PALLADIAN TRUST, 485BPOS, 1996-12-04

PALLADIAN TRUST
485BPOS, 1996-12-04

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<PAGE>

As filed with SEC on December 4, 1996 Registration No. 33-73882
- -------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /_/

Pre-Effective Amendment No. /_/
Post-Effective Amendment No. 3 /x/

and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /_/
Amendment No. 6 /x/
(Check appropriate box or boxes)

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

THE PALLADIAN TRUST
(Exact name of registrant as specified in charter)
4225 EXECUTIVE SQUARE, SUITE 270
LA JOLLA, CALIFORNIA 92037
(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, including Area Code: (619) 677-5917

H. Michael Schwartz
4225 Executive Suite, Suite 270
La Jolla, California 92037

(Name and Address of Agent for Service of Process)

copies to:
Jeffrey C. Martin
Christopher E. Palmer
Shea & Gardner
1800 Massachusetts Avenue, N.W.
Washington, D.C. 20036

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

The Registrant has elected, pursuant to Rule 24f-2 under the Investment Company
Act of 1940, to register an indefinite number of shares.

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

/ / immediately upon filing pursuant to paragraph (b)
/X/ on (December 6, 1996) pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(1)
/ / on (date) pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / 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.

<PAGE>

CROSS REFERENCE SHEET
FOR PROSPECTUS AND SAI
(as required by Rule 495)

Form N-1A Item No. Caption in Part A Prospectus
------------------ ----------------------------
Item 1. Cover Page Cover Page

Item 2. Synopsis Summary of Expenses

Item 3. Condensed Financial Performance Information

Item 4. General Description
of Registrant General Information; Investment
Objectives and Policies;
Description of Securities and
Investment Techniques

Item 5. Management of the Fund Management of the Trust

Item 6. Capital Stock and Other Dividends, Distributions,
Securities and Taxes; Other Information

Item 7. Purchase of Securities Being Investment in the Trust
Offered

Item 8. Redemption of Repurchase Investment in the Trust

Item 9. Pending Legal Proceedings Not Applicable

<PAGE>

Caption in Part B Statement
Form N-1A Item No. of Additional Information
------------------ -----------------------------

Item 10. Cover Page Cover Page

Item 11. Table of Contents Table of Contents

Item 12. General Information Not Applicable
and History

Item 13. Investment Objectives Description of Securities and
and Policies Investment Techniques;
Investment Restrictions;
Appendix

Item 14. Management of the Fund Management of the Trust

Item 15. Control Person and Principal Management of the Trust
Holders of Securities

Item 16. Investment Advisory and Management of the Trust
Other Services

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

Item 18. Capital Stock and Other Capitalization
Securities

Item 19. Purchase, Redemption and Not Applicable
Pricing of Securities Being
Offered

Item 20. Tax Status Taxation

Item 21. Underwriters Not Applicable

Item 22. Calculations of Performance Performance Information
Data

Item 23. Financial Statements Financial Statements

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

ii
<PAGE>

SUPPLEMENT DATED DECEMBER 6, 1996
TO PROSPECTUS DATED MAY 1, 1996

THE PALLADIAN TRUST

FINANCIAL HIGHLIGHTS

The following chart is based on the financial statements for the period
February 1, 1996 (commencement of operations) to June 30, 1996. This chart is
unaudited and should be read in conjunction with the unaudited financial
statements and notes thereto in the Statement of Additional Information dated
December 6, 1996.

<TABLE>
<CAPTION>
Global Global
International Strategic Interactive /
Value Growth Growth Income Telecomm
Portfolio Portfolio Portfolio Portfolio Portfolio
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, commencement
of operations.................................... $10.00 $10.00 $10.00 $10.00 $10.00
-------- -------- ---------- -------- ----------
INCOME/(LOSS) FROM INVESTMENT
OPERATIONS:

Net investment income.............................. (0.42) (4.10) (3.29) (0.19) (0.45)

Net realized and unrealized gain/(loss)
on investments................................... 1.26 3.50 0.56 (0.39) 0.16
-------- -------- ---------- -------- ----------

Total from investment operations................... 0.84 (0.59) (2.73) (0.58) (0.28)
-------- -------- ---------- -------- ----------

LESS DISTRIBUTIONS:

Dividends from net investment
income........................................... 0.00 0.00 0.00 0.00 0.00

Distributions from capital gains................... 0.00 0.00 0.00 0.00 0.00
-------- -------- ---------- -------- ----------

Total distributions................................ 0.00 0.00 0.00 0.00 0.00
-------- -------- ---------- -------- ----------

Net asset value, end of period..................... $10.64 $9.41 $7.27 $9.42 $9.72

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

Total Return....................................... 8.41% -5.93% -27.31% -5.78% -2.64%
-------- -------- ---------- -------- ----------

RATIOS TO AVERAGE NET ASSETS/
SUPPLEMENTAL DATA:

Net assets, end of reporting period................ $724,474 $81,732 $51,916 $1,002,474 $559,764

Ratio of operating expenses to
average net assets............................... 14.04% 155.32% 332.72% 12.13% 15.71%

Ratio of net investment income
to average net assets............................ -11.25% -77.72% -77.47% -5.45% -12.47%

Portfolio turnover rate............................ 23.15% 490.77% 0.00% 76.14% 23.55%
</TABLE>

<PAGE>

PROSPECTUS
for
The Value Portfolio
The Growth Portfolio
The International Growth Portfolio
The Global Strategic Income Portfolio, and
The Global Interactive/Telecomm Portfolio
of
THE PALLADIAN TRUST
4225 Executive Square, Suite 270
La Jolla, California 92037
(619) 677-5917

This prospectus offers shares of five portfolios (each individually a
"Portfolio" or collectively the "Portfolios") of The Palladian Trust (the
"Trust"), which is an open-end, management investment company. Each Portfolio
has its own investment objective or objectives and investment policies. Shares
of the Portfolios may be sold only to: (1) life insurance company separate
accounts (the "Separate Accounts") to serve as the underlying investment medium
for variable annuity contracts; (2) qualified retirement plans, as permitted by
Treasury Regulations; and (3) life insurance companies and advisers to the
Portfolios and their affiliates. In the future, the Trust intends to sell its
shares to Separate Accounts to serve as the underlying investment medium for
variable life insurance contracts. Shares will not be offered directly to the
public.

Palladian Advisors, Inc. ("PAI") serves as overall manager of the
Portfolios. PAI has retained Tremont Partners, Inc. ("Portfolio Adviser") to
assist it in evaluating, recommending, and monitoring an investment adviser for
each Portfolio which will provide day-to-day management (a "Portfolio Manager").
The five Portfolios and their respective Portfolio Managers are as follows:

Portfolio Portfolio Manager
- -------------------------------------------------------------------------------
The Value Portfolio GAMCO Investors, Inc.
The Growth Portfolio Stonehill Capital Management, Inc.
The International Growth Portfolio Bee & Associates Incorporated
The Global Strategic Income Portfolio Fischer Francis Trees & Watts, Inc.
The Global Interactive/Telecomm Portfolio GAMCO Investors, Inc.

Information about the investment objectives and policies of each Portfolio,
along with a detailed description of the types of securities and other assets in
which each Portfolio may invest, are set forth in this prospectus. There can be
no assurance that the investment objective for any Portfolio will be achieved.
The Global Strategic Income Portfolio may invest up to 50% of its assets in
bonds rated below investment grade (commonly referred to as "junk bonds" or
"high yield/high risk bonds"). High yield/high risk bonds involve significant
risks. See page 14.

This prospectus sets forth concisely the information a prospective
purchaser of a variable contract or a participant in a qualified retirement
plan should know before directing that contributions or amounts credited to
him or her be invested in the Portfolios. A Statement of Additional
Information (the "SAI") dated May 1, 1996 containing additional and more
detailed information about the Portfolios has been filed with the Securities
and Exchange Commission and is hereby incorporated by reference into this
prospectus. It is available without charge and can be obtained by writing or
calling the Trust at the address and telephone number printed above.

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

PROSPECTIVE PURCHASERS OF A VARIABLE CONTRACT SHOULD READ THIS PROSPECTUS IN
CONJUNCTION WITH THE PROSPECTUS FOR THE SEPARATE ACCOUNT. BOTH PROSPECTUSES
SHOULD BE READ CAREFULLY AND RETAINED FOR FUTURE REFERENCE.

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

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

THE DATE OF THIS PROSPECTUS IS May 1, 1996.

<PAGE>

TABLE OF CONTENTS

PAGE
----

SUMMARY OF EXPENSES 5

GENERAL INFORMATION 6
The Palladian Trust 6
The Manager and Portfolio Managers 6
Investment Objectives 6

MANAGEMENT OF THE TRUST 7
Manager 7
Portfolio Advisor 7
Portfolio Managers 8
The Value Portfolio 8
The Growth Portfolio 8
The International Growth Portfolio 8
The Global Strategic Income Portfolio 8
The Global Interactive/Telecomm Portfolio 8
Management and Portfolio Management Investment Advisory Fees 9
Custodian and Transfer Agent 11

INVESTMENT OBJECTIVES AND POLICIES 11
The Value Portfolio 11
The Growth Portfolio 12
The International Growth Portfolio 13
The Global Strategic Income Portfolio 13
The Global Interactive/Telecomm Portfolio 14

DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES 15
U.S. Government Securities 15
Debt Securities 16
Mortgage-Backed Securities 16
Other Asset-Backed Securities 17
Variable and Floating Rate Securities 17
Banking Industry and Savings Industry Obligations 17
Commercial Paper 18
Repurchase Agreements 18
Reverse Repurchase Agreements 18
Lending Portfolio Securities 18
Illiquid Securities 18
Warrants 19
Other Investment Companies 19
Short Sales 19
Short Sales Against the Box 20
Foreign Securities 20
Investment in Gold and Other Precious Metals 21
Futures Contracts 21
Options 22
Foreign Currency Transactions 23

<PAGE>

PAGE
----

Leverage 24
Indexed Securities 24

INVESTMENT IN THE TRUST 24
Principal Underwriter 24
Determination of Net Asset Value 24
Purchase of Shares 25
Redemption of Shares 26

DIVIDENDS, DISTRIBUTIONS, AND TAXES 26

OTHER INFORMATION 27
Capitalization 27
Voting Rights 27
Portfolio Brokerage 27
Performance Information 27
Performance Data for the Portfolio Managers 28

APPENDIX A 33
APPENDIX B 34

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFERING CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS BEING AUTHORIZED BY
THE TRUST. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY THE TRUST TO SELL
SHARES IN ANY STATE TO ANY PERSON TO WHOM IT IS UNLAWFUL FOR THE TRUST TO MAKE
SUCH AN OFFER IN SUCH STATE.

<PAGE>

SUMMARY OF EXPENSES

The following table shows the expenses that will incurred by each
Portfolio, expressed as a percentage of average net assets during the year. If
you have been given this prospectus because you are considering the purchase of
a variable annuity contract, you should refer instead to the corresponding table
in the variable annuity contract prospectus.

Shareholder Transactions Expenses (for each Portfolio)
Sales Load on Purchases None
Sales Load on Reinvested Dividends None
Deferred Sales Load Imposed on Redemption None
Exchange Fees None

Annual Fund Operating Expenses
(as a percentage of average net assets)

<TABLE>
<CAPTION>
Management 12b-1 Other Operating
Portfolio Fees(1) Fees Expenses(2) Expenses
<S> <C> <C> <C> <C>
The Value Portfolio 0.80% None 0.85% 1.65%
The Growth Portfolio 0.80% None 1.10% 1.90%
The International Growth Portfolio 0.80% None 1.23% 2.03%
The Global Strategic Income Portfolio 0.80% None 1.23% 2.03%
The Global Interactive/Telecomm Portfolio 0.80% None 0.96% 1.76%
</TABLE>
The purpose of the following example is to assist investors in
understanding the various costs and expenses that an investor in the Portfolios
will bear directly or indirectly. It shows the total expenses that would be
payable if you redeemed your shares after having held them for one and three
year periods respectively. The amounts shown are based upon the estimates.
Actual expenses may be greater or less than those shown. The example assumes a
5% annual rate of return pursuant to requirements of the Securities and Exchange
Commission. This hypothetical rate of return is not intended to be
representative of past or future performance.

EXAMPLE
A shareholder would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end of each time
period:

1 year 3 years
The Value Portfolio $16.50 $51.18
The Growth Portfolio $19.00 $58.79
The International Growth Portfolio $20.30 $62.73
The Global Strategic Income Portfolio $20.30 $62.73
The Global Interactive/Telecomm Portfolio $17.60 $54.53

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

(1) As explained in "Management and Portfolio Management Advisory Fees," page
9, the total advisory fee for PAI, the Portfolio Adviser, and the Portfolio
Managers for the first 12 months of operations is, for each Portfolio, 0.80% of
average daily net assets. After that time, there will be an incentive fee
arrangement. The base fee will be 2.00%, but it may vary from between 0.00% to
4.00% depending on the Portfolio's performance.

(2) Based on estimates for the current fiscal year.

<PAGE>

GENERAL INFORMATION

THE PALLADIAN TRUST
This Prospectus offers shares of five Portfolios (the "Portfolios") of The
Palladian Trust (the "Trust"), each with its own investment objective and
investment policies. The Trust was established as a Massachusetts business
trust and is registered under the Investment Company Act of 1940 (the "1940
Act") as an open-end management investment company.

THE MANAGER AND PORTFOLIO MANAGERS
Palladian Advisors, Inc. ("PAI") serves as overall manager of the
Portfolios. PAI has retained Tremont Partners, Inc. ("Portfolio Adviser") to
assist it in evaluating, recommending, and monitoring an investment adviser for
each Portfolio who will provide day-to-day management (a "Portfolio Manager").
The five Portfolios and their respective Portfolio Managers are as follows:

After the first year of operations each Portfolio Manager will be paid on
an incentive fee basis, which could result in either higher than average
advisory fees or possibly no advisory fee at all, depending on how well each
Portfolio Manager performs for you.

Each Portfolio Manager has contractually agreed that it or an affiliate
(either directly or through a qualified plan) will invest at least a total
of $1 million in the Portfolio or Portfolios it manages. The Portfolio
Manager for the Global Strategic Income Portfolio made the investment shortly
after the Portfolio commenced operations. The Portfolio Managers for the
International Growth Portfolio (Bee & Associates Incorporated) and the Growth
Portfolio (Stonehill Capital Management, Inc.) have each agreed that it or
its principals will make the investment (directly or through qualified plans)
when the Portfolio reaches $10 million in total assets. Since GAMCO
Investors, Inc. manages both the Value Portfolio and the Global
Interactive/Telecomm Portfolio, it agreed to invest $500,000 in each
Portfolio. GAMCO Investors, Inc. made those investments shortly after the
Portfolios commenced operations. Although a Portfolio Manager is permitted
by law to sell its shares at any time, each Portfolio Manager currently
intends to maintain that investment as long as it manages the Portfolio.
Once a Portfolio Manager makes that investment, and for as long as it
maintains the investment, the Portfolio Manager will be managing a portion of
their own money along with your money.

There can be no assurance that any particular Portfolio investment
objective will be attained. The Board of Trustees may establish additional
Portfolios at any time and may discontinue offering a Portfolio at any time.

INVESTMENT OBJECTIVES
The Trust is currently offering shares of five separate Portfolios.
Each Portfolio has a different investment objective which it pursues through
different investment policies as described below. Since the Portfolios have
different investment objectives, each can be expected to have different
investment results and incur different market and financial risks. There can be
no assurance that any of these objectives will be met.

The investment objectives of the Portfolios are fundamental, which
means they may not be changed without shareholder approval as required by the
1940 Act.

THE VALUE PORTFOLIO seeks to make money for investors by investing
primarily in companies that the Portfolio Manager believes are undervalued and
that by virtue of anticipated developments may, in the Portfolio Manager's
judgment, achieve significant capital appreciation.

THE GROWTH PORTFOLIO seeks to make money for investors by investing
primarily in securities selected for their long-term growth prospects.

<PAGE>

THE INTERNATIONAL GROWTH PORTFOLIO seeks to make money for investors by
investing internationally for long-term capital appreciation, primarily in
equity securities.

THE GLOBAL STRATEGIC INCOME PORTFOLIO seeks to make money for investors by
investing for high current income and capital appreciation in a variety of
domestic and foreign fixed-income securities.

THE GLOBAL INTERACTIVE/TELECOMM PORTFOLIO seeks to make money for investors
primarily by investing globally in equity securities of companies engaged in the
development, manufacture or sale of interactive and/or telecommunications
services and products.

MANAGEMENT OF THE TRUST

The business and affairs of the Trust are managed under the direction of
the Board of Trustees. Additional information about the trustees and officers
of the Trust may be found in the Statement of Additional Information under the
heading "Management of the Trust."

The Trust is responsible for the payment of certain fees and expenses
including, among others, the following: (1) fees of the Manager and the
Portfolio Managers; (2) custodial, accounting, auditing, legal and transfer
agency fees; (3) fees of independent trustees; (4) brokerage fees and
commissions in connection with the purchase and sale of Portfolio securities;
(5) taxes; (6) the reimbursement of organizational expenses; and (7) expenses of
printing and mailing prospectuses, proxy statements and shareholder
communications.

MANAGER
Palladian Advisors, Inc. ("PAI" or the "Manager") serves as overall Manager
of the Trust and is responsible for general investment supervisory services to
the Portfolios. PAI, located at 4225 Executive Square, Suite 270, La Jolla,
California 92037, is registered with the Securities and Exchange Commission as
an investment adviser. Prior to PAI's registration on May 21, 1993 and the
subsequent development and offering of the Trust, the Manager had no direct
previous experience in providing management services for investment companies;
however, its officers have extensive experience in the development and
distribution of investment products, specifically, variable life insurance
policies, variable annuity contracts, and management investment companies that
serve as investment mediums for such policies and contracts. PAI evaluates and
recommends to the Trust registered investment advisers to be retained by the
Trust on behalf of each of the Portfolios as Portfolio Managers and monitors and
assesses their performance and makes periodic reports to the Trust. In
performing these responsibilities, the Manager will rely on the services of
Tremont Partners, Inc., which has been retained as Portfolio Advisor. PAI, not
the Trust, pays the fee of the Portfolio Advisor.

PORTFOLIO ADVISOR
Tremont Partners, Inc. ("Tremont" or the "Portfolio Advisor"), located at
One Corporate Center at Rye, 555 Theodore Fremd Avenue, Rye, New York 10580, has
been engaged in the business of rendering portfolio manager evaluation selection
and supervisory services to consulting clients since 1984. Tremont is wholly
owned by Tremont Advisors, Inc. (formerly Lynch Asset Management Corporation),
a public corporation. As of March 22, 1996, Mario J. Gabelli (Chairman of
Lynch Corporation and Chief Investment Officer of GAMCO Investors, Inc.,
Portfolio Manager for the Value and Global Interactive/Telecomm Portfolios)
together with certain affiliated entities, controls 24.40% of the voting stock
of Tremont Advisors, Inc. (as defined by Rule l3d-3 under the Securities
Exchange Act of l934). The principals and staff of Tremont are experienced in
acting as investment consultants and in developing, implementing and managing
multiple portfolio manager programs. Tremont provides asset management
consulting services to various institutions and individual clients and provides
PAI with investment consulting services with respect to the development,
implementation and management of the Trust's multiple portfolio managers
program. Tremont is paid by PAI (not the Trust). As Portfolio Advisor, Tremont
provides research concerning registered investment advisers to be retained by
the Trust as Portfolio Managers, monitors and assists PAI with the periodic
reevaluation of existing Portfolio Managers and makes periodic reports to PAI
and the Trust.

PORTFOLIO MANAGERS
Each Portfolio Manager makes specific investments on behalf of a Portfolio
in accordance with the particular Portfolio's objective and the Portfolio
Manager's investment approach and strategies. The Portfolio Managers designated
for each Portfolio are listed and described below.

<PAGE>

Selection and retention criteria for Portfolio Managers include: (1)
their historical performance records relative to their respective markets and
peer groups; (2) consistent performance in the context of the markets and
preservation of capital in declining markets; (3) organizational stability and
reputation; (4) the quality and depth of investment personnel; (5) the ability
of the Portfolio Manager to apply its approach consistently; (6) a willingness
to work on an incentive fee basis; and (7) a willingness to invest $1 million in
their Portfolio(s). Each Portfolio Manager will not necessarily exhibit all of
the criteria to the same degree. It should be noted, however, that there can be
no certainty that any Portfolio Manager will obtain superior results at any
given time.

Tremont recommends Portfolios Managers to PAI based upon its
continuing quantitative and qualitative evaluation of the Portfolio Managers
skills in managing assets pursuant to specific investment approaches and
strategies. Short-term investment performance, by itself, is not a significant
factor in selecting or terminating a Portfolio Manager, and PAI and Tremont do
not expect to recommend frequent changes of Portfolio Managers.

The Portfolio Managers activities are subject to general oversight by
the Trustees, PAI and Tremont. Although the Trustees, PAI and Tremont do not
evaluate the investment merits of the Portfolio Managers' specific securities
selections, they do review the performance of each Portfolio Manager relative to
the selection criteria.

The Portfolio Managers for the Portfolios are as follows:

THE VALUE PORTFOLIO. GAMCO Investors, Inc. ("GAMCO"), One Corporate
Center, Rye, New York 10580-1434, acts as investment adviser for individuals,
pension trusts, profit-sharing trusts and endowments. GAMCO is a majority-owned
subsidiary of Gabelli Funds, Inc. Mario J. Gabelli may be deemed a "controlling
person" of GAMCO on the basis of his ownership of stock of Gabelli Funds, Inc.
Mario J. Gabelli is primarily responsible for the day-to-day investment
management of the Portfolio. Mr. Gabelli has been the Chief Investment Officer
of GAMCO since its organization in 1980.

THE GROWTH PORTFOLIO. Stonehill Capital Management, Inc. ("Stonehill
Capital"), 277 Park Avenue, New York, New York 10172, is owned by its founder
Robert L. Emerson. Stonehill Capital is registered with the SEC as an
investment adviser and manages assets in excess of $100 million. Mr. Emerson
is primarily responsible for the day-to-day investment management of the
Portfolio, and has been President of Stonehill Capital for the past five years.

THE INTERNATIONAL GROWTH PORTFOLIO. Bee & Associates Incorporated ("BAI"),
370 17th Street, Suite 5150, Denver, Colorado 80202, was formed in 1989 to
provide global equity management expertise to individuals, retirement plan
sponsors, foundations, endowments and other entities. The firm, which is
registered with the SEC as an investment adviser, currently manages assets of
approximately $170 million. Bruce B. Bee is primarily responsible for the day-
to-day investment management of the Portfolio. Since BAI's organization in
1989, Mr. Bee has been the firm's controlling person and principal portfolio
manager.

THE GLOBAL STRATEGIC INCOME PORTFOLIO. Fischer Francis Trees & Watts, Inc.
("Fisher Francis"), 200 Park Avenue, 46th Floor, New York, New York 10166, was
formed in 1972 to provide global fixed income management expertise to
individuals, central banks, government institutions, commercial banks and
private corporations. The firm, which is registered with the SEC as an
investment adviser, currently manages assets of approximately $18 billion.
Liaquat Ahamed is primarily responsible for the day-to-day investment management
of the Portfolio. Since 1988, Mr. Ahamed has served as the firm's Chief
Investment Officer for global strategy and head of the firm's London office.
Prior to 1988, he worked for nine years at the World Bank and was in charge of
the Bank's non-dollar government bond investments.

THE GLOBAL INTERACTIVE/TELECOMM PORTFOLIO. GAMCO manages this Portfolio,
as well as the Value Portfolio. Mario J. Gabelli is primarily responsible for
the day-to-day investment management of the Global Interactive/Telecomm
Portfolio. Mr. Gabelli has been Chief Investment Officer of GAMCO since its
organization in 1980.

MANAGEMENT AND PORTFOLIO MANAGEMENT INVESTMENT ADVISORY FEES
As explained in more detail above, PAI serves as the overall manager of the
Portfolios, Tremont serves as a consultant to PAI, and the Portfolio Managers
handle the day-to-day investment management of the Portfolios. For these
services, each Portfolio pays an overall management fee, computed and accrued
daily and paid monthly, based on its average daily net assets. After the first
year of operations, the overall fee will vary based on the performance of that
Portfolio (after expenses) compared to that of an appropriate benchmark. The
overall advisory fee will be split among the various advisers in the following
manner. The Portfolio Manager will receive 80% of the fee, and PAI will receive
the remaining 20%. PAI is responsible for paying the fee of Tremont, which
equals 32.5% of the fee received by PAI.

<PAGE>

FIXED ADVISORY FEE FOR THE FIRST YEAR. For the period beginning with the
day on which the Portfolio commences investment operations (February 1, 1996)
and ending with the last day of the twelfth full calendar month thereafter, each
Portfolio will pay at the end of each month, a monthly advisory fee calculated
at an annual rate of 0.80% of the Portfolio's average daily net assets.

PERFORMANCE-BASED FEE AFTER THE FIRST YEAR. Beginning with the thirteenth
month (February 1997) each Portfolio will pay at the end of each month, a
monthly advisory fee equal to a Basic Fee plus or minus an Incentive Fee. (As
explained below, the fee might be reduced if absolute performance is negative.)
The monthly Basic Fee will equal one-twelfth of the annual Basic Fee rate of
2.0% multiplied by average daily net assets over the previous 12 months. The
Incentive Fee rate ranges from -2.0% to +2.0% on an annual basis, depending on a
comparison of the Portfolio's performance (reflecting a deduction of Portfolio
expenses) and the performance of a selected benchmark index over the past 12
months. The monthly Incentive Fee, like the monthly Basic Fee, is calculated by
multiplying one-twelfth of the Incentive Fee rate on an annual basis by the
average daily net assets over the previous 12 months. Accordingly, the Total
Fee could range from 0.0% to an annual rate of 4.0%, depending on performance.

As noted above, performance of both the Portfolio and the selected
benchmark index will be calculated on a rolling 12-month period (i.e., the
previous 12 months, including the month for which the fee is being calculated).
The performance of a Portfolio will be calculated by first determining the
change in the Portfolio's net asset value per share during the period, assuming
the reinvestment of distributions during that period, and then expressing this
amount as a percentage of the net asset value per share at the beginning of the
period. Net asset value per share is calculated by dividing the value of the
securities held by the Portfolio plus any cash or other assets minus all
liabilities including accrued advisory fees and the other expenses, by the total
number of shares outstanding at the time. The performance of the selected
benchmark index is calculated as the sum of the change in the level of the index
during the period, plus the value of any dividends or distributions made by the
companies whose securities comprise the index accumulated to the end of the
period, and then expressing that amount as a percentage of the index at the
beginning of the period.

No Incentive Fee will be paid if the Portfolio's performance equals the
targeted performance -- selected benchmark index plus 2.25 percentage points.
The maximum fee will be paid if performance is 5.25 percentage points higher
than the target (i.e., 7.5 percentage points higher than the selected benchmark
index). No fee will be paid if performance is 5.25 percentage points lower than
the target (i.e., more than 3 percentage points below the selected benchmark
index). The chart below further explains the Incentive Fee at various
performance levels.

PERCENTAGE POINT DIFFERENCE BETWEEN PERFORMANCE OF THE PORTFOLIO
(NET OF EXPENSES INCLUDING BASIC FEE AND INCENTIVE FEE) TOTAL
AND CHANGE IN SELECTED BENCHMARK INDEX BASIC FEE (%) INCENTIVE FEE (%) ADVISORY FEE
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
+7.5 or greater 2.0 2.0 4.0
+6.0 or greater, but less than +7.5 2.0 1.5 3.5
+4.5 or greater, but less than +6.0 2.0 1.0 3.0
+3.0 or greater, but less than +4.5 2.0 0.5 2.5
+1.5 or greater, but less than +3.0 2.0 0.0 2.0
0.0 or greater, but less than +1.5 2.0 -0.5 1.5
- -1.5 or greater, but less than 0.0 2.0 -1.0 1.0
- -3.0 or greater, but less than -1.5 2.0 -1.5 0.5
Less than -3.0 2.0 -2.0 0.0
- -----------------------------------------------------------------------------------------------------------------------------------

</TABLE>

MAXIMUM FEE IF PERFORMANCE IS NEGATIVE. Notwithstanding the above
schedule, if the absolute performance of a Portfolio (after payment of all
expenses, including the Basic Fee and any Incentive Fee) is negative, the
monthly advisory fee will be the lesser of the fee calculated pursuant to the
above schedule or the alternative monthly advisory fee described below, which
under certain circumstances results in the Portfolios paying either no advisory
fee or a lower monthly advisory fee than under the performance fee schedule
above. If a Portfolio's performance (after payment of all expenses including
advisory fees) is negative and does not exceed the selected benchmark by six
percentage points (on an annual basis), no monthly advisory fee will be paid.
If the Portfolio's performance (after payment of all expenses including advisory
fees) is negative and does not exceed the selected benchmark by twelve
percentage points but does exceed the selected benchmark by six percentage
points (on an annual basis), the alternate monthly advisory fee will be based on
an annual rate of 1.0% of average daily net assets over the previous 12 months.
If, on the other hand, the performance of a Portfolio (after payment of all
expenses including advisory

<PAGE>

fees) is negative but exceeds the selected benchmark by twelve percentage points
or more (on an annual basis), the alternative monthly advisory fee will be based
on an annual rate of 2.0% of average daily net assets over the previous 12
months.

SIZE OF FEE. The Basic Fee payable by the Portfolios is at a rate higher
than the investment advisory fees paid by most other investment companies. If a
Portfolio outperforms the selected benchmark by 3.0 percentage points or more,
the advisory fee payable by a Portfolio may further exceed those paid by other
investment companies. On the other hand, if a Portfolio underperforms the
selected benchmark, the advisory fee paid by the Portfolio may be less than
those paid by other investment companies. If, during the applicable performance
period, a Portfolio underperforms the selected benchmark by three or more
percentage points, the Portfolio will not pay any advisory fee, although the
Manager, Portfolio Advisor and Portfolio Managers will remain obligated to
provide the Portfolio with the services contemplated herein as long as they are
in effect.

FACTORS CONSIDERED BY TRUST. In April 1972, the SEC issued Release No.
7113 under the 1940 Act to focus attention of mutual fund directors and
investment advisers on certain factors which must be considered in connection
with investment company performance fee arrangements. One of these factors is to
"avoid basing significant fee adjustments upon random or insignificant
differences" between the investment performance of a Portfolio and that of a
particular index which is being compared. The Release concludes that the
directors of a Portfolio "should satisfy themselves that the maximum performance
adjustment will be made only for performance differences that can reasonably be
considered significant." In approving the advisory fee structure, the Trust
considered that the performance fee was structured so that only the Basic Fee
would be paid in the event of small changes in performance and that any
significant incentive payments or penalties would be attributable to the
Portfolio Manager's skill or lack of skill rather than random fluctuations in
performance.

PERFORMANCE BENCHMARKS. As described above, total advisory fees paid to
each Portfolio Manager for advising the Portfolios are based on the performance
of the Portfolio they manage relative to an appropriately selected market
benchmark. In selecting the performance benchmark for each Portfolio, the
Trust, with the assistance of PAI and Tremont, attempted to select a benchmark
with characteristics and attributes most analogous to each Portfolio. The
performance benchmarks selected for the Portfolios are listed below and
described in more detail in Appendix A.

Portfolio Performance Benchmark
- -------------------------------------------------------------------------------

The Value Portfolio S&P 500
The Growth Portfolio S&P 500
The International Growth Portfolio MSCI - Europe, Australia, Far East
(EAFE) Index
The Global Strategic Income Portfolio JP Morgan Global Government Bond
Index, Unhedged
The Global Interactive/Telecomm
Portfolio S&P 500

CUSTODIAN AND TRANSFER AGENT
The custodian and transfer agent for the Trust is Investors Bank & Trust
Company, 89 South Street, Boston, MA 02111.

INVESTMENT OBJECTIVES AND POLICIES

Each of the Portfolios has a different investment objective, described
below. Each Portfolio is managed by its own Portfolio Manager. There can be no
assurance that any of the Portfolios will achieve their investment objective.
Each Portfolio is subject to the risk of changing economic, business, and
financial conditions, as well as the risk the Portfolio Manager will not
accurately anticipate those changes. As with any security, a risk of loss is
inherent in an investment in a Portfolio's shares.

The different types of securities and investment techniques used by the
individual Portfolio Managers all have attendant risks of varying degrees. For
example, with respect to equity securities, there can be no assurance of capital
appreciation and there is a substantial risk of decline. With respect to debt
securities, there exists the risk that the issuer of a security may not be able
to meet its obligations on interest or principal payments at the time called for
by the instrument. In addition, the value of debt instruments generally rises
and falls inversely with interest rates.

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

<PAGE>

The investment objectives of the Portfolios are fundamental, which means
that they may be changed only with shareholder approval in accordance with the
1940 Act. Unless otherwise indicated, each Portfolio's practices, policies, and
programs for achieving its objectives are not fundamental and thus may be
changed by the Board of Trustees without shareholder approval. The Statement of
Additional Information sets forth certain investment restrictions which are
fundamental, and, like the investment objectives, may be changed only with
shareholder approval.

THE VALUE PORTFOLIO
The Value Portfolio seeks to make money for investors by investing
primarily in companies that the Portfolio Manager believes are undervalued and
that by virtue of anticipated developments may, in the Portfolio Manager's
judgment, achieve significant capital appreciation.

In identifying such companies, the Portfolio Manager seeks to invest in
companies that, in the public market, are selling at a significant discount to
their private market value, the value the Portfolio Manager believes informed
industrialists would be willing to pay to acquire companies with similar
characteristics. If investor attention is focused on the underlying asset values
of these companies through an emerging or anticipated development or other
catalyst, an investment opportunity to realize this private market value may
exist. Undervaluation of a company can result from a variety of factors, such as
a lack of investor recognition of (1) the underlying value of a company's fixed
assets, (2) the value of a consumer or commercial franchise, (3) changes in the
economic or financial environment particularly affecting a company, (4) new,
improved or unique products or services, (5) new or rapidly expanding markets,
(6) technological developments or advancements affecting a company or its
products, or (7) changes in government regulations, political climate or
competitive conditions. The actual developments or catalysts particularly
applicable to a given company that may, in the Portfolio Manager's judgment,
lead to significant appreciation of that company's securities include: a change
in management or management policies; the acquisition of a significant equity
position by an investor or group of investors acting in concert; a merger,
reorganization, sale of a division, or a third-party or issuer tender offer, the
spin-off to shareholders of a subsidiary, division or other substantial assets;
or a recapitalization, an internal reorganization or the retirement or death of
a senior officer or substantial shareholder. In addition to the foregoing
factors, developments and catalysts, the Portfolio Manager, in selecting
investments, also considers the market price of the issuer's securities, its
balance sheet characteristics and the perceived strength of its management.

The Portfolio seeks to achieve its objective by investing primarily in a
portfolio of common stocks, preferred stocks and other securities convertible
into, or exchangeable for, common stocks. The Portfolio may invest up to 5% of
its assets in high yield/high risk debt securities. See "Debt Securities," page
16. When the Portfolio Manager believes that a defensive investment posture is
warranted or when opportunities for capital appreciation do not appear
attractive, the Portfolio may temporarily invest all or a portion of its assets
in short-term money market instruments, such as obligations of the U.S.
Government and its agencies and instrumentalities, high-quality commercial paper
and bank certificates of deposit and time deposits and repurchase agreements
with respect to such instruments.

THE GROWTH PORTFOLIO
The Growth Portfolio seeks to make money for investors by investing
primarily in securities selected for their long-term growth prospects.

In considering securities for the Portfolio, the Portfolio Manager reviews
on a weekly basis the projected annual earnings, sales growth, quarterly profit
outlook and valuations of a universe of approximately 200 companies. These
companies are, for the most part, involved in the retail, food service,
healthcare, technology and financial services industries and typically have high
returns on equity, strong brand names, rapid unit volume sales growth and, with
the exception of financial companies, balance sheets with little or no debt.
The Portfolio Manager usually seeks to select companies that enjoy market
dominance, which, in turn, confers pricing power within a growing market niche.
Such pricing control normally produces high returns on investment which allows
companies to fund superior growth without the need for dilutive financing.

The Portfolio Manger's 200 stock universe is constantly being modified and
updated with an active and ongoing effort to find more attractive stocks.
Additions to the list are made when the Portfolio Manager finds a company with
financial characteristics superior to the least attractive stocks in the current
universe. Deletions are made when a company's fundamental prospects
deteriorate.

From the Portfolio Manager's 200 stock universe, investments are made in
those stocks which meet all of the following criteria: (1) accelerating near-
term profit growth; (2) valuation in the lower half of the stock's historic
range; and (3) price momentum superior to that of the overall market. Normally,
60 to 80 stocks from the Portfolio Manager's universe meet these tests.

<PAGE>

Stocks will typically be sold whenever any of the following occurs: (1) a
reduction in quarterly or annual earnings estimates; (2) a company's long-term
competitive position is called into question; (3) the stock's valuation on the
next 12 months' earnings moves into the upper 10% of its historic range; or (4)
the stock price experiences a unexpected decline.

The Portfolio's policy stresses flexibility and adaptability in arranging
its Portfolio to seek the desired results. Common stocks will generally
constitute all or most of the Portfolio, but the Portfolio may invest in
preferred stocks, debt securities and cash instruments when, in the judgment of
the Portfolio Manager, a more conservative investment position seems appropriate
in light of anticipated market conditions. The Portfolio may invest up to 5% of
its assets in high yield/high risk debt securities. See "Debt Securities," page
16. The Portfolio will not invest for purposes of exercising management or
control.

The Portfolio will be subject to the risks of investment in equity
securities, i.e., there is no assurance of capital appreciation and there is a
substantial risk of decline. Investment in the securities of new companies may
in some instances involve a higher degree of risk than investments in securities
of companies with longer operating histories. The Portfolio does not intend to
invest in securities of companies with no operating history. Any current income
from dividends received from such securities will be entirely incidental.

THE INTERNATIONAL GROWTH PORTFOLIO
The International Growth Portfolio seeks to make money for investors by
investing internationally for long-term capital appreciation, primarily in
equity securities.

Foreign securities are defined as securities of issuers whose principal
activities are outside of the United States. In determining whether an issuer's
principal activities and interests are outside the United States, the Portfolio
Manager will look at such factors as the location of its assets, personnel,
sales and earnings.

Normally, at least 65% of the Portfolio's total assets will be invested in
securities of issuers from at least three different countries outside of North
America. Although the Portfolio may invest up to 35% in securities of issuers
from Canada, Mexico and the United States, the Portfolio Manager currently does
not expect to invest in a significant part of this amount in securities of U.S.
issuers. No more than 20% of the Portfolio's net assets may be invested in the
securities of any one foreign country, except that the Portfolio may invest up
to 35% of net assets in securities of issuers located in any one of the
following countries: Australia, Canada, France, Japan, the United Kingdom or
Germany.

In considering securities for the Portfolio, the Portfolio Manager will
concentrate on companies with market capitalization of under $1 billion. When
allocating the Portfolio's investments among geographic regions and individual
countries, the Portfolio Manager considers 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 Manager expects to invest most of the
Portfolio's assets in securities of issuers located in developed countries in
these general geographic areas: the Americas (other than the United States),
the Far East and Pacific Basin, Australia, Scandinavia and Western Europe.

The Portfolio Manager may invest the Portfolio's assets in all types of
securities, most of which are denominated in foreign currencies. The Portfolio
Manager expects that opportunities for long term growth of capital will come
primarily from common stock, securities such as warrants or rights that are
convertible into common stock, preferred stock, and depository receipts for
those securities. The Portfolio may invest up to 5% of its assets in high
yield/high risk debt securities. See "Debt Securities," page 16. The
Portfolio does not place any emphasis on dividends or interest income except
when the Portfolio Manager believes this income will have a favorable influence
on the market value of the security. The Portfolio may invest in indexed
securities whose value depends on the price of foreign currencies, commodities,
securities indices, or other financial indicators. In the normal course of
managing the Portfolio, the Portfolio Manager may invest a portion of the
Portfolio's assets in U.S. and foreign government obligations and money market
securities (including repurchase agreements) when the Portfolio has monies not
yet invested, it has sold one security and is waiting to buy another one, so
that it will be prepared to meet redemption requests, or to earn a return on
available cash balances. When market conditions warrant, the Portfolio Manager
can make substantial temporary defensive investments in U.S. government
obligations or investment-grade obligations of companies incorporated in and
having principal business activities in the United States.

THE GLOBAL STRATEGIC INCOME PORTFOLIO
The Global Strategic Income Portfolio seeks to make money for investors by
investing for high current income and capital appreciation in a variety of
domestic and foreign fixed-income securities.

<PAGE>

The Global Strategic Income Portfolio allocates its assets among debt
securities of issuers in three separate areas: (1) the United States, (2)
developed foreign countries, and (3) emerging markets. The Portfolio will select
particular debt securities in each sector based on their relative investment
merits. Within each area, the Portfolio selects debt securities from those
issued by governments and their agencies and instrumentalities; central banks;
and commercial banks and other corporate entities.

The Portfolio Manager will actively manage both the allocation of assets
among the major markets and the currencies underlying the fixed income
securities purchased for the Portfolio. In doing so, the Portfolio Manager will
rely on its proprietary technical and fundamental global fixed income and multi-
currency systems which allow the Portfolio Manager to identify market changes.
The Portfolio Manager does not use its system to forecast market changes or for
market timing purposes.

Debt securities in which the Global Strategic Income Portfolio may invest
include bonds, notes, debentures, and other similar instruments. The Portfolio
normally invests at least 50% of its total assets in U.S. and foreign debt and
other fixed income securities that, at the time of purchase, are rated at least
investment grade, or, if unrated, are determined by the Portfolio Manager to be
of comparable quality. No more than 50% of the Portfolio's assets may be
invested in securities of below investment grade quality (also called high
yield/high risk bonds), which involve a high degree of risk and are
predominantly speculative. See "Debt Securities", page 16. Consistent with the
foregoing percentage limitations, the Portfolio may invest in securities that
are in default in payment of principal and/or interest.

For purposes of the Portfolio's operations, "emerging markets" consist of
all countries determined by Portfolio Manager to have developing or emerging
economies and markets. These countries generally are expected to include every
country in the world except the United States, and the developed foreign
countries of Canada, Japan, Australia, New Zealand and most countries in Western
Europe. The Global Strategic Income Portfolio considers investment in the
following emerging markets: Algeria, Argentina, Bolivia, Botswana, Brazil,
Chile, China, Colombia, Costa Rica, Czechoslovakia, Ecuador, Egypt, Finland,
Greece, Hong Kong, Hungary, India, Indonesia, Israel, Ivory Coast, Jamaica,
Jordan, Kenya, Malaysia, Mexico, Morocco, Nicaragua, Nigeria, Pakistan, Panama,
Peru, Philippines, Poland, Portugal, Russia, Singapore, South Korea, Sri Lanka,
Taiwan, Thailand, Turkey, Uruguay, Venezuela, Zimbabwe.

The Global Strategic Income Portfolio's investments in emerging market
securities will consist substantially of debt securities issued by emerging
market governments that are traded in the markets of developed countries or
groups of developed countries. The Portfolio Manager may invest in debt
securities of emerging market issuers that it determines to be suitable
investments for the Portfolio without regard to ratings. Currently,
substantially all emerging market debt securities are of below investment grade
quality. Because the Global Strategic Income Portfolio's investment in debt
securities rated below investment grade (i.e., high yield/high risk bonds) is
limited to 50% of its total assets, its investment in emerging market debt
securities is therefore effectively limited to 50% of its assets as well.
Emerging market securities are subject to greater risks than securities from
developed nations. See "Foreign Securities," page 20.

The Global Strategic Income Portfolio also may consider making carefully
selected investments in below investment grade debt securities of corporate
issuers in the United States and in developed foreign markets, subject to the
overall 50% limitation on high yield/high risk bonds. The Global Strategic
Income Portfolio also may invest up to 5% of its assets in loan participations
and assignments. More information is included in the Statement of Additional
Information.

THE GLOBAL INTERACTIVE/TELECOMM PORTFOLIO
The Global Interactive/Telecomm Portfolio seeks to make money for investors
primarily by investing globally in equity securities of companies engaged in the
development, manufacture or sale of interactive and/or telecommunications
services and products.

Under normal circumstances, at least 65% of the Portfolio's total assets
will be invested in common and preferred stocks of (1) companies participating
in emerging technological advances in interactive services and products that are
accessible to individuals in their homes or offices through consumer electronics
devices; (2) telecommunications companies; and (3) companies outside of the
telecommunications industry which, in the opinion of the Portfolio Manager,
stand to benefit from development in the telecommunications industry. The
Portfolio may invest up to 5% of its assets in high yield/high risk debt
securities. See "Debt Securities," page 16. When the Portfolio Manager
believes that a defensive investment posture is warranted or when opportunities
for capital appreciation do not appear attractive, the Portfolio may temporarily
invest all or a portion of its assets in short-term money market instruments,
such as obligations of the U.S. Government and its agencies and
instrumentalities, high-quality commercial paper and bank certificates of
deposit and time deposits and repurchase agreements with respect to such
instruments.

<PAGE>

For example, the Portfolio may invest in companies involved in the
following products and services: emerging technologies combining television,
telephone and computer systems; regular telephone service; wireless
communications services and equipment, including cellular telephone data and
voice transmission; electronic components and communications equipment; video
conferencing; electronic mail; local and wide area networking; linkage of data
and word processing systems; publishing and information systems; broadcasting,
including television and radio; cable television systems and networks; wireless
cable television and other emerging distribution technologies; the creation,
packaging, distribution, and ownership of entertainment programming; computer
hardware and software and other equipment used in the creation and distribution
of entertainment programming; interactive and multimedia programming including
home shopping and multiplayer games; and advertising agencies and niche
advertising mediums such as in-store or direct mail.

In analyzing companies for investment, the Portfolio Manager ordinarily
looks for several of the following characteristics: above-average per share
earnings growth; high return on invested capital; a healthy balance sheet; sound
financial and accounting policies and overall financial strength; strong
competitive advantages; and effective research and product development and
marketing.

The Portfolio Manager will allocate the Portfolio's assets among securities
of countries and in currency denominations and industry sectors where
opportunities for meeting the Portfolio's investment objective are expected to
be the most attractive. The Portfolio may invest substantially in securities
denominated in one or more foreign currencies. Under normal conditions, the
Portfolio will invest in at least three different countries, including the
United States; issuers in any one country, other than the U.S., will represent
no more than 40% of the Portfolio's assets.

The governments of some foreign countries have been engaged in programs of
selling part or all of their stakes in government owned or controlled
enterprises ("privatizations"). The Portfolio Manager believes that
privatizations in the telecommunications industry may offer opportunities for
significant capital appreciation and intends to invest assets of the Portfolio
in privatizations in appropriate circumstances. In certain foreign countries,
the ability of foreign entities such as the Portfolio to participate in
privatizations may be limited by local law and/or the terms on which the
Portfolio may be permitted to participate may be less advantageous than those
afforded local investors. There can be no assurance that foreign governments
will continue to sell companies currently owned or controlled by them or that
privatization programs will be successful.

DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES

The following discussion describes in greater detail different types of
securities and investment techniques used by the individual Portfolios, as
described in "Investment Objectives and Policies" as well as the risks
associated with such securities and techniques.

U.S. GOVERNMENT SECURITIES
All of the Portfolios may invest in U.S. Government securities. U.S.
Government securities are obligations of, or are guaranteed by, the U.S.
Government, its agencies or instrumentalities. Treasury bills, notes, and bonds
are direct obligations of the U.S. Treasury. Securities guaranteed by the U.S.
Government include federal agency obligations guaranteed as to principal and
interest by the U.S. Treasury (such as Government National Mortgage Association
("GNMA") certificates, described in the section on "Mortgage-Backed Securities,"
and Federal Housing Administration debentures). In guaranteed securities, the
payment of principal and interest is unconditionally guaranteed by the U.S.
Government, and thus they are of the highest credit quality. Such direct
obligations or guaranteed securities are subject to variations in market value
due to fluctuations in interest rates, but, if held to maturity, the U.S.
Government is obligated to or guarantees to pay them in full.

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

<PAGE>

DEBT SECURITIES
All Portfolios may invest in debt securities of domestic or foreign issuers
(both U.S. dollar denominated and non-U.S. dollar denominated). All Portfolios
may also invest in obligations of international organizations such as the
International Bank for Reconstruction and Development (the World Bank). Each
Portfolio may only invest in (1) debt securities which meet the minimum ratings
criteria set forth for that particular Portfolio and (2) unrated debt securities
that are, in the Portfolio Manager's determination, comparable in quality to the
rated debt securities in which the Portfolio may invest.

The investment return on a corporate debt security reflects interest
earnings and changes in the market value of the security. The market value of
corporate debt obligations may be expected to rise and fall inversely with
interest rates generally. There also exists the risk that the issuers of the
securities may not be able to meet their obligations on interest or principal
payments at the time called for by an instrument. Bonds rated BBB or Baa, which
are considered medium-grade category bonds, do not have economic characteristics
that provide the high degree of security with respect to payment of principal
and interest associated with higher rated bonds, and generally have some
speculative characteristics. A bond will be placed in this rating category where
interest payments and principal security appear adequate for the present, but
economic characteristics that provide longer term protection may be lacking. Any
bond, and particularly those rated BBB or Baa, may be susceptible to changing
conditions, particularly to economic downturns, which could lead to a weakened
capacity to pay interest and principal.

The Global Strategic Income Portfolio may invest up to 50% of its assets in
debt securities that are below investment grade (i.e., rated BB or lower by
Standards & Poor's, rated Ba or lower by Moody's, or unrated but determined by
the Portfolio Manager to be of similar quality). These securities are commonly
referred to as "junk bonds" or "high yield/high risk debt securities." The
Value, Growth, International Growth and Global Interactive/Telecomm Portfolios
may each invest up to 5% of assets in high yield/high risk debt securities.

High yield/high risk debt securities involve significant risks. They are
considered predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the obligation.
The market value of the securities also tend to be more sensitive than higher
rated securities to news about the issuer and changes in overall economic
conditions. In addition, markets for lower-rated securities may be more limited
than for higher-rated securities.

New issues of certain debt securities are often offered on a when-issued or
firm-commitment basis; that is, the payment obligation and the interest rate are
fixed at the time the buyer enters into the commitment, but delivery and payment
for the securities normally take place after the customary settlement time. The
value of when-issued securities or securities purchased on a firm-commitment
basis may vary prior to and after delivery depending on market conditions and
changes in interest rate levels. However, the Portfolios will not accrue any
income on these securities prior to delivery. The Portfolios will maintain in a
segregated account with its custodian an amount of cash or high quality debt
securities equal (on a daily marked-to-market basis) to the amount of its
commitment to purchase the when-issued securities or securities purchased on a
firm-commitment basis.

Many securities of foreign issuers are not rated by Moody's or Standard and
Poor's; therefore, the selection of such issuers depends, to a large extent, on
the credit analysis performed or used by the Portfolio Manager.

MORTGAGE-BACKED SECURITIES
All Portfolios may invest in mortgage-backed securities issued by the
Government National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA"), and the Federal Home Loan Mortgage Corporation ("FHLMC").
These securities represent an interest in a pool of mortgages, such as 30-year
and 15-year fixed mortgages and adjustable rate mortgages. For GNMA securities,
the payment of principal and interest on the underlying mortgages is guaranteed
by the full faith and credit of the U.S.; for FNMA and FHLMC securities the
payment of principal and interest is guaranteed by the issuing agency but not
the U.S. The guarantees, however, do not extend to the securities' value or
yield, which are likely to fluctuate inversely with fluctuations in interest
rates. Because the prepayment characteristics of the underlying mortgages vary,
it is not possible to predict accurately the average life of a particular issue
of mortgage-backed securities.

The Portfolios may invest in mortgage-backed securities issued by private
entities, such as commercial or mortgage banks, savings and loan associations,
or broker-dealers, that meet the quality standards discussed above for debt
securities.

The Portfolios may invest in collateralized mortgage obligations ("CMOs").
A CMO is a security issued by a corporation or a U.S. government instrumentality
that is backed by a portfolio of mortgages or mortgage-backed securities. The
issuer's obligation to make interest and principal payments is secured by the
underlying portfolio of mortgages or

<PAGE>

mortgage-backed securities. CMOs are partitioned into several classes with a
ranked priority by which classes of obligations are redeemed.

OTHER ASSET-BACKED SECURITIES
All Portfolios may invest in asset-backed securities, which represent a
participation in, or are secured by and payable from, a stream of payments
generated by particular assets, such as automobile or credit card receivables.
Asset-backed securities present certain risks, including the risk that the
underlying obligor on the asset, such as the automobile purchaser or the credit
card holder, may default on his or her obligation. In addition, asset-backed
securities often do not provide a security interest in the related collateral.
For example, credit card receivables are generally unsecured, and the pool of
automobile receivables may not include the security interests in those
automobiles. In general, however, these type of loans have a shorter average
life than mortgage loans and are less likely to have substantial prepayments.

VARIABLE AND FLOATING RATE SECURITIES
All Portfolios may invest in variable and floating rate securities.

Variable rate securities provide for automatic establishment of a new
interest rate at fixed intervals (e.g., daily, monthly, semi-annually, etc.).
Floating rate securities provide for automatic adjustment of the interest rate
whenever some specified interest rate index changes. The interest rate on
variable or floating rate securities is ordinarily determined by reference to or
is a percentage of a bank's prime rate, the 90-day U.S. Treasury bill rate, the
rate of return on commercial paper or bank certificates of deposit, an index of
short-term interest rates, or some other objective measure.

Variable or floating rate securities frequently include a demand feature
entitling the holder to sell the securities to the issuer at par value. In many
cases, the demand feature can be exercised at any time on 7 days' notice; in
other cases, the demand feature is exercisable at any time on 30 days' notice or
on similar notice at intervals of not more than one year. Some securities which
do not have variable or floating interest rates may be accompanied by puts
producing similar results and price characteristics.

BANKING INDUSTRY AND SAVINGS INDUSTRY OBLIGATIONS
All Portfolios may invest in certificates of deposit, time deposits,
bankers' acceptances, and other short-term debt obligations issued by commercial
banks and in certificates of deposit, time deposits, and other short-term
obligations issued by savings and loan associations ("S&Ls"). Certificates of
deposit are receipts from a bank or an S&L for funds deposited for a specified
period of time at a specified rate of return. Time deposits in banks or S&Ls are
generally similar to certificates of deposit, but are uncertificated. Bankers'
acceptances are time drafts drawn on commercial banks by borrowers, usually in
connection with international commercial transactions. Each Portfolio may also
invest in obligations of foreign branches of commercial banks and foreign banks
so long as the securities are U.S. dollar-denominated. See "Foreign Securities"
on page 20 and "Banking Industry and Savings Industry Obligations" in the
Statement of Additional Information regarding risks attending investment in
foreign instruments generally and foreign bank instruments in particular.

The Portfolios will not invest in obligations issued by a commercial bank
or S&L unless:

(i) the bank or S&L has total assets of at least $1 billion, or the
equivalent in other currencies, and the institution has outstanding securities
rated A or better by Moody's or Standard and Poor's, or, if the institution has
no outstanding securities rated by Moody's or Standard & Poor's, it has, in the
determination of the Portfolio Manager, similar creditworthiness to institutions
having outstanding securities so rated;

(ii) in the case of a U.S. bank or S&L, its deposits are insured by the
Federal Deposit Insurance Corporation or the Savings Association Insurance Fund,
as the case may be; and

(iii) in the case of a foreign bank, the security is, in the determination
of the Portfolios' Portfolio Manager, of an investment quality comparable with
other debt securities which may be purchased by the Portfolios. These
limitations do not prohibit investments in securities issued by foreign branches
of U.S. banks, provided such U.S. banks meet the foregoing requirements.

COMMERCIAL PAPER
All Portfolios may invest in commercial paper, which includes short-term
unsecured promissory notes, variable rate demand notes, and variable note master
demand notes issued by domestic and foreign bank holding companies,
corporations, and financial institutions, as well as similar taxable instruments
issued by government agencies and instrumentalities. All

<PAGE>

commercial paper purchased by the Portfolios must be, the time of investment,
(i) rated "P-l" by Moody's or "A-l" by S&P, (ii) issued or guaranteed as to
principal and interest by issuers having an existing debt security rating of
"Aa" or better by Moody's or "AA" by S&P, or (iii) securities which, if not
rated, are in the opinion of the Portfolio Manager of an investment quality
comparable to rated commercial paper in which the Portfolio may invest. See
Appendix B for description of these ratings.

REPURCHASE AGREEMENTS
All Portfolios may enter into repurchase agreements with banks and
broker-dealers under which they acquire securities subject to an agreement with
the seller to repurchase the securities at an agreed-upon time and price. If
the seller should default on its obligation to repurchase the securities, the
Portfolio may experience delays or difficulties in exercising its right to
realize a gain upon the securities held as collateral and might incur a loss if
the value of the securities should decline.

REVERSE REPURCHASE AGREEMENTS
All Portfolios may enter into reverse repurchase agreements with banks and
broker-dealers. Those agreements have the characteristics of borrowing and
involve the sale of securities held by a Portfolio with an agreement to
repurchase the securities at an agreed-upon price and date, which reflect a rate
of interest paid for the use of funds for the period. Generally, the effect of
such a transaction is that a Portfolio can recover all or most of the cash
invested in the securities involved during the term of the reverse repurchase
agreement, while in many cases it will be able to keep some of the interest
income associated with those securities. Such transactions are only
advantageous if the Portfolio has an opportunity to earn a greater rate of
interest on the cash derived from the transaction than the interest cost of
obtaining that cash. A Portfolio may be unable to realize a return from the use
of the proceeds equal to or greater than the interest required to be paid.

LENDING PORTFOLIO SECURITIES
For the purpose of realizing additional income, each Portfolio may lend
securities with a value of up to 33% of its total assets to unaffiliated
broker-dealers or institutional investors. Any such loan will be continuously
secured by collateral at least equal to the value of the security loaned.
Although the risk of lending portfolio securities are believed to be slight, as
with other extensions of secured credit, such lending could result in delays in
receiving additional collateral or in the recovery of the securities or possible
loss of rights in the collateral should the borrower fail financially. Loans
will only be made to firms deemed to be of good standing and will not be made
unless the consideration to be earned from such loans would justify the risk.

ILLIQUID SECURITIES
Each Portfolio may invest up to 15% of its net assets in securities for
which there is no readily available market ("illiquid securities"), which would
include repurchase agreements having more than 7 days to maturity. A
considerable period of time may elapse between a Portfolio's decision to dispose
of such securities and the time when the Portfolio is able to dispose of them,
during which time the value of the securities could decline. The SEC has
adopted Rule 144A which permits resale among certain institutional investors of
certain unregistered securities. As a result, a significant institutional
trading market has developed in many unregistered securities relying on this
rule. In determining whether such securities should be considered liquid, the
Portfolios will consider the following factors, among others: (1) the frequency
of the trades and the quotes for the security; (2) the number of dealers willing
to purchase or sell the security and the number of potential purchasers; (3)
dealer undertakings to make a market in the security; and (4) the nature of the
security and the nature of the marketplace trades (for example, the time needed
to dispose of the security, the method of soliciting offers, and the mechanics
of the transfer).

WARRANTS
Each Portfolio may invest up to 5% of its net assets in warrants (not
including those that have been acquired in units or attached to other
securities), measured at the time of acquisition. No Portfolio may acquire a
warrant not listed on the New York or American Stock Exchanges if, after the
purchase, more than 2% of the Portfolio's assets would be invested in such
warrants.

The holder of a warrant has the right to purchase a given number of shares
of a particular issuer at a specified price until expiration of the warrant.
Such investments can provide a greater potential for profit or loss than an
equivalent investment in the underlying security. Prices of warrants do not
necessarily move in tandem with the prices of the underlying securities, and are
speculative investments. They pay no dividends and confer no rights other than a
purchase option. If a warrant is not exercised by the date of its expiration,
the Portfolio will lose its entire investment in such warrant.

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OTHER INVESTMENT COMPANIES
All Portfolios may invest in shares issued by other investment companies. A
Portfolio is limited in the degree to which it may invest in shares of another
investment company in that it may not, at the time of the purchase, (1) acquire
more than 3% of the outstanding voting shares of the investment company, (2)
invest more than 5% of the Portfolios' total assets in the investment company,
or (3) invest more than 10% of the Portfolios' total assets in all investment
company holdings. As a shareholder in any investment company, a Portfolio will
bear its ratable share of the investment company's expenses, including
management fees in the case of a management investment company.

SHORT SALES
All Portfolios may make short sales of securities. A short sale is a
transaction in which the Portfolio sells a security it does not own (but has
borrowed) in anticipation of a decline in the market price of the security. A
Portfolio may make short sales to offset a potential decline in a long position
or a group of long positions, or if the Portfolio Manager believes that a
decline in the price of a particular security or group of securities is likely.

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

The Portfolios' obligation to replace the security borrowed in connection
with the short sale will be secured by collateral deposited with the broker,
consisting of cash or U.S. Government securities or other securities acceptable
to the broker. In addition, with respect to any short sale, other than short
sales against the box, as discussed below, the Portfolios will be required to
deposit collateral consisting of cash, cash items, or U.S. Government securities
in a segregated account with its custodian in an amount such that the value of
the sum of both collateral deposits is at all times equal to at least 100% of
the current market value of the securities sold short. The deposits do not
necessarily limit the Portfolios' potential loss on a short sale, which may
exceed the entire amount of the collateral.

If the price of the security sold short increases between the time of the
short sale and the time the Portfolios replaces the borrowed security, the
Portfolio will incur a loss, and if the price declines during this period, the
Portfolio will realize a capital gain. Any realized gain will be decreased, and
any incurred loss increased, by the amount of transactional costs and any
premium, dividend, or interest which the Portfolios may have to pay in
connection with such short sale.

A Portfolio may make a short sale only if, at the time the short sale is
made and after giving effect thereto, the market value of all securities sold
short is 25% or less of the value of its net assets and the market value of
securities sold short which are not listed on a national securities exchange
does not exceed 10% of the Portfolio's net assets. In addition, a Portfolio will
not make short sales of the securities of any one issuer to the extent of more
than 2% of the Portfolio's net assets, nor will a Portfolio make short sales of
more than 2% of the outstanding securities of one class of any issuer. The
Portfolios are not required to liquidate an existing short sale position solely
because a change in market values has caused one or more of these percentage
limitations to be exceeded.

SHORT SALES AGAINST THE BOX
All Portfolios may make short sales "against the box." A short sale
"against the box" is a short sale where, at the time of the short sale, a
Portfolio owns or has the immediate and unconditional right, at no added cost,
to obtain the identical security. The Portfolios would enter into such a
transaction to defer a gain or loss for Federal income tax purposes on the
security owned by the Portfolio or to receive a portion of the interest earned
by the executing broker from the proceeds of the sale. Short sales against the
box are not subject to the percentage limitations on short sales described
above.

FOREIGN SECURITIES
All Portfolios, except the Global Strategic Income Portfolio, may invest in
equity securities of foreign issuers. Each of the Portfolios may invest in
American Depository Receipts ("ADRs"), which are described below. All
Portfolios may invest in foreign government securities that are denominated in
U.S. dollars, and none of these Portfolios except for the International Growth
and Global Interactive/Telecomm Portfolios, will purchase foreign government
securities if, as a result, more than 10% of the value of its total assets would
be invested in such securities. The Portfolios may invest in foreign branches
of commercial banks and foreign banks. See the "Banking Industry and Savings
Industry Obligations" discussion in this section for further description of
these securities.

<PAGE>

Each Portfolio is subject to the following guidelines for diversification
of foreign security investments. If a Portfolio has less than 20% of its assets
in foreign issuers, then all of such investment may be in issuers domiciled or
primarily traded in one country. If a Portfolio has at least 20% but less than
40% of its assets in foreign issuers, then such investment must be allocated to
issuers domiciled or primarily traded in at least two different countries.
Similarly, if a Portfolio has at least 40% but less than 60% of its assets in
foreign issuers, such investment must be allocated in at least three different
countries. Foreign investments must be allocated to at least four different
countries if at least 60% of a Portfolios' assets is in foreign issuers, and to
at least five different countries if at least 80% is in foreign issuers.

A Portfolio may have no more than 20% of its net asset value invested in
securities of issuers domiciled or primarily traded in any one foreign country,
except that a Portfolio may have up to 35% of its net asset value invested in
securities of issuers domiciled or primarily traded in any one of the following
countries: Australia, Canada, France, Japan, The United Kingdom, or West
Germany.

Investments in foreign securities offer potential benefits not available
solely in securities of domestic issuers by offering the opportunity to invest
in foreign issuers that appear to offer growth potential, or in foreign
countries with economic policies or business cycles different from those of the
United States, or to reduce fluctuations in portfolio value by taking advantage
of foreign stock markets that may not move in a manner parallel to U.S. markets.
Investments in securities of foreign issuers involve certain risks not
ordinarily associated with investments in securities of domestic issuers. Such
risks include fluctuations in foreign exchange rates, future political and
economic developments, and the possible imposition of exchange controls or other
foreign governmental laws or restrictions. Since each of these Portfolios may
invest in securities denominated or quoted in currencies other than the U.S.
dollar, changes in foreign currency exchange rates will affect the value of
securities in the portfolio and the unrealized appreciation or depreciation of
investments so far as U.S. investors are concerned. In addition, with respect to
certain countries, there is the possibility of expropriation of assets,
confiscatory taxation, other foreign taxation, political or social instability,
or diplomatic developments that could adversely affect investments in those
countries.

There may be less publicly available information about a foreign company
than about a U.S. company, and foreign companies may not be subject to
accounting, auditing, and financial reporting standards and requirements
comparable to or as uniform as those of U.S. companies. Foreign securities
markets, while growing in volume, have, for the most part, substantially less
volume than U.S. markets. Securities of many foreign companies are less liquid
and their prices more volatile than securities of comparable U.S. companies.
Transactional costs in non-U.S. securities markets are generally higher than in
U.S. securities markets. There is generally less government supervision and
regulation of exchanges, brokers, and issuers than there is in the U.S. A
Portfolio might have greater difficulty taking appropriate legal action with
respect to foreign investments in non-U.S. courts than with respect to domestic
issuers in U.S. courts. In addition, transactions in foreign securities may
involve greater time from the trade date until settlement than domestic
securities transactions and involve the risk of possible losses through the
holding of securities by custodians and securities depositories in foreign
countries.

Dividend and interest income from foreign securities may generally be
subject to withholding taxes by the country in which the issuer is located and
may not be recoverable by a Portfolio or its investors.

ADRs are certificates issued by a U.S. bank or trust company representing
the right to receive securities of a foreign issuer deposited in a foreign
subsidiary or branch or a correspondent of that bank. Generally, ADRs, in
registered form, are designed for use in U.S. securities markets and may offer
U.S. investors more liquidity than the underlying securities.

Investment in emerging markets countries presents risks in a greater degree
than, and in addition to, those presented by investment in foreign issuers in
general. A number of emerging market countries restrict, to varying degrees,
foreign investment in securities. Repatriation of investment income, capital,
and proceeds of sales by foreign investors may require governmental registration
and/or approval in some emerging market countries. A number of the currencies
of developing countries have experienced significant declines against the U.S.
dollar in recent years, and devaluation may occur subsequent to investments in
those currencies by the Portfolio. Inflation and rapid fluctuations in
inflation rates have had and may continue to have negative effects on the
economies and securities markets of certain emerging market countries.

Many of the emerging securities markets are relatively small, have low
trading volumes, suffer periods of relative illiquidity, and are characterized
by significant price volatility. There is a risk in emerging market countries
that a future economic or political crisis could lead to price controls, forced
mergers of companies, expropriation or confiscatory taxation, seizure,
nationalization, foreign exchange controls (which may include suspension of the
ability to transfer currency from a given country) or creation of government
monopolies, any of which may have a detrimental effect on a Portfolio's
investment.

<PAGE>

INVESTMENT IN GOLD AND OTHER PRECIOUS METALS
All Portfolios may invest up to 10% of its total assets, in gold bullion
and coins and other precious metals (silver or platinum) bullion and in futures
contracts with respect to such metals. Each Portfolio may also engage in gold
futures contracts. (See "Futures Contracts" for further explanation of this
investment technique.) The Portfolios will further restrict the level of their
metal investments if necessary in order to comply with applicable regulatory
requirements. In order to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), each
Portfolio intends to manage its metal investments and/or futures contracts on
metals so that less than 10% of its gross income for tax purposes during any
fiscal year (the current limit on so-called non-qualifying income) is derived
from these and other sources that produce such non-qualifying income.

Metals will not be purchased in any form that is not readily marketable,
and gold coins will be purchased for their intrinsic value only, i.e., coins
will not be purchased for their numismatic value. Any metals purchased by the
Portfolios will be delivered to and stored with a qualified custodian bank.
Metal investments do not generate interest or dividend income and will subject
the Portfolios to higher custody and transactional costs than are normally
associated with the ownership of securities or futures contracts on precious
metals.

Metal investments are considered speculative and are affected by various
worldwide economic, financial, and political factors. Prices may fluctuate
sharply over short time periods due to changes in inflation expectations in
various countries, metal sales by central banks of governments or international
agencies, speculation, changes in industrial and commercial demand, and
governmental prohibitions or restriction on the private ownership of certain
precious metals or minerals. At the present time, there are four major
producers of gold bullion: the Republic of South Africa, the United States,
Canada, and Australia. Political and economic conditions in these countries will
have a direct effect on the mining and distribution of gold and, consequently,
on its price.

FUTURES CONTRACTS
All Portfolios may purchase and sell (i) interest rate futures contracts,
(ii) stock index futures contracts, (iii) foreign currency futures contracts,
(iv) futures contracts on gold and other precious metals, and (v) options on
these futures contracts. A futures contract provides for the future sale by one
party and purchase by the other party of a specified amount of a particular
financial instrument or commodity for a specified price at a designated date,
time, and place.

The Portfolios will use futures contracts solely for the purpose of hedging
positions with respect to securities, interest rates, foreign currencies, and
gold and other precious metals.

An option on a futures contract gives the purchaser or holder the right,
but not the obligation, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put) at
a specified price at any time during the option exercise period. The Portfolios
will utilize options on futures contracts for the same purposes that they use
the underlying futures contracts.

There are several risks associated with the use of futures and futures
options for hedging purposes. While a Portfolio's hedging transactions may
protect it against adverse movements in the general level of interest rates or
other economic conditions, such transactions could also preclude a Portfolio
from the opportunity to benefit from favorable movements in the level of
interest rates or other economic conditions. There can be no guarantee that
there will be correlation between price movements in the hedging vehicle and in
the securities or other assets being hedged. An incorrect correlation could
result in a loss on both the hedged assets and the hedging vehicle so that the
Portfolio's return might have been better if hedging had not been attempted. The
degree of imperfection of correlation depends on circumstances such as
variations in speculative market demand for futures and futures options,
including technical influences in futures trading and futures options, and
differences between the financial instruments being hedged and the instruments
underlying the standard contracts available for trading in such respects as
interest rate levels, maturities, and creditworthiness of issuers. A decision as
to whether, when, and how to hedge involves the exercise of skill and judgment
and even a well-conceived hedge may be unsuccessful to some degree because of
market behavior or unexpected market trends.

There can be no assurance that a liquid market will exist at a time when a
Portfolio seeks to close out a futures contract or a futures option position.
Most futures exchanges and boards of trade limit the amount of fluctuation
permitted in futures contract prices during a single day; once the daily limit
has been reached on a particular contract, no trades may be made that day at a
price beyond that limit. In addition, certain of these instruments are
relatively new and without a significant trading history. As a result, there is
no assurance that an active secondary market will develop or continue to exist.
The daily limit

<PAGE>

governs only price movements during a particular trading day and therefore does
not limit potential losses because the limit may work to prevent the liquidation
of unfavorable positions. For example, futures prices have occasionally moved to
the daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of positions and subjecting some holders
of futures contracts to substantial losses. Lack of a liquid market for any
reason may prevent the Portfolios from liquidating an unfavorable position and
the Portfolios would remain obligated to meet margin requirements and continue
to incur losses until the position is closed.

A Portfolio will only enter into futures contracts or futures options which
are standardized and traded on a U.S. exchange or board of trade, or, in the
case of futures options, for which an established over-the-counter market
exists.

OPTIONS
The Portfolios may purchase and sell (i.e., write) put and call options on
equity securities, debt securities, securities indices, and foreign currencies.
An option gives the owner the right to buy or sell securities at a predetermined
exercise price for a given period of time.

Although options will be primarily used to minimize principal fluctuations
or to generate additional premium income, they do involve certain risks. The
Portfolio Manager may not correctly anticipate movements in the relevant
markets, thus causing losses on the Portfolio's options positions.

A position in an exchange-traded option may be closed out only on an
exchange, board of trade or other trading facility which provides a secondary
market for an option of the same series. Although the Portfolios will generally
purchase or write only those exchange-traded options for which there appears to
be an active secondary market, there is no assurance that a liquid secondary
market on an exchange will exist for any particular option, or at any particular
time, and for some options no secondary market on an exchange or otherwise may
exist. In such event it might not be possible to effect closing transactions in
particular options, with the result that the Portfolio would have to exercise
its options in order to realize any profit and would incur brokerage commissions
upon the exercise of such options and upon the subsequent disposition of
underlying securities acquired through the exercise of call options or upon the
purchase of underlying securities for the exercise of put options. If a
Portfolio as a covered call option writer is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise.

Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions imposed by an exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (v) the facilities of an exchange or
a clearing corporation may not at all times be adequate to handle current
trading volume; or (vi) one or more exchanges could, for economic or other
reasons, decide to be compelled at some future date to discontinue the trading
of options (or a particular class or series of options), in which event the
secondary market on that exchange (or in the class or series of options) would
cease to exist, although outstanding options on that exchange that had been
issued by a clearing corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms. There is no
assurance that higher than anticipated trading activity or other unforeseen
events might not, at times, render certain of the facilities of any of the
clearing corporations inadequate, and thereby result in the institution by an
exchange of special procedures which may interfere with the timely execution of
customers' orders.

The purchase and sale of over-the-counter ("OTC") options will also be
subject to certain risks. Unlike exchange-traded options, OTC options generally
do not have a continuous liquid market. Consequently, a Portfolio will
generally be able to realize the value of an OTC option it has purchased only by
exercising it or reselling it to the dealer who issued it. Similarly, when a
Portfolio writes an OTC option, it generally will be able to close out the OTC
option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which the Portfolio originally wrote the OTC
option. There can be no assurance that a Portfolio will be unable to liquidate
an OTC option at a favorable price at any time prior to expiration. In the
event of insolvency of the other party, the Portfolio may be unable to liquidate
an OTC option.

The distinctive characteristics of options on stock indices create certain
risks that are not present with stock options. Index prices may be distorted if
trading of certain stocks included in the index is interrupted. Trading in the
index options also may be interrupted in certain circumstances, such as if
trading were halted in a substantial number of stocks included in the index. If
this occurred, a Portfolio would not be able to close out options which it had
purchased or written and, if restrictions on exercise were imposed, may be
unable to exercise an option it holds, which could result in substantial losses

<PAGE>

to the Portfolio. Price movements in a Portfolio's equity security holdings
probably will not correlate precisely with movements in the level of the index
and, therefore, in writing a call on a stock index a Portfolio bears the risk
that the price of the securities held by the Portfolio may not increase as much
as the index. In such event, the Portfolio would bear a loss on the call which
is not completely offset by movement in the price of the Portfolio's equity
securities. It is also possible that the index may rise when the Portfolio's
securities do not rise in value. If this occurred, the Portfolio would
experience a loss on the call which is not offset by an increase in the value of
its securities holdings and might also experience a loss in its securities
holdings.

A Portfolio's successful use of options on foreign currencies depends upon
the manager's ability to predict the direction of the currency exchange markets
and political conditions, which requires different skills and techniques than
predicting changes in the securities markets generally.

FOREIGN CURRENCY TRANSACTIONS
All Portfolios may enter into forward currency contracts and enter into
currency exchange transactions on a spot (i.e., cash) basis. A forward currency
contract is an obligation to purchase or sell a currency against another
currency at a future date and price as agreed by the parties. A Portfolio may
either accept or make delivery of the currency at the maturity of the forward
contract or, prior to maturity, enter into a closing transaction involving the
purchase or sale of an offsetting contract. A Portfolio will engage in forward
currency transactions in anticipation of or to protect itself against
fluctuations in currency exchange rates, as further described in the Statement
of Additional Information.

LEVERAGE
Each Portfolio may leverage its investments by purchasing securities with
borrowed money. In leveraging its investments, each Portfolio may borrow up to
33 1/3% of the value of its total assets (minus liabilities other than the
borrowing). Leveraging by means of borrowing will exaggerate the effect of any
increase or decrease in the value of portfolio securities on a Portfolios' net
asset value; money borrowed will be subject to interest and other costs (which
may include commitment fees and/or the cost of maintaining minimum average
balances), which may or may not exceed the income received from the securities
purchased with borrowed funds. The use of borrowing tends to result in a faster
than average movement, up or down, in the net asset value of the Portfolio's
shares. A Portfolio also may be required to maintain minimum average balances in
connection with such borrowing or to pay a commitment or other fee to maintain a
line of credit; either of these requirements would increase the cost of
borrowing over the stated interest rate.

Reverse repurchase agreements, short sales of securities, and short sales
of securities against the box will be included as borrowing subject to the
borrowing limitations described above. Securities purchased on a when-issued or
delayed delivery basis will not be subject to the Portfolio's borrowing
limitations to the extent that a Portfolio establishes and maintains liquid
assets in a segregated account with the Trust's custodian equal to the
Portfolio's obligations under the when-issued or delayed delivery arrangement.

A Portfolio may, in connection with permissible borrowings, transfer as
collateral securities it owns.

INDEXED SECURITIES
Each Portfolio may invest up to 5% of its assets in indexed securities.
Indexed securities values are linked to currencies, interest rates, commodities,
indices, or other financial indicators. Most indexed securities are short to
intermediate term fixed-income securities whose values at maturity or interest
rates rise or fall according to the change in one or more specified underlying
instruments. Indexed securities may be positively or negatively indexed (i.e.,
their value may increase or decrease if the underlying instrument appreciates),
and may have return characteristics similar to direct investments in the
underlying instrument or to one or more options on the underlying instrument.
Indexed securities may be more volatile than the underlying instrument itself.

INVESTMENT IN THE TRUST

PRINCIPAL UNDERWRITER
Western Capital Financial Group, Inc., 4225 Executive Square, Suite 325, La
Jolla, California 92037, serves as the principal underwriter of the shares of
the Portfolios. H. Michael Schwartz, a trustee and officer of the Trust, is
also the President of the principal underwriter. For more information about the
principal underwriter of a particular variable contract, see the prospectus for
the contract.

<PAGE>

DETERMINATION OF NET ASSET VALUE
The net asset values per share of the Portfolios are calculated as of 4:00
p.m. (New York City time), Monday through Friday, on each day that the New York
Stock Exchange is open for trading, exclusive of federal holidays. Net asset
value per share is calculated by dividing the aggregate value of each
Portfolio's assets less all liabilities by the number of each Portfolio's
outstanding shares.

The Board of Trustees has established procedures to value each Portfolio's
assets to determine net asset value. In general, these valuations are based on
actual or estimated market value, with special provisions for assets not having
readily available market quotations and short-term debt securities. The net
asset values per share of each Portfolio will fluctuate in response to changes
in market conditions and other factors.

Portfolio securities for which market quotations are readily available are
stated at market value. Market value is determined on the basis of last reported
sales price, or, if no sales are reported, the mean between representative bid
and asked quotations obtained from a quotation reporting system or from
established market makers. In other cases, securities are valued at their fair
value as determined in good faith by the Board of Trustees, although the actual
calculations will be made by persons acting under the direction of the Board and
subject to the Board's review. Money market instruments are valued at market
value, except that instruments maturing in sixty days or less may be valued
using the amortized cost method valuation. The value of a foreign security is
determined in its national currency based upon the price on the foreign exchange
as of its close of business immediately preceding the time of valuation.
Securities traded in over-the-counter markets outside the United States are
valued at the last available price in the over-the-counter market prior to the
time of valuation.

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

When a Portfolio writes a put or call option, the amount of the premium is
included in the Portfolios' assets and an equal amount is included in its
liabilities. The liability thereafter is adjusted to the current market value of
the option. The premium paid for an option purchased by the Portfolio is
recorded as an asset and subsequently adjusted to market value. Futures and
options thereon which are traded on commodities exchanges or boards of trade
will be valued at their closing settlement price on such exchange or board of
trade. Foreign securities quoted in foreign currencies generally are valued at
appropriately translated foreign market closing prices.

Trading in securities on exchanges and over-the-counter markets in European
and Pacific Basin countries is normally completed well before 4:00 p.m., New
York City time. Trading on these exchanges may not take place on all New York
business days and in addition, trading takes place in various foreign markets on
days which are not business days in New York and on which the Trust's net asset
value is not calculated. As a result, the calculation of the net asset value of
a Portfolio investing in foreign securities may not take place contemporaneously
with the determination of the prices of the securities included in the
calculation. Events that may affect the value of these securities that occur
between the time their prices are determined and the time the Portfolios' net
asset value is determined may not be reflected in the calculation of net asset
value of the Portfolio unless the Portfolio Manager, acting under authority
delegated by the Board of Trustees, deems that the particular event would
materially affect net asset value. In this event, the securities would be valued
at fair market value as determined in good faith by the Board of Trustees of the
Trust, although the actual calculations will be made by the Portfolio Manager
acting under the direction of the Board and subject to the Board's review.

PURCHASE OF SHARES
Shares of the Portfolios may be sold to: (1) life insurance company
separate accounts to serve as the underlying investment medium for variable
annuity contracts; (2) qualified retirement plans, as permitted by Treasury
Regulations; and (3) life insurance companies and advisers to the Portfolios and
their affiliates. In the future, the Trust intends to sell its shares to
separate accounts to serve as the underlying investment medium for variable life
contracts. The Trust currently does not foresee any disadvantages to variable
contract owners or retirement plan participants arising from offering the
Trust's shares to contract owners, participants, insurers and advisers, to
separate accounts of unaffiliated insurers, or to separate accounts funding both
life insurance policies and annuity contracts. In some circumstances, however,
it is theoretically possible that the interests of the various beneficial owners
of Trust shares might at some time be in conflict. If and when shares are sold
to variable life separate accounts, the Board of Trustees will monitor events in
order to identify the existence of any material

<PAGE>

irreconcilable conflicts and to determine what action, if any, should be taken
in response. The Trust and insurers and retirement plans that purchase its
shares will be responsible for remedying any material conflict in accordance
with SEC exemptive rules or orders. One potential remedy is withdrawal of a
separate account's investment in the Trust.

Shares of the Portfolios are sold at their respective net asset values
(without a sales charge) next computed after receipt of a purchase order. The
Portfolios reserve the right to cease offering its shares at any time.

REDEMPTION OF SHARES
Shares of the Portfolios may be redeemed on any business day. Redemptions
are effected at the net asset value per share next determined after receipt of
the redemption request. Redemption proceeds normally will be paid within seven
days following receipt of instructions in proper form, or sooner if required by
law.

The right of redemption may be suspended by the Trust or the payment date
postponed beyond seven days when the New York Stock Exchange is closed (other
than customary weekend and holiday closings) or for any period during which
trading thereon is restricted because an emergency exists, as determined by the
Securities and Exchange Commission, making disposal of portfolio securities or
valuation of net assets not reasonably practicable, and whenever the Securities
and Exchange Commission has by order permitted such suspension or postponement
for the protection of shareholders.

If the Board of Trustees should determine that it would be detrimental to
the best interests of the remaining shareholders of the Portfolios to make
payment wholly or partly in cash, the Portfolios may pay the redemption price in
whole or in part by a distribution in kind of securities from the portfolios of
the Portfolios, in lieu of cash, in conformity with applicable rules of the
Securities and Exchange Commission. If shares are redeemed in kind, the
redeeming shareholder might incur brokerage costs in converting the assets into
cash.

DIVIDENDS, DISTRIBUTIONS, AND TAXES

The Trust intends that the Portfolios will qualify and elect to be treated
as regulated investment companies under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"). In any year in which the Portfolios
qualify as regulated investment companies and distribute substantially all of
their net investment income and their net capital gains, the Portfolios
generally will not be subject to federal income tax to the extent they
distributes to shareholders such income and capital gains in the manner required
under the Code.

Tax consequences to the Variable Contract owners are described in the
prospectus for the pertinent Variable Contract.

The provisions of the Code and the Treasury Regulations that apply to
qualified retirement plans are complex and vary according to the type of plan
and its terms and conditions. Accordingly, this prospectus provides only
general tax information, and participants in qualified retirement plans that
invest directly in the Portfolios should consult a qualified tax adviser before
purchasing or redeeming any Portfolio shares. In general, assuming that a plan
adheres to the applicable limitations of the Code and Treasury Regulations,
payments for the purchase of Portfolio shares (other than after-tax employee
payments) will be deductible (or not includable in income) up to certain amounts
each year. Federal income tax currently is not imposed upon the investment
income and realized gains until redemption. When Portfolio shares are redeemed
for the purpose of making payments to plan participants, all or a portion of the
payment is normally taxable as ordinary income. Some redemptions may also be
subject to penalty tax. For more information contact a qualified tax adviser.

The Portfolios intend to declare as a dividend and to distribute net
investment income quarterly. The Portfolios will distribute any net realized
capital gains at least once annually. All dividends and distributions will be
reinvested automatically at net asset value in additional shares of the
Portfolios. Dividends declared in October, November, or December to
shareholders of record in such month and paid during the following January will
be treated as having been distributed and received by shareholders on December
31.

Regulations under Section 817(h) of the Code contain certain
diversification requirements. Generally, under those regulations, the Portfolios
will be required to diversify its investments so that, on the last day of each
quarter of a calendar year, no more than 55% of the value of its assets will be
represented by any one investment, no more than 70% will be represented by any
two investments, no more than 80% will be represented by any three investments,
and no more than 90% will be represented by any four investments. For this
purpose, all securities of a given issuer are treated as a single investment,
but, each U.S. Government agency and instrumentality is treated as a separate
issuer. In addition, any security issued, guaranteed,

<PAGE>

or insured (to the extent so guaranteed or insured) by the United States or an
instrumentality of the U.S. will be treated as a security issued by the U.S.
Government or its instrumentality, whichever is applicable.

OTHER INFORMATION

CAPITALIZATION
The Trust was organized as a Massachusetts business trust on September 8,
1993. The Trust currently intends initially to issue shares of the five
portfolios described in this prospectus. The Agreement and Declaration of Trust
established three other portfolios, and the Board of Trustees may establish
additional portfolios in the future. The capitalization of the Trust consists
solely of an unlimited number of shares of beneficial interest with a par value
of $0.001 each. When issued in accordance with the Trust's Agreement and
Declaration of Trust, shares of the Portfolios are fully paid, redeemable,
freely transferable, and non-assessable by the Trust.

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

VOTING RIGHTS
Shareholders of the Trust are given certain voting rights. Each share of
the Portfolios will be given one vote, unless otherwise required by law.

Massachusetts business trust law does not require the Trust to hold annual
shareholder meetings, although special meetings may be called for the Portfolio,
or for the Trust as a whole, for purposes such as electing or removing Trustees,
changing fundamental policies, or approving a contract for investment advisory
services. In accordance with current laws, it is anticipated that an insurance
company issuing a Variable Contract that participates in the Trust will request
voting instructions from Variable Contract owners and will vote shares or other
voting interests in the Separate Account in proportion to the voting
instructions received.

As of January 15, 1996 all of the outstanding shares of the Portfolios
were held by either PAI or Security Life of Denver Insurance Company, a stock
life insurance company organized under the laws of Colorado and a wholly owned
indirect subsidiary of Internationale Nederladen Group. The shares were
purchased to provide the initial capital for the Trust. Until Variable Contract
owners have the right to instruct insurance companies how to vote the shares,
PAI and Security Life of Denver Insurance Company will control the Portfolios.

As explained in "The Managers and Portfolio Managers," page , each
Portfolio Manager (or affiliate) has agreed to invest at least $1 million in the
Portfolio or Portfolios it manages. Each Portfolio Manager has agreed to vote
its shares in the same proportion as all Contract owners having voting rights
with respect to the Portfolio or in such other manner as may be required by the
SEC or its staff.

PORTFOLIO BROKERAGE
A Portfolio Manager may employ an affiliated broker to execute brokerage
transactions on behalf of the Portfolio as long as the commissions are
reasonable and fair compared to the commissions received by other brokers in
connection with comparable transactions involving similar securities being
purchased or sold on a securities exchange during a comparable period of time.
The Portfolios may not engage in any transactions in which a Portfolio Manager
or its affiliates acts as principal, including over-the-counter purchases and
negotiated trades in which such party acts as a principal.

PERFORMANCE INFORMATION
The Trust may, from time to time, include quotations of each Portfolio's
total return in advertisements or reports to shareholders or prospective
investors. Performance information for the Portfolios will not be advertised or
included in sales literature for Variable Contracts unless accompanied by
comparable performance information for a separate account to which the
Portfolios offer their shares. Quotations of total return will be expressed in
terms of the average annual compounded rate of return of a hypothetical
investment in the Portfolios over periods of 1, 5 and 10 years (up to the life
of the Portfolios). All

<PAGE>

total return figures will reflect the deduction of a proportional share of each
Portfolio's expenses on an annual basis, and will assume that all dividends and
distributions are reinvested when paid. Quotations of total return reflect only
the performance of a hypothetical investment in the Portfolios during the
particular time period on which the calculations are based. Total return for the
Portfolios will vary based on changes in market conditions and the level of each
Portfolio's expenses, and no reported performance figure should be considered an
indication of performance which may be expected in the future.

Quotations of total return for the Portfolios will not take into account
charges or deductions against any Separate Account to which the Portfolio shares
are sold or charges and deductions against the pertinent Variable Contract,
although comparable performance information for the Separate Account will take
such charges into account. A person considering the purchase of a Variable
Contract should not compare a Portfolio's total return with the total returns of
mutual funds that sell their shares directly to the public since the Portfolio's
figures do not reflect charges against the separate accounts or the Variable
Contracts.

Reports and promotional literature may also contain other information,
including the effect of tax deferred compounding on each Portfolio's investment
returns, or returns in general, which may be illustrated by graphs, charts, or
otherwise, and which may include a comparison, at various points in time, of the
return from an investment in the Portfolio (or returns in general) on a tax-
deferred basis (assuming one or more tax rates) with the return on a taxable
basis. For a more detailed description of the methods used to calculate each
Portfolio's total return, see the SAI.

PERFORMANCE DATA FOR THE PORTFOLIO MANAGERS
The following tables include historical performance data relating to each
Portfolio Manager. The data is provided to illustrate past performance in
managing accounts, portfolios, and/or investment companies with investment
objectives and techniques similar to the Portfolio of the Trust that the
Portfolio Manager will manage.

The performance figures have been adjusted to reflect a deduction of the
investment management fee for the first year of the Portfolio's operation (0.80%
of average daily net assets) and an estimate of other operating expenses of the
Portfolio for the Portfolio's first fiscal year of operations. (The advisory
fee and the estimated expenses are the same as those indicated in the "Summary
of Expenses," page .)

All returns quoted are dollar weighted rates of return which include the
impact of capital appreciation as well as the reinvestment of interest and
dividends.

The performance figures rely on data supplied by the Portfolio Managers or
from statistical services, reports or other sources believed by PAI to be
reliable. However, the data has not been verified and the performance figures
are unaudited. The performance figures for each Portfolio Manager do not
reflect all of the assets under its management and may not accurately reflect
the performance of all accounts it has managed.

As noted above, the performance figures are calculated using the advisory
fee that will be applicable only for the first 12 months of operations, 0.80% of
average daily net assets. After that time, there will be an incentive fee
arrangement. The base fee will be 2.00%, but it may vary from between 0.00% to
4.00% depending on the Portfolio's performance. See "Management and Portfolio
Management Advisory Fees," page 9. In some instances, performance figures
calculated using the incentive fee arrangement would show lower rates of return
(because the fee would be higher). In other instances, performance figures
calculated using the incentive fee arrangement would show higher rates of return
(because the fee would be lower or zero).

INVESTORS SHOULD NOT CONSIDER THIS PERFORMANCE DATA AS AN INDICATION OF THE
FUTURE PERFORMANCE OF ANY OF THE PORTFOLIOS.

<PAGE>

GAMCO INVESTORS, INC.
THE VALUE PORTFOLIO MANAGER

ANNUALIZED PERFORMANCE (AFTER ADJUSTMENT FOR PORTFOLIO FEES):

Time Period Gabelli(1) S&P 500(2)
- -------------------------------------------------------------------------------
10 Years: 1985-1995................ -------- --------

5 Years: 1991-1995................ 17.15% 16.51%

3 Years: 1993-1995................ 19.42% 15.23%

1 Years: 1995..................... 22.45% 37.50%

Inception: September 29, 1989 - 1995 12.77% 12.80%
- -------------------------------------------------------------------------------
(1) GAMCO Investors, Inc. ("GAMCO") results are based on The Gabelli Value
Fund, Inc. (the "Fund"), a publicly available mutual fund whose management
experience, investment objectives and techniques are similar to that of the
Value Portfolio. The Fund is managed by GAMCO's parent company, Gabelli
Funds, Inc., and had assets of $486 million as of December 31, 1995. Mario
Gabelli is primarily responsible for day-to-day investment management of
the Value Portfolio and the Fund. As of December 31, 1995, GAMCO
Investors, Inc. had in excess of $5.1 billion under management. These
figures were calculated by: (1) taking the total return of the Fund; (2)
increasing that return by the advisory fees and operating expenses of the
Fund to create an estimate of the gross return of the Fund; and (3)
reducing that return by the investment management fee for the first 12
months of the Portfolio's operations (0.80% of average daily net assets)
and the estimated expenses for the Portfolio's first fiscal year of
operations. For more information, see the introduction to these tables.

(2) Standard & Poors 500 is a capital-weighted index representing the aggregate
market value of the common equity of 500 stock primarily traded on the
NYSE. These 500 stocks are composed of 400 industrial, 40 utility, 40
financial and 20 transportation companies. The weight of each stock in the
index is proportional to its price time the number of shares outstanding.
The Standard & Poors 500 is an unmanaged index and includes the
reinvestment of all dividends.

THESE RESULTS ARE UNAUDITED. OF COURSE, PAST PERFORMANCE SHOULD NOT BE
INTERPRETED AS INDICATIVE OF FUTURE PERFORMANCE.

<PAGE>

BEE & ASSOCIATES INCORPORATED
THE INTERNATIONAL GROWTH PORTFOLIO MANAGER

ANNUALIZED PERFORMANCE (AFTER ADJUSTMENT FOR PORTFOLIO FEES):

Time Period BAI(1) MSCI -- EAFE(2)
- -------------------------------------------------------------------------------

10 Years: 1985-1995................ -------- --------

5 Years: 1991-1995................ 21.79% 9.37%

3 Years: 1993-1995................ 21.08% 16.69%

1 Years: 1995..................... 20.87% 11.20%

Inception: April 1989 - 1995 16.97% 4.24%

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

(1) Bee & Associates Incorporated results are based on a dollar weighted
composite of all fully discretionary managed accounts (with at least 3
months of experience) whose investment objectives and techniques are
similar to that of the International Growth Portfolio (the "Investment
Strategy"). These figures were calculated by: (1) taking the gross
performance figures for the subject managed accounts (i.e., without
deduction of advisory fees and other expenses) calculated by the Portfolio
Manager according to the formula recommended by the Association for
Investment Management and Research Standards (dated 1993); (2) deducting
the investment management fee for the first 12 months of the Portfolio's
operations (0.80% of average daily net assets); and (3) deducting the
estimated expenses for the Portfolio's first fiscal year of operations.
For more information, see the introduction to these tables. As of December
31, 1995, Bee & Associates Incorporated had approximately $170 million
under management, all of which used the Investment Strategy. The composite
results reflected above consist of 85% of the managed accounts and 85% of
the assets under management which used the Investment Strategy. The only
accounts using the Investment Strategy which are not included in the
composite either have been managed for less than 3 months or are not fully
discretionary (for example, do not permit certain types of investments in
the account).
(2) The Morgan Stanley Capital International -- Europe, Australia, Far East
Index (EAFE) is a widely recognized unmanaged index of non-U.S. companies
which assumes the reinvestment of dividends. These non-U.S. companies are
listed on one of 20 countries and is divided into 8 economic sectors and 38
industry groups.

THESE RESULTS ARE UNAUDITED. OF COURSE, PAST PERFORMANCE SHOULD NOT BE
INTERPRETED AS INDICATIVE OF FUTURE PERFORMANCE.

<PAGE>

FISHER FRANCIS TREES & WATTS, INC.
THE GLOBAL STRATEGIC INCOME PORTFOLIO MANAGER

ANNUALIZED PERFORMANCE (AFTER ADJUSTMENT FOR PORTFOLIO FEES):
J.P. MORGAN GLOBAL
BOND INDEX,
TIME PERIOD FFTW(1) UNHEDGED(2)
- -------------------------------------------------------------------------------

10 Years: 1985-1995................ -------- --------

5 Years: 1991-1995................ 10.62% 10.36%

3 Years: 1993-1995................ 10.48% 10.69%

1 Years: 1995..................... 17.77% 19.31%

Inception: December 1989 - 1995 11.92% 10.65%

- -------------------------------------------------------------------------------
(1) Fischer Francis Trees & Watts results are based on a dollar weighted
composite of its fully discretionary portfolios (with at least 3 months of
experience) whose investment objectives and techniques are similar to that
of the Global Strategic Income Portfolio (the "Investment Strategy").
These figures were calculated by: (1) taking the gross performance figures
for the subject portfolios (i.e., without deduction of advisory fees and
other expenses) calculated by the Portfolio Manager according to the
formula recommended by the Association for Investment Management and
Research Standards (dated 1993); (2) deducting the investment management
fee for the first 12 months of the Portfolio's operations (0.80% of average
daily net assets); and (3) deducting the estimated expenses for the
Portfolio's first fiscal year of operations. For more information, see the
introduction to these tables. As of December 31, 1995, Fischer Francis
Trees & Watts had $21 billion under management, $4.8 billion of which
were global fixed income portfolios. Of that $4.8 billion, approximately
$392 million were managed using the Investment Strategy. The composite
results reflected above consist of 100% of the managed accounts and 100% of
the assets under management which used the Investment Strategy.

(2) The JP Morgan Global Government Bond Index, Unhedged is a widely recognized
index that measures the global government bond market of 13 countries.
This index is weighted by market capitalization ($3,053 billion-US) and is
comprised of 424 bonds with maturities greater than one year. In the
unhedged index, foreign currencies are converted into dollars at spot
rates. This gives the index exposure to both bond and currency markets.

THESE RESULTS ARE UNAUDITED. OF COURSE, PAST PERFORMANCE SHOULD NOT BE
INTERPRETED AS INDICATIVE OF FUTURE PERFORMANCE.

<PAGE>

GAMCO INVESTORS, INC.
THE GLOBAL INTERACTIVE / TELECOMM PORTFOLIO MANAGER

ANNUALIZED PERFORMANCE (AFTER ADJUSTMENT FOR PORTFOLIO FEES):
<TABLE>
<CAPTION>

Gabelli Gabelli
Time Period Interactive(1) S&P 500(2) Telecomm(1) S&P 500(2)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
10 Years: 1985-1995................ -------- -------- -------- --------

5 Years: 1991-1995................ -------- -------- --------- --------

3 Years: 1993-1995................ -------- -------- -------- --------

1 Years: 1995......................... 18.61% 37.50 16.24% 37.50%

Inception: 11.19% 17.06 6.96% 16.51%

- ---------------------------------------------------------------------------------------------------------
</TABLE>

(1) GAMCO Investors, Inc. results are based upon two publicly available mutual
funds, The Gabelli Global Interactive Couch Potato-Registered Trademark-
Fund (the "Interactive Fund") and The Gabelli Global Telecommunications
Fund (the "Telecomm Fund"). The Portfolio will be managed combining the
investment objectives and techniques of these two Funds. The Funds are
managed by GAMCO's parent company, Gabelli Funds, Inc. Mario Gabelli is
primarily responsible for the day-to-day investment management of the Funds
and the Global Interactive/Telecomm Portfolio. As of December 31, 1995,
GAMCO Investors, Inc. had in excess of $5.1 billion under management. As
of that date, the Interactive Fund (which commenced operations on February
7, 1994) had assets of $31.4 million, and the Telecomm Fund (which
commenced operations on November 1, 1993) had assets of $122.8 million.
For each Fund, these figures were calculated by: (1) taking the total
return of the Fund; (2) increasing that return by the advisory fees and
operating expenses of the Fund to create an estimate of the gross return of
the Fund; and (3) reducing that return by the investment management fee for
the first 12 months of the Portfolio's operations (0.80% of average daily
net assets) and the estimated expenses for the Portfolio's first fiscal
year of operations.

THESE RESULTS ARE UNAUDITED. OF COURSE, PAST PERFORMANCE SHOULD NOT BE
INTERPRETED AS INDICATIVE OF FUTURE PERFORMANCE.

<PAGE>

APPENDIX A

DESCRIPTION OF INDICES

The following information as to each index has been supplied by the
respective preparer of the index or has been obtained from other
publicly-available information.

S&P 500 COMPOSITE
STOCK PRICE INDEX

The purpose of the S&P 500 Composite Stock Price Index is to portray the
pattern of common stock price movement. Construction of the index proceeds from
industry groups to the whole. Currently there are four groups: 400 Industrials,
40 Utilities, 20 Transportation and 40 Financial. Since some industries are
characterized by companies of relatively small stock capitalization, the index
does not comprise the 500 largest companies listed on the New York Stock
Exchange.

Component stocks are chosen solely with the aim of achieving a distribution
by broad industry groupings that approximates the distribution of these
groupings in the New York Stock Exchange common stock population, taken as the
assumed model for the composition of the total market. Each stock added to the
index must represent a viable enterprise and must be representative of the
industry group to which it is assigned. Its market price movements must in
general be responsive to changes in industry affairs.

The formula adopted by S&P is generally defined as a "base-weighted
aggregative" expressed in relatives with the average value for the base period
(1941-1943) equal to 10. Each component stock is weighted so that it will
influence the index in proportion to its respective market importance. The most
suitable weighting factor for this purpose is the number of shares outstanding.
The price of any stock multiplied by number of shares outstanding gives the
current market value for that particular issue. This market value determines the
relative importance of the security.

Market values for individual stocks are added together to obtain their
particular group market value. These group values are expressed as a relative,
or index number, to the base period (1941-1943) market value. As the base period
market value is relatively constant, the index number reflects only fluctuations
in current market values.

MORGAN STANLEY CAPITAL INTERNATIONAL
EUROPE, AUSTRALIA, AND THE FAR EAST INDEX

The Morgan Stanley EAFE index measures the performance in Europe,
Australia, and the Far East (EAFE). EAFE contains 20 countries, excluding the
U.S. and the emerging markets of Latin America. Japan represents approximately
46% of the Index value. EAFE is divided into 8 economic sectors and 38 industry
groups. Banking, utilities, and health care are the largest groups.

JP MORGAN GLOBAL GOVERNMENT BOND INDEX, UNHEDGED

The J.P. Morgan Global Government Bond Index, Unhedged, measures the global
government bond market of 13 countries. This index is weighted by market
capitalization ($3,053 billion-US) and is comprised of 424 bonds with maturities
greater than one year. In the unhedged index, foreign currencies are converted
into dollars at spot rates. This gives the index exposure to both bond and
currency markets. As of February 1995, the index was comprised of the following
countries and country weights: Australia (1.2%), Belgium (3.2%), Canada (2.7%),
Denmark (1.7%), France (7.0%), Germany (9.3%), Italy (4.5%), Japan (13.5%), the
Netherlands (3.5%), Spain (2.6%), Sweden (1.5%), United Kingdom (6.2%) and the
United States (43.1%).

<PAGE>

APPENDIX B

DESCRIPTION OF RATINGS

CERTAIN RATINGS OF CORPORATE DEBT SECURITIES

MOODY'S INVESTORS SERVICE INC.

Aaa -- Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged."

Aa -- Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.

A -- Bonds rated A possess many favorable investment attributes and are
generally considered as upper-medium-grade obligations.

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

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

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

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

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

STANDARD & POOR'S CORPORATION

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

AA -- Bonds rated AA have a very strong capacity to pay interest and repay
principal, and differ from the highest rated issues in small degree.

A -- Bonds rated A have a strong capacity to pay interest and repay principal,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.

BBB -- Bonds rated BBB are regarded as having adequate capacity to pay interest
and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in the higher rated categories.

<PAGE>

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

RATINGS OF COMMERCIAL PAPER

MOODY'S INVESTORS SERVICE, INC.

Prime-l is the highest commercial paper rating assigned by Moody's. Issuers
rated Prime-l (or supporting institutions) are considered to have a superior
capacity for repayment of short-term promissory obligations. Issuers rated
Prime-2 (or supporting institutions) are considered to have a strong capacity
for repayment of short-term promissory obligations. This will normally be
evidenced by many of the characteristics of issuers rated Prime-l but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate
may be more affected by external conditions. Ample alternative liquidity is
maintained.

STANDARD & POOR'S CORPORATION

Commercial paper rated A-l by S&P indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Capacity for
timely payment on commercial paper on commercial paper rated A-2 is strong, but
the relative degree of safety is not as high as for issues designated A-1.

32
<PAGE>

STATEMENT OF ADDITIONAL INFORMATION

for

The Value Portfolio,
The Growth Portfolio,
The International Growth Portfolio,
The Global Strategic Income Portfolio, and
The Global Interactive/Telecomm Portfolio
of
THE PALLADIAN TRUST
4225 Executive Square, Suite 270
La Jolla, California 92037
(619) 677-5917

December 6, 1996

This Statement of Additional Information discusses five portfolios listed
above (the "Portfolios") of The Palladian Trust (the "Trust"), which is an
open-end management investment company.

Shares of the Portfolios may be sold only to: (1) life insurance company
separate accounts (the "Separate Accounts") to serve as the underlying
investment medium for variable annuity contracts; (2) qualified retirement
plans, as permitted by Treasury Regulations; and (3) life insurance companies
and advisers to the Portfolios and their affiliates. In the future, the Trust
intends to sell its shares to Separate Accounts to serve as the underlying
investment medium for variable life contracts.

This Statement of Additional Information is intended to supplement
the information provided to investors in the Trust's Prospectus dated May 1,
1996 (and the Prospectus Supplement dated December 6, 1996). It has been
filed with the Securities and Exchange Commission as part of the Trust's
Registration Statement. Investors should note, however, that this Statement
of Additional Information is not itself a prospectus and should be read
carefully in conjunction with the Prospectus for the Portfolios and retained
for future reference. The contents of this Statement of Additional
Information are incorporated by reference in the Prospectus in their
entirety. A copy of the Prospectus and the Prospectus Supplement may be
obtained free of charge from the Trust at the address and telephone number
listed above.

Manager:
Palladian Advisors, Inc.

<PAGE>

TABLE OF CONTENTS
PAGE

INTRODUCTION 3

DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES 3
Mortgage-Backed Securities 3
GNMA Certificates 3
FNMA and FHLMC Mortgage-Backed Obligations 4
Collateralized Mortgage Obligations (CMOs) 4
Other Mortgage-Backed Securities 5
Asset-Backed Securities 6
Banking Industry and Savings Industry Obligations 7
Commercial Paper 7
Repurchase Agreements 7
Options on Equity Securities 8
Options on Debt Securities 9
Options on Stock Indices 10
Options on Foreign Currencies 12
Futures Contracts 12
Options on Futures Contracts 13
When-Issued or Delayed Delivery Securities 13
Foreign Currency Transactions 14

INVESTMENT RESTRICTIONS 15

MANAGEMENT OF THE TRUST 17
Trustees and Officers 17
Service Providers 19

PORTFOLIO TRANSACTIONS AND BROKERAGE 19
Investment Decisions 19
Brokerage and Research Services 20

PERFORMANCE INFORMATION 21

TAXATION 22

OTHER INFORMATION 23
Capitalization 23
Organization Expenses 23
Registration Statement 23

FINANCIAL STATEMENTS 25

<PAGE>

INTRODUCTION

This Statement of Additional Information is designed to elaborate upon the
discussion of certain securities and investment techniques which are described
in the Portfolios' Prospectus. The more detailed information contained herein
is intended solely for investors who have read the Prospectus and are interested
in a more detailed explanation of certain aspects of some of the Portfolios'
securities and some investment techniques. Some of the Portfolios' investment
techniques are described only in the Prospectus and are not repeated herein.
Captions and defined terms in this Statement of Additional Information generally
correspond to like captions and terms in the Portfolios' Prospectus.

DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES

MORTGAGE-BACKED SECURITIES

All Portfolios may invest in mortgage-backed securities.

GNMA CERTIFICATES. Government National Mortgage Association ("GNMA")
certificates are mortgage-backed securities representing part ownership of a
pool of mortgage loans on which timely payment of interest and principal is
guaranteed by the full faith and credit of the U.S. Government. GNMA is a
wholly owned U.S. Government corporation within the Department of Housing and
Urban Development. GNMA is authorized to guarantee, with the full faith and
credit of the U.S. Government, the timely payment of principal and interest on
securities issued by institutions approved by GNMA (such as savings and loan
institutions, commercial banks, and mortgage bankers) and backed by pools of
FHA-insured or VA-guaranteed mortgages.

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

<PAGE>

Loan Mortgage Corporation ("FHLMC") and the Federal National Mortgage
Association ("FNMA"), trade in book-entry form and should not be subject to the
risk of delays in timely payment of income.

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

FNMA AND FHLMC MORTGAGE-BACKED OBLIGATIONS. Government-related guarantors
(i.e., not backed by the full faith and credit of the U.S. Government) include
the FNMA and the FHLMC. FNMA, a federally chartered and privately owned
corporation, issues pass-through securities representing interests in a pool of
conventional mortgage loans. FNMA guarantees the timely payment of principal
and interest, but this guarantee is not backed by the full faith and credit of
the U.S. Government. FNMA also issues REMIC Certificates, which represent an
interest in a trust funded with FNMA Certificates. REMIC Certificates are
guaranteed by FNMA, and not by the full faith and credit of the U.S. Government.

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

COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS). A CMO is a hybrid between a
mortgage-backed bond and a mortgage pass-through security. Similar to a bond,
interest and

<PAGE>

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

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

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

OTHER MORTGAGE-BACKED SECURITIES. Commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers, and other
secondary market issuers also create pass-through pools of conventional
residential mortgage loans. In addition, such issuers may be the originators
and/or servicers of the underlying mortgage loans as well as the guarantors of
the mortgage-backed securities. Pools created by such non-governmental issuers
generally offer a higher rate of interest than government and government-related
pools because there are no direct or indirect government or agency guarantees of
payments in the former pools. Timely payment of interest and principal of these
pools may be supported by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance, and letters of credit. The
insurance and guarantees are issued by governmental entities, private insurers,
and the mortgage poolers. Such insurance, guarantees, and the creditworthiness
of the issuers thereof will be considered in determining whether a mortgage-
backed security meets a Portfolio's investment quality standards. There can be
no assurance that the private insurers or guarantors can meet their obligations
under the insurance policies or guarantee arrangements.

All Portfolios may buy mortgage-backed securities without insurance or
guarantees, if the Portfolio Manager determines that the securities meet a
Portfolio's quality standards. Although the market for such securities is
becoming increasingly liquid, securities issued by certain private organizations
may not be readily marketable. A Portfolio will not purchase mortgage-backed
securities or any other assets which, in the opinion of the Portfolio Manager,
are illiquid if, as a result, more than 15% of the value of a Portfolio's total
assets will be illiquid. As new types of mortgage-backed securities are
developed and offered to investors, the Portfolio Manager will,

<PAGE>

consistent with a Portfolio's investment objectives, policies, and quality
standards, consider making investments in such new types of mortgage-backed
securities.

ASSET-BACKED SECURITIES

All Portfolios may purchase asset-backed securities. Two such securities
are "CARS-SM-" ("Certificates for Automobile Receivables-SM-") and Credit Card
Receivable Securities.

CARS-SM-, represent undivided fractional interests in a trust ("trust")
whose assets consist of a pool of motor vehicle retail installment sales
contracts and security interests in the vehicles securing the contracts.
Payments of principal and interest on CARS-SM- are "passed-through" monthly to
certificate holders, and are guaranteed up to certain amounts by a letter of
credit issued by a financial institution unaffiliated with the trustee or
originator of the trust. Underlying sales contracts are subject to prepayment,
which may reduce the overall return to certificate holders. Certificate holders
may also experience delays in payment or losses on CARS-SM- if the full amounts
due on underlying sales contracts are not realized by the trust because of
unanticipated legal or administrative costs of enforcing the contracts, or
because of depreciation, damage, or loss of the vehicles securing the contracts,
or other factors.

Credit Card Receivable Securities are asset-backed securities backed by
receivables from revolving credit card agreements. Credit balances on revolving
credit card agreements ("Accounts") are generally paid down more rapidly than
are Automobile Contracts. Most of the Credit Card Receivable Securities issued
publicly to date have been Pass-Through Certificates. In order to lengthen the
maturity of Credit Card Receivable Securities, most such securities provide for
a fixed period during which only interest payments on the underlying Accounts
are passed through to the security holder and principal payments received on
such Accounts are used to fund the transfer to the pool of assets supporting the
related Credit Card Receivable Securities of additional credit card charges made
on an Account. The initial fixed period usually may be shortened upon the
occurrence of specified events which signal a potential deterioration in the
quality of the assets backing the security, such as the imposition of a cap on
interest rates. The ability of the issuer to extend the life of an issue of
Credit Card Receivable Securities thus depends upon the continued generation of
additional principal amounts in the underlying Accounts during the initial
period and the non-occurrence of specified events. The Tax Reform Act of 1986,
pursuant to which a taxpayer's ability to deduct consumer interest in his or her
federal income tax calculation was completely phased out for taxable years
beginning in 1991, as well as competitive and general economic factors, could
adversely affect the rate at which new receivables are created in an Account and
conveyed to an issuer, shortening the expected weighted average life of the
related Credit Card Receivable Security, and reducing its yield. An
acceleration in cardholders' payment rates or any other event which shortens the
period during which additional credit card charges on an Account may be
transferred to the pool of assets supporting the related Credit Card Receivable
Security could have a similar effect on the weighted average life and yield.
Credit card holders are entitled to the protection of a number of state and
federal consumer credit laws, many of which give such holder the right to set
off certain amounts against balances owed on the credit card, thereby reducing
amounts paid on Accounts. In addition, unlike many other asset-backed
securities, Accounts are unsecured obligations of the cardholder.

<PAGE>

BANKING INDUSTRY AND SAVINGS INDUSTRY OBLIGATIONS

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

COMMERCIAL PAPER

Commercial paper obligations may include variable amount master demand
notes. These notes are obligations that permit the investment of fluctuating
amounts at varying rates of interest pursuant to direct arrangements between a
Portfolio, as lender, and the borrower. These notes permit daily changes in the
amounts borrowed. The lender has the right to increase or to decrease the
amount under the note at any time up to the full amount provided by the note
agreement; and the borrower may prepay up to the full amount of the note without
penalty. Because variable amount master demand notes are direct lending
arrangements between the lender and borrower, and because no secondary market
exists for those notes, such instruments will probably not be traded. However,
the notes are redeemable (and thus immediately repayable by the borrower) at
face value, plus accrued interest, at any time. In connection with master
demand note arrangements, the Portfolio Manager will monitor, on an ongoing
basis, the earning power, cash flow, and other liquidity ratios of the borrower
and its ability to pay principal and interest on demand. The Portfolio Manager
also will consider the extent to which the variable amount master demand notes
are backed by bank letters of credit. These notes generally are not rated by
Moody's or S&P; the Portfolio may invest in them only if the Portfolio Manager
believes that at the time of investment the notes are of comparable quality to
the other commercial paper in which the Portfolio may invest. Master demand
notes are considered by the Portfolio to have a maturity of one day, unless the
Portfolio Manager has reason to believe that the borrower could not make
immediate repayment upon demand. See the Appendix for a description of Moody's
and S&P ratings applicable to commercial paper.

REPURCHASE AGREEMENTS

The term of a repurchase agreement is generally quite short, possibly
overnight or for a few days, although it may extend over a number of months (up
to one year) from the date of delivery. The resale price is in excess of the
purchase price by an amount which reflects an agreed-upon market rate of return,
effective for the period of time the Portfolio is invested in the security.
This results in a fixed rate of return protected from market fluctuations during
the

<PAGE>

period of the agreement. This rate is not tied to the coupon rate on the
security subject to the repurchase agreement.

A Portfolio may engage in repurchase transactions in accordance with
guidelines approved by the Board of Trustees of the Trust, which include
monitoring the creditworthiness of the parties with which a Portfolio engages in
repurchase transactions, obtaining collateral at least equal in value to the
repurchase obligation, and marking the collateral to market on a daily basis.

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

OPTIONS ON EQUITY SECURITIES

The Portfolios may purchase and write (i.e., sell) put and call options on
equity securities that are traded on U.S. securities exchanges, are listed on
the National Association of Securities Dealers Automated Quotation System
("NASDAQ"), or that result from privately negotiated transactions with
broker-dealers ("OTC options"). A call option is a short-term contract pursuant
to which the purchaser or holder, in return for a premium paid, has the right to
buy the security underlying the option at a specified exercise price at any time
during the term of the option. The writer of the call option, who receives the
premium, has the obligation, upon exercise of the option, to deliver the
underlying security against payment of the exercise price. A put option is a
similar contract which gives the purchaser or holder, in return for a premium,
the right to sell the underlying security at a specified price during the term
of the option. The writer of the put, who receives the premium, has the
obligation to buy the underlying security at the exercise price upon exercise by
the holder of the put.

A Portfolio will write only "covered" options on stocks. A call option is
covered if: (1) the Portfolio owns the security underlying the option; or (2)
the Portfolio has an absolute and immediate right to acquire that security
without additional cash consideration (or for additional cash consideration held
in a segregated account by its custodian) upon conversion or exchange of other
securities it holds; or (3) the Portfolio holds on a share-for-share basis a
call on the same security as the call written where the exercise price of the
call held is equal to or less than the exercise price of the call written or
greater than the exercise price of the call written if the difference is
maintained by the Portfolio in cash, Treasury bills or other high grade
short-term debt obligations in a segregated account with its custodian. A put
option is covered if: (1) the Portfolio deposits and maintains with its
custodian in a segregated account cash, U.S. Government securities or other
liquid high-grade debt obligations having a value equal to or greater than the
exercise price of the option; or (2) the Portfolio holds on a share-for-share
basis a put on the same security as the put written where the exercise price of
the put held is equal to or greater than the exercise price of the put written
or less than the exercise price if the difference is

<PAGE>

maintained by the Portfolio in cash, Treasury bills or other high grade
short-term debt obligations in a segregated account with its custodian.

A Portfolio may also purchase "protective puts" (i.e., put options acquired
for the purpose of protecting a Portfolio security from a decline in market
value). The loss to the Portfolio is limited to the premium paid for, and
transaction costs in connection with, the put plus the initial excess, if any,
of the market price of the underlying security over the exercise price.
However, if the market price of the security underlying the put rises, the
profit the Portfolio realizes on the sale of the security will be reduced by the
premium paid for the put option less any amount (net of transaction costs) for
which the put may be sold.

A Portfolio may also purchase putable and callable equity securities, which
are securities coupled with a put or call option provided by the issuer.

A Portfolio may purchase call options for hedging and investment purposes.
No Portfolio intends to invest more than 5% of its net assets at any one time in
the purchase of call options on stocks.

If the writer of an exchange-traded option wishes to terminate the
obligation, he or she may effect a "closing purchase transaction" by buying an
option of the same series as the option previously written. Similarly, the
holder of an option may liquidate his or her position by exercise of the option
or by effecting a "closing sale transaction" by selling an option of the same
series as the option previously purchased. There is no guarantee that closing
purchase or closing sale transactions can be effected.

OPTIONS ON DEBT SECURITIES

The Portfolios may purchase and write exchange-traded and OTC put and call
options on debt securities. Options on debt securities are similar to options
on stock, except that the option holder has the right to take or make delivery
of a debt security, rather than stock.

A Portfolio will write only "covered" options. Options on debt securities
are covered in the same manner as options on stocks, discussed above, except
that, in the case of call options on U.S. Treasury Bills, the Portfolio might
own U.S. Treasury Bills of a different series from those underlying the call
option, but with a principal amount and value corresponding to the option
contract amount and a maturity date no later than that of the securities
deliverable under the call option.

A Portfolio may also write straddles (i.e., a combination of a call and a
put written on the same security at the same strike price where the same issue
of the security is considered as the cover for both the put and the call). In
such cases, the Portfolio will also segregate or deposit for the benefit of the
Portfolio's broker cash or liquid high-grade debt obligations equivalent to the
amount, if any, by which the put is "in the money." It is contemplated that
each Portfolio's use of straddles will be limited to 5% of the Portfolio's net
assets (meaning that the securities used for cover or segregated as described
above will not exceed 5% of the Portfolio's net assets at the time the straddle
is written).

<PAGE>

A Portfolio may purchase "protective puts" in an effort to protect the
value of a security that it owns against a substantial decline in market value.
Protective puts are described in OPTIONS ON EQUITY SECURITIES above. A
Portfolio may wish to protect certain securities against a decline in market
value at a time when put options on those particular securities are not
available for purchase. A Portfolio may therefore purchase a put option on
securities it does not hold. While changes in the value of the put should
generally offset changes in the value of the securities being hedged, the
correlation between the two values may not be as close in these transactions as
in transactions in which the Portfolio purchases a put option on an underlying
security it owns.

A Portfolio may also purchase call options on debt securities for hedging
or investment purposes. No Portfolio currently intends to invest more than 5%
of its net assets at any one time in the purchase of call options on debt
securities.

A Portfolio may also purchase putable and callable debt securities, which
are securities coupled with a put or call option provided by the issuer.

A Portfolio may enter into closing purchase or sale transactions in a
manner similar to that discussed above in connection with options on equity
securities.

OPTIONS ON STOCK INDICES

The Portfolios may purchase and sell put and call options on stock indices
traded on national securities exchanges, listed on NASDAQ or that result from
privately negotiated transactions with broker-dealers ("OTC options"). Options
on stock indices are similar to options on stock except that, rather than the
right to take or make delivery of stock at a specified price, an option on a
stock index gives the holder the right to receive, upon exercise of the option,
an amount of cash if the closing level of the stock index upon which the option
is based is greater than in the case of a call, or less than, in the case of a
put, the strike price of the option. This amount of cash is equal to such
difference between the closing price of the index and the strike price of the
option times a specified multiple (the "multiplier"). If the option is
exercised, the writer is obligated, in return for the premium received, to make
delivery of this amount. Unlike stock options, all settlements are in cash, and
gain or loss depends on price movements in the stock market generally (or in a
particular industry or segment of the market) rather than price movements in
individual stocks.

A Portfolio will write only "covered" options on stock indices. A call
option is covered if the Fund follows the segregation requirements set forth in
this paragraph. When a Portfolio writes a call option on a broadly based stock
market index, it will segregate or put into escrow with its custodian or pledge
to a broker as collateral for the option, cash, Treasury bills or other liquid
high-grade short-term debt obligations, or "qualified securities" (defined
below) with a market value at the time the option is written of not less than
100% of the current index value times the multiplier times the number of
contracts. A "qualified security" is an equity security which is listed on a
national securities exchange or listed on NASDAQ against which the Portfolio has
not written a stock call option and which has not been hedged by the Portfolio
by the sale of stock index futures. When a Portfolio writes a call option on an
industry or market

<PAGE>

segment index, it will segregate or put into escrow with its custodian or pledge
to a broker as collateral for the option, cash, Treasury bills or other liquid
high-grade short-term debt obligations, or at least five qualified securities,
all of which are stocks of issuers in such industry or market segment, with a
market value at the time the option is written of not less than 100% of the
current index value times the multiplier times the number of contracts. Such
stocks will include stocks which represent at least 50% of the weighting of the
industry or market segment index and will represent at least 50% of the
Portfolio's holdings in that industry or market segment. No individual security
will represent more than 15% of the amount so segregated, pledged or escrowed in
the case of broadly based stock market stock options or 25% of such amount in
the case of industry or market segment index options. If at the close of
business on any day the market value of such qualified securities so segregated,
escrowed, or pledged falls below 100% of the current index value times the
multiplier times the number of contracts, the fund will so segregate, escrow, or
pledge an amount in cash, Treasury bills, or other liquid high-grade short-term
debt obligations equal in value to the difference. In addition, when a
Portfolio writes a call on an index which is in-the-money at the time the call
is written, it will segregate with its custodian or pledge to the broker as
collateral, cash or U.S. government or other liquid high-grade short-term
obligations equal in value to the amount by which the call is in-the-money times
the multiplier times the number of contracts. Any amount segregated pursuant to
the foregoing sentence may be applied to the Portfolio's obligation to segregate
additional amounts in the event that the market value of the qualified
securities falls below 100% of the current index value times the multiplier
times the number of contracts.

A call option is also covered if the Portfolio holds a call on the same
index as the call written where the strike price of the call held is equal to or
less than the strike price of the call written or greater than the strike price
of the call written if the difference is maintained by the Portfolio in cash,
Treasury bills or other high-grade short-term obligations in a segregated
account with its custodian.

A put option is covered if: (1) the Portfolio holds in a segregated
account cash, Treasury bills or other high-grade short-term debt obligations of
a value equal to the strike price times the multiplier times the number of
contracts; or (2) the Portfolio holds a put on the same index as the put written
where the strike price of the put held is equal to or greater than the strike
price of the put written or less than the strike price of the put written if the
difference is maintained by the Portfolio in cash, Treasury bills or other
high-grade short-term debt obligations in a segregated account with its
custodian.

A Portfolio may purchase put and call options for hedging and investment
purposes. No Portfolio intends to invest more than 5% of its net assets at any
one time in the purchase of puts and calls on stock indices. A Portfolio may
effect closing sale and purchase transactions involving options on stock
indices, as described above in connection with stock options.

The prospectus details certain risks particular to options on stock
indices. In addition, when a Portfolio has written a call, there is also a risk
that the market may decline between the time the Portfolio has a call exercised
against it, at a price which is fixed as of the closing level of the index on
the date of exercise, and the time the Portfolio is able to sell stocks in its
Portfolio. As with stock options, the Portfolio will not learn that an index
option has been

<PAGE>

exercised until the day following the exercise date but, unlike a call on stock
where the Portfolio would be able to deliver the underlying securities in
settlement, the Portfolio may have to sell part of its stock Portfolio in order
to make settlement in cash, and the price of such stocks might decline before
they can be sold. This timing risk makes certain strategies involving more than
one option substantially more risky with options in stock indices than with
stock options.

There are also certain special risks involved in purchasing put and call
options on stock indices. If a Portfolio holds an index option and exercises it
before final determination of the closing index value for that day, it runs the
risk that the level of the underlying index may change before closing. If such
a change causes the exercise option to fall out of-the-money, the Portfolio will
be required to pay the difference between the closing index value and the strike
price of the option (times the applicable multiplier) to the assigned writer.
Although a Portfolio may be able to minimize the risk by withholding exercise
instructions until just before the daily cutoff time or by selling rather than
exercising an option when the index level is close to the exercise price, it may
not be possible to eliminate this risk entirely because the cutoff times for
index options may be earlier than those fixed for other types of options and may
occur before definitive closing index values are announced.

OPTIONS ON FOREIGN CURRENCIES

The Portfolios may purchase and write put and call options on foreign
currencies traded on U.S. or foreign securities exchanges or boards of trade.
Options on foreign currencies are similar to options on stock, except that the
option holder has the right to take or make delivery of a specified amount of
foreign currency, rather than stock.

FUTURES CONTRACTS

The Portfolios may purchase and sell stock index futures contracts for
hedging purposes. A stock index futures contract is an agreement in which the
seller of the contract agrees to deliver to the buyer an amount of cash equal to
a specific dollar amount times the difference between the value of a specific
stock index at the close of the last trading day of the contract and the price
at which the agreement is made. No physical delivery of the underlying stocks
in the index is made. In addition, the Portfolios may, for hedging purposes,
purchase and sell (a) futures contracts on interest-bearing securities (such as
U.S. Treasury bonds and notes) or interest rate indices (referred to
collectively as "interest rate futures contracts"); (2) futures contracts on
foreign currencies or groups of foreign currencies; and (3) futures contracts on
gold and other precious metals.

When the futures contract is entered into, each party deposits with a
broker or in a segregated custodial account approximately 5% of the contract
amount, called the "initial margin." Subsequent payments to and from the
broker, called the "variation margin," will be made on a daily basis as the
underlying security, index or rate fluctuates making the long and short
positions in the futures contracts more or less valuable, a process known as
"marking to the market."

<PAGE>

OPTIONS ON FUTURES CONTRACTS

The Portfolios may enter into certain transactions involving options on
futures contracts. An option on a futures contract gives the purchaser or
holder the right, but not the obligation, to assume a position in a futures
contract (a long position if the option is a call and a short position if the
option is a put) at a specified price at any time during the option exercise
period. The writer of the option is required upon exercise to assume an
offsetting futures position (a short position if the option is a call and long
position if the option is a put). Upon exercise of the option, the assumption
of offsetting futures positions by the writer and holder of the option will be
accomplished by delivery of the accumulated balance in the writer's futures
margin account which represents the amount by which the market price of the
futures contract, at exercise, exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option on the futures contract.
As an alternative to exercise, the holder or writer of an option may terminate a
position by selling or purchasing an option of the same series. There is no
guarantee that such closing transactions can be effected. The Portfolios intend
to utilize options on futures contracts for the same purposes that they use the
underlying futures contracts.

Options on futures contracts are subject to risks similar to those
described above with respect to options on securities, options on stock indices,
and futures contracts. These risks include the risk that the Portfolio manager
may not correctly predict changes in the market, the risk of imperfect
correlation between the option and the securities being hedged, and the risk
that there might not be a liquid secondary market for the option. There is also
the risk of imperfect correlation between the option and the underlying futures
contract. If there were no liquid secondary market for a particular option on a
futures contract, the Portfolio might have to exercise an option it held in
order to realize any profit and might continue to be obligated under an option
it had written until the option expired or was exercised. If a Portfolio were
unable to close out an option it had written on a futures contract, it would
continue to be required to maintain initial margin and make variation margin
payments with respect to the option position until the option expired or was
exercised against the Portfolio.

WHEN-ISSUED OR DELAYED DELIVERY SECURITIES

All Portfolios may purchase securities on a when-issued or delayed delivery
basis if the Portfolio holds, and maintains until the settlement date in a
segregated account, cash, U.S. Government securities, or high-grade debt
obligations in an amount sufficient to meet the purchase price, or if the
Portfolio enters into offsetting contracts for the forward sale of other
securities it owns. Purchasing securities on a when-issued or delayed delivery
basis involves a risk of loss if the value of the security to be purchased
declines prior to the settlement date, which risk is in addition to the risk of
decline in value of the Portfolios' other assets. Although a Portfolio would
generally purchase securities on a when-issued basis or enter into forward
commitments with the intention of acquiring securities, the Portfolio may
dispose of a when-issued or delayed delivery security prior to settlement if the
Portfolio Manager deems it appropriate to do so. The Portfolio may realize
short-term profits or losses upon such sales.

<PAGE>

FOREIGN CURRENCY TRANSACTIONS

The Portfolio's may enter into forward currency contracts and enter into
currency exchange transactions on a spot (i.e. cash) basis. A forward currency
contract is an obligation to purchase or sell a currency against another
currency at a future date and price as agreed upon by the parties. A Portfolio
may either accept or make delivery of the currency at the maturity of the
forward contract or, prior to maturity, enter into a closing transaction
involving the purchase or sale of an offsetting contract. A Portfolio will
engage in forward currency transactions in anticipation of or to protect itself
against fluctuations in currency exchange rates.

A Portfolio may enter into forward foreign currency contracts in two
circumstances. First, when a Portfolio enters into a contract for the purchase
or sale of a security denominated in a foreign currency, the Portfolio may
desire to "lock in" the U.S. dollar price of the security. By entering into a
forward contract for a fixed amount of dollars for the purchase or sale of the
amount of foreign currency involved in the underlying transactions, the
Portfolio will be able to protect itself against a possible loss resulting from
an adverse change in the relationship between the U.S. dollar and such foreign
currency during the period between the date on which the security is purchased
or sold and the date on which payment is made or received.

Second, when the Portfolio Manager believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract for a fixed amount of dollars to
sell the amount of foreign currency approximating the value of some or all of
the Portfolios securities denominated in such foreign currency. The precise
matching of the forward contract amounts and the value of the securities
involved will not generally be possible since the future value of securities in
foreign currencies will change as a consequence of market movements in the value
of these securities between the date on which the forward contract is entered
into and the date it matures. The projection of short-term currency market
movement is extremely difficult, and the successful execution of a short-term
hedging strategy is highly uncertain. None of the Portfolios will enter into
such forward contracts or maintain a net exposure to such contracts where the
consummation of the contracts would obligate the Portfolios to deliver an amount
of foreign currency in excess of the value of the Portfolios securities or other
assets denominated in that currency.

A Portfolio's custodian will place cash or liquid, high-grade equity or
debt securities into a segregated account of the Portfolio in an amount equal to
the value of the Portfolio's total assets committed to the consummation of
forward foreign currency exchange contracts. If the value of the securities
placed in the segregated account declines, additional cash or securities will be
placed in the account on a daily basis so that the value of the account will
equal the amount of the Portfolio's commitments with respect to such contracts.

At the maturity of a forward contract, a Portfolio may either sell the
portfolio security and make delivery of the foreign currency, or it may retain
the security and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract with the same currency trader
obligating it to purchase, on the same maturity date, the same amount of the
foreign currency.

<PAGE>

It is impossible to forecast the market value of a particular portfolio
security at the expiration of the contract. Accordingly, if a decision is made
to sell the security and make delivery of the foreign currency, it may be
necessary for the Portfolio to purchase additional foreign currency on the spot
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency that the Portfolio is
obligated to deliver.

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

Forward contracts are not traded on regulated commodities exchanges. There
can be no assurance that a liquid market will exist when a Portfolio seeks to
close out a forward currency position, and in such an event, a Portfolio might
not be able to effect a closing purchase transaction at any particular time. In
addition, a Portfolio entering into a forward foreign currency contract incurs
the risk of default by the counter party to the transaction. The CFTC has
indicated that it may in the future assert jurisdiction over certain types of
forward contracts in foreign currencies and attempt to prohibit certain entities
from engaging in such foreign currency forward transactions.

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

INVESTMENT RESTRICTIONS

Each Portfolio's investment objective as set forth under "Investment
Objectives and Policies" in the Prospectus, together with the investment
restrictions set forth below, are, fundamental and may not be changed with
respect to any Portfolio without the approval of a majority of the outstanding
voting shares of that Portfolio. The vote of a majority of the outstanding
voting securities of a Portfolio means the vote, at an annual or special
meeting, of the lesser of (a) 67% or more of the voting securities present at
such meeting, if the holders of more than 50% of the outstanding voting
securities of such Portfolio are present or represented

<PAGE>

by proxy; or (b) more than 50% of the outstanding voting securities of such
Portfolio. None of the Portfolios will:

(1) Make an investment unless, when considering all its other
investments, 75% of the value of a Portfolio's assets would consist of
cash, cash items, obligations of the United States government, its
agencies or instrumentalities, securities of other investment
companies, and other securities. For purposes of this restriction,
"other securities" are limited for each issuer to not more than 5% of
the value of a Portfolio's assets and to not more than 10% of the
issuer's outstanding voting securities held by the Palladian Trust as
a whole. Some uncertainty exists as to whether certain of the types
of bank obligations in which a Portfolio may invest, such as
certificates of deposit and bankers' acceptances, should be classified
as "cash items" rather than "other securities" for purposes of this
restriction, which is a diversification requirement under the 1940
Act. Interpreting most bank obligations as "other securities" limits
the amount a Portfolio may invest in the obligations of any one bank
to 5% of its total assets. If there is an authoritative decision that
any of these obligations are not "securities" for purposes of this
diversification test, this limitation would not apply to the purchase
of such obligations.

(2) Invest in a security if more than 25% of its total assets
(taken at market value at the time of such investment) would be
invested in the securities of issuers in any particular industry,
except (a) that this restriction does not apply to securities issued
or guaranteed by the U.S. Government or its agencies or
instrumentalities (or repurchase agreements with respect thereto), and
to securities or obligations issued by banks, as permitted by the SEC;
and (b) that the Global Interactive/Telecomm Portfolio may invest more
than 25% of its total assets in the public utilities industry and may
invest more than 25% of its total assets in the telecommunications
industry.

(3) Purchase or sell real estate, except that a Portfolio may
invest in securities secured by real estate or real estate interests
or issued by companies in the real estate industry or which invest in
real estate or real estate interests;

(4) Buy or sell commodities or commodity contracts, except that
the Portfolio may purchase and sell futures contracts and related
options, foreign currency, forward foreign currency exchange
contracts, and gold and other precious metals.

(5) Purchase securities on margin (except for use of short-term
credit necessary for clearance of purchases and sales of portfolio
securities), except a Portfolio engaged in transactions in options,
futures, and options on futures may make margin deposits in connection
with those transactions, except that effecting short sales will be
deemed not to constitute a margin purchase for purposes of this
restriction.

<PAGE>

(6) Lend any funds or other assets, except that a Portfolio may,
consistent with its investment objective and policies:

(a) invest in debt obligations, even though the
purchase of such obligations may be deemed to be the making
of loans;

(b) enter into repurchase agreements; and

(7) Issue senior securities, except insofar as a Portfolio may be
deemed to have issued a senior security by reason of borrowing money
in according with that Portfolio's borrowing policies, or in
connection with any repurchase agreement, and except, for purposes of
this investment restriction, collateral or escrow arrangements with
respect to the making of short sales, purchase or sale of futures
contracts or related options, purchase or sale of forward currency
contracts, writing of options, and collateral arrangements with
respect to margin or other deposits respecting futures contracts,
related options, and forward currency contracts are not deemed to be
an issuance of a senior security;

(8) Act as an underwriter of securities of other issuers, except,
when in connection with the disposition of portfolio securities, a
Portfolio may be deemed to be an underwriter under the federal
securities laws; and

(9) Borrow money or pledge, mortgage, or hypothecate its assets,
except that a Portfolio may: (a) borrow from banks, but only if
immediately after each borrowing and continuing thereafter there is
asset coverage of 300%; and (b) enter into reverse repurchase
agreements and transactions in options, futures, options on futures,
and forward currency contracts.

MANAGEMENT OF THE TRUST

TRUSTEES AND OFFICERS

The trustees and officers of the Trust, their business addresses, and
principal occupations during the past five years are set forth below:

<PAGE>

Position Principal Occupations
Name and Address with the Trust During Past 5 Years
- ---------------- -------------- ---------------------

Matthew J. Stacom* Chairman of Vice Chairman, Cushman &
51 West 52nd Street the Board; Wakefield,
New York, NY 10036 Vice President September 1946 to present;
Chairman, Palladian
Advisors, Inc.,
December 1992 to present.

Tom N. Dallape Trustee Commercial Land Broker,
18300 Von Karman Avenue The Hoffman Company,
Suite 110 September 1992 to present;
Irvine, CA 92715 Commercial Land Broker,
Voit Commercial Brokerage,
July 1990 to August 1992.

H. Michael Schwartz* Trustee; Vice President, Chief
4225 Executive Square President; Financial Officer, Protean
Suite 355 Secretary; Financial Companies,
La Jolla, California 92037 Treasurer December 1992 to present;
President and Director,
Palladian Advisors, Inc.,
December 1992 to present;
President,
Western Capital
Financial Group, Inc.,
April 1994 to present;
Chief Financial Officer,
Western Capital
Financial Group, Inc.,
October 1988 to
April 1994.

<PAGE>

* Matthew J. Stacom and H. Michael Schwartz are "interested persons" of the
Trust (as that term is defined in the Investment Company Act) because of their
affiliation with the Manager or its affiliates as shown above.

None of the trustees directly owns shares of the Portfolios. In addition,
as of the date of this Statement of Additional Information, the Trustees and
Officers in the aggregate owned variable contracts that entitled them to give
voting instructions with respect to less than one percent of the outstanding
shares of the Portfolios.

Trustees other than those affiliated with the Manager receive $1,500 for
each Board meeting and are reimbursed for any expenses incurred in attending
such meetings or otherwise in carrying out their responsibilities as trustees.

SERVICE PROVIDERS

For information about the investment advisers, the custodian and transfer
agent, and the principal underwriter, see the prospectus.

Coopers & Lybrand, L.L.P., 350 South Grand Avenue, Los Angeles, California
90071, serves as independent auditors for the Trust.

Investors Bank & Trust Company, 89 South Street, Boston, Massachusetts
02111 will provide fund accounting services. The fee for each Portfolio is
based on an annual rate of 0.05% of net assets for the first $600 million in net
assets and an annual rate of 0.03% of net assets for net assets in excess of
$600 million. In addition, each Portfolio will reimburse Investors Bank & Trust
Company for out-of-pocket expenses such as pricing services.

PORTFOLIO TRANSACTIONS AND BROKERAGE

INVESTMENT DECISIONS

Investment decisions for each Portfolio are made by the Portfolio Manager
of each Portfolio. Each Portfolio Manager has investment advisory clients other
than the Portfolio. A particular security may be bought or sold by a Portfolio
Manager for certain clients even though it could have been bought or sold for
other clients at the same time. It also sometimes happens that two or more
clients simultaneously purchase or sell the same security, in which event each
day's transactions in such security are, insofar as possible, allocated between
such clients in a manner deemed fair and reasonable by the Portfolio Manager.
Although there is no specified formula for allocating such transactions, the
various allocation methods used by the Portfolio Manager, and the results of
such allocations, are subject to periodic review by the Trust's Manager and
Board of Trustees. There may be circumstances when purchases or sales of
portfolio securities for one or more clients will have an adverse effect on
other clients.

<PAGE>

BROKERAGE AND RESEARCH SERVICES

Each Portfolio Manager is responsible for the selection of brokers and
dealers to effect that Portfolio's transactions and the negotiation of brokerage
commissions, if any. Transactions on a stock exchange in equity securities will
be executed primarily through brokers who will receive a commission paid by the
Portfolio. In the United States, commissions are usually negotiated; in other
countries, the commissions are usually fixed. Fixed income securities, as well
as securities traded in the over-the-counter market, on the other hand, will not
normally involve any brokerage commissions. The securities are generally traded
on a "net" basis with the dealer acting as principal for its own account without
a stated commission, although the price of the security usually includes a
profit to the dealer. In underwritten offerings, securities are purchased at a
fixed price that includes an amount of compensation to the underwriter,
generally referred to as the underwriter's concession or discount. On occasion,
certain of these securities may be purchased directly from an issuer, in which
case neither commissions nor discounts are paid.

In purchasing and selling securities, it is the policy of each Portfolio
Manager to seek the best execution for the Portfolios taking into account such
factors as price (including the applicable brokerage commission or dollar
spread), size of order, the nature of the market for the security, the timing of
the transaction, the reputation, experience and financial stability of the
broker-dealer involved, the quality of the service, the difficulty of the
execution, the operational facilities of the firms involved, and the firm's risk
in positioning a block of securities.

Notwithstanding the above, under certain conditions, the Portfolios are
authorized to pay higher brokerage commissions in return for brokerage and
research services, although they have no current arrangement to do so. A
Portfolio Manager may cause a Portfolio to pay a broker-dealer who furnishes
brokerage and/or research services a commission or price for executing a
transaction that is in excess of the commission or price another broker would
have received for executing the transaction if it is determined that such
commission or price is reasonable in relation to the value of the brokerage
and/or research services which have been provided. In some cases, research
services are generated by third parties, but are provided to the Portfolio
Manager or through broker-dealers.

The Portfolio Managers may receive a wide range of research services from
broker-dealers, including information on securities markets, the economy,
individual companies, statistical information, accounting and tax law
interpretations, technical market action, pricing and appraisal services, and
credit analyses. Research services are received primarily in the form of
written reports, telephone contacts, personal meetings with security analysts,
corporate and industry spokespersons, economists, academicians, and government
representatives, and access to various computer-generated data. Research
services received from broker-dealers are supplemental to each Portfolio
Manager's own research efforts and, when utilized, are subject to internal
analysis before being incorporated into the investment process.

In allocating brokerage, a Portfolio Manager annually assesses the
contribution of the brokerage and research services provided by broker-dealers,
and allocates a portion of the brokerage business of its clients on the basis of
these assessments. In addition, broker-dealers sometimes suggest a level of
business they would like to receive in return for the various

<PAGE>

brokerage and research services they provide. Actual brokerage received by any
firm may be less than the suggested allocations, but can (and often does) exceed
the suggestions because total brokerage is allocated on the basis of all the
considerations described above. In no instance is a broker-dealer excluded
from receiving business because it has not been identified as provided research
services.

The Portfolio Managers cannot readily determine the extent to which net
prices or commission rates charged by broker- dealers reflect the value of their
research services. However, net prices and commissions are periodically
reviewed to determine whether they are reasonable in relation to the services
provided. In some instances, the Portfolio Managers receive research services
they might otherwise have had to perform for themselves. The research services
provided by broker-dealers can be useful to the Portfolio Managers, in serving
the Portfolios, as well as their other clients.

PERFORMANCE INFORMATION

The Trust may, from time to time, include the total return of the
Portfolios in advertisements or sales literature.

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

Performance information for a Portfolio may be compared, in advertisements,
sales literature, and reports to shareholders to: (i) the Standard & Poor's 500
Stock Index ("S & P 500"), the Dow Jones Industrial Average ("DJIA"), the Lehman
Brothers Government Bond Index, the Donoghue Money Market Institutional
Averages, the Lehman Brothers Government Corporate Index, the Salomon High Yield
Index, or other indices that measure performance of a pertinent group of
securities, (ii) other groups of mutual funds tracked by Lipper Analytical
Services, a widely used independent research firm which ranks mutual funds by
overall performance, investment objectives, and assets, or tracked by other
services, companies, publications, or persons who rank mutual funds on overall
performance or other criteria; and (iii) the Consumer Price Index (measure for
inflation) to assess the real rate of return from an investment in the
Portfolio. Unmanaged indices may assume the reinvestment of dividends but
generally do not reflect deductions for administrative and management costs and
expenses.

Quotations of total return for a Portfolio will not take into account
charges and deductions against any Variable Accounts to which the Portfolios
shares are sold. Performance information

<PAGE>

for any Portfolio reflects only the performance of a hypothetical investment in
the Portfolio during the particular time period on which the calculations are
based. Performance information should be considered in light of the Portfolio's
investment objective or objectives and investment policies and the market
conditions during the given time period. Performance information should not be
considered as a representation of what may be achieved in the future.

TAXATION

The requirements applicable to a Portfolios' qualification as a regulated
investment company may limit the extent to which a Portfolio will be able to
engage in transactions in options, futures contracts or forward contracts.

Income received by a Portfolio from sources within a foreign country may be
subject to withholding and other taxes imposed by that country. Tax conventions
between certain countries and the U.S. may reduce or eliminate such taxes.

To comply with regulations under Section 817(h) of the Code, each Portfolio
of the Trust will be required to diversify its investments so that on the last
day of each quarter of a calendar year, no more than 55% of the value of its
assets is represented by any one investment, no more than 70% is represented by
any two investments, no more than 80% is represented by any three investments,
and no more than 90% is represented by any four investments.

Generally, securities of a single issuer are treated as one investment and
obligations of each U.S. Government agency and instrumentality (such as the
Government National Mortgage Association) are treated for purposes of Section
817(h) as issued by separate issuers.

In connection with the issuance of the diversification regulations, the
Treasury Department announced that it would issue future regulations or rulings
addressing the circumstances in which a variable contract owner's control of the
investments of a separate account may cause the contract owner, rather than the
insurance company, to be treated as the owner of the assets held by the separate
account. If the variable contract owner is considered the owner of the
securities underlying the separate account, income and gains produced by those
securities would be included currently in the contract owner's gross income.
Among the areas in which Treasury has indicated informally that it is concerned
that there may be too much contract owner control is where a mutual fund (or
Portfolio) underlying a separate account invests solely in securities issued by
companies in a specific industry.

These future rules and regulations proscribing investment control may
adversely affect the ability of certain Portfolios of the Trust to operate as
described in this Prospectus. There is, however, no certainty as to what
standards, if any, Treasury will ultimately adopt.

In the event that unfavorable rules or regulations are adopted, there can
be no assurance that the Portfolios will be able to operate as currently
described in the Prospectus, or that a Portfolio will not have to change its
investment objective or objectives, investment policies, or investment
restrictions. While a Portfolios' investment objective is fundamental and may
be

<PAGE>

changed only by a vote of a majority of its outstanding shares, the Trustees
have reserved the right to modify the investment policies of a Portfolio as
necessary to prevent any such prospective rules and regulations from causing the
Variable Contract Owners to be considered the owners of the assets underlying
the Variable Accounts.

OTHER INFORMATION

CAPITALIZATION

The Trust is a Massachusetts business trust established under an
Agreement and Declaration of Trust dated September 8, 1993. The Trust is
currently offering to Separate Accounts shares of five different "series" or
Portfolios. Each Portfolio is, for investment purposes, a separate
investment fund, and each issues a separate class of capital stock with a par
value of $0.001 per share. Each share of stock issued with respect to a
Portfolio has a pro rata interest in the assets of that Portfolio and has no
interest in the assets of any other Portfolio. Each Portfolio bears its own
liabilities and also its proportionate share of the general liabilities of
the Trust. This Statement of Additional Information discusses the initial
five Portfolios, which issue the following five shares: Value Portfolio
shares, Growth Portfolio shares, International Growth Portfolio shares,
Global Strategic Income Portfolio shares, and Global Interactive/Telecomm
Portfolio shares.

The Agreement and Declaration of Trust established three other Portfolios,
and the Board of Trustees may establish additional Portfolios (with different
investment objectives and policies) at any time in the future. The Trust has
sold 2,000 shares of one of those Portfolios (the Balanced Opportunity
Portfolio) to provide part of the Trust's initial capitalization, but the Trust
is not now offering shares of that Portfolio to Separate Accounts or qualified
plans. Establishment and offering of additional Portfolios will not alter the
rights of the Trust's shareholders. When issued in accordance with the terms of
the Agreement and Declaration of Trust, shares are fully paid, redeemable,
freely transferable, and non-assessable by the Trust. Shares do not have
preemptive rights or subscription rights. In liquidation of a Portfolio of the
Trust, each shareholder is entitled to receive his or her pro rata share of the
net assets of that Portfolio.

ORGANIZATION EXPENSES

Certain of the expenses incurred by the Portfolios in connection with its
organization, its registration with the Securities and Exchange Commission, and
the public offering of its shares were advanced on behalf of the Trust by the
Manager. These organizational expenses are deferred and amortized by the
Portfolio over a period not exceeding 60 months from the date of the Portfolio's
commencement of operations.

REGISTRATION STATEMENT

This Statement of Additional Information and the prospectus do not contain
all the information included in the Trust's registration statement filed with
the Securities and Exchange

<PAGE>

Commission under the Securities Act of 1933 with respect to the securities
offered by the prospectus. Certain portions of the registration statement have
been omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. The registration statement, including the exhibits filed
therewith, may be examined at the offices of the Securities and Exchange
Commission in Washington, D.C.

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

<PAGE>

THE PALLADIAN TRUST
STATEMENTS OF ASSETS AND LIABILITIES
December 31, 1995
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Global Global
Balanced International Strategic Interactive/
Value Growth Opportunity Growth Income Telecomm
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
ASSETS:
Cash $10,000 $10,000 $10,000 $10,000 $50,000 $10,000
Deferred organization expenses (Note 2) 19,678 19,678 19,678 19,678 19,678 19,678
---------------------------------------------------------------------------
Total Assets 29,678 29,678 29,678 29,678 69,678 29,678
----------------------------------------------------------------------------------------------------------------------

LIABILITIES
Payable for organization expenses (Note 2) 19,678 19,678 19,678 19,678 19,678 19,678
---------------------------------------------------------------------------
NET ASSETS: 10,000 10,000 10,000 10,000 50,000 10,000
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------

NET ASSET VALUE:
Offering and redemption price per share $10.00 $10.00 $10.00 $10.00 $10.00 $10.00
---------------------------------------------------------------------------

SHARES OUTSTANDING: 1,000 1,000 1,000 1,000 5,000 1,000
---------------------------------------------------------------------------
---------------------------------------------------------------------------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS

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

25
<PAGE>

THE PALLADIAN TRUST

Notes to the Statements of Assets and Liabilities
As of December 31, 1995
- --------------------------------------------------------------------------------

1. ORGANIZATION

The Palladian Trust (the "Trust"), an open-end management investment company
established as a Massachusetts business trust, is registered under the
Investment Company Act of 1940. The Trust offers shares of the following no-load
portfolios: Value Portfolio ("Value"), Growth Portfolio ("Growth"), Balanced
Opportunity Portfolio ("Balanced"), International Growth Portfolio
("International"), Global Strategic Income Portfolio ("Income"), and Global
Interactive/Telecomm ("Interactive/Telecomm") Portfolios. For the period
October 1995 (inception) to December 31, 1995 the Trust and Portfolios have had
no operations other than those actions relating to organizational matters. As of
December 31, 1995, the Value, Growth, Balanced, International, and
Interactive/Telecomm Portfolios had 1,000 shares outstanding that were owned by
Palladian Advisors, Inc. The Income Portfolio had 5,000 shares outstanding that
were owned by Security Life of Denver Insurance Company.

2. ORGANIZATION EXPENSES

The Trust has incurred expenses of $118,068 in connection with the organization
of the Trust. These costs have been deferred and allocated to each Portfolio
equally and will be amortized on a straight line basis over a period of sixty
months from the date the Trust commences investment operations. In the event
that any of the initial shares of the Funds are redeemed during the amortization
period by any holder thereof, the redemption proceeds will be reduced by any
unamortized organization expenses in the same proportion as the number of said
shares being redeemed bears to the number of initial shares that are outstanding
at the time of the redemption.

3. COMMITMENTS AND RELATED AGREEMENTS

ADVISORY AGREEMENT

Palladian Advisors, Inc. ("PAI") serves as overall Manager of the Trust. PAI has
engaged Tremont Partners ("Tremont") as the Portfolio Advisor which evaluates
and recommends registered investment advisers ("Portfolio Managers") for each
Portfolio of the Trust.

Each Portfolio pays an overall management fee, computed and accrued daily and
paid monthly, based on its average daily net assets. For the first twelve months
of operations, the management fee will be 0.80% of average daily net assets.
After that time, the base fee will be 2%, but it may vary from between 0% and 4%
depending on the performance of that Portfolio (after expenses) compared to that
of an appropriate benchmark. Each Portfolio Manager will receive 80% of the fee,
and PAI will receive the remaining 20%. PAI is responsible for paying the fee of
Tremont, which equals 32.5% of the fee received by PAI.

26
<PAGE>

THE PALLADIAN TRUST

Notes to the Statements of Assets and Liabilities (continued)
As of December 31, 1995
- --------------------------------------------------------------------------------

3. COMMITMENTS AND RELATED AGREEMENTS (CONTINUED)

DISTRIBUTION AGREEMENT

Western Capital Financial Group (the "Distributor") serves as the principal
underwriter and distributor of the shares of the Trust. The Distributor has
voluntarily waived any fees associated with servicing the Trust.

TRANSFER AGENCY, FUND ACCOUNTING AND CUSTODY AGREEMENT

Investors Bank & Trust will provide transfer agency, fund accounting, and
custody services for the Trust. The transfer agency and fund accounting fees for
the year will be the greater of $40,000 or 0.05% of net assets for the first
$600 million and 0.03% of net assets in excess of $600 million. Custody fees are
separated between domestic and global portfolios. The domestic custody fee will
be 0.01% of net assets each year subject to a monthly minimum fee. The global
custody fee varies by country according to the Band groupings. The
aforementioned fees are exclusive of transaction costs and out-of-pocket
expenses.

4. RELATED PARTY TRANSACTIONS

Certain officers of the Trust are also officers of PAI and the Distributor.

An individual, together with certain affiliated entities, own a majority
interest in the parent company of Tremont. He is also an officer of a Portfolio
Manager selected by Tremont to provide investment advisory services to two
Portfolios of the Trust.

An officer of the Distributor is also an officer of PAI, and a trustee and
officer of the Trust. An officer of PAI is also a trustee and officer of the
Trust.

27
<PAGE>

[COOPERS & LYBRAND LETTERHEAD]

REPORT OF INDEPENDENT ACCOUNTANTS

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

To the Board of Trustees
and Shareholders of The Palladian Trust

We have audited the accompanying statements of assets and liabilities of the
Value, Growth, Balanced Opportunity, International Growth, Global Strategic
Income, and Global Interactive/Telecomm Portfolios (hereinafter the
"Portfolios"), series of The Palladian Trust, as of December 31, 1995. These
financial statements are the responsibility of the management of the Portfolios.
Our responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial positions of the Portfolios as of
December 31, 1995 in conformity with generally accepted accounting principles.

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

Los Angeles, California
January 15, 1996

28
<PAGE>
THE PALLADIAN TRUST
STATEMENTS OF ASSETS AND LIABILITIES (UNAUDITED)
FROM THE PERIOD FEBRUARY 1, 1996 (COMMENCEMENT OF OPERATIONS) TO JUNE 30, 1996

<TABLE>
<CAPTION>
Global Global
International Strategic Interactive /
Value Growth Growth Income Telecomm
Portfolio Portfolio Portfolio Portfolio Portfolio Total
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments:
At identified cost........................... $709,080 $31,224 $42,607 $821,819 $527,213 $2,131,953
---------- ---------- ---------- ----------- ----------- -----------
---------- ---------- ---------- ----------- ----------- -----------

At value..................................... $787,246 $33,600 $45,321 $783,730 $533,216 $2,183,113

Cash........................................... 0 58,349 19,442 307,619 40,481 425,891

Receivables:
Interest and dividends ...................... 601 117 60 29,138 1,014 30,930
Investments sold ............................ 0 4,228 0 0 0 4,228
Forward foreign exchange contracts to buy ... -- -- -- 302,204 -- 302,204
Shares of beneficial interest sold .......... 0 0 0 0 0 0
Expense reimbursements ...................... 0 0 0 0 0 0
Unamortized organization costs................. 21,858 21,858 22,493 21,857 21,857 109,923
Prepaid insurance.............................. 2,209 2,208 2,202 2,210 2,210 11,039
---------- ---------- ---------- ----------- ----------- -----------

Total Assets ................................ $811,914 $120,360 $89,518 $1,446,758 $598,778 $3,067,328
---------- ---------- ---------- ----------- ----------- -----------

LIABILITIES
Payables:
Investments purchased ....................... $0 $0 $0 $101,166 $0 $101,166
Due Custodian ............................... 47,987 -- -- -- -- 47,987
Forward foreign exchange contracts to buy ... -- -- -- 300,810 -- 300,810
Shares of beneficial interest purchased...... 0 0 0 0 0 0
Accrued expenses ............................ 39,453 38,628 37,602 42,308 39,014 197,005
---------- ---------- ---------- ----------- ----------- -----------

Total Liabilities ........................... $87,440 $38,628 $37,602 $444,284 $39,014 $646,968
---------- ---------- ---------- ----------- ----------- -----------

NET ASSETS..................................... $724,474 $81,732 $51,916 $1,002,474 $559,764 $2,420,380
---------- ---------- ---------- ----------- ----------- -----------
---------- ---------- ---------- ----------- ----------- -----------

NET ASSETS Consist of:
Undistributed net investment income / (loss)... ($26,602) ($18,794) ($17,003) ($19,730) ($24,667) ($106,796)
Unrealized appreciation (depreciation)
of investments............................... 78,155 2,377 2,715 (42,527) 6,003 46,723
Accumulated net realized gain / (loss)......... 1,376 10,382 630 (1,161) 2,736 13,963
Capital shares at par value.................... 671,545 87,767 65,574 1,065,892 575,692 2,466,470
---------- ---------- ---------- ----------- ----------- -----------

Total Net Assets............................. $724,474 $81,732 $51,916 $1,002,474 $559,764 $2,420,360
---------- ---------- ---------- ----------- ----------- -----------
---------- ---------- ---------- ----------- ----------- -----------

Shares of beneficial interest outstanding.... 66,830 8,688 7,142 106,397 57,615
---------- ---------- ---------- ----------- -----------
---------- ---------- ---------- ----------- -----------
NET ASSET VALUE, offering price and
redemption price per share of beneficial
interest outstanding ........................ $10.84 $9.41 $7.27 $9.42 $9.72
---------- ---------- ---------- ----------- -----------
---------- ---------- ---------- ----------- -----------

</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

1
<PAGE>
THE PALLADIAN TRUST
STATEMENTS OF OPERATIONS (UNAUDITED)
FROM THE PERIOD FEBRUARY 1, 1996 (COMMENCEMENT OF OPERATIONS) TO JUNE 30, 1996

<TABLE>
<CAPTION>
Global Global
International Strategic Interactive /
Value Growth Growth Income Telecomm
Portfolio Portfolio Portfolio Portfolio Portfolio Total
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends (Net of foreign withholding taxes of
$11, $59 and $139 for the Value,
International Growth and Global Interactive/ $2,552 $13 $336 $0 $2,300 $5,201
Telecomm) portfolio..........................
Interest....................................... 1,707 437 246 21,982 1,678 26,050
-------- -------- -------- --------- --------- ---------

Total Investment Income...................... $4,259 $450 $562 $21,982 $3,978 $31,251
-------- -------- -------- --------- --------- ---------

EXPENSES
Amortization of organization costs............. $1,780 $1,780 $1,145 $1,780 $1,780 $8,265
Auditing fees.................................. 4,977 302 271 8,170 4,167 17,887
Custodian fees................................. 2,385 3,422 2,541 4,454 2,304 15,016
Insurance...................................... 1,797 1,800 1,806 1,797 1,797 8,997
Legal fees..................................... 3,321 204 181 5,454 2,779 11,939
Management & advisory fees..................... 1,983 112 90 3,379 1,722 7,286
Other.......................................... 21 1 1 34 17 74
Portfolio accounting fees...................... 11,404 11,425 11,467 11,404 11,404 57,104
Registration & filing fees..................... 689 43 37 1,130 577 2,476
Shareholders' expenses......................... 125 8 7 205 105 450
Trustee's fees and expenses.................... 2,379 147 129 3,905 1,993 8,553
-------- -------- -------- --------- --------- ---------

Total Expenses............................... $30,861 $19,244 $17,585 $41,712 $28,645 $138,047

Less expense reimbursements.................... $0 $0 $0 $0 $0 $0
-------- -------- -------- --------- --------- ---------

Net Expenses................................. 30,861 19,244 17,585 41,712 28,645 138,047
-------- -------- -------- --------- --------- ---------

NET INVESTMENT INCOME.......................... ($25,602) ($16,794) ($17,003) ($19,730) ($24,667) ($106,796)
-------- -------- -------- --------- --------- ---------

REALIZED and UNREALIZED GAIN/
(LOSS) on INVESTMENTS:
Net realized gain/(loss) from:
Security transactions........................ $1,376 $10,382 $0 ($615) $2,658 $13,801
Forward foreign exchange contracts........... -- -- (210) (1,299) -- (1,509)
Forward currency transactions................ -- -- 640 754 77 1,671

Net change in unrealized appreciation/
(depreciation) on:
Security transactions........................ $78,155 $2,377 $2,715 ($38,089) $6,003 $51,161
Forward foreign exchange contracts........... 0 0 0 (5,274) 0 (5,274)
Forward currency transactions................ 0 0 0 837 0 837

Net realized and unrealized gain/(loss) on
investments.................................. $79,531 $12,759 $3,345 ($43,886) $8,736 $60,687
-------- -------- -------- --------- --------- ---------

NET INCREASE/(DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS.................... $52,929 ($6,035) ($13,656) ($63,416) ($15,929) ($45,109)
-------- -------- -------- --------- --------- ---------
-------- -------- -------- --------- --------- ---------

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

</TABLE>

2
<PAGE>

THE PALLADIAN TRUST
STATEMENTS OF CHANGE IN NET ASSETS (UNAUDITED)
FROM THE PERIOD FEBRUARY 1, 1996 (COMMENCEMENT OF OPERATIONS) TO JUNE 30, 1996

Net investment income/(loss)...................... ($26,602) ($18,794) ($17,003) ($19,730) ($24,667)

Net realized gain/(loss) on securities.
forward foreign exchange contracts and
foreign currency transactions.................... 1,376 10,382 830 (1,160) 2,735

Net unrealized gain/(loss) on securities,
forward foreign exchange contracts and
other assets and liabilities denominated
in foreign currencies............................ 76,155 2,377 2,715 (42,526) 6,003
----------- ----------- ---------- ------------ -----------

Net increase/(decrease) in net assets
resulting from operations........................ $52,929 ($6,035) ($13,858) ($63,415) ($15,929)

Distributions to shareholders from:
Net investment income............................ $0 $0 $0 $0 $0
Net realized gains on investments................ 0 0 0 0 0

Net increase/(decrease) in net
assets from shares of beneficial
interest transactions............................ $671,544 $87,767 $65,574 $1,065,892 $575,692
----------- ----------- ---------- ------------ -----------

Net increase/(decrease) in net assets.............. 724,473 81,732 51,918 1,002,476 559,763

NET ASSETS:
Beginning of period................................ 0 0 0 0 0
----------- ----------- ---------- ------------ -----------
End of period...................................... $724,474 $81,732 $51,918 $1,002,474 $559,764
----------- ----------- ---------- ------------ -----------
----------- ----------- ---------- ------------ -----------

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
</TABLE>

3
<PAGE>

THE PALLADIAN TRUST
THE VALUE PORTFOLIO
PORTFOLIO OF INVESTMENTS - JUNE 30, 1996

VALUE
SHARES (NOTE 1)
- ------ --------
COMMON STOCKS - 104.5%
Advertising - 3.8%
1,000 Ackerty Communications, Inc. . . . . . . . . . . . . . . . 27,250
-------
Aerospace & Defense - 6.3%
300 Boeing Company . . . . . . . . . . . . . . . . . . . . . . 26,136
500 Precision Castparts Corp.. . . . . . . . . . . . . . . . . 21,500
-------
47,636
-------
AUTOMOTIVE EQUIPMENT & SUPPLIES - 9.2%
600 Echlin Inc.. . . . . . . . . . . . . . . . . . . . . . . . 22,725
1,000 Kollmorgan . . . . . . . . . . . . . . . . . . . . . . . . 14,750
1,000 Standard Motor Products. . . . . . . . . . . . . . . . . . 17,875
500 Wynn's International, Inc. . . . . . . . . . . . . . . . . 14,125
-------
69,475
-------
BEVERAGES - 5.0%
1,000 Celestial Seasonings, Inc. . . . . . . . . . . . . . . . . 20,500
500 Seagrams . . . . . . . . . . . . . . . . . . . . . . . . . 16,812
-------
37,312
-------
BROADCASTING & CABLE - 11.9%
2,000 Chicasters, Inc. . . . . . . . . . . . . . . . . . . . . . 62,500
300 Chris-Craft Industries, Inc. . . . . . . . . . . . . . . . 13,598
500 Liberty Media Group. . . . . . . . . . . . . . . . . . . . 13,250
-------
89,346
-------
COMMUNICATION SERVICES - 8.4%
500 Comsol Corp. . . . . . . . . . . . . . . . . . . . . . . . 13,000
2,000 Loral Space & Communications . . . . . . . . . . . . . . . 27,250
-------
40,250
-------
DEPARTMENT STORES - 3.9%
1,000 Nieman Marcus Group, Inc.. . . . . . . . . . . . . . . . . 27,000
-------
DIVERSIFIED - 1.6%
500 Rollins, Inc.. . . . . . . . . . . . . . . . . . . . . . . 11,750
-------
ELECTRICAL EQUIPMENT & SUPPLIES - 4.9%
500 Westinghouse Electric. . . . . . . . . . . . . . . . . . . 9,375
500 Moog, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 12,250
1,000 Kaly Industries, Inc.. . . . . . . . . . . . . . . . . . . 15,000
-------
36,625
-------
FOOD - 5.3%
500 Quaker Oats Co . . . . . . . . . . . . . . . . . . . . . . 20,475
1,000 Archer Daniels Midland . . . . . . . . . . . . . . . . . . 19,125
-------
39,600
-------
GROCERY STORES - 6.5%
1,000 Giant Food Inc.. . . . . . . . . . . . . . . . . . . . . . 35,875
2,000 Bruno's Inc. . . . . . . . . . . . . . . . . . . . . . . . 27,750
-------
63,625
-------
INDUSTRIAL INORGANIC CHEMICALS - 2.8%
1,000 Church & Dwight Co., Inc.. . . . . . . . . . . . . . . . . 20,875
-------
INDUSTRIAL EQUIPMENT & SUPPLIES - 5.5%
2,000 AMPCO - Pittsburgh Corp. . . . . . . . . . . . . . . . . . 23,250
1,000 Goulds Pumps . . . . . . . . . . . . . . . . . . . . . . . 25,625
300 Sequa Corp.. . . . . . . . . . . . . . . . . . . . . . . . 15,000
-------
63,875
-------
LABORATORY APPARATUS - 2.8%
2,000 Ametek Inc.. . . . . . . . . . . . . . . . . . . . . . . . 21,750
-------
NEWSPAPERS/PUBLISHING - 10.6%
500 Lee Enterprises, Inc.. . . . . . . . . . . . . . . . . . . 11,512
500 Media General Inc. . . . . . . . . . . . . . . . . . . . . 13,625
500 Meredith Corp. . . . . . . . . . . . . . . . . . . . . . . 20,875
500 Pulitzer Publishing. . . . . . . . . . . . . . . . . . . . 29,025
-------
80,937
-------
NON-DURABLE GOODS - 4.0%
500 Culbro Corporation . . . . . . . . . . . . . . . . . . . . 29,513
-------
OIL & GAS - 1.6%
1,000 RPC Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 11,500
-------
PAPER & PLASTIC PRODUCTS - 3.9%
500 Petro Corp.. . . . . . . . . . . . . . . . . . . . . . . . 13,250
500 Grief Bros. Corp.. . . . . . . . . . . . . . . . . . . . . 16,000
-------
29,250
-------
TELECOMMUNICATIONS - 6.2%
1,000 Centennial Cellular Corp.. . . . . . . . . . . . . . . . . 16,875
500 Telephone & Data Systems . . . . . . . . . . . . . . . . . 22,500
-------
39,375
-------

TOTAL INVESTMENTS (COST $700,060) 108.7% 757,248
- -------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (NET) 8.7% (62,772)
- -------------------------------------------------------------------------------
NET ASSETS 100.0% 724,476
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

5
<PAGE>

THE PALLADIAN TRUST
THE GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS - JUNE 30, 1996

VALUE
SHARES (NOTE 1)
- ------ --------
COMMON STOCKS - 39.0%
AUTOMOTIVE SERVICES - 1.2%
50 Olympic Financial, Inc.. . . . . . . . . . . . . . . . . . 1,151
-------
BANKS & FINANCIAL SERVICES - 1.8%
25 Bank of New York - Warrants. . . . . . . . . . . . . . . . 1,035
50 Mercury Financial Co.. . . . . . . . . . . . . . . . . . . 637
-------
1,672
-------
BUILDING RESIDENTIAL & COMMERCIAL - 0.5%
20 Cond. Homes Holding Corp.. . . . . . . . . . . . . . . . . 430
-------
BUSINESS SERVICES - 1.3%
50 Personnel Group of America, Inc. . . . . . . . . . . . . . 1,232
-------
COMMUNICATION SERVICES - 1.2%
50 Brite Voice Systems, Inc.. . . . . . . . . . . . . . . . . 1,075
-------
COMPUTERS & DATA PROCESSING - 3.0%
10 Hewlett Packard Company. . . . . . . . . . . . . . . . . . 996
50 PC Docs Group Intl., Inc.. . . . . . . . . . . . . . . . . 993
100 Sunriver Corporation . . . . . . . . . . . . . . . . . . . 787
-------
2,776
-------

ENTERTAINMENT - 1.2%
110 Quintal Entertainment, Inc.. . . . . . . . . . . . . . . . 1,156
-------
ENVIRONMENTAL SCVS. & WASTE DISPOSAL - 2.7%
40 USA Waste Services, Inc. . . . . . . . . . . . . . . . . . 1,185
40 United Waste Systems, Inc. . . . . . . . . . . . . . . . . 1,291
-------
2,476
-------
HEALTH SERVICES - 1.0%
100 Neurocrine Biosciences, Inc. . . . . . . . . . . . . . . . 887
-------
INDUSTRIAL EQUIPMENT - 1.8%
50 Platinum Technology, Inc.. . . . . . . . . . . . . . . . . 756
100 Starsight Telecast, Inc. . . . . . . . . . . . . . . . . . 912
-------
1,668
-------
MACHINERY - 1.5%
100 Figgs International. . . . . . . . . . . . . . . . . . . . 1,425
-------
MEDICAL SUPPLIES - 3.6%
40 Safeskin Corp. . . . . . . . . . . . . . . . . . . . . . . 1,661
50 Ameridata Technologies, Inc. . . . . . . . . . . . . . . . 794
50 Bacou USA, Inc.. . . . . . . . . . . . . . . . . . . . . . 887
-------
3,342
-------
MISCELLANEOUS - 0.5%
100 Geographics, Inc.. . . . . . . . . . . . . . . . . . . . . 588
-------
OIL & GAS SERVICES - 0.4%
25 Digicon, Inc.. . . . . . . . . . . . . . . . . . . . . . . 418
-------
RESTAURANTS - 7.4%
50 CKE Restaurants. . . . . . . . . . . . . . . . . . . . . . 1,275
100 Cooker Restaurant Corp.. . . . . . . . . . . . . . . . . . 1,337
30 Lone Star Steakhouse & Saloon. . . . . . . . . . . . . . . 1,132
40 Manhattan Bagel Company. . . . . . . . . . . . . . . . . . 590
50 Landy's Seafood Restaurants. . . . . . . . . . . . . . . . 1,237
50 Dave & Buster's, Inc.. . . . . . . . . . . . . . . . . . . 1,337
-------
6,906
-------
RESTAURANT EQUIPMENT - 1.5%
100 Turbochef, Inc.. . . . . . . . . . . . . . . . . . . . . . 1,476
-------
RETAIL - 3.4%
40 Friedman's Inc.. . . . . . . . . . . . . . . . . . . . . . 1,020
90 Renters Choice . . . . . . . . . . . . . . . . . . . . . . 1,276
10 Fita Holdings Spd., ADR. . . . . . . . . . . . . . . . . . 862
-------
3,158
-------
SEMICONDUCTOR CAPITAL EQUIPMENT - 0.7%
50 Advanced Technology Material . . . . . . . . . . . . . . . 875
-------
TELECOMMUNICATIONS - 1.2%
20 Worldcom, Inc. . . . . . . . . . . . . . . . . . . . . . . 1,107
-------

TOTAL INVESTMENTS (COST $31,224) 41.1% 33,800
- -------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (NET) 58.9% 48,132
- -------------------------------------------------------------------------------
NET ASSETS 100.0% 81,732
- -------------------------------------------------------------------------------

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

<PAGE>

THE PALLADIAN TRUST
THE INTERNATIONAL GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS - JUNE 30, 1996

VALUE
SHARES (NOTE 1)
------ --------
COMMON STOCKS - 65.5%
SWITZERLAND - 14.0%
10 Stratec Holding. . . . . . . . . . . . . . . . . . . . . . 9,713
FINLAND - 11.9% --------
500 Benefon. . . . . . . . . . . . . . . . . . . . . . . . . . 8,261
FRANCE - 15.2% --------
75 Axime (Ex Segin) . . . . . . . . . . . . . . . . . . . . . 10,504
HONG KONG - 10.9% --------
22,500 Joyce Boutique . . . . . . . . . . . . . . . . . . . . . . 7,556
SWEDEN - 13.4% --------
500 Nobel Biocare. . . . . . . . . . . . . . . . . . . . . . . 9,287
--------

TOTAL INVESTMENTS (COST $42,607) 87.3% 45,321
- -----------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (NET) 12.7% 6,595
- -----------------------------------------------------------------------------
NET ASSETS 100.0% 51,916
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

<PAGE>

THE PALLADIAN TRUST
THE GLOBAL STRATEGIC INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS - JUNE 30, 1996

VALUE
FACE VALUE (NOTE 1)
- ---------- --------
UNITED STATES DOLLAR BOND - 41.5%
450,000 U.S. Treasury Note 429,609
5.250% due 1/31/01

GERMAN DEUTSCHE MARK BOND - 24.4%
350,000 Deutschland Republic
8.000% due 7/22/02 $253,094

JAPANESE YEN BOND - 9.8%
11,400,000 JAPAN - 184 (10 Year Issue)
2.900% due 12/20/05 101,026

TOTAL INVESTMENTS (COST $821,819) 78.2% 783,729
- -------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (NET) 21.8% 218,745
- -------------------------------------------------------------------------------
NET ASSETS 100.0% 1,002,474
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

SCHEDULE OF FORWARD FOREIGN EXCHANGE CONTRACTS

NUMBER CONTRACT MARKET
OF VALUE VALUE
CONTRACTS DATE (NOTE 1)
- --------- -------- --------
FORWARD FOREIGN EXCHANGE CONTRACTS TO BUY
121,456 German Deutsche Mark. . . . . . . . . . . 07/22/96 $79,982
15,499,998 Japanese Yen. . . . . . . . . . . . . . . 07/22/96 142,298
3,800,000 Spanish Peseta. . . . . . . . . . . . . . 07/22/96 29,646
77,199,998 Italian Lira. . . . . . . . . . . . . . . 07/22/96 50,278

- --------------------------------------------------------------------------------
TOTAL FORWARD FOREIGN EXCHANGE CONTRACTS TO BUY
(CONTRACT AMOUNT $300,808) $302,204
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

<PAGE>

THE PALLADIAN TRUST
THE GLOBAL INTERACTIVE / TELECOMM PORTFOLIO
PORTFOLIO OF INVESTMENTS - JUNE 30, 1996

VALUE
SHARES (NOTE 1)
------ --------
COMMON STOCKS - 91.3%
CANADA - 1.7%
500 British Columbia Telecomm. . . . . . . . . . . . . . . . . 9,725
--------
GREAT BRITAIN - 2.7%
2,000 Flextech PLC . . . . . . . . . . . . . . . . . . . . . . . 15,779
--------
FOREIGN - 7.0%
1,000 Grupo Televisa, GDS. . . . . . . . . . . . . . . . . . . . 30,750
500 Haves S.A. Sports, ADR . . . . . . . . . . . . . . . . . . 10,222
--------
40,972
--------
UNITED STATES - 79.9%
BROADCASTING, MEDIA & RADIO - 12.5%
1,000 Multi-Market Radio, Class A. . . . . . . . . . . . . . . . 10,937
500 The News Corporation, Ltd. ADR . . . . . . . . . . . . . . 11,750
500 Time Warner, Inc.. . . . . . . . . . . . . . . . . . . . . 19,626
1,000 Citicasters, Inc., Class A . . . . . . . . . . . . . . . . 31,250
--------
73,563
--------
COMPUTER SOFTWARE - 2.1%
100 Microsoft Corporation. . . . . . . . . . . . . . . . . . . 12,012
--------
CABLE - 12.3%
500 Cablevision Systems Corp.. . . . . . . . . . . . . . . . . 23,125
1,000 Home Shopping Network. . . . . . . . . . . . . . . . . . . 12,000
1,000 Tele-Communications, Inc.. . . . . . . . . . . . . . . . . 18,125
1,000 Comcest Corp. Class A. . . . . . . . . . . . . . . . . . . 18,375
--------
71,525
--------
COMMUNICATION SERVICES - 5.2%
500 Comsat Corp. . . . . . . . . . . . . . . . . . . . . . . . 13,000
1,000 Loral Space & Communications . . . . . . . . . . . . . . . 13,625
1,000 Rogers Communications, Class B . . . . . . . . . . . . . . 9,376
--------
38,001
--------
DIVERSIFIED - 11.7%
1,000 Westinghouse Electric. . . . . . . . . . . . . . . . . . . 18,750
300 Sony Corp., ADR. . . . . . . . . . . . . . . . . . . . . . 19,838
1,050 Gaylord Entertainment. . . . . . . . . . . . . . . . . . . 29,682
--------
86,250
--------
ENTERTAINMENT - 3.2%
1,000 Intl Family Entertainment. . . . . . . . . . . . . . . . . 18,500
--------
MISCELLANEOUS - 5.2%
700 Santa Anita Realty Entertainment . . . . . . . . . . . . . 8,837
1,000 United International Holding, Class A. . . . . . . . . . . 13,751
300 Liberty Media Group, Class A . . . . . . . . . . . . . . . 7,950
--------
30,538
--------
TELECOMMUNICATIONS - 26.8%
500 Airtouch Communications, Inc.. . . . . . . . . . . . . . . 14,125
500 BCE, Inc.. . . . . . . . . . . . . . . . . . . . . . . . . 19,750
300 Bell Atlantic. . . . . . . . . . . . . . . . . . . . . . . 19,125
500 Cable & Wireless, plc., ADR. . . . . . . . . . . . . . . . 9,878
500 Century Telephone Enterprises. . . . . . . . . . . . . . . 15,937
1,000 New World Communications Group . . . . . . . . . . . . . . 14,625
300 NYNEX Corp.. . . . . . . . . . . . . . . . . . . . . . . . 14,250
1,500 Rogers Comtel Mobile, Class B. . . . . . . . . . . . . . . 35,082
300 Telephone Data Systems . . . . . . . . . . . . . . . . . . 13,501
--------
158,251
--------

TOTAL INVESTMENTS (COST $527,213) 95.3% 533,216
- -----------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (NET) 4.7% 26,548
- -----------------------------------------------------------------------------
NET ASSETS 100.0% 559,784
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

<PAGE>

The Palladian Trust

Notes to Financial Statements as of June 30, 1996

1. ORGANIZATION

The Palladian Trust (the "Trust") is registered under the Investment Company Act
of 1940, as amended, (the "Act") as an open-end management investment company
organized as a Massachusetts business trust. As of the date of this report the
Trust had outstanding shares for six managed investment Portfolios: Value
Portfolio, Growth Portfolio, Balanced Portfolio, International Growth Portfolio,
Global Strategic Income Portfolio and Global Interactive / Telecomm Portfolio.
The Trust is intended to serve as an investment medium for (i) variable life
insurance policies and variable annuity contracts offered by insurance
companies, (ii) certain qualified pension and retirement plans, as permitted by
Treasury Regulations; and (iii) and advisers to the Portfolios and their
affiliates.

2. SIGNIFICANT ACCOUNTING POLICIES

The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures in financial statements. Actual
results could differ from those estimates. The following is a summary of
significant accounting policies consistently followed by the Portfolios in the
preparation of their financial statements.

PORTFOLIO VALUATION: Domestic and foreign portfolio securities, except as noted
below, for which market quotations are readily available are stated at market
value. Market value is determined on the basis of the last reported sales price
in the principal market where such securities are traded or, if no sales are
reported, the mean between representative bid and asked quotations obtained from
a quotation reporting system or from established market makers.

Long-term debt securities, including those to be purchased under firm commitment
agreements, are normally valued on the basis of quotes obtained from brokers and
dealers or pricing services, which take into account appropriate factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics, and other market
data. Under certain circumstances, long-term debt securities having a maturity
of sixty days or less may be valued at amortized cost. Debt securities with a
maturity date at time of purchase of 60 days or less are valued at amortized
cost which approximates fair value.

Securities for which market quotations are not readily available are valued at
fair market value as determined in good faith by, or under the direction of the
Board of Trustees.
<PAGE>

FOREIGN CURRENCY. The books and records of the Portfolios are maintained in
U.S. dollars. Foreign currencies, investments and other assets and liabilities
are translated into U.S. dollars at the exchange rates prevailing at the end of
the period, and purchases and sales of investment securities, income and
expenses are translated on the respective dates of such transactions. It is not
practicable to isolate that portion of the results of operations arising as a
result of changes in the foreign exchange rates from the portion that arises
from in market prices of investment during the period. Accordingly, all such
changes have been reflected as net gain/(loss) on security transactions in the
Statement of Operations.

Unrealized gains and losses, not relating to securities, which result from
changes in foreign currency exchange rates have been included in unrealized
appreciation/(depreciation) of foreign currency transactions. Unrealized gains
and losses on securities, which result from changes in forward currency exchange
rates as well as changes in market prices of securities, have been included in
unrealized appreciation / (depreciation) of securities. Net realized foreign
currency gains and losses resulting from changes in exchange rates include
foreign currency gains and losses between trade date and settlement date on
investment securities transactions, gains and losses on foreign currency
transactions and the difference between the amounts of interest and dividends
recorded on the books of the Portfolios and the amount actually received. The
portion of foreign currency gains and losses related to fluctuations in exchange
rates between the initial purchase trade date and subsequent sale trade is
included in realized gain/(loss) from investment securities sold.

FORWARD FOREIGN CURRENCY CONTRACTS. All portfolios may enter into forward
foreign currency contracts. Foreign currency contracts are agreements to
exchange one currency for another at a future date and at a specified price.
The Portfolios may use forward foreign currency contracts to facilitate
transactions in foreign securities and to manage the Portfolios' foreign
currency exposure. The U.S. dollar market value, contract value and the foreign
currencies the Portfolios have committed to buy or sell are shown in the
Portfolio of Investments under the caption "Schedule of Forward Foreign Currency
Contracts." These amounts represent the aggregate exposure to each foreign
currency the Portfolios have acquired or hedged through currency contracts at
June 30, 1996. Forward foreign currency contracts that have been offset with
different counterparties are reflected as both a forward foreign currency
contract to buy and a forward foreign currency contract to sell. Forward
foreign currency contracts to buy generally are used to acquire exposure to
foreign currencies, while forward foreign currency contracts to sell are used to
hedge the Portfolios' investments against currency fluctuations. Also, a
forward foreign currency contract to buy or sell can offset a previously
acquired opposite forward foreign currency contract.

Forward foreign currency contracts are marked-to-market daily using foreign
currency exchange rates supplied by an independent pricing service. The change
in a contract's market value is recorded by the Portfolios as an unrealized gain
or loss. When the contract is closed or delivery is taken, the Portfolios
record a realized gain or loss equal to
<PAGE>

the difference between the value of the contract at the time it was opened and
the value at the time it was closed.

The use of forward foreign currency contracts does not eliminate fluctuations in
the underlying prices of the Portfolio's securities, but it does establish a
rate of exchange that can be achieved in the future. Although forward foreign
currency contracts used for hedging purposes limit the risk of loss due to a
decline in the value of the hedged currency, they also limit any potential gain
that might result should the value of the currency increase. In addition, the
Portfolios could be exposed to risks if the counterparties to the contracts are
unable to meet the terms of their contracts.

FEDERAL INCOME TAXES. Each Portfolio of the Trust is a separate entity for
Federal income tax purposes. No provision for Federal income taxes has been
made since each Portfolio of the Trust has complied and intends to continue to
comply with provisions of the Internal Revenue Code available to regulated
investment companies and to distribute its taxable income to shareholders
sufficient to relieve it from all or substantially all federal income taxes.

SECURITIES TRANSACTIONS AND INVESTMENT INCOME. Investment transactions are
recorded on trade date. Dividend income and distributions to shareholders are
recorded on the ex-dividend date. Interest income (including amortization of
premium and discount on securities) and expenses are accrued daily. Realized
gains and losses from investment transactions are recorded on an identified cost
basis which is the same basis the Trust uses for Federal income tax purposes.
Purchases of securities under agreements to resell are carried at cost, and the
related accrued interest is included in interest receivable.

DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends from net investment
income are declared and paid quarterly for all portfolios. Net realized capital
gains, if any, are distributed at least annually.

Income and capital gain distributions are determined in accordance with income
tax regulations which may differ from generally accepted accounting principles.
Permanent book and tax basis differences relating to shareholder distributions
will result in reclassifications to paid in capital. Undistributed net
investment income may include temporary book and tax basis differences which
will reverse in a subsequent period.

EXPENSES. The Trust accounts separately for the assets, liabilities and
operations of each Portfolio. Expenses directly attributable to a Portfolio are
charged to a Portfolio, while expenses which are attributable to more than one
Portfolio of the Trust are allocated among the respective Portfolios based upon
the relative net assets of each Portfolio.

ORGANIZATION EXPENSE. Organization expense were deferred and are being
amortized by each Portfolio on a straight-line basis over a five-year period
from commencement of operations. Each Portfolio's organizational fees payable
includes fees and expenses payable to Palladian Advisors, Inc. ("PAI") of
$141,828. The amount paid by the Trust
<PAGE>

on any redemption by PAI or, any other then-current holder of the organizational
seed capital shares ("Initial Shares") of the Portfolio, will be reduced by a
portion of any unamortized organization expenses of the Portfolio determined by
the proportion of the number of the Initial Shares of the Portfolio redeemed to
the number of the Initial Shares of the Portfolio outstanding after into account
any prior redemptions of the Initial Shares of the Portfolio.

TRUSTEES. Each Trustee who is not an "interested person" (as defined in the
Act) of the Trust, receives $1,500 per meeting attended, as well as
reimbursement for reasonable out-of-pocket expenses, from the Trust. For the
quarter ending June 30, 1996 the Trust incurred $9,000 in Trustee fees, which
was prorated to each portfolio.

3. MANAGER, PORTFOLIO ADVISOR, PORTFOLIO MANAGERS, ADMINISTRATION FEES AND
OTHER TRANSACTIONS.

Palladian Advisors, Inc. ("PAI") serves as overall Manager of the Trust and is
responsible for general investment supervisory services to the Portfolios. PAI
evaluates and recommends to the Trust registered investment advisors to be
retained by the Trust on behalf of each of the Portfolios as Portfolio Managers
and monitors and assesses their performance and makes periodic reports to the
Trust. In performing these responsibilities, the Manager will rely on the
services of Tremont Partners, Inc., which has been retained as Portfolio
Advisor.

As Portfolio Advisor, Tremont provides research concerning registered investment
advisors to be retained by the Trust as Portfolio Managers, monitors and assists
PAI with the periodic reevaluation of existing Portfolio Managers and makes
periodic reports to PAI and the Trust. PAI, not the Trust, pays the fees of the
Portfolio Advisor.

The Trust and PAI have entered into portfolio management agreements with various
Portfolio Managers. The Portfolio Managers for the Portfolios are as follows:
GAMCO Investors, Inc. serves as the Portfolio Manager for The Value Portfolio
and The Global Interactive/Telecomm Portfolio; Stonehill Capital Management,
Inc. serves as the Portfolio Manager of The Growth Portfolio; Bee & Associates
Incorporated serves as the Portfolio Manager of The International Growth
Portfolio, and Fischer Francis Trees & Watts serves as the Portfolio Manager of
The Global Strategic Income Portfolio.

Each Portfolio pays an overall management fee, computed and accrued daily and
paid monthly, based on its average daily net assets. For the first twelve
months of operations, the management fee is .80% of average net assets. After
that time, the base fee will be 2.0%, but may vary between 0% and 4% depending
on the performance of a Portfolio compared to that of an appropriate benchmark.
Each Portfolio Manager will receive 80% of the fee, and PAI will receive the
remaining 20%. PAI is responsible for paying the fee of Tremont, which equals
32.5% of the fee received by PAI.
<PAGE>

Investors Bank & Trust Company provides transfer agency, portfolio accounting
and custody services for the Trust. The transfer agency and portfolio
accounting fees are the greater of $40,000 or .05% of net assets for the first
$600 million and .03% of the net assets in excess of $600 million. Custody fees
are separated between domestic and global.

Western Capital Financial Group, Inc. (the "Distributor") serves as the
principal underwriter and distributor of the shares of the Trust. The
Distributor does not currently charge any fees for servicing in this capacity.

Certain officers of the Trust are also officers of PAI and the Distributor.

An individual, together with certain affiliated entities, owns a majority
interest in the parent company of Tremont. The individual is also an officer of
GAMCO Investors, Inc. selected by Tremont to provide investment advisory
services to two Portfolios of the Trust.

An officer of the Distributor is also an officer of PAI, and a trustee and
officer of the Trust. An officer of PAI is also a trustee and officer of the
Trust.

4. PURCHASES AND SALES OF SECURITIES. The aggregate cost of purchases and
proceeds from sales of securities, excluding U.S. Government and short-term
investments, for the quarter ending June 30, 1996 were as follows:

Purchases Sales
--------- -----

Value $832,199 $123,109
Growth $141,823 $102,964
International Growth $32,910 -----
Global Strategic Income $860,611 $489,214
Global Telecomm / Interactive $625,940 $98,727

The aggregate cost of purchases and proceeds from sales of long-term U.S.
Government Securities, excluding short-term investments, for the quarter ending
June 30, 1996 were as follows:

Purchases Sales
--------- -----
Global Strategic Income $451,688 -----
<PAGE>

5. SHARES OF BENEFICIAL INTEREST. Each Portfolio of the Trust may issue an
unlimited number of shares of beneficial interest without par value.

MONTH ENDED - 6/30/96
SHARES AMOUNT
- --------------------------------------------------------------------------------
VALUE PORTFOLIO:
Sold. . . . . . . . . . . . . . . . . . . . . . 66,865 $671,929
Issued as reinvestment of dividends . . . . . . 0 0
Redeemed. . . . . . . . . . . . . . . . . . . . (35) (385)
--------------------------
Net increase. . . . . . . . . . . . . . . . . . 66,830 $671,544
--------------------------
--------------------------

MONTH ENDED - 6/30/96
SHARES AMOUNT
- --------------------------------------------------------------------------------
GROWTH PORTFOLIO:
Sold. . . . . . . . . . . . . . . . . . . . . . 8,696 $87,857
Issued as reinvestment of dividends . . . . . . 0 0
Redeemed. . . . . . . . . . . . . . . . . . . . (8) (90)
--------------------------
Net increase. . . . . . . . . . . . . . . . . . 8,688 $87,767
--------------------------
--------------------------

MONTH ENDED - 6/30/96
SHARES AMOUNT
- --------------------------------------------------------------------------------
INTERNATIONAL GROWTH PORTFOLIO:
Sold. . . . . . . . . . . . . . . . . . . . . . 7,142 $65,574
Issued as reinvestment of dividends . . . . . . 0 0
Redeemed. . . . . . . . . . . . . . . . . . . . 0 0
--------------------------
Net increase. . . . . . . . . . . . . . . . . . 7,142 $65,574
--------------------------
--------------------------

MONTH ENDED - 6/30/96
SHARES AMOUNT
- --------------------------------------------------------------------------------
GLOBAL STRATEGIC INCOME PORTFOLIO:
Sold. . . . . . . . . . . . . . . . . . . . . . 141,960 $1,399,125
Issued as reinvestment of dividends . . . . . . 0 0
Redeemed. . . . . . . . . . . . . . . . . . . . (35,563) (333,233)
--------------------------
Net increase. . . . . . . . . . . . . . . . . . 106,397 $1,065,892
--------------------------
--------------------------

MONTH ENDED - 6/30/96
SHARES AMOUNT
- --------------------------------------------------------------------------------
GLOBAL INTERACTIVE / TELECOMM PORTFOLIO:
Sold. . . . . . . . . . . . . . . . . . . . . . 57,615 $575,692
Issued as reinvestment of dividends . . . . . . 0 0
Redeemed. . . . . . . . . . . . . . . . . . . . 0 0
--------------------------
Net increase . . . . . . . . . . . . . . . . . 57,615 $575,692
--------------------------
--------------------------
<PAGE>

6. SUBSEQUENT EVENTS. On August 8, 1996, under the terms approved by the
Board of Trustees of the Portfolios, PAI agreed to limit operating expenses and
reimburse those expenses to the extent that each Portfolio's "other expenses"
(i.e., expenses other than management fees) exceeds the expense limitation for
that Portfolio from September 11, 1996 through January 31, 1997. The Portfolios
will not pay PAI its advisory fee while a receivable is due the Portfolios as a
result of the expense limitations, except that the portion of the advisory fee
that PAI is obligated to pay Tremont Partners, Inc. will be paid. The expense
limitations for each of the Portfolio's as a percentage of average daily net
assets are as follows:

Portfolio Limitation on other expenses
- --------- ----------------------------
Value 0.70%
Growth 0.70%
International Growth 1.20%
Global Strategic Income 1.20%
Global Interactive / Telecomm 1.20%

PAI, if agreed to by the Board, may continue the voluntary expense limitation
past January 31, 1997. Thereafter, each Portfolio is required to reimburse PAI
for any fees it waived or expenses it reimbursed pursuant to the expense
limitation, provided that such reimbursement would not cause the Portfolio's
"other expense" ratio to exceed the expense limitations set forth above.

PAI has acknowledged that, upon termination of the Investment Management
Agreement between PAI and the Portfolios, the Portfolios would not be liable to
PAI for any waived or reimbursed fees which have not been reimbursed. Under the
terms of the Agreement, the Board of Trustees or the Portfolios shareholders may
terminate the Agreement at any time upon 60 days notice. Since the amounts due
PAI are dependent upon future events and the Agreement is terminable, the amount
of the total obligation cannot be reasonably estimated. The repayment to PAI
will be recorded in future years as an expense and a liability at each net asset
value determination date to the extent that such repayment does not cause the
Portfolio to exceed the expense limitation.

In addition, on September 24, 1996 PAI agreed to voluntarily contribute capital
to each of Portfolios as follows:

Portfolio Amount
- --------- ------
Value $51,906.35
Growth $49,230.63
International Growth $34,947.29
Global Strategic Income $52,077.06
Global Interactive / Telecomm $40,662.47

The amounts were contributed to offset expenses accrued to the Portfolios in
excess of the expense limitations set forth above from the period from the
inception of the Portfolios to
<PAGE>

September 10, 1996. PAI received no shares of beneficial interest or other
consideration in exchange for these contributions. These capital contributions
resulted in an increase to paid capital for each Portfolio.

These transactions had no impact on the financial statements of the Portfolios
as of June 30, 1996.

<PAGE>
PART C

OTHER INFORMATION

ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.

(a) FINANCIAL STATEMENTS:

1. Financial Statements included in the Prospectus constituting Part
A of this Registration Statement:

2. Financial Statements included in the Statement of Additional
Information constituting Part B of this Registration Statement:

Statement of Assets and Liabilities, December 31, 1995.

Statement of Assets and Liabilities (unaudited), June 30, 1996.

Statement of Operations (unaudited), February 1, 1996 to
June 30, 1996.

Statement of Change in Net Assets (unaudited), February 1,
1996 to June 30, 1996.

Portfolio of Investments (unaudited), June 30, 1996.

(b) EXHIBITS

1. Declaration of Trust.4/

2. By-Laws.4/

3. Not Applicable.

4. Not Applicable.

5. (a) Form of management agreement between the Registrant and
Palladian Advisors, Inc.4/

(b) Form of portfolio advisor agreement among the Registrant,
Palladian Advisors, Inc. and Tremont Partners, Inc.4/

6. Form of distribution agreement between the Registrant and Western
Capital Financial Group, Inc.3/

7. Not Applicable.

8. Form of custodial and fund accounting contract between the
Registrant and Investors Bank & Trust Company.3/

C-1

<PAGE>

9. (a) Form of transfer agency agreement between Registrant and
Investors Bank & Trust Company.3/

(b) Form of indemnification agreement among Palladian Advisors,
Inc., Tremont Partners, Inc., and a Portfolio Manager.3/

(d) Form of Participation Agreement among Registrant, Security
Life of Denver Insurance Company [and First ING Life Insurance
Company of New York], Western Capital Financial Group, Inc., and
Palladian Advisors, Inc.3/

10. Opinion of counsel.4/

11. Consent of independent accountants.5/

12. Not Applicable.

13. Not Applicable.

14. Not Applicable.

15. Not Applicable.

16. Not Applicable.

17. Not Applicable.

18. Powers of attorney.3/

_________________________

1/ Incorporated by reference to initial registration statement for The
Palladian Trust, Reg. No. 33-73882, filed January 7, 1994.

2/ Incorporated by reference to pre-effective amendment no. 1, Reg. No. 33-
73882, filed May 12, 1995.

3/ Incorporated by reference to pre-effective amendment no. 2, Reg. No. 33-
73882, filed October 18, 1995.

4/ Incorporated by reference to post-effective amendment No. 1, Reg. No.
33-73882, filed January 26, 1996.

5/ Filed herewith.

C-2

<PAGE>

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

Not Applicable.

ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
Number of
Title of Class Record Holders
-------------- --------------

Value 3
Growth 2
Balanced Opportunity 2
International Growth 2
Global Strategic Income 3
Global Interactive/Telecomm 3

ITEM 27. INDEMNIFICATION.

Section 5.4 of the Agreement and Declaration of Trust of The Palladian
Trust provides in part:

"The Trust shall indemnify (from the assets of the Portfolio or
Portfolio in question) each of its Trustees and officers (including
persons who serve at the Trust's request as directors, officers or
trustees of another organization in which the Trust has any interest
as a shareholder, creditor or otherwise) [hereinafter referred to as a
"Covered Person"] against all liabilities, including but not limited
to amounts paid in satisfaction of judgments, in compromise or as
fines and penalties, and expenses, including reasonable accountants'
and counsel fees, incurred by any Covered Person in connection with
the defense or disposition of any action, suit or other proceeding,
whether civil or criminal, before any court or administrative or
legislative body, in which such Covered Person may be or may have been
involved as a party or otherwise or with which such person may be or
may have been threatened, while in office or thereafter, by reason of
being or having been such a Trustee or officer, director or trustee,
except with respect to any matter as to which it has been determined
that such Covered Person (i) did not act in good faith in the
reasonable relief that such Covered Person's action was in or not
opposed to the best interests of the Trust or (ii) had acted with
willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of such Covered Person's office
(either and both of the conduct described in (i) and (ii) being
referred to hereafter as "Disabling Conduct")."

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The Agreement and Declaration, Exhibit 1 hereto, provides additional terms of
this indemnification.

The agreement between the Registrant and the Manager includes the following
indemnification provision:

"The Manager shall not be liable for any loss suffered by the Trust as
the result of actions by persons other than the Manager or for any
loss suffered by the Trust as the result of any negligent act or error
of judgment of the Manager in connection with the matters to which
this Agreement relates, except a loss resulting from a breach by the
Manager of its fiduciary duty with respect to the receipt of
compensation for services (in which case any award of damages shall be
limited to the period and the amount set forth in Section 36(b)(3) of
the 1940 Act) or loss resulting from willful misfeasance, bad faith or
gross negligence on its part in the performance of its duties under
this Agreement or from reckless disregard by it of its obligations and
duties under this Agreement. The Trust shall indemnify the Manager
and hold it harmless from all cost, damage and expense, including
reasonable expenses for legal counsel, incurred by the Manager
resulting from actions for which it is relieved of responsibility by
this paragraph. The Manager shall indemnify the Trust and hold it
harmless from all cost, damage and expense, including reasonable
expenses for legal counsel, incurred by the Trust resulting from (i) a
breach by the Manager of its fiduciary duty with respect to
compensation for services paid by the Trust (in which case any award
of damages shall be limited to the period and the amount set forth in
Section 36(b)(3) of the 1940 Act); (ii) willful misfeasance, bad faith
or gross negligence by the Manager in the performance of its duties
under this Agreement; or (iii) reckless disregard by the Manager of
its obligations and duties under this Agreement."

The agreements with the Portfolio Advisor and the Portfolio Managers
include substantially similar provisions.

By separate indemnification agreements, the Manager, the Portfolio Advisor
and each Portfolio Manager have indemnified each other from all cost damage and
expense, including reasonable expenses for legal counsel, incurred by the
indemnified party as a result of the indemnifying party's actions or omissions
in performing its duties under the advisory agreements that constitute
negligence, bad faith, breach of trust or fiduciary duty, a material violation
of one or more of the advisory agreements, fraud, reckless or intentional
misconduct, or violation of law or regulation.

The Participation Agreements with Security Life of Denver Insurance Company
and First ING Life Insurance Company of New York include certain indemnification
provisions. Subject to certain limitations, the Life Company agrees, among
other things,

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to indemnify the Registrant, the Manager and the principal underwriter for any
and all losses, claims, damages, or liabilities (including legal and other
expenses) arising out of certain misrepresentations or omissions, a failure by
Life Company to substantially provide the services required by the Participation
Agreement, or a material breach of the Participation Agreement. Subject to
certain limitations, the Manager and the principal underwriter agree, among
other things, to indemnify the Life Company against all losses, claims, damages,
or liabilities (including legal and other expenses) arising out of certain
misrepresentations or omissions, a failure by the Trust to meet certain
requirements, or a material breach of the Participation Agreement.

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

ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER

(b) PALLADIAN ADVISORS, INC. ("PAI")

See "Management of the Trust" in both Prospectuses and Statements of
Additional Information (Parts A and B) of this Registration Statement.

The business and other connections of the PAI's directors and officers are
set forth below.

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<PAGE>

Position
Name and Address with PAI Principal Occupations
- ---------------- -------- ---------------------

Matthew J. Stacom Chairman Vice Chairman, Cushman
51 West 52nd Street & Wakefield, September
New York, NY 10036 1946 to present.

Lesta Stacom- Vice Vice Chairman, PAI,
Summerfield Chairman December 1992 to
5211 Fisher Island Drive present.
Fisher Island Miami, FL
33109

H. Michael Schwartz Director, Vice President and
4225 Executive Square President, Chief Financial
Suite 270 Secretary Officer, Protean
La Jolla, CA 92037 Financial Companies,
December 1992 to
present; President,
Western Capital
Financial Group, Inc.
April 1994 to present;
Chief Financial
Officer, Western
Capital Financial
Group, Inc., October
1988 to April 1994.

(b) TREMONT PARTNERS, INC.

See "Management of the Trust" both in the Prospectus and Statement of
Additional Information (Parts A and B) of this Registration Statement relating
to the six Portfolios.

Information as to Tremont Partners, Inc.'s directors, officers and partners
included in its Form ADV filed with the Securities and Exchange Commission (File
No. 801-238-22), as most recently amended, the text of which is incorporated
herein by reference.

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<PAGE>

See "Management of the Trust" both in the Prospectus and Statement of
Additional Information (Parts A and B) of this Registration Statement relating
to the Value and Global Interactive/Telecomm Portfolios.

Information as to GAMCO Investors, Inc.'s directors and executive officers
is included in its Form ADV filed with the Securities and Exchange Commission
(File No. 801-141-32), as most recently amended, the text of which is
incorporated herein by reference.

(d) STONEHILL CAPITAL MANAGEMENT, INC.

See "Management of the Trust" both in the Prospectus and Statement of
Additional Information (Parts A and B) of this Registration Statement relating
to the Growth Portfolio.

Information as to Stonehill Capital Management, Inc.'s directors and
executive officers is included in its Form ADV filed with the Securities and
Exchange Commission (File No. 801-39-824), as most recently amended, the text of
which is incorporated herein by reference.

(e) BEE & ASSOCIATES INCORPORATED

See "Management of the Trust" both in the Prospectus and Statement of
Additional Information (Parts A and B) of this Registration Statement relating
to the International Growth Portfolio.

Information as to Bee & Associates Incorporated's directors and executive
officers is included in its Form ADV filed with the Securities and Exchange
Commission (File No. 801-345-38), as most recently amended, the text of which is
incorporated herein by reference.

(f) FISCHER FRANCIS TREES & WATTS, INC.

See "Management of the Trust" both in the Prospectus and Statement of
Additional Information (Parts A and B) of this Registration Statement relating
to the Global Strategic Income Portfolio.

Information as to Fischer Francis Trees & Watts, Inc.'s directors and
executive officers is included in its Form ADV filed with the Securities and
Exchange Commission (File No. 801-105-07), as most recently amended, the text of
which is incorporated herein by reference.

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<PAGE>

ITEM 29. PRINCIPAL UNDERWRITERS

(a) The principal underwriter does not act as principal underwriter,
depositor or investment adviser of any other investment company.

(b) Information concerning the directors and officers of Western Capital
Financial Group, Inc. is set forth below. The address of each person is 4225
Executive Square, Suite 325, La Jolla, California 92037.

Positions and Positions and
Offices with Offices with
Name Underwriter Registrant
- ---- ------------ -------------
H. Michael Schwartz President and Trustee, President,
Director Secretary and
Treasurer

Dan Dubois Senior Vice None
President

Richard Zak Senior Vice None
President

ITEM 30. LOCATION OF ACCOUNTS AND RECORDS

All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules thereunder are
maintained at the offices of (1) the Registrant and Palladian Advisors, Inc.,
4225 Executive Square, Suite 325, La Jolla, CA 92037; (2) GAMCO Investors, Inc.,
One Corporate Center, Rye, NY 10580; (3) Stonehill Capital Management, Inc., 277
Park Avenue, New York, NY 10172; (4) Bee & Associates Incorporated, 370 17th
Street, Denver, CO 80202; (5) Fischer Francis Trees & Watts, Inc., 200 Park
Avenue, 46th Floor, New York, NY 10166; (6) Tremont Partners, Inc., One
Corporate Center at Rye, 555 Theodore Fremd Avenue, Rye, NY 10580; and (7)
Investors Bank & Trust Company, 89 South Street, Boston, MA 02111.

ITEM 31. MANAGEMENT SERVICES

Not Applicable.

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ITEM 32. UNDERTAKINGS

Not applicable.

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<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 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 City of La Jolla, and State of California on the 3rd day of
December, 1996.

THE PALLADIAN TRUST

By: /s/ H. Michael Schwartz
-------------------------------
H. Michael Schwartz
Trustee, President,
Secretary and Treasurer

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the 3rd day of December, 1996.

SIGNATURE AND TITLE

/s/ Matthew J. Stacom By: /s/ H. Michael Schwartz
- ------------------------------ --------------------------------
Matthew J. Stacom H. Michael Schwartz
Chairman and Vice President (Attorney-in-Fact)

/s/ H. Michael Schwartz
- ------------------------------
H. Michael Schwartz
Trustee, President,
Secretary and Treasurer

/s/ Tom N. Dallape By: /s/ H. Michael Schwartz
- ------------------------------ ---------------------------------
Tom N. Dallape H. Michael Schwartz
Trustee (Attorney-in-Fact)

C-10

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EXHIBIT INDEX

EXHIBIT NO. DESCRIPTION PAGE NOS.
- ----------- ----------------------- ---------

11 Consent of independent accountants

C-11

<PAGE>

[COOPERS & LYBRAND LETTERHEAD]

CONSENT OF INDEPENDENT ACCOUNTANTS

To the Board of Trustees
and Shareholders of The Palladian Trust

We consent to the inclusion in the Post-Effective Amendment No. 3 to the
Registration Statement of The Palladian Trust (File No. 33-73882) of our
report dated January 15, 1996 on our audits of the statements of assets and
liabilities of the Value, Growth, Balanced Opportunity, International Growth,
Global Strategic Income, and Global Interactive/Telecomm Portfolios, six
series of The Palladian Trust as of December 31, 1995. We also consent to the
reference of our Firm under the caption "Service Providers" in the statement
of additional information.

Los Angeles, California COOPERS & LYBRAND L.L.P.
December 4, 1996