participants
or disrupting established plan administration. Replacing a Subadviser, however,
will necessitate a shareholder proxy solicitation which involves other expenses
to a Fund.

Highly disciplined manager evaluation on both a quantitative and
qualitative basis, is an ongoing process. Diversified's Manager Monitoring
Group gathers and analyzes performance and Diversified's Investment Committee
reviews it. Performance attribution, risk/return ratios and purchase/sale
assessments are prepared monthly and, each quarter, a more comprehensive review
is completed which consists of manager visits, fundamental analysis and
statistical analysis. Extensive quarterly analysis is conducted to ensure that
the investment fund is being managed in line with the stated objectives.
Semiannually, the Investment Committee reviews the back-up manager selection,
regression analysis and universe comparisons.

A number of "red flags" signal a more extensive and frequent manager
review. These flags consist of a return inconsistent with the investment
objective, changes in subadviser leadership, ownership or portfolio managers,
large changes in assets under management and changes in philosophy or
discipline. The immediate response to any red flag is to assess the potential
impact on the manager's ability to meet investment objectives. Diversified
monitors "back-up" additional independent managers for each investment so that,
should a manager change be warranted, the transition can be effected on a
timely basis.

For the fiscal year ended December 31, 1994, Diversified earned and
voluntarily waived advisory fees as indicated with respect to the following
Portfolios:

PORTFOLIO EARNED WAIVED
--------- ------ ------
Money Market............ $ 312,079 $29,141
High Quality Bond.......... 607,967 20,204
Intermediate Government Bond 246,814 32,308
Government/Corporate Bond.. 776,654 10,376
Balanced................... 443,372 38,936
Equity Income.............. 2,470,354 2,000
Growth & Income............ 576,431 23,726
Equity Growth.............. 629,874 1,377
Special Equity............. 1,628,738 61,756

<PAGE>

For the fiscal year ended December 31, 1995, Diversified earned and
voluntarily waived advisory fees as indicated with respect to the following
Portfolios:

PORTFOLIO EARNED WAIVED

Money Market.............. $ 391,657 $ 22,086
High Quality Bond......... 562,958 9,897
Intermediate Government Bond 286,019 44,808
Government/Corporate Bond. 1,011,116 ---
High-Yield Bond........... 11,146 11,146
Balanced.................. 639,345 51,146
Equity Income............. 2,878,308 ---
Growth & Income........... 639,911 28,140
Equity Growth............. 1,272,213 ---
Special Equity............ 2,018,861 82,511
International Equity...... 143,910 6,191

For the fiscal year ended December 31, 1996, Diversified earned and
voluntarily waived advisory fees as indicated with respect to the following
Portfolios:

PORTFOLIO EARNED WAIVED

Money Market.............. $ 445,832 $ 680
High Quality Bond......... 627,049 ---
Intermediate Government Bond 340,989 27,685
Government/Corporate Bond. 1,232,524 ---
High-Yield Bond........... 60,742 60,742
Balanced.................. 995,489 ---
Equity Income............. 3,895,211 ---
Equity Value.............. 84,055 70,088
Growth & Income........... 1,052,349 39,117
Equity Growth............. 1,730,632 1,462
Special Equity............ 3,255,893 47,350
Aggressive Equity......... 95,060 57,904
International Equity...... 799,760 69,256

ADMINISTRATOR

Diversified provides administrative services to the Portfolios under
Advisory Agreements with each of the Portfolios, and to the Trust under the
Administrative Services and Transfer Agency Services Agreement with the Trust.
These agreements are described in the Prospectus. Each such agreement provides
that Diversified may render services to others as administrator. In addition,
each agreement terminates automatically if it is assigned and may be terminated
without penalty, in the case of the Portfolio Series, by majority vote of the
Funds and of the other investors in the Portfolio Series (with the vote of each
being in proportion to the amount of its investment) or, in the case of the
Trust, by majority vote of the Trust's shareholders, or by either party on not
more than 60 days' nor less than 30 days' written notice. Each agreement also
provides that neither Diversified nor its personnel shall be liable for any
error of judgment or mistake of law or for any act or omission in connection
with administrative services provided to any Fund or Portfolio, except for
willful misfeasance, bad faith or gross negligence in the performance of its or
their duties or by reason of reckless disregard of its or their duties or
obligations under said agreements.

<PAGE>

CUSTODIAN AND TRANSFER AGENT

Pursuant to the Administrative and Transfer Agency Services Agreement,
Diversified acts as transfer agent for each of the Funds (the "Transfer
Agent"). The Transfer Agent maintains an account for each shareholder of a
Fund, performs other transfer agency functions, and acts as dividend disbursing
agent for each Fund.

Pursuant to two Custodian Agreements, Investors Bank & Trust Company acts
as the custodian of each Fund's assets, i.e., each Fund's interest in its
corresponding Portfolio, and as the custodian of each Portfolio's assets (the
"Custodian"). The Custodian's responsibilities include safeguarding and
controlling the Portfolios' cash and securities, handling the receipt and
delivery of securities, determining income and collecting interest on the
Portfolios' investments, maintaining books of original entry for portfolio
accounting and other required books and accounts, and calculating the daily net
asset value of beneficial interests in each Portfolio. Securities held by the
Portfolios may be deposited into the Federal Reserve-Treasury Department Book
Entry System or the Depository Trust Company and may be held by a subcustodian
bank if such arrangements are reviewed and approved by the Trustees of the
Portfolio Series. The Custodian does not determine the investment policies of
the Portfolios or decide which securities the Portfolios will buy or sell. A
Portfolio may, however, invest in securities of the Custodian and may deal with
the Custodian as principal in securities and foreign exchange transactions. For
its services, the Custodian will receive such compensation as may from time to
time be agreed upon by it and the Trust and the Portfolio Series.

TAXATION

Each Fund intends to qualify as a regulated investment company ("RIC") for
federal income tax purposes by meeting all applicable requirements of
Subchapter M of the Code, including requirements as to the nature of the Fund's
gross income, the amount of Fund distributions and the composition and holding
period of the Fund's portfolio assets. Because each Fund intends to distribute
all of its net investment income and net realized capital gains to its
shareholders in accordance with the timing requirements imposed by the Code,
it is expected that no Fund will be required to pay any entity level federal
income or excise taxes, although foreign-source income may be subject to
foreign withholding taxes. If a Fund should fail to qualify as a "regulated
investment company" in any year, the Fund will incur a regular corporate
federal income tax upon its taxable income (thereby reducing the return
realized by Fund shareholders) and Fund distributions would constitute ordinary
corporate dividends when issued to shareholders. However, shareholders who are
Qualified Investors would not, in that event, incur any income tax liability on
such distributions provided they remain exempt from federal income tax.

Under interpretations of the Internal Revenue Service (1) each Portfolio
will be treated for federal income tax purposes as a partnership which is not a
publicly traded partnership and (2) for purposes of determining whether a Fund
satisfies requirements of Subchapter M of the Code, the Fund, as an investor in
its corresponding Portfolio, will be deemed to own a proportionate share of
that Portfolio's assets and will be deemed to be entitled to the Portfolio's
income attributable to that share. The Portfolio Series has advised the Funds
that it intends to conduct the Portfolios' operations so as to enable
investors, including the Funds, to satisfy those requirements.

DISTRIBUTIONS

Tax-qualified retirement plans which invest in any Fund generally will not
be subject to tax liability on either distributions from a Fund or redemptions
of shares of a Fund. Rather, participants are taxed when they take
distributions from the underlying plan in accordance with the rules under the
Code governing the taxation of such distributions. Qualified Investors

<PAGE>

otherwise generally exempt from federal taxation of their income might
nevertheless be taxed on distributions of the Fund, and any gain realized on
redemption of Fund shares, where the Investor is subject to the unrelated
business taxable income provisions of the Code with respect to its investment
in the Fund because, e.g., its acquisition of shares in the Fund was financed
with debt.

Individual and institutional investors, and Qualified Investors which for
any reason prove not to be exempt from federal income taxation, will be subject
to tax on distributions received from the Fund irrespective of the fact that
such distributions are reinvested in additional shares. Distributions to such
investors, other than of net capital gains, will be taxable as ordinary income;
distributions of net capital gains would be taxable to such Investors as
long-term capital gain without regard to the length of time they have held in
shares in the Fund. A portion of the dividends received from a Fund investing
in corporate stocks (but none of that Fund's capital gain distribution) may
qualify for the dividends-received deduction for corporations. Availability of
the deduction for particular corporate shareholders is subject to certain
limitations, and deducted amounts may be subject to the alternative minimum tax
and may result in certain basis adjustments. Certain dividends declared in
October, November or December of a calendar year and paid to a Qualified
Investor which is subject to tax on the distribution in January of the
succeeding calendar year are taxable to such Investor as if paid on December 31
of the year in which they were declared. Fund distributions will reduce a
Fund's net asset value per share. Shareholders who buy shares shortly before a
Fund makes a distribution may thus pay the full price for the shares and then
effectively receive a portion of the purchase price back as a distribution,
subject to tax in the case of investors otherwise subject to income taxation.

Distributions and certain other payments to persons who are not citizens
or residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. tax withholding at the rate of 30%. Each Fund intends
to withhold U.S. federal income tax at the rate of 30% on taxable distributions
and other payments to Non-U.S. Persons that are subject to withholding,
regardless of whether a lower rate may be permitted under an applicable treaty.
Any amounts overwithheld may be recovered by such persons by filing a claim for
refund with the U.S. Internal Revenue Service within the time period
appropriate to such claims. Distributions received from a Fund by Non-U.S.
Persons may also be subject to tax under the laws of their own jurisdictions.
Each Fund is also required in certain circumstances to apply backup withholding
at the rate of 31% on taxable distributions and redemption proceeds paid to any
shareholder (including a non-U.S. Person) who does not furnish to the Fund
certain information and certifications or who is otherwise subject to backup
withholding. Backup withholding will not, however, be applied to payments that
have been subject to 30% withholding.

SALE OF SHARES

Any gain or loss realized by a shareholder subject to federal income tax
upon the sale or other disposition of shares of a Fund, or upon receipt of a
distribution in complete liquidation of a Fund, generally will be a capital
gain or loss that will be long-term or short-term depending upon the
shareholder's holding period for the shares. Any loss realized on a sale or
exchange of a Fund's shares by such a shareholder will be disallowed to the
extent the shares disposed of are replaced (including by shares acquired
pursuant to reinvested distribution) within a period of 61 days beginning 30
days before and ending 30 days after the disposition. In such a case, the basis
of the shares acquired will be adjusted to reflect the disallowed loss. Any
loss realized by such a shareholder on a disposition of a Fund's shares held
for six months or less will be treated as a long-term capital loss to the

<PAGE>

extent of any distributions of net capital gain received by the shareholder
with respect to such shares.

FOREIGN SHAREHOLDERS

The tax consequences to a foreign shareholder of an investment in a 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 a Fund.

TAXATION OF THE PORTFOLIO SERIES

The Portfolio Series, if treated for tax purposes as a partnership, would
not be subject to federal income taxation. Instead, a Fund would take into
account, in computing its federal income tax liability, its share of the
Portfolio Series' income, gains, losses, deductions, credits and tax preference
items, without regard to whether it has received any cash distributions from
the Portfolio Series.

Withdrawals by a Fund from its corresponding Portfolio generally will not
result in such 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 the basis of a Fund's interest in its Portfolio prior to
the distribution, (2) income or gain will be realized if the withdrawal is in
liquidation of a Fund's entire interest in the Portfolio Series and includes a
disproportionate share of any unrealized receivables held by the Portfolio
Series, and (3) loss will be recognized if the distribution is in liquidation
of that entire interest and consists solely of cash and/or unrealized
receivables. The basis of a Fund's interest in the Portfolio Series generally
equals the amount of cash and the basis of any property that the Fund invests
in its corresponding Portfolio, increased by the Fund's share of income from
that Portfolio and decreased by the amount of any cash distributions and the
basis of any property distributed from its corresponding Portfolio.

FOREIGN WITHHOLDING TAXES

Income received by a Portfolio from sources within foreign countries may
be subject to withholding and other taxes imposed by such countries; it is not
expected that the Portfolios or the Funds will be able to "pass through" to the
Fund shareholders subject to tax any foreign tax credits with respect to these
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 assets to be invested in various
countries will vary.

EFFECTS OF CERTAIN INVESTMENTS AND INVESTMENT POLICIES

A Fund's current dividend and accounting policies will affect the amount,
timing, and character of distributions to shareholders, and may, under certain
circumstances, make an economic return of capital taxable to shareholders
otherwise subject to taxation. Any investment in zero coupon securities,
deferred interest bonds, payment-in-kind bonds, certain stripped securities,
and certain securities purchased at a market discount will cause a Fund to
recognize income prior to the receipt of cash payments with respect to those
securities. In order to distribute this income and avoid a tax on the Fund, the
Fund may be required to liquidate portfolio securities that it might otherwise
have continued to hold, potentially resulting in additional taxable gain or
loss to the Fund.

<PAGE>

A Fund's transactions in options, futures contracts and forward contracts
will be subject to special tax rules that may affect the amount, timing and
character of Fund income and distributions to shareholders. For example,
certain positions held by a Fund on the last business day of each taxable year
will be marked to market (i.e., treated as if closed out) on that day, and any
gain or loss associated with the positions will be treated as 60% long-term and
40% short-term capital gain or loss. Certain positions held by a Fund that
substantially diminish its risk of loss with respect to other positions in its
portfolio may constitute "straddles," and may be subject to special tax rules
that would cause deferral of Fund losses, adjustments in the holding periods of
Fund securities, and conversion of short-term into long-term capital losses.
Certain tax elections exist for straddles that may alter the effects of these
rules. The Fund will limit its activities in options, futures contracts,
forward contracts, and swaps and related transactions to the extent necessary
to meet the requirements of Subchapter M of the Code. As a result, however, a
Portfolio may be forced to defer the closing out of certain options and futures
contracts beyond the time when it otherwise would be advantageous to do so.

Special tax considerations apply with respect to foreign investments of a
Fund. Foreign exchange gains and losses realized by the Fund will generally be
treated as ordinary income and loss. The holding of foreign currencies for
nonhedging purposes and investment by a Fund in certain "passive foreign
investment companies" may be limited in order to avoid a tax on the Fund.

OTHER TAXATION

The Trust is organized as a Massachusetts business trust and, under
current law, neither the Trust nor any Fund is liable for any income or
franchise tax in the Commonwealth of Massachusetts, provided that each Fund
continues to qualify as a RIC for federal income tax purposes. The investment
by each Fund in its corresponding Portfolio does not cause a Fund to be liable
for any income or franchise tax in the State of New York.

The Portfolio Series is organized as a New York trust. The Portfolio
Series is not subject to any income or franchise tax in the State of New York
or, so long as it is treated as a partnership (not taxable as a publicly traded
partnership) for federal income tax purposes, the Commonwealth of
Massachusetts.

Distributions of a Fund that are derived from interest on obligations of
the U.S. Government and certain of its agencies and instrumentalities (but
generally not from capital gains realized upon the disposition of such
obligations) may be exempt from state and local taxes. The Fund intends to
advise shareholders of the extent, if any, to which its distributions consist
of such interest. Shareholders of the Funds may be subject to state and local
taxes on a Fund's distributions to them. Shareholders are advised to consult
their own tax advisers with respect to the particular tax consequences to them
of an investment in a Fund.

DISTRIBUTION PLAN

The Trust has adopted a Distribution Plan (the "Distribution Plan") in
accordance with Rule 12b-1 under the 1940 Act after having concluded that there
is a reasonable likelihood that the Distribution Plan will benefit the Funds
and their shareholders. The Distribution Plan provides that the Distributor may
receive a fee from each Fund at an annual rate not to exceed 0.25% of that
Fund's average daily net assets in anticipation of, or as reimbursement for,
expenses incurred in connection with the sale of shares of the Fund, such as
advertising expenses and the expenses of printing (excluding typesetting) and
distributing Prospectuses and reports used for sales purposes, expenses of

<PAGE>

preparing and printing of sales literature and other distribution-related
expenses.

The Distribution Plan will continue in effect if such continuance is
specifically approved at least annually by a vote of both a majority of the
Trust's Trustees and a majority of the Trust's Trustees who are not "interested
persons" of the Trust and who have no direct or indirect financial interest in
the operation of the Distribution Plan or in any agreement related to such Plan
("Qualified Trustees"). The Distribution Plan requires that at least quarterly
the Trust and the Distributor shall provide to the Board of Trustees and the
Board of Trustees shall review a written report of the amounts expended (and
the purposes therefor) under the Distribution Plan. The Distribution Plan
further provides that the selection and nomination of the Trust's disinterested
Trustees shall be committed to the discretion of the Trust's disinterested
Trustees then in office. The Distribution Plan may be terminated with respect
to a Fund at any time by a vote of a majority of the Trust's Qualified Trustees
or by vote of a majority of the outstanding voting securities of that Fund. The
Distribution Plan may not be amended to increase materially the amount of
permitted expenses thereunder without the approval of a majority of the
outstanding voting securities of the Fund and may not be materially amended in
any case without a vote of the majority of both the Trust's Trustees and the
Trust's Qualified Trustees. The Distributor will preserve copies of any plan,
agreement or report made pursuant to the Distribution Plan for a period of not
less than six years from the date of the Distribution Plan, and for the first
two years the Distributor will preserve such copies in an easily accessible
place.

As contemplated by the Distribution Plan, Diversified Investors Securities
Corp. acts as the agent of the Funds in connection with the offering of shares
of the Funds pursuant to a Distribution Agreement (the "Distribution
Agreement"). After the Prospectuses and periodic reports have been prepared,
set in type and mailed to existing shareholders, the Distributor pays for the
printing and distribution of copies of the Prospectuses and periodic reports
which are used in connection with the offering of shares of the Funds to
prospective investors. The Prospectus contains a description of fees payable to
the Distributor under the Distribution Agreement.

INDEPENDENT ACCOUNTANTS

Coopers & Lybrand L.L.P. serves as the Funds' and the Portfolios'
independent accountants providing audit and accounting services including (i)
audit of the annual financial statements, (ii) assistance and consultation with
respect to the preparation of filings with the SEC and (iii) preparation of
annual income tax returns.

DESCRIPTION OF THE TRUST; FUND SHARES

The Trust is a Massachusetts business trust established under a
Declaration of Trust dated as of April 23, 1993. Its authorized capital
consists of an unlimited number of shares of beneficial interest of $0.00001
par value which may be issued in separate series. Currently, the Trust has
thirteen active series, although additional series may be established from time
to time. If additional series are established, each share of a series will
represent an equal proportionate interest in that series with each other share
of the series. The Trust may also establish classes of shares within each
series at any time.

The assets of the Trust received for the issue or sale of the shares of
each class of each series and all income, earnings, profits and proceeds
thereof, subject only to the rights of creditors, are specifically allocated to
such class and constitute the underlying assets of such class. The underlying
assets of each class are segregated on the books of account, and are to be

<PAGE>

charged with the liabilities in respect to such class and with such a share of
the general liabilities of the Trust.

In the event a particular expense is not reasonably allocable by class or
to a particular class, it shall be treated as a Fund expense or a Trust
expense. Trusts expenses directly attributable to a Fund are charged to the
Fund; other expenses are allocated proportionately among all the series in the
Trust in relation to the net assets of each series.

The officers of the Trust, subject to the general supervision of the
Trustees, have the power to determine which liabilities are allocable to a
given class or series, or which are general or allocable to two or more classes
or series. In the event of the dissolution or liquidation of the Trust or any
class or series, the holders of the shares of any class or series are entitled
to receive as a class the value of the underlying assets of such shares
available for distribution to shareholders.

Shares of the Trust entitle their holder to one vote per share; however,
separate votes are taken by each class or series on matters affecting an
individual series. For example, a change in the distribution fee applicable to
a class would be voted only by shareholders of the class involved. Similarly, a
change in investment policy for a series would be voted upon only by
shareholders of the series involved.

The Declaration of Trust provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust,
that the Trustees and officers will not be liable for errors of judgment or
mistakes of fact or law, and that the Trust will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with
litigation in which they may be involved because of their offices with the
Trust unless, as to liability to the Trust or its shareholders, it is finally
adjudicated that they engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in their offices, or
unless with respect to any other matter it is finally adjudicated that they did
not act in good faith in the reasonable belief that their actions were in the
best interests of the Trust. In the case of settlement, such indemnification
will not be provided unless it has been determined by a court or other body
approving the settlement or other disposition, or by a reasonable
determination, based upon a review of readily available facts, by vote of a
majority of disinterested Trustees or in a written opinion of independent
counsel, that such officers or Trustees have not engaged in willful
misfeasance, bad faith, gross negligence or reckless disregard of their duties.

Under Massachusetts law, shareholders of a Massachusetts business trust
may, under certain circumstances, be held personally liable as partners for its
obligations and liabilities. However, the Declaration of Trust contains an
express disclaimer of shareholder liability for acts or obligations of each
Fund and provides for indemnification and reimbursement of expenses out of Fund
property for any shareholder held personally liable for the obligations of a
particular Fund. The Declaration of Trust also provides for the maintenance, by
or on behalf of the Trust and the Funds, of appropriate insurance (for example,
fidelity bonding and errors and omissions insurance) for the protection of the
Funds, their shareholders, Trustees, officers, employees and agents covering
possible tort and other liabilities. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which both inadequate insurance existed and a Fund itself was unable to meet
its obligations.

<PAGE>

EXPERTS

The financial statements incorporated herein have been so included in
reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of said firm as experts in auditing and accounting.

FINANCIAL STATEMENTS

The financial statements of the Trust and the Portfolio Series as of
December 31, 1996 have been filed with the Securities and Exchange Commission
as part of the Fund's annual report pursuant to Section 30(b) of the 1940 Act
and Rule 30b2-1 thereunder, and are hereby incorporated herein by reference
from such report. A copy of such report will be provided without charge to each
person receiving this Statement of Additional Information.

<PAGE>

APPENDIX A

DESCRIPTION OF SECURITY RATINGS

STANDARD & POOR'S

Corporate and Municipal Bonds

AAA--An obligation rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.

AA--An obligation rated AA differs from the highest rated obligations only
in a small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.

A--An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.

BBB--An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.

BB--An obligation rated BB is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.

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

Commercial Paper, including Tax Exempt

A-1--A short-term obligation rated A-1 is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is extremely strong.

A-2--A short-term obligation rated A-2 is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to
meet its financial commitment on the obligation is satisfactory.

A-3--A short-term obligation rated A-3 exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.

<PAGE>

MOODY'S

Corporate and Municipal Bonds

AAA--Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged". 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 risk appear somewhat larger than the 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 some time in the future.

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

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

Commercial Paper

PRIME-1--Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics:

-- Leading market positions in well established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structure 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.

<PAGE>

Investment Adviser of the Portfolio Series,
Administrator and Transfer Agent

Diversified Investment Advisors, Inc.
Four Manhattanville Road
Purchase, NY 10577 THE DIVERSIFIED INVESTORS FUNDS GROUP
Diversified Investors Money Market Fund
Diversified Investors High Quality Bond Fund
Diversified Investors Intermediate Government
Bond Fund
Diversified Investors Government/Corporate
Bond Fund
Diversified Investors High-Yield Bond Fund
Diversified Investors Balanced Fund
Diversified Investors Equity Income Fund
Diversified Investors Equity Value Fund
Diversified Investors Growth & Income Fund
Diversified Investors Equity Growth Fund
Diversified Investors Special Equity Fund
Diversified Investors Aggressive Equity Fund
Diversified Investors International Equity Fund

Investment Subadvisers of the Portfolios

Diversified Investors Money Market Fund,
Diversified Investors Intermediate Government
Bond Fund and Diversified Investors
Government/Corporate Bond Fund
Capital Management Group
1740 Broadway
New York, NY 10019

Diversified Investors High Quality Bond Fund
Merganser Capital Management Corporation
One Cambridge Center
Cambridge, MA 02142

Diversified Investors High-Yield Bond Fund
Delaware Investment Advisers
2005 Market Street
Philadelphia, Pennsylvania 19103

<PAGE>

Diversified Investors Balanced Fund
Institutional Capital Corporation
303 West Madison Street
Chicago, IL 60606

Diversified Investors Equity Income Fund
Asset Management Group
1740 Broadway
New York, NY 10019

Diversified Investors Equity Value Fund
ARK Asset Management Co., Inc.
55 Water Street
New York, NY 10041

Diversified Investors Growth & Income Fund
Putnam Advisory Company, Inc.
One Post Office Square
Boston, MA 02109

Diversified Investors Equity Growth Fund
Chancellor LGT Asset Management, Inc.
1166 Avenue of the Americas
New York, NY 10036

Diversified Investors Special Equity Fund
Pilgrim Baxter & Associates
1255 Drummers Lane
Wayne, PA 19087

ARK Management Co., Inc.
One New York Plaza
New York, NY 10004

Liberty Investment Management
2502 Rocky Point Drive
Tampa, FL 33607

Westport Asset Management, Inc.
53 Riverside Avenue
Westport, CT 06880

Diversified Investors Aggressive Equity Fund
McKinley Capital Management, Inc.
3301 C Street
Anchorage, AK 99503

Diversified Investors International Equity Fund
Capital Guardian Trust Company
333 South Hope Street
Los Angeles, CA 90071

<PAGE>

Distributor

Diversified Investors Securities Corp.
Four Manhattanville Road
Purchase, NY 10577

Custodian

Investors Bank & Trust Company
89 South Street
Boston, MA 02205-1537

Independent Accountants

Coopers & Lybrand L.L.P.
1301 Avenue of the Americas
New York, New York 10019

<PAGE>

PART C

OTHER INFORMATION

ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.

(a) Financial Statements:

The financial statements included in Part A are as follows:

Financial Highlights:
Diversified Investors Money Market Fund
Diversified Investors High Quality Bond Fund
Diversified Investors Intermediate Government Bond Fund
Diversified Investors Government/Corporate Bond Fund
Diversified Investors High-Yield Bond Fund
Diversified Investors Balanced Fund
Diversified Investors Equity Income Fund
Diversified Investors Equity Value Fund
Diversified Investors Growth & Income Fund
Diversified Investors Equity Growth Fund
Diversified Investors Special Equity Fund
Diversified Investors Aggressive Equity Fund
Diversified Investors International Equity Fund

The financial statements incorporated by reference into Part B are as follows:

THE DIVERSIFIED INVESTORS FUNDS GROUP

Statements of Assets and Liabilities at December 31, 1996
Statements of Operations For the Year Ended December 31, 1996
Statements of Changes in Net Assets For the Years Ended December 31, 1995
and December 31, 1996
Notes to Financial Statements at December 31, 1996
Financial Highlights
Report of Independent Accountants

DIVERSIFIED INVESTORS PORTFOLIOS

Statements of Assets and Liabilities at December 31, 1996
Statements of Operations For the Year Ended December 31, 1996
Statements of Changes in Net Assets For the Years Ended December 31, 1995
and December 31, 1996
Portfolio of Investments at December 31, 1996
Notes to Financial Statements at December 31, 1996
Financial Highlights
Report of Independent Accountants

(b) Exhibits:

1. Declaration of Trust of the Registrant; Amended and Restated
Establishment and Designation of Series of Shares of Beneficial Interest.(3)

2. By-Laws of the Registrant.(3)

<PAGE>

6. Distribution Agreement between the Registrant and Diversified Investors
Securities Corp.(1)

8. Custodian Agreement between the Registrant and Investors Bank & Trust
Company.(1)

9. Administrative and Transfer Agency Services Agreement between the
Registrant and Diversified Investment Advisors, Inc.(1)

10. Opinion of Counsel.(1)

11. Consent of Independent Auditors.(*)

13. Investor Representation Letter of Initial Shareholder.(1)

15. Distribution Plan pursuant to Rule 12b-1 under the Investment Company
Act of 1940, as amended.(1)

16. Schedule for computation of performance quotations.(2)

17. Financial Data Schedules.(*)

19. Powers of Attorney.(*)
- --------------------------
(1) Incorporated herein by reference from pre-effective amendment no. 2 to the
Registrant's registration statement (the "Registration Statement") on Form N-1A
(File no. 33-61810) as filed with the U.S. Securities and Exchange Commission
(the "Commission") on January 3, 1994.

(2) Incorporated herein by reference from post-effective amendment no. 2
to the Registration Statement as filed with the Commission on April 28, 1995.

(3) Incorporated herein by reference from post-effective amendment no. 7
to the Registration Statement as filed with the Commission on February 28,
1997.

(*) Filed herewith.

ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.

See "Management of the Trust and Portfolio Series Trustees and Officers
of the Trust" in the Statement of Additional Information filed as part of this
Registration Statement.

ITEM 26. NUMBER OF HOLDERS OF SECURITIES.

NUMBER OF RECORD
HOLDERS AS OF
TITLE OF CLASS MARCH 1, 1997

Diversified Investors Balanced Fund 85
Diversified Investors Money Market Fund 54
Diversified Investors Growth & Income Fund 89
Diversified Investors Equity Growth Fund 87
Diversified Investors Equity Income Fund 86

<PAGE>

Diversified Investors Special Equity Fund 98
Diversified Investors High Quality Bond Fund 39
Diversified Investors Government/Corporate Bond Fund 59
Diversified Investors Intermediate Government Bond Fund 44
Diversified Investors High-Yield Bond Fund 31
Diversified Investors Equity Value Fund 32
Diversified Investors Aggressive Equity Fund 36
Diversified Investors International Equity Fund 62

ITEM 27. INDEMNIFICATION.

Reference is made to Article V of the Registrant's Declaration of Trust,
filed as an Exhibit herewith.

Insofar as indemnification for liability arising under the Securities Act
of 1933, as amended (the "1933 Act"), may be permitted to Trustees, officers
and controlling persons of the Trust pursuant to the Trust's Declaration of
Trust, or otherwise, the Trust has been advised that in the opinion of the SEC
such indemnification is against public policy as expressed in the 1933 Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Trust of expenses
incurred or paid by a Trustee, officer or controlling person of the Trust in
the successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person in connection with the securities being
registered, the Trust will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1933 Act and will be governed by the final
adjudication of such issue.

ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.

Not applicable.

ITEM 29. PRINCIPAL UNDERWRITERS.

(a) Diversified Investors Securities Corp. is the principal underwriter
(the "Distributor") of the Registrant. The Distributor also serves as the
exclusive placement agent for Diversified Investors Portfolios.

(b) The names, titles and principal business addresses of the officers and
directors of the Distributor are as stated on Form U-4 filed by each individual
officer and on Form BD including Schedule A thereof (File No. 8-45671) (filed
on August 31, 1993 and amended September 20, 1993), the text of which is hereby
incorporated herein by reference.

ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.

Diversified Investment Advisors, Inc.
4 Manhattanville Road
Purchase, New York 10577
(administrator and transfer agent)

<PAGE>

Diversified Investors Securities Corp.
4 Manhattanville Road
Purchase, New York 10577
(distributor)

Investors Bank & Trust Company
89 South Street
Boston, Massachusetts 02205-1537
(custodian)

ITEM 31. MANAGEMENT SERVICES.

Not applicable.

ITEM 32. UNDERTAKINGS.

(a) The Registrant undertakes to comply with Section 16(c) of the 1940
Act as though such provisions of the 1940 Act were applicable to the
Registrant, except that the request referred to in the third full paragraph
thereof may only be made by shareholders who hold in the aggregate at least 10%
of the outstanding shares of the Registrant, regardless of the net asset value
of shares held by such requesting shareholders.

(b) If the information called for by Item 5A of Form N-1A is contained in
the latest annual report to shareholders, the Registrant will furnish each
person to whom a Part A is delivered with a copy of the Registrant's latest
annual report to shareholders upon request and without charge.

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this registration statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized in the County of Westchester and the State of New York, on the
29th day of April, 1997.

THE DIVERSIFIED INVESTORS FUNDS GROUP

By: /s/ Tom A. Schlossberg
Tom A. Schlossberg
Trustee, President,
Chief Executive
Officer and Chairman
of the Board of Trustees

Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities indicated on April 29th, 1997.

SIGNATURES TITLE

/s/ Tom A. Schlossberg
Tom A. Schlossberg Trustee, President, Chief Executive
Officer and Chairman of the Board of
Trustees

*/s/ Donald E. Flynn
Donald E. Flynn Trustee

*/s/ Robert Lester Lindsay
Robert Lester Lindsay Trustee

*/s/ Nikhil Malvania
Nikhil Malvania Trustee

*/s/ Joyce Galpern Norden
Joyce Galpern Norden Trustee

/s/ Alfred C. Sylvain
Alfred C. Sylvain Treasurer and Principal Accounting
Officer

*By: /s/ Robert F. Colby
Robert F. Colby
Attorney-in-fact pursuant to powers of attorney filed herewith

<PAGE>

SIGNATURES

Diversified Investors Portfolios has duly caused this registration
statement on Form N-1A of The Diversified Investors Funds Group to be signed on
its behalf by the undersigned, thereunto duly authorized in the County of
Westchester and the State of New York, on the 29th day of April, 1997.

DIVERSIFIED INVESTORS PORTFOLIOS

By /s/ Tom A. Schlossberg
Tom A. Schlossberg
Trustee, President, Chief
Executive Officer and
Chairman of the Board of
Trustees of the Portfolios

This post-effective amendment to the registration statement on Form N-1A
of The Diversified Investors Funds Group has been signed below by the following
persons in the capacities indicated on April 29th, 1997.

SIGNATURES TITLE

/s/ Tom A. Schlossberg
Tom A. Schlossberg Trustee, President, Chief Executive
Officer and Chairman of the Board of
Trustees of the Portfolios

*/s/ Neal M. Jewell
Neal M. Jewell Trustee of the Portfolios

*/s/ Eugene M. Mannella
Eugene M. Mannella Trustee of the Portfolios

*/s/ Patricia L. Sawyer
Patricia L. Sawyer Trustee of the Portfolios

/s/ Alfred C. Sylvain
Alfred C. Sylvain Principal Accounting Officer of the
Portfolios

*By /s/ Robert F. Colby
Robert F. Colby
Attorney-in-Fact pursuant to powers of attorney filed herewith

<PAGE>

THE DIVERSIFIED INVESTORS FUNDS GROUP
EXHIBIT INDEX

EXHIBIT NO.

11. Consent of Independent Auditors.

17. Financial Data Schedules.

19. Powers of Attorney.

<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> MONEY MARKET FUND
<MULTIPLIER> 1

<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 3,752,992
<RECEIVABLES> 46,514
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 3,799,506
<PAYABLE-FOR-SECURITIES> 33
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 15,671
<TOTAL-LIABILITIES> 15,704
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3,783,942
<SHARES-COMMON-STOCK> 374,174
<SHARES-COMMON-PRIOR> 11,542
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (131)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 3,783,802
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 71,242
<EXPENSES-NET> 6,651
<NET-INVESTMENT-INCOME> 64,591
<REALIZED-GAINS-CURRENT> (131)
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 64,460
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (64,451)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (5,649)
<NUMBER-OF-SHARES-SOLD> 1,175,725
<NUMBER-OF-SHARES-REDEEMED> (820,034)
<SHARES-REINVESTED> 6,941
<NET-CHANGE-IN-ASSETS> 3,670,311
<ACCUMULATED-NII-PRIOR> 3,270
<ACCUMULATED-GAINS-PRIOR> (2)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 20
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 54,985
<AVERAGE-NET-ASSETS> 1,356,225
<PER-SHARE-NAV-BEGIN> 9.83
<PER-SHARE-NII> 0.19
<PER-SHARE-GAIN-APPREC> 0.30
<PER-SHARE-DIVIDEND> 0.19
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.02
<PER-SHARE-NAV-END> 10.11
<EXPENSE-RATIO> 0.08
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> HIGH QUALITY BOND FUND
<MULTIPLIER> 1

<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 947,120
<RECEIVABLES> 26,972
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 974,092
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 8,061
<TOTAL-LIABILITIES> 8,061
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 963,848
<SHARES-COMMON-STOCK> 88,671
<SHARES-COMMON-PRIOR> 6,706
<ACCUMULATED-NII-CURRENT> 219
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (820)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,964
<NET-ASSETS> 966,031
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 20,565
<EXPENSES-NET> 1,931
<NET-INVESTMENT-INCOME> 18,634
<REALIZED-GAINS-CURRENT> (820)
<APPREC-INCREASE-CURRENT> 289
<NET-CHANGE-FROM-OPS> 18,103
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (18,249)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 99,550
<NUMBER-OF-SHARES-REDEEMED> (19,260)
<SHARES-REINVESTED> 1,675
<NET-CHANGE-IN-ASSETS> 894,864
<ACCUMULATED-NII-PRIOR> 2,860
<ACCUMULATED-GAINS-PRIOR> 1,748
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 32
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 40,782
<AVERAGE-NET-ASSETS> 333,765
<PER-SHARE-NAV-BEGIN> 10.61
<PER-SHARE-NII> 0.20
<PER-SHARE-GAIN-APPREC> 0.28
<PER-SHARE-DIVIDEND> 0.20
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.89
<EXPENSE-RATIO> 0.98
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> INTERMEDIATE GOVERNMENT BOND
FUND
<MULTIPLIER> 1

<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 2,042,444
<RECEIVABLES> 23,093
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2,065,537
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 9,410
<TOTAL-LIABILITIES> 9,410
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2,044,751
<SHARES-COMMON-STOCK> 175,879
<SHARES-COMMON-PRIOR> 74,370
<ACCUMULATED-NII-CURRENT> 1,067
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (149)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 11,420
<NET-ASSETS> 2,056,127
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 40,075
<EXPENSES-NET> 3,681
<NET-INVESTMENT-INCOME> 36,394
<REALIZED-GAINS-CURRENT> (149)
<APPREC-INCREASE-CURRENT> 3,603
<NET-CHANGE-FROM-OPS> 39,848
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (36,587)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 170,137
<NUMBER-OF-SHARES-REDEEMED> (12,473)
<SHARES-REINVESTED> 3,124
<NET-CHANGE-IN-ASSETS> 1,881,048
<ACCUMULATED-NII-PRIOR> 4,132
<ACCUMULATED-GAINS-PRIOR> 8,222
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 44,204
<AVERAGE-NET-ASSETS> 622,261
<PER-SHARE-NAV-BEGIN> 11.60
<PER-SHARE-NII> 0.23
<PER-SHARE-GAIN-APPREC> 0.10
<PER-SHARE-DIVIDEND> 0.22
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 11.69
<EXPENSE-RATIO> 0.99
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> GOVERNMENT / CORPORATE BOND FUND
<MULTIPLIER> 1

<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 5,144,165
<RECEIVABLES> 52,775
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 5,196,940
<PAYABLE-FOR-SECURITIES> 210
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 14,617
<TOTAL-LIABILITIES> 14,827
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5,017,955
<SHARES-COMMON-STOCK> 390,399
<SHARES-COMMON-PRIOR> 45,109
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 264,051
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 161,171
<NET-ASSETS> 5,182,113
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 85,336
<EXPENSES-NET> 11,804
<NET-INVESTMENT-INCOME> 73,532
<REALIZED-GAINS-CURRENT> 264,051
<APPREC-INCREASE-CURRENT> 123,736
<NET-CHANGE-FROM-OPS> 461,319
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (73,532)
<DISTRIBUTIONS-OF-GAINS> (188,578)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 320,635
<NUMBER-OF-SHARES-REDEEMED> (24,343)
<SHARES-REINVESTED> 19,737
<NET-CHANGE-IN-ASSETS> 4,286,762
<ACCUMULATED-NII-PRIOR> 15,888
<ACCUMULATED-GAINS-PRIOR> 85,221
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 7,809
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 65,524
<AVERAGE-NET-ASSETS> 2,536,572
<PER-SHARE-NAV-BEGIN> 12.04
<PER-SHARE-NII> 0.21
<PER-SHARE-GAIN-APPREC> 1.77
<PER-SHARE-DIVIDEND> 0.21
<PER-SHARE-DISTRIBUTIONS> 0.54
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 13.27
<EXPENSE-RATIO> 0.97
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 5
<NAME> BALANCED FUND
<MULTIPLIER> 1

<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 7,438,888
<RECEIVABLES> 39,755
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 7,478,643
<PAYABLE-FOR-SECURITIES> 2,190
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 21,074
<TOTAL-LIABILITIES> 23,264
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 7,030,266
<SHARES-COMMON-STOCK> 488,902
<SHARES-COMMON-PRIOR> 38,683
<ACCUMULATED-NII-CURRENT> 8,029
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 111,136
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 413,615
<NET-ASSETS> 7,455,379
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 72,070
<EXPENSES-NET> 12,978
<NET-INVESTMENT-INCOME> 59,092
<REALIZED-GAINS-CURRENT> 111,136
<APPREC-INCREASE-CURRENT> 357,771
<NET-CHANGE-FROM-OPS> 527,999
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (68,841)
<DISTRIBUTIONS-OF-GAINS> (18,502)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 477,665
<NUMBER-OF-SHARES-REDEEMED> (39,558)
<SHARES-REINVESTED> 5,686
<NET-CHANGE-IN-ASSETS> 6,864,998
<ACCUMULATED-NII-PRIOR> 6,771
<ACCUMULATED-GAINS-PRIOR> 62,810
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 3,588
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 69,356
<AVERAGE-NET-ASSETS> 2,532,774
<PER-SHARE-NAV-BEGIN> 13.09
<PER-SHARE-NII> 0.14
<PER-SHARE-GAIN-APPREC> 2.18
<PER-SHARE-DIVIDEND> 0.16
<PER-SHARE-DISTRIBUTIONS> 0.04
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 15.25
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 6
<NAME> EQUITY INCOME FUND
<MULTIPLIER> 1

<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 5,467,748
<RECEIVABLES> 36,403
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 5,504,151
<PAYABLE-FOR-SECURITIES> 1,041
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 19,363
<TOTAL-LIABILITIES> 20,404
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5,367,353
<SHARES-COMMON-STOCK> 397,951
<SHARES-COMMON-PRIOR> 43,043
<ACCUMULATED-NII-CURRENT> 18,724
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 245,458
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 86,261
<NET-ASSETS> 5,483,747
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 18,315
<EXPENSES-NET> 9,320
<NET-INVESTMENT-INCOME> 8,995
<REALIZED-GAINS-CURRENT> 245,458
<APPREC-INCREASE-CURRENT> 97,247
<NET-CHANGE-FROM-OPS> 351,700
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (57,057)
<DISTRIBUTIONS-OF-GAINS> (7,997)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 382,209
<NUMBER-OF-SHARES-REDEEMED> (27,604)
<SHARES-REINVESTED> 4,663
<NET-CHANGE-IN-ASSETS> 5,040,109
<ACCUMULATED-NII-PRIOR> 1,939
<ACCUMULATED-GAINS-PRIOR> 49,409
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 31,070
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 63,677
<AVERAGE-NET-ASSETS> 1,918,062
<PER-SHARE-NAV-BEGIN> 11.47
<PER-SHARE-NII> 0.15
<PER-SHARE-GAIN-APPREC> 2.29
<PER-SHARE-DIVIDEND> 0.19
<PER-SHARE-DISTRIBUTIONS> 0.02
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 13.78
<EXPENSE-RATIO> 1.14
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 7
<NAME> GROWTH & INCOME FUND
<MULTIPLIER> 1

<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 3,853,966
<RECEIVABLES> 20,448
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 3,874,414
<PAYABLE-FOR-SECURITIES> 212
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 14,271
<TOTAL-LIABILITIES> 14,483
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4,206,176
<SHARES-COMMON-STOCK> 266,262
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 664,603
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (346,245)
<NET-ASSETS> 3,859,931
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> (3,649)
<EXPENSES-NET> 4,550
<NET-INVESTMENT-INCOME> (8,199)
<REALIZED-GAINS-CURRENT> 664,603
<APPREC-INCREASE-CURRENT> (385,220)
<NET-CHANGE-FROM-OPS> 271,184
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (271,722)
<DISTRIBUTIONS-OTHER> (20,433)
<NUMBER-OF-SHARES-SOLD> 212,329
<NUMBER-OF-SHARES-REDEEMED> (12,245)
<SHARES-REINVESTED> 19,902
<NET-CHANGE-IN-ASSETS> 3,241,614
<ACCUMULATED-NII-PRIOR> 592
<ACCUMULATED-GAINS-PRIOR> 37,328
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 3,456
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 57,193
<AVERAGE-NET-ASSETS> 1,655,143
<PER-SHARE-NAV-BEGIN> 13.36
<PER-SHARE-NII> 0.00
<PER-SHARE-GAIN-APPREC> 2.41
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 1.18
<RETURNS-OF-CAPITAL> 0.09
<PER-SHARE-NAV-END> 14.50
<EXPENSE-RATIO> 1.20
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 8
<NAME> EQUITY GROWTH FUND
<MULTIPLIER> 1

<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 7,689,435
<RECEIVABLES> 68,153
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 7,757,588
<PAYABLE-FOR-SECURITIES> 1,025
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 20,216
<TOTAL-LIABILITIES> 21,241
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 7,439,142
<SHARES-COMMON-STOCK> 452,759
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 325,617
<OVERDISTRIBUTION-GAINS> (14,365)
<ACCUM-APPREC-OR-DEPREC> 311,570
<NET-ASSETS> 7,736,347
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 6,920
<EXPENSES-NET> 15,326
<NET-INVESTMENT-INCOME> (8,406)
<REALIZED-GAINS-CURRENT> 325,617
<APPREC-INCREASE-CURRENT> 269,600
<NET-CHANGE-FROM-OPS> 586,811
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (158,686)
<DISTRIBUTIONS-OTHER> (12,961)
<NUMBER-OF-SHARES-SOLD> 450,805
<NUMBER-OF-SHARES-REDEEMED> (52,148)
<SHARES-REINVESTED> 11,059
<NET-CHANGE-IN-ASSETS> 7,136,053
<ACCUMULATED-NII-PRIOR> (464)
<ACCUMULATED-GAINS-PRIOR> 88,219
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 13,116
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 67,464
<AVERAGE-NET-ASSETS> 2,440,670
<PER-SHARE-NAV-BEGIN> 13.95
<PER-SHARE-NII> 0.00
<PER-SHARE-GAIN-APPREC> 3.58
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.38
<RETURNS-OF-CAPITAL> 0.03
<PER-SHARE-NAV-END> 17.09
<EXPENSE-RATIO> 1.49
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 9
<NAME> SPECIAL EQUITY FUND
<MULTIPLIER> 1

<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 891,670
<RECEIVABLES> 11,383
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 903,053
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 9,792
<TOTAL-LIABILITIES> 9,792
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 889,257
<SHARES-COMMON-STOCK> 87,487
<SHARES-COMMON-PRIOR> 15,091
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (389)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,004
<NET-ASSETS> 893,261
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 13,636
<EXPENSES-NET> 1,251
<NET-INVESTMENT-INCOME> 12,385
<REALIZED-GAINS-CURRENT> (389)
<APPREC-INCREASE-CURRENT> 4,004
<NET-CHANGE-FROM-OPS> 16,000
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (12,303)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (673)
<NUMBER-OF-SHARES-SOLD> 91,285
<NUMBER-OF-SHARES-REDEEMED> (5,068)
<SHARES-REINVESTED> 1,270
<NET-CHANGE-IN-ASSETS> 893,261
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 40,246
<AVERAGE-NET-ASSETS> 275,509
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.14
<PER-SHARE-GAIN-APPREC> 0.22
<PER-SHARE-DIVIDEND> 0.14
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.01
<PER-SHARE-NAV-END> 10.21
<EXPENSE-RATIO> 0.94
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 10
<NAME> HIGH YEILD BOND FUND
<MULTIPLIER> 1

<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 736,328
<RECEIVABLES> 9,858
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 746,186
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 8,086
<TOTAL-LIABILITIES> 8,086
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 722,790
<SHARES-COMMON-STOCK> 69,114
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 1,011
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,088)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 15,106
<NET-ASSETS> 738,100
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 13,875
<EXPENSES-NET> 758
<NET-INVESTMENT-INCOME> 13,117
<REALIZED-GAINS-CURRENT> (1,088)
<APPREC-INCREASE-CURRENT> 15,106
<NET-CHANGE-FROM-OPS> 27,135
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (12,551)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 69,866
<NUMBER-OF-SHARES-REDEEMED> (1,933)
<SHARES-REINVESTED> 1,181
<NET-CHANGE-IN-ASSETS> 738,100
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 38,278
<AVERAGE-NET-ASSETS> 170,693
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.19
<PER-SHARE-GAIN-APPREC> 0.66
<PER-SHARE-DIVIDEND> 0.21
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.68
<EXPENSE-RATIO> 15.78
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 11
<NAME> INTERNATIONAL EQUITY FUND
<MULTIPLIER> 1

<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 2,371,416
<RECEIVABLES> 41,074
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2,412,490
<PAYABLE-FOR-SECURITIES> 84
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 14,127
<TOTAL-LIABILITIES> 14,211
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2,326,763
<SHARES-COMMON-STOCK> 212,884
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (7,585)
<ACCUMULATED-NET-GAINS> 13,712
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 78,137
<NET-ASSETS> 2,398,279
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 4,162
<EXPENSES-NET> 1,663
<NET-INVESTMENT-INCOME> 2,499
<REALIZED-GAINS-CURRENT> 13,712
<APPREC-INCREASE-CURRENT> 78,137
<NET-CHANGE-FROM-OPS> 98,708
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,866)
<DISTRIBUTIONS-OF-GAINS> (8,777)
<DISTRIBUTIONS-OTHER> (3,382)
<NUMBER-OF-SHARES-SOLD> 214,323
<NUMBER-OF-SHARES-REDEEMED> (3,479)
<SHARES-REINVESTED> 2,040
<NET-CHANGE-IN-ASSETS> 2,398,279
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 45,151
<AVERAGE-NET-ASSETS> 547,197
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.01
<PER-SHARE-GAIN-APPREC> 1.37
<PER-SHARE-DIVIDEND> 0.01
<PER-SHARE-DISTRIBUTIONS> 0.04
<RETURNS-OF-CAPITAL> 0.02
<PER-SHARE-NAV-END> 11.27
<EXPENSE-RATIO> 1.41
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 12
<NAME> AGGRESSIVE EQUITY FUND
<MULTIPLIER> 1

<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 323,296
<RECEIVABLES> 12,827
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 336,123
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 9,647
<TOTAL-LIABILITIES> 9,647
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 349,100
<SHARES-COMMON-STOCK> 34,618
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 316
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 21,420
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (22,940)
<NET-ASSETS> 326,476
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> (360)
<EXPENSES-NET> 243
<NET-INVESTMENT-INCOME> (603)
<REALIZED-GAINS-CURRENT> 21,420
<APPREC-INCREASE-CURRENT> (22,940)
<NET-CHANGE-FROM-OPS> (2,123)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,515)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 37,116
<NUMBER-OF-SHARES-REDEEMED> (2,657)
<SHARES-REINVESTED> 159
<NET-CHANGE-IN-ASSETS> 326,476
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 35,979
<AVERAGE-NET-ASSETS> 103,275
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.04
<PER-SHARE-GAIN-APPREC> (0.58)
<PER-SHARE-DIVIDEND> 0.05
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.43
<EXPENSE-RATIO> 1.79
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 13
<NAME> EQUITY VALUE FUND
<MULTIPLIER> 1

<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 383,740
<RECEIVABLES> 11,531
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 395,271
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 10,063
<TOTAL-LIABILITIES> 10,063
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 371,222
<SHARES-COMMON-STOCK> 35,828
<SHARES-COMMON-PRIOR> 46,276
<ACCUMULATED-NII-CURRENT> 296
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 6,142
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 13,694
<NET-ASSETS> 385,208
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 981
<EXPENSES-NET> 290
<NET-INVESTMENT-INCOME> 691
<REALIZED-GAINS-CURRENT> 6,142
<APPREC-INCREASE-CURRENT> 13,694
<NET-CHANGE-FROM-OPS> 20,527
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (395)
<DISTRIBUTIONS-OF-GAINS> (4,303)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 35,966
<NUMBER-OF-SHARES-REDEEMED> (576)
<SHARES-REINVESTED> 438
<NET-CHANGE-IN-ASSETS> 385,208
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 13,773
<AVERAGE-NET-ASSETS> 114,389
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.01
<PER-SHARE-GAIN-APPREC> 0.86
<PER-SHARE-DIVIDEND> 0.02
<PER-SHARE-DISTRIBUTIONS> 0.12
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.75
<EXPENSE-RATIO> 1.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00

</TABLE>

COOPERS & LYBRAND

CONSENT OF INDEPENDENT ACCOUNTANTS

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

We consent to the incorporation by reference in this Post-Effective Amendment
No. 8 to the Registration Statement of Diversified Investors Funds Group on
Form N-1A (File No. 33-61810) of our reports dated February 12, 1997 and
February 10, 1997 on our audits of the financial statements and financial
highlights of Diversified Investors Funds Group and Diversified Investors
Portfolios, respectively.

We also consent to the references to our firm under the caption "Financial
Highlights" in the Prospectus and under the captions "Independent Accountants"
and "Experts" in the Statement of Additional Information.

/s/Coopers & Lybrand L.L.P.

New York, New York
April 25, 1997

EXHIBIT 19

POWER OF ATTORNEY

The undersigned hereby constitutes and appoints Tom A. Schlossberg,
Robert F. Colby, Alfred C. Sylvain and John F. Hughes, and each of them, with
full powers of substitution as his true and lawful attorneys and agents to
execute in his name and on his behalf in any and all capacities the
Registration Statement, and any and all amendments thereto, filed by The
Diversified Investors Funds Group (the "Trust") with the Securities and
Exchange Commission under the Investment Company Act of 1940 and the Securities
Act of 1933, and any and all instruments which such attorneys and agents, or
any of them, deem necessary or advisable to enable the Trust to comply with
such Acts, the rules, regulations and requirements of the Securities and
Exchange Commission, and the securities or Blue Sky laws of any state or other
jurisdiction, and the undersigned hereby ratifies and confirms as his own act
and deed any and all acts that such attorneys and agents, or any of them, shall
do or cause to be done by virtue hereof. Any one of such attorneys and agents
have, and may exercise, all of the powers hereby conferred.

IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 25th
day of January, 1995.

/s/Donald E. Flynn
Donald E. Flynn

STATE OF NEW YORK )
)ss.:
COUNTY OF NEW YORK )

On the 25th day of January, 1995 before me personally came Donald E. Flynn to
me known to be the person described in and who executed the foregoing
instrument, and acknowledged that he executed same.

/s/Catherine A. Mohr
NOTARY PUBLIC, State of New York
No. 31-4656544
Qualified in New York County
Term Expires June 30, 1995

<PAGE>

POWER OF ATTORNEY

IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 25th
day of January, 1995.

/s/Robert L. Lindsay
Robert L. Lindsay

STATE OF NEW YORK )
)ss.:
COUNTY OF NEW YORK )

On the 25th day of January, 1995 before me personally came Robert L. Lindsay to
me known to be the person described in and who executed the foregoing
instrument, and acknowledged that he executed same.

/s/Catherine A. Mohr
NOTARY PUBLIC, State of New York
No. 31-4656544
Qualified in New York County
Term Expires June 30, 1995

<PAGE>

POWER OF ATTORNEY

IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 25th
day of January, 1995.

/s/Nikhil Malvania
Nikhil Malvania

STATE OF NEW YORK )
)ss.:
COUNTY OF NEW YORK )

On the 25th day of January, 1995 before me personally came Nikhil Malvania to
me known to be the person described in and who executed the foregoing
instrument, and acknowledged that he executed same.

/s/Catherine A. Mohr
NOTARY PUBLIC, State of New York
No. 31-4656544
Qualified in New York County
Term Expires June 30, 1995

<PAGE>

POWER OF ATTORNEY

IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 25th
day of January, 1995.

/s/Joyce Norden
Joyce Norden

STATE OF NEW YORK )
)ss.:
COUNTY OF NEW YORK )

On the 25th day of January, 1995 before me personally came Joyce Norden to me
known to be the person described in and who executed the foregoing instrument,
and acknowledged that he executed same.

/s/Catherine A. Mohr
NOTARY PUBLIC, State of New York
No. 31-4656544
Qualified in New York County
Term Expires June 30, 1995

<PAGE>

POWER OF ATTORNEY

IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 25th
day of January, 1995.

/s/Tom Schlossberg
Tom Schlossberg

STATE OF NEW YORK )
)ss.:
COUNTY OF NEW YORK )

On the 25th day of January, 1995 before me personally came Tom Schlossberg to
me known to be the person described in and who executed the foregoing
instrument, and acknowledged that he executed same.

/s/Catherine A. Mohr
NOTARY PUBLIC, State of New York
No. 31-4656544
Qualified in New York County
Term Expires June 30, 1995

<PAGE>

POWER OF ATTORNEY

IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 25th
day of January, 1995.

/s/E.M. Mannella
E.M. Mannella

STATE OF NEW YORK )
)ss.:
COUNTY OF NEW YORK )

On the 25th day of January, 1995 before me personally came E.M. Mannella to me
known to be the person described in and who executed the foregoing instrument,
and acknowledged that he executed same.

/s/Catherine A. Mohr
NOTARY PUBLIC, State of New York
No. 31-4656544
Qualified in New York County
Term Expires June 30, 1995

<PAGE>

POWER OF ATTORNEY

IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 25th
day of January, 1995.

/s/Patricia L. Sawyer
Patricia L. Sawyer

STATE OF NEW YORK )
)ss.:
COUNTY OF NEW YORK )

On the 25th day of January, 1995 before me personally came Patricia L. Sawyer
to me known to be the person described in and who executed the foregoing
instrument, and acknowledged that he executed same.

/s/Catherine A. Mohr
NOTARY PUBLIC, State of New York
No. 31-4656544
Qualified in New York County
Term Expires June 30, 1995

<PAGE>

POWER OF ATTORNEY

IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 25th
day of January, 1995.

/s/Neal M. Jewell
Neal M. Jewell

STATE OF NEW YORK )
)ss.:
COUNTY OF NEW YORK )

On the 25th day of January, 1995 before me personally came Neal M. Jewell to me
known to be the person described in and who executed the foregoing instrument,
and acknowledged that he executed same.

/s/Catherine A. Mohr
NOTARY PUBLIC, State of New York
No. 31-4656544
Qualified in New York County
Term Expires June 30, 1995