GNA VARIABLE SERIES TRUST, 485BPOS, 1997-04-30

GNA VARIABLE SERIES TRUST
485BPOS, 1997-04-30

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As filed with the Securities and Exchange Commission on April 30, 1997

1933 Act File No. 33-77138
1940 Act File No. 811-8456

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. 4 [X]

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

GNA VARIABLE SERIES TRUST

(Exact Name of Registrant as Specified in Charter)

Suite 5600, Two Union Square, Seattle, Washington 98101
(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, Including Area Code: (206) 625-1755

Edward J. Wiles, Esq.
GNA Variable Series Trust
Suite 5600
Two Union Square
Seattle, Washington 98101
(Name and Address of Agent for Service)

It is proposed that this filing will become effective under Rule 485:

[_] Immediately upon filing [X] On May 1, 1997
pursuant to paragraph (b), pursuant to paragraph (b),
[_] 60 days after filing [_] On ______________ pursuant
pursuant to paragraph (a)(1), to paragraph (a)(1).
[_] 75 days after filing pursuant [_] On ______________ pursuant
to paragraph (a)(2), to paragraph (a)(2) of
rule 485.

If appropriate, check the following box:
[_] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
--------------------

The Registrant hereby declares that, pursuant to Rule 24f-2(a)(1)
promulgated under the Investment Company Act of 1940, as amended, it has
registered an indefinite number of shares of beneficial interest, no par value,
of each of the GNA Adjustable Rate Portfolio series, GNA Government Portfolio
series, GNA Value Portfolio series and GNA Growth Portfolio series, and of the
Registrant. The Registrant filed its Rule 24f-2 notice for the year ended
December 31, 1996 on or about February 28, 1997.

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<PAGE>

CROSS REFERENCE SHEET

(REGISTRATION STATEMENT ON
FORM N-1A AND PROSPECTUS)

<TABLE>
<CAPTION>
Form N-1A Item No. Caption or
Part A Location in the Prospectus
<S> <C>
1. Cover Page......................................Cover page

2. Synopsis........................................Not Applicable

3. Condensed Financial Information.................Not Applicable

4. General Description of Registrant...............Investment Objective and
Policies; The Trust, the
Portfolios and Management

5. Management of the Portfolio.....................The Trust, the Portfolios
and Management; Additional
Information

6. Capital Stock and Other Securities..............Dividends, Distributions
and Taxes; The Trust, the
Portfolios and Management

7. Purchase of Securities Being
Offered.......................................Purchases and Redemptions

8. Redemption or Repurchase........................Purchases and Redemptions

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

Caption or Location in
Part B Statement of Additional Information

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

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

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

13. Investment Objectives and Policies..............Additional Information
Concerning Certain
Investment Techniques;
Debt Instruments and
Permitted Cash
Investments; Debt
Securities Ratings;
Investment Restrictions;
Portfolio Transactions

14. Management of the Registrant....................Management of the Trust

15. Control Persons and Principal Holder
of Securities.................................Management of the Trust

16. Investment Advisory and Other Services..........The Investment Adviser
and Sub-Advisers

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

18. Capital Stock and Other Securities..............General Information

19. Purchase, Redemption and Pricing
of Securities Being Offered...................Purchase and Redemption
Information; Net Asset
Value

2
<PAGE>

Caption or Location in
Part B Statement of Additional Information

20. Tax Status......................................Certain Tax Matters

21. Underwriters....................................Not Applicable

22. Calculation of Performance Data.................Performance Information

23. Financial Statements............................Financial Statements
</TABLE>
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<PAGE>

GNA VARIABLE SERIES TRUST(sm)

GNA Variable Series Trust (the "Trust") is a professionally managed, open-end
investment company that offers a selection of diversified managed investment
portfolios (individually a "Portfolio"; collectively, the "Portfolios"), each
with its own investment objective and policies. This Prospectus describes the
following four Portfolios currently offered by the Trust.

The GNA Adjustable Rate Portfolio's investment objective is to produce a high
level of current income consistent with limiting fluctuations in net asset value
of shares. This Portfolio will seek to achieve its objective by investing
primarily in adjustable rate securities, including, but not limited to
adjustable rate mortgage securities.

The GNA Government Portfolio's investment objective is to produce a high level
of current income consistent with safety of principal. This Portfolio will seek
to achieve its objective by investing primarily in obligations issued or
guaranteed by the U.S. Government or by its agencies or instrumentalities.

The GNA Value Portfolio's investment objective is to provide long-term growth of
capital and an above-average level of dividend income by investing primarily in
equity securities. This Portfolio will seek to provide a higher total return
than that of the Standard & Poor's 500 Stock Index (the "S&P 500 Index").

The GNA Growth Portfolio's investment objective is to provide long term growth
of capital. This Portfolio will seek to achieve its objective by investing
primarily in equity securities of companies which, in the opinion of the
Portfolio's sub-adviser, have above average prospects for growth.

Shares of each Portfolio are offered only to insurance company separate accounts
that fund certain variable contracts. The information contained in this
Prospectus should be read together with the Prospectus for the variable
contracts.

This Prospectus sets forth the information about the Trust and the Portfolios
that you ought to know before allocating premiums or cash value from variable
contracts to the Portfolios. Please read this Prospectus carefully and retain it
for future reference. A Statement of Additional Information (dated May 1, 1997)
for the Portfolios has been filed with the Securities and Exchange Commission
and is incorporated herein by reference. This Statement of Additional
Information is available upon request and without charge by contacting the Trust
at Suite 5600, Two Union Square, 601 Union Street, Seattle, Washington 98101 or
by telephoning (800) 455-0870.

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

THESE SECURITIES ARE NOT DEPOSITS WITH OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR ANY AFFILIATE THEREOF, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC), THE FEDERAL RESERVE BOARD OR ANY
OTHER GOVERNMENT AGENCY.

Prospectus
May 1, 1997

4
<PAGE>

Page
FINANCIAL HIGHLIGHTS .............................

GENERAL INFORMATION ..............................

INVESTMENT OBJECTIVES
AND POLICIES ..................................
The GNA Adjustable Rate Portfolio .............
The GNA Government Portfolio ..................
The GNA Value Portfolio .......................
The GNA Growth Portfolio ......................
Additional Investment Techniques ..............

PURCHASES AND REDEMPTIONS ........................

EXCHANGE PRIVILEGE ...............................

NET ASSET VALUE ..................................
The GNA Adjustable Rate Portfolio .............
The GNA Government Portfolio ..................
The GNA Value Portfolio .......................
The GNA Growth Portfolio ......................

DIVIDENDS, DISTRIBUTIONS
AND TAXES .....................................

PERFORMANCE INFORMATION ..........................
Yield .........................................
Total Return ..................................
Periodicals and Indices .......................

THE TRUST, THE PORTFOLIOS
AND MANAGEMENT ................................
The GNA Adjustable Rate Portfolio .............
The GNA Government Portfolio ..................
The GNA Value Portfolio .......................
The GNA Growth Portfolio ......................

ADDITIONAL INFORMATION ...........................
Transfer Agent and Custodian ..................
Independent Accountants and
Counsel .....................................

5
<PAGE>

FINANCIAL HIGHLIGHTS

The Financial Highlights set forth below include selected data for a share
outstanding throughout each period and other performance information derived
from the financial statements of the Portfolios that have been audited by
Coopers & Lybrand L.L.P., independent accountants, whose report thereon is
contained in the Trust's Annual Report which is included in the Statement of
Additional Information. The Statement of Additional Information and the Trust's
Annual Report may be obtained by writing or calling the Trust.

GNA Growth Portfolio GNA Value Portfolio
Year Ended Year Ended Year Ended Year Ended
12/31/96 12/31/95(a) 12/31/96 12/31/95(a)
<S> <C>
Net Asset Value,
beginning of period... $33.24 $25.00 $31.32 $25.00
----- ----- ----- -----
Income from Investment
Operations
Net investment
income *............ 0.08 0.10 0.40 0.55
Net realized and
unrealized gains
(losses) on
investments......... 5.74 8.24 6.54 6.31
---- ---- ---- ----

Total from investment
operations............ 5.82 8.34 6.94 6.86
---- ---- ---- ----

Less Distributions From
Net investment income. (0.03) (0.10) (0.41) (0.54)
Net realized gains.... (0.36) 0.00 (2.23) 0.00
------ ---- ------ ----
Total distributions... (0.39) (0.10) (2.64) (0.54)
------ ------ ------ ------

Net Asset Value,
end of period......... $38.67 $33.24 $35.62 $31.32
====== ====== ====== ======

Total Return (%) (b) 17.48 33.37 22.29 27.68

Ratios/Supplemental Data
Ratios to average daily
net assets (%) (c)
Net expenses*....... 1.10 1.10 1.10 1.10
Gross expenses*..... 1.64 2.89 1.82 3.87
Net investment
income*............ 0.21 0.47 1.22 2.03

Portfolio turnover (%) 42.57 65.88 98.53 41.67

Net Assets, end of
period (millions)..... $12.4 $6.9 $10.5 $4.5

* Reimbursement of expenses
from Adviser.......... $0.21 $0.38 $0.24 $0.75

Average commission rate (d) $0.050 N/A $0.050 N/A
</TABLE>

(a) For the period January 3, 1995 (commencement of operations) through
December 31, 1995.
(b) Total returns are historical and assume changes in share price and
reinvestment of dividends and capital gains. Had the Adviser not
absorbed a portion of expenses, total return would have been lower.
Periods less than one year are not annualized.
(c) Annualized.
(d) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share of security
trades on which commissions are charged.

<PAGE>

GNA GNA
Government Portfolio Adjustable Rate Portfolio
Year Ended Year Ended Year Ended Year Ended
12/31/96 12/31/95(a) 12/31/96 12/31/95(a)

Net Asset Value,
beginning of period... $27.19 $25.00 $26.44 $25.00
----- ----- ----- -----
Income from Investment
Operations
Net investment
income *............ 1.64 1.70 1.54 1.38
Net realized and
unrealized gains
(losses) on
investments......... (0.79) 2.19 (0.12) 1.44
------ ---- ------ ----

Total from investment
operations............ 0.85 3.89 1.42 2.82
---- ---- ---- ----

Less Distributions From
Net investment income. (1.66) (1.70) (1.62) (1.38)
Net realized gains.... (0.50) 0.00 (0.27) 0.00
------ ---- ------ ----
Total distributions... (2.16) (1.70) (1.89) (1.38)
------ ------ ------ ------

Net Asset Value,
end of period......... $25.88 $27.19 $25.97 $26.44
====== ====== ====== ======

Total Return (%) (b) 3.38 15.99 5.60 11.50

Ratios/Supplemental Data
Ratios to average daily
net assets (%) (c)
Net expenses*....... 0.90 0.90 0.70 0.70
Gross expenses*..... 1.68 2.09 1.63 2.05
Net investment
income*........... 6.34 6.51 6.19 5.38

Portfolio turnover(%). 1.65 129.71 36.59 36.47

Net Assets, end of
period (millions)..... $8.1 $7.2 $6.4 $5.6

* Reimbursement of expenses
from Adviser.......... $0.20 $0.31 $0.23 $0.35

Average commission rate (d) N/A N/A N/A N/A

GENERAL INFORMATION

GNA Variable Series Trust(sm) (the "Trust") is a Delaware business trust, and is
an open-end, diversified, management investment company. Shares of the Trust are
offered only to insurance company separate accounts that fund certain variable
contracts (the "Contracts"). Separate accounts may purchase or redeem shares at
net asset value without any sales or redemption charge. Fees and charges imposed
by a separate account, however, will affect the actual return to the holder of a
Contract. A separate account may also impose certain restrictions or limitations
on the allocation of purchase payments or Contract value to the Trust, and the
Trust may not be available in connection with a particular Contract. Prospective
investors should consult the applicable Contract prospectus for information

7
<PAGE>

regarding fees and expenses of the Contract and separate account and any
applicable restrictions or limitations.

Shares of the Portfolios are offered to the separate accounts of insurance
companies that are affiliated with GNA Capital Management, Inc., the Trust's
investment adviser, and may also be offered to the separate accounts of
unaffiliated insurance companies. Shares of the Portfolios may serve as the
underlying investments for both annuity and life insurance contracts. In that
event, certain conflicts may at some point arise between variable annuity
contract holders and variable life insurance contract holders which could
adversely affect the management of the Portfolios. See "Purchases and
Redemptions."

INVESTMENT OBJECTIVES AND POLICIES

The Trust offers four series of shares, each of which represents a segregated,
separately managed portfolio of securities with its own investment objective.
The investment objective of each Portfolio is a fundamental policy that cannot
be changed without shareholder approval. Except as expressly provided in this
Prospectus or the Statement of Additional Information, the other investment
policies of each Portfolio are not fundamental and may be changed without such
approval. There can be no assurance that a Portfolio will be able to achieve its
investment objective.

The GNA Adjustable Rate Portfolio

The investment objective of the GNA Adjustable Rate Portfolio (the "Adjustable
Rate Portfolio") is to produce a high level of current income consistent with
limiting fluctuations in the net asset value of Adjustable Rate Portfolio
shares.

The Adjustable Rate Portfolio will seek to achieve its investment objective by
investing primarily in adjustable rate securities, including, but not limited
to, adjustable rate mortgage securities ("ARMs"). ARMs are collateralized by
adjustable rate, rather than fixed-rate, mortgages. The Adjustable Rate
Portfolio intends to invest at least 65% of the value of its total assets in
adjustable rate securities under normal market conditions.

At least 50% of the Adjustable Rate Portfolio's total assets will be invested in
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities ("U.S. Government Securities") or securities that are
collateralized by U.S. Government Securities. The Adjustable Rate Portfolio may
also invest in high-grade fixed and adjustable rate mortgage and debt securities
rated within the three highest credit categories by Moody's, S&P or Fitch
Investors Service ("Fitch") or, if unrated, determined by the Adjustable Rate
Portfolio's sub-adviser, Standish, Ayer & Wood, Inc. ("Standish, Ayer & Wood")
to be of equivalent quality. In the event the rating of a security is
downgraded, Standish, Ayer & Wood will determine whether the securities should
be retained or sold depending on an assessment of all facts and circumstances at
that time. The Adjustable Rate Portfolio will concentrate at least 25% of its
total assets in asset-backed securities, including mortgage securities of
governmental and non-governmental issuers, collateralized mortgage obligations
and other asset-backed securities. The Adjustable Rate Portfolio is expected to
have an effective duration ranging from 1 year to 2 1/2 years. A bond's duration
is the weighted average life of its principal and interest payments and is often
considered a useful indication of its price volatility.

Adjustable rate mortgages, like fixed-rate mortgages, have a specified maturity
date, and the principal amount of the mortgage is repaid over the life of the
mortgage. Unlike fixed-rate mortgages, the interest rate on adjustable rate
mortgages is adjusted at regular intervals based on a specified, published
interest rate "index." The new rate is determined by adding a specific interest
amount, the "margin" or "spread," to the interest rate of the index. See
"Characteristics of ARMs." As a result, ARMs generally provide higher yields
than money market securities and more stable principal values than longer term
fixed-rate mortgage securities. Investment in ARMs allows the Adjustable Rate
Portfolio to participate in changing interest rate levels through regular
adjustments in the coupons of the underlying mortgages, resulting in more
variable current income and lower price volatility than longer term fixed-rate
mortgage securities. The ARMs in which the Adjustable Rate Portfolio expects to
invest will generally
8

<PAGE>

adjust their interest rates at regular intervals of two
years or less. ARMs are a less effective means of locking in long-term rates
than securities collateralized by fixed-rate mortgages because the income from
adjustable rate mortgages will increase during periods of rising interest rates
and decline during periods of falling rates.

Mortgage Securities. A mortgage security is an interest in a pool of mortgage
loans. The Adjustable Rate Portfolio will invest primarily in mortgage
securities that are collateralized by a pool of adjustable rate mortgages. The
primary issuers of ARMs are the Federal National Mortgage Association, the
Federal Home Loan Mortgage Corporation and the Government National Mortgage
Association. The principal and interest on GNMA securities are guaranteed by
GNMA and backed by the full faith and credit of the U.S. Government. While the
ARMs issued by FNMA and FHLMC are not backed by the full faith and credit of the
U.S. Government, their close relationship with the U.S. Government makes them
high quality securities with minimal credit risks.

Some mortgage securities are called "pass-through certificates" because a
pro-rata share of interest (less GNMA, FHLMC, or FNMA fees and any applicable
loan servicing fees) as well as scheduled and unscheduled principal payments on
the underlying mortgage pool are passed through each month to the owner of the
security (e.g., the Adjustable Rate Portfolio). While the Adjustable Rate
Portfolio's net income will be distributed to shareholders, the Adjustable Rate
Portfolio will reinvest scheduled and unscheduled principal payments, and
prevailing interest rates may be higher or lower than the Adjustable Rate
Portfolio's current yield at the time these investments are made.

Characteristics of ARMs. The interest rates paid on the adjustable rate
mortgages underlying ARMs are reset at regular intervals by adding an interest
rate margin to a specified interest rate index. There are two main categories of
indices: rates tied to the yield on U.S. Treasury securities or the London
interbank offered rate; and those derived from a calculated measure such as a
cost of living index or a moving average of mortgage rates. Some indices, such
as the one-year constant maturity Treasury rate, closely mirror changes in
interest rate levels. Others, such as the 11th District Home Loan Bank Cost of
Funds Index, tend to lag behind changes in market rate levels and tend to be
somewhat less volatile. Due to the inverse relationship between interest rates
and the value of certain securities, such a delay in adjusting to changes in
interest rates may cause the Adjustable Rate Portfolio's net asset value to
increase or decrease in value, particularly during periods between interest
adjustment dates.

The underlying adjustable rate mortgages in which the Adjustable Rate Portfolio
invests will frequently have caps and floors which limit the maximum amount by
which the interest rate to the residential borrower may move up or down,
respectively, during each adjustment period and over the life of the loan.
Interest rate caps on mortgages underlying ARMs may prevent their income from
increasing to prevailing interest rate levels, and cause these securities to
decrease in value. Conversely, interest rate floors on mortgages underlying ARMs
may cause their income to remain higher than prevailing interest rate levels and
result in an increase in the value of such securities. In addition, some
residential mortgage loans limit adjustments to the borrower's monthly principal
and interest payments rather than limiting interest rate changes. These payment
caps may cause the outstanding principal balance of the mortgage to increase.

Mortgage securities generally have a maximum maturity of 15 to 30 years.
However, due to the adjustable rate feature of the mortgages underlying ARMs,
their prices are considered to have volatility characteristics which approximate
the average period of time until the next adjustment of the interest rate. As a
result, the principal volatility of ARMs may be more comparable to short- and
intermediate-term securities than to longer term fixed-rate mortgage securities.

Collateralized Mortgage Obligations ("CMOs"). The Adjustable Rate Portfolio may
also invest in CMOs which are debt obligations fully collateralized by a
portfolio of mortgages or mortgage-related securities. Typically, CMOs are
collateralized by mortgage securities guaranteed or issued by GNMA, FNMA or
FHLMC. Payments of principal and interest on the mortgages are passed through to
the holders of the CMOs on the same schedule as they are received, although
certain classes of CMOs have priority over others with respect to the receipt of
prepayments on the mortgages. Therefore, depending on the types of CMOs in which
the Adjustable Rate Portfolio invests, the

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<PAGE>

investment may be subject to a greater or lesser risk of prepayment than other
types of mortgage-related securities.

U.S. Government Securities. The U.S. Government Securities which the Adjustable
Rate Portfolio may purchase include but are not limited to (1) U.S. Treasury
obligations: Treasury Notes (maturities of one to ten years) and Treasury Bonds
(generally maturities of greater than ten years); and (2) obligations issued,
guaranteed or otherwise backed by the U.S. Government, its agencies or
instrumentalities which are supported by any of the following: (a) the full
faith and credit of the U.S. Treasury (such as obligations of GNMA, the General
Services Administration and Federal Maritime Administration), (b) the right of
the issuer to borrow an amount limited to a specific line of credit from the
U.S. Treasury (such as obligations of the FNMA, FHLMC and the U.S. Postal
Service); the U.S. Treasury has discretionary authority to provide financial
assistance to such entities, however, it is not obligated to do so by law and
may take steps to restrict or eliminate such support in the future; or (c) the
credit of the agency or instrumentality (such as obligations of the Federal Home
Loan Bank and Federal Farm Credit System).

U.S. Government Securities of the type to be included in the Adjustable Rate
Portfolio's portfolio have historically involved little risk of loss of
principal if held to maturity. However, the prices of such securities are
inversely affected by changes in interest rate levels. A decrease in rates
generally produces an increase in the value of the Adjustable Rate Portfolio's
investments while an increase in rates generally reduces the value of these
investments.

Other Securities

The Adjustable Rate Portfolio may invest up to 35% of its total assets in
securities other than adjustable rate mortgage securities, either alone or in
combination with money market securities.

Multi-Class Residential Mortgage Securities. The Adjustable Rate Portfolio may
invest in Multi-Class Residential Mortgage Securities. Such securities represent
interests in pools of mortgage loans to residential home buyers made by
commercial banks, savings and loan associations or other financial institutions.
Unlike GNMA, FNMA and FHLMC securities, the payment of principal and interest on
Multi-Class Residential Mortgage Securities is not guaranteed or otherwise
backed by the U.S. Government or any of its agencies. Accordingly, yields on
Multi-Class Residential Mortgage Securities have been historically higher than
the yields on U.S. Government mortgage securities. However, the risk of loss due
to default on such instruments is higher since they are not guaranteed by the
U.S. Government, its agencies or instrumentalities. Additionally, pools of such
securities may be divided into senior or subordinated segments. Although
subordinated mortgage securities may have a higher yield than senior mortgage
securities, the risk of loss of principal is greater because losses on the
underlying mortgage loans must be borne by persons holding subordinated
securities before those holding senior mortgage securities.

Stripped Mortgage Securities. The Adjustable Rate Portfolio may also invest in
stripped mortgage securities. With such securities, the principal and interest
payments on a pool of mortgages are separated or "stripped" to create two
classes of securities. In general, the interest-only, or "IO" class of stripped
securities, receives all interest and no principal payments, while the
principal-only, or "PO" class, is entitled to receive all principal and no
interest payments. Stripped mortgage securities are expected to be acutely
sensitive to fluctuations in interest rates which, in turn, affect prepayment
rates on the mortgages underlying stripped securities. The Adjustable Rate
Portfolio will invest principally in IO securities for the purpose of reducing,
or hedging against, the decline in principal value of mortgage securities which
may occur as a result of increasing interest and prepayment rates.

Asset-Backed Securities. Asset-backed securities represent a participation in,
or are secured by and payable from, a stream of payments generated by particular
assets, for example, credit card or automobile receivables and home equity
loans. Asset-backed commercial paper, one type of asset-backed security, is
issued by a special purpose entity, organized solely to issue the commercial
paper and to purchase interests in the assets. The credit quality of these
securities depends primarily upon the quality of the underlying assets and the
level of credit support and/or enhancement provided.

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<PAGE>

The underlying assets (e.g., loans) are subject to prepayments which shorten the
securities' weighted average life and may lower their return. If the credit
support or enhancement is exhausted, losses or delays in payment may result if
the required payments of principal and interest are not made. The value of these
securities also may change because of changes in the market's perception of the
creditworthiness of the servicing agent for the pool, the originator of the
pool, or the financial institution providing the credit support or enhancement.

Non U.S. Government ARMs or CMOs. The Adjustable Rate Portfolio may purchase
ARMs or CMOs issued by private issuers. Privately issued ARMs and CMOs may take
a form similar to ARMs or CMOs issued or guaranteed by GNMA, FNMA or FHMLC.
Private issuers include originators of or investors in mortgage loans and
receivables such as savings and loan associations, savings banks, commercial
banks, investment banks, finance companies and special purpose finance
subsidiaries of any of the above. Securities issued by private issuers must be
rated at least A by S&P, Moody's or Fitch or, if unrated, be judged by Standish,
Ayer & Wood to be of equivalent quality. Such rating may be based, in part, on
certain types of credit enhancements issued in respect of such securities. Such
credit enhancements may include insurance policies, bank letters of credit, or
guaranties by third parties. CMOs may also be issued by private issuers. Such
CMOs are collateralized by mortgages or mortgage related securities of such
private issuers. Certain private issuers of ARMs and CMOs may be considered
investment companies under the Investment Company Act of 1940. In such event,
the Adjustable Rate Portfolio may be restricted from investing in the securities
of such issuers.

Cash Reserves. The Adjustable Rate Portfolio may hold short-term U.S. government
cash reserves (money market securities maturing in one year or less) if
Standish, Ayer & Wood believes such holdings are advisable to facilitate the
Adjustable Rate Portfolio's cash flow needs (e.g., redemptions and expenses) or
for temporary defensive purposes.

Debt Securities. The Adjustable Rate Portfolio may invest in short-term debt
securities, such as commercial paper, that are rated at least A3 by S&P or Fitch
or Prime-3 by Moody's or, if not rated, are of equivalent investment quality as
determined by Standish, Ayer & Wood. Debt securities within the top credit
categories comprise what are generally known as high-quality bonds.

Other Portfolio Strategies

Lending of Portfolio Securities. The Adjustable Rate Portfolio may lend its
portfolio securities to qualified institutional investors for the purpose of
realizing additional income. Loans may be made pursuant to agreements which
provide safeguards for the Adjustable Rate Portfolio, e.g., that the loans will
be continuously secured by collateral in any combination of cash, letters of
credit and securities of the U.S. Government or its agencies, equal to at least
the market value at all times of the securities lent. The bank or banks issuing
any such letters of credit must meet creditworthiness standards approved by the
Adjustable Rate Portfolio's Board of Trustees. The Adjustable Rate Portfolio
will not make securities loans if as a result the aggregate of all outstanding
securities loans exceeds one-third of the value of the Adjustable Rate
Portfolio's total assets. The Adjustable Rate Portfolio receives compensation
for lending its securities in the form of fees or it retains a portion of
interest on the investment of any cash collateral it receives. The Adjustable
Rate Portfolio also continues to receive interest or dividends on the securities
lent. However, the amounts received by the Adjustable Rate Portfolio may be
reduced by administrative or finders' fees paid to broker-dealers and related
expenses.

The primary risk in lending securities is that the borrower may become insolvent
at a time at which the loaned security is rapidly increasing in value. In such
event, if the borrower fails to return the loaned security, the existing
collateral might be insufficient to purchase back the full amount of the
security loaned, and the borrower would be unable to furnish additional
collateral. The borrower would be liable for any shortage, but the lending
Adjustable Rate Portfolio would be an unsecured creditor with respect to such
shortage and might not be able to recover all or any thereof. However, this risk
may be minimized by a careful selection of borrowers and securities to be lent
and by monitoring collateral.

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When-Issued and Forward Commitment Contracts. The Adjustable Rate Portfolio may
purchase securities on a "when-issued" or delayed delivery basis or may purchase
or sell securities on a forward commitment basis. No more than 25% of the
Adjustable Rate Portfolio's assets will be invested in these types of
securities, including forward roll transactions described below. When such
transactions are negotiated, the price is fixed at the time of the commitment,
but delivery and payment for the securities can take place a month or more after
the date of the commitment to purchase. The securities so purchased or sold are
subject to market fluctuation, and no interest accrues to the purchaser during
this period. At the time of delivery of the securities, their value may be more
or less than the purchase or sale price. The Adjustable Rate Portfolio may
receive a fee for entering into forward commitment contracts.

Forward Roll Transactions. In order to enhance current income, the Adjustable
Rate Portfolio may enter into forward roll transactions with respect to
mortgage-backed securities. In a forward roll transaction, the Adjustable Rate
Portfolio sells a mortgage-backed security to a financial institution, such as a
bank or broker-dealer, and simultaneously agrees to repurchase a similar
security from the institution at a later date at an agreed-upon price. The
mortgage-backed securities that are repurchased will bear the same interest rate
as those sold, but with different prepayment histories than those sold. The
Adjustable Rate Portfolio is compensated by the difference between the current
sales price and the lower forward price for the future purchase as well as by
the interest earned on the cash proceeds of the initial sale. The value of
securities sold by the Adjustable Rate Portfolio in forward roll transactions
may decline below the repurchase price of the corresponding similar securities.
At the time the Adjustable Rate Portfolio enters into a forward roll
transaction, it will place in an account with the Custodian cash, U.S.
Government Securities or high grade debt obligations having a value equal to the
repurchase price (including accrued interest) and will subsequently monitor the
account to insure that the equivalent value is maintained.

144A Securities. The Adjustable Rate Portfolio may invest in restricted
securities in accordance with Rule 144A under the Securities Act of 1933, which
allows for the resale of such securities among certain qualified institutional
buyers. Because the market for such securities is still developing, such
securities could possibly become illiquid in particular circumstances. See the
Statement of Additional Information.

Portfolio Turnover. The Adjustable Rate Portfolio will not generally trade in
securities for short-term profits but, when circumstances warrant, securities
may be purchased and sold without regard to length of time held. Standish, Ayer
& Wood anticipates that the Adjustable Rate Portfolio's annual portfolio
turnover rate may exceed 100% but generally will not exceed 150%. A high
portfolio turnover rate in any year will increase brokerage commissions which
are borne directly by the Adjustable Rate Portfolio and could result in a high
amount of realized investment gain. See "Portfolio Transactions," "Portfolio
Turnover" and "Certain Tax Matters" in the Statement
of Additional Information.

Risk Factors. The types of securities in which the Adjustable Rate Portfolio
invests have certain unique attributes that warrant special consideration or
that present risks that may not exist in other types of mutual fund investments.
Some of these considerations and risks pertain to the characteristics of
mortgage-backed securities generally, while others are peculiar to ARMs. One of
the principal risks regarding mortgage-backed securities is the risk of
prepayments. Recently, prepayment rates on mortgage-backed securities have been
high, however, prepayment rates may vary significantly over relatively short
periods of time. The net asset value of a share of the Adjustable Rate Portfolio
will fluctuate as market conditions change. The amount received upon redemption
may be more or less than a purchaser's original cost.

Investments in Foreign Companies. The Adjustable Rate Portfolio may invest up to
10% of its total assets in U.S. dollar denominated American Depository Receipts
which represent securities of foreign companies. ADRs are traded in the United
States on national securities exchanges or over-the-counter and are issued by
domestic banks. The Adjustable Rate Portfolio will not make investments in
foreign securities other than through ADRs.

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<PAGE>

When investing in ADRs, the Adjustable Rate Portfolio assumes certain additional
risks that are not present with investments in stocks of domestic companies.
These risks include political and economic developments such as possible
expropriation or confiscatory taxation that might adversely affect the market
value of such ADRs. In addition, there might be less publicly available
information about such foreign issuers than about domestic issuers, and such
foreign issuers may not be subject to the same accounting, auditing and
financial standards and requirements as domestic issuers.

Investment Restrictions

In seeking to reduce investment risk, the Adjustable Rate Portfolio operates
under certain investment restrictions. The restrictions in the following
paragraph may not be changed except by a vote of the shareholders of the
Adjustable Rate Portfolio. The remaining restrictions and policies are subject
to change by the Trustees.

The Adjustable Rate Portfolio may not invest in a security if, at the time of
purchase, the transaction would result in: (a) more than 5% of the Adjustable
Rate Portfolio's total assets being invested in any one issuer (excluding
securities issued or guaranteed by U.S. Government, its agencies and
instrumentalities); or (b) the Adjustable Rate Portfolio's owning more than 10%
of the outstanding voting securities of an issuer (excluding securities issued
or guaranteed by U.S. Government, its agencies and instrumentalities).

The Adjustable Rate Portfolio may not: (a) invest more than 15% of its net
assets in illiquid securities, including certain IOs and POs and securities
restricted as to resale (which restricted securities are limited to 5% of total
assets), repurchase agreements extending for more than seven days and other
securities which are not readily marketable; (b) invest in securities of foreign
issuers other than through ADRs; (c) borrow in excess of 10% of the value of its
total assets (through reverse repurchase agreements, forward rolls or otherwise)
and then only as a temporary measure or (d) make cash loans except that it may
purchase debt obligations, including money market instruments, directly from the
issuer thereof or in the open market and may engage in repurchase transactions
collateralized by obligations of the U.S. Government and its agencies and
instrumentalities. For further information on these and other investment
restrictions, including other non-fundamental investment restrictions which may
be changed without a shareholder vote, see the Statement of Additional
Information.

The GNA Government Portfolio

The investment objective of the GNA Government Portfolio (the "Government
Portfolio") is to produce a high level of current income consistent with safety
of principal.

The Government Portfolio will seek to achieve its investment objective by
investing primarily in obligations issued or guaranteed by the U.S. Government
or by its agencies or instrumentalities, having remaining maturities of one year
or more ("U.S. Government Securities"). The Government Portfolio intends to
invest at least 65% of the value of its total assets in U.S. Government
Securities except during times when the Government Portfolio's Adviser, GNA
Capital Management, Inc., (the "Adviser") believes the adoption of a temporary
defensive position is desirable due to prevailing market or economic conditions.

The remainder of the Government Portfolio's assets will be invested in other
debt instruments having a rating from Standard & Poor's Corporation ("S&P") of
AAA and cash or cash equivalents. Cash equivalents, for purposes of the
Government Portfolio, are highly liquid instruments which include commercial
paper having a rating from S&P of A-1 or A-1+.

The composition and weighted average maturity of the Government Portfolio will
vary from time to time, based upon a determination of how best to further the
Government Portfolio's investment objective. The Government Portfolio is
expected to have an average duration of approximately 4 years. A bond's duration
is the weighted average life of its principal and interest payments and is often
considered a useful indication of its price volatility.

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<PAGE>

U.S. Government Securities. The U.S. Government Securities which the Government
Portfolio may purchase include but are not limited to (1) U.S. Treasury
obligations: Treasury Notes (maturities of one to ten years) and Treasury Bonds
(generally maturities of greater than ten years); and (2) obligations issued,
guaranteed or otherwise backed by U.S. Government agencies and instrumentalities
which are supported by any of the following: (a) the full faith and credit of
the U.S. Treasury (such as obligations of the Government National Mortgage
Association ("GNMA"'), the General Services Administration and Federal Maritime
Administration), (b) the right of the issuer to borrow an amount limited to a
specific line of credit from the U.S. Treasury (such as obligations of the
Federal National Mortgage Association ("FNMA"), the Federal Home Loan Mortgage
Corporation ("FHLMC"), the Federal Housing Administration ("FHA"), and the U.S.
Postal Service); the U.S. Treasury has discretionary authority to provide
financial assistance to such entities, however, it is not obligated to do so by
law and may take steps to restrict or eliminate such support in the future; or
(c) the credit of the agency or instrumentality (such as obligations of the
Federal Home Loan Bank and Federal Farm Credit System).

U.S. Government Securities of the type to be included in the Government
Portfolio have historically involved little risk of loss of principal if held to
maturity. However, the prices of such securities are inversely affected by
changes in interest rate levels. A decrease in rates generally produces an
increase in the value of the Government Portfolio's investments, while an
increase in rates generally reduces the value of these investments. Certain
additional risks are described below.

Mortgage Securities. A mortgage security is an interest in a pool of mortgage
loans. With the requisite degree of government backing, a mortgage security may
constitute a U.S. Government Security. The primary issuers of mortgage
securities that constitute U.S. Government Securities are the Federal National
Mortgage Association, the Federal Home Loan Mortgage Corporation and the
Government National Mortgage Association. The principal and interest on GNMA
securities are guaranteed by GNMA and backed by the full faith and credit of the
U.S. Government. While the mortgage securities issued by FNMA and FHLMC are not
backed by the full faith and credit of the U.S. Government, their close
relationship with the U.S. Government makes them high quality securities with
minimal credit risk. There is no limit upon the Government Portfolio's
investments in mortgage-backed U.S. Government Securities and from time-to-time
a majority of the Government Portfolio may be invested in such securities.

Some mortgage securities are called "pass-through certificates" because a pro
rata share of interest (less GNMA, FHLMC or FNMA fees and any applicable loan
servicing fees) as well as scheduled and unscheduled principal payments on the
underlying mortgage pool are passed through each month to the owner of the
security (e.g., the Government Portfolio).

Investments by the Government Portfolio in U.S. Government Securities which are
mortgage-backed securities may have maturities shorter than anticipated if the
underlying mortgages are prepaid. This prepayment feature will make such
mortgage-backed securities less effective than other types of securities as a
means of locking in attractive long-term interest rates. This is caused by the
need to reinvest prepayments of principal generally and the possibility of
significant unscheduled prepayments resulting from declines in mortgage interest
rates. At the time principal payments or prepayments are received by the
Government Portfolio, prevailing interest rates may be higher or lower than the
current yield of the Government Portfolio. As a result, GNMA certificates and
other mortgage-backed securities will have less potential for capital
appreciation during periods of declining interest rates than other investments
of comparable maturities due to the likelihood of increased prepayments of
mortgages as interest rates decline. If the Government Portfolio buys
mortgage-backed securities at a premium, mortgage foreclosures and prepayment of
principal by mortgagors (which may be made at any time without penalty) may
result in some loss of the Government Portfolio's principal investment to the
extent of the premium paid.

As prepayment rates of individual mortgage pools vary widely, it is not possible
to predict accurately the average life of a particular issue of GNMA
certificates or other mortgage-backed security. However, statistics published by

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<PAGE>

the FHA indicate that the average life of single-family dwelling mortgages with
25- to 30-year maturities, the type of mortgages backing the vast majority of
GNMA certificates, is approximately 12 years. Therefore, it is customary to
treat GNMA certificates as 30-year mortgage-backed securities which prepay fully
in the twelfth year.

The coupon rate of interest on GNMA certificates is lower than the interest rate
paid on the mortgages underlying the certificates, by the amount of the fees
paid to GNMA and the issuer. The coupon rate by itself, however, does not
indicate the yield which will be earned on GNMA certificates. First, GNMA
certificates may be issued at a premium or discount, rather than at par, and,
after issuance, GNMA certificates may trade in the secondary market at a premium
or discount. Second, interest is earned monthly, rather than semi-annually as
with traditional bonds; monthly compounding raises the effective yield earned.
Finally, the actual yield of a GNMA certificate is influenced by the prepayment
experience of the mortgage pool underlying it.

Collateralized Mortgage Obligations (CMOs). The Government Portfolio may also
invest in CMOs which are debt obligations fully collateralized by a portfolio of
mortgages or mortgage-related securities. Typically, CMOs are collateralized by
mortgage securities guaranteed or issued by GNMA, FNMA or FHLMC. Payments of
principal and interest on the mortgages are passed through to the holders of the
CMOs on the same schedule as they are received, although certain classes of CMOs
have priority over others with respect to the receipt of prepayments on the
mortgages. Therefore, depending on the types of CMOs in which the Government
Portfolio invests, the investment may be subject to a greater or lesser risk of
prepayment than other types of mortgage-related securities.

Stripped Mortgage Securities. The Government Portfolio may also invest in
stripped mortgage securities. With such securities, the principal and interest
payments on a pool of mortgages are separated or "stripped" to create two
classes of securities. In general, the interest-only, or "IO" class of stripped
securities, receives all interest and no principal payments, while the
principal-only, or "PO" class, is entitled to receive all principal and no
interest payments. Stripped mortgage securities are expected to be acutely
sensitive to fluctuations in interest rates which, in turn, affect prepayment
rates on the mortgages underlying stripped securities. The Government Portfolio
will invest principally in IO securities for the purpose of reducing, or hedging
against, the decline in, principal value of mortgage securities which may occur
as a result of increasing interest and prepayment rates.

Inverse Floating Obligations. The Government Portfolio may invest in mortgage
securities and other instruments that are "inverse floating obligations." The
interest rates on these instruments typically decline as market interest rates
increase, and increase as market rates decline. Such instruments have the effect
of providing the opportunity for incremental returns, because they will
generally increase or decrease in value in response to changes in market
interest rates at a rate which is a multiple of the rate at which fixed-rate
securities increase or decrease in response to such changes. As a result, the
market values of such securities will generally be more volatile than the market
values of conventional securities.

Forward Roll Transactions. In order to enhance current income, the Government
Portfolio may enter into forward roll transactions with respect to
mortgage-backed securities. In a forward roll transaction, the Government
Portfolio sells a mortgage-backed security to a financial institution, such as a
bank or broker-dealer, and simultaneously agrees to repurchase a similar
security from the institution at a later date at an agreed-upon price. The
mortgage-backed securities that are repurchased will bear the same interest rate
as those sold, but with different prepayment histories than those sold. The
Government Portfolio is compensated by the difference between the current sales
price and the lower forward price for the future purchase as well as by the
interest earned on the cash proceeds of the initial sale. The value of
securities sold by the Government Portfolio in forward roll transactions may
decline below the repurchase price of the corresponding similar securities. At
the time the Government Portfolio enters into a forward roll transaction, it
will place in an account with the Custodian cash, U.S. Government Securities or
high grade debt obligations having a value equal to the repurchase price
(including accrued interest) and will subsequently monitor the account to insure
that the equivalent value is maintained.

Adjustable Rate Mortgage Securities. The Government Portfolio may invest in
mortgage securities backed by

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<PAGE>

pools of adjustable rate mortgages, as well as mortgage securities backed by
pools of fixed-rate mortgages. Adjustable rate mortgages, like fixed-rate
mortgages, have a specified maturity date, and the principal amount of the
mortgage is repaid over the life of the mortgage. Unlike fixed-rate mortgages,
the interest rate on adjustable rate mortgages is adjusted at regular intervals
based on a specified, published interest rate "index." The new rate is
determined by adding a specific interest amount, the "margin" or "spread," to
the interest rate of the index. As a result, ARMs generally provide higher
yields than money market securities and more stable principal values than longer
term fixed-rate mortgage securities. Investment in ARMs allows the Government
Portfolio to participate in changing interest rate levels through regular
adjustments in the coupons of the underlying mortgages, resulting in more
variable current income and lower price volatility than longer term fixed-rate
mortgage securities. The ARMs in which the Fund expects to invest will generally
adjust their interest rates at regular intervals of two years or less. ARMs are
a less effective means of locking in long-term rates than securities
collateralized by fixed-rate mortgages because the income from adjustable rate
mortgages will increase during periods of rising interest rates and decline
during periods of falling rates. The interest rates paid on the adjustable rate
mortgages underlying ARMs are reset at regular intervals by adding an interest
rate margin to a specified interest rate index. There are two main categories of
indices: rates tied to the yield on U.S. Treasury securities or the London
interbank offered rate; and those derived from a calculated measure such as a
cost of living index or a moving average of mortgage rates. Some indices, such
as the one-year constant maturity Treasury rate, closely mirror changes in
interest rate levels. Others, such as the 11th District Home Loan Bank Cost of
Funds Index, tend to lag behind changes in market rate levels and tend to be
somewhat less volatile. Due to the inverse relationship between interest rates
and the value of certain securities, such a delay in adjusting to changes in
interest rates may cause the Government Portfolio's net asset value to increase
or decrease in value, particularly during periods between interest adjustment
dates.

The underlying adjustable rate mortgages in which the Government Portfolio
invests will frequently have caps and floors which limit the maximum amount by
which the interest rate to the residential borrower may move up or down,
respectively, during each adjustment period and over the life of the loan.
Interest rate caps on mortgages underlying ARMs may prevent their income from
increasing to prevailing interest rate levels, and cause these securities to
decrease in value. Conversely, interest rate floors on mortgages underlying ARMs
may cause their income to remain higher than prevailing interest rate levels and
result in an increase in the value of such securities. In addition, some
residential mortgage loans limit adjustments to the borrower's monthly principal
and interest payments rather than limiting interest rate changes. These payment
caps may cause the outstanding principal balance of the mortgage to increase.

Mortgage securities generally have a maximum maturity of 15 to 30 years.
However, due to the adjustable rate feature of the mortgages underlying ARMS,
their prices are considered to have volatility characteristics which approximate
the average period of time until the next adjustment of the interest rate. As a
result, the principal volatility of ARMs may be more comparable to short- and
intermediate-term securities than to longer term fixed-rate mortgage securities.

Securities Lending. The Government Portfolio may lend its portfolio securities
to qualified institutional investors for the purpose of realizing additional
income. Loans may be made pursuant to agreements which provide safeguards for
the Government Portfolio, e.g., that the loans will be continuously secured by
collateral in any combination of cash, letters of credit and securities of the
U.S. Government or its agencies, equal to at least the market value at all times
of the securities lent. The bank or banks issuing any such letters of credit
must meet creditworthiness standards approved by the Trustees. The Government
Portfolio will not make securities loans if as a result the aggregate of all
outstanding securities loans exceeds one-third of the value of the Government
Portfolio's total assets. The Government Portfolio receives compensation for
lending its securities in the form of fees or it retains a portion of interest
on the investment of any cash collateral it receives. The Government Portfolio
also continues to receive interest or dividends on the securities lent. However,
the amounts received by the Government Portfolio may be reduced by finders' fees
paid to broker-dealers and related expenses.

The primary risk in lending securities is that the borrower may become insolvent
at a time at which the loaned

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<PAGE>

security is rapidly increasing in value. In such
event, if the borrower fails to return the loaned security, the existing
collateral might be insufficient to purchase back the full amount of the
security loaned, and the borrower would be unable to furnish additional
collateral. The borrower would be liable for any shortage, but the lending
Government Portfolio would be an unsecured creditor with respect to such
shortage and might not be able to recover all or any thereof. However, this risk
may be minimized by a careful selection of borrowers and securities to be lent
and by monitoring collateral.

Other Investment Techniques. The Government Portfolio may engage in when issued
and delayed delivery transactions, short sales against the box, and payment of
premiums with respect to straddles and real estate investment trusts but
presently has no intention to engage in any such investment techniques to the
extent that more than 5% of the Government Portfolio's net assets would be at
risk. For further information on these investment techniques, see the Statement
of Additional Information.

Temporary Investments. The Government Portfolio may hold up to 100% of its
assets in cash or short-term, high-quality money market securities such as
repurchase agreements for temporary defensive purposes if, in the opinion of the
Adviser, unusual market conditions warrant such a position. See the Statement of
Additional Information.

Portfolio Turnover. The Government Portfolio may experience a very substantial
turnover of its portfolio because of its options transactions, since the
Government Portfolio may be forced to sell portfolio securities in order to meet
its obligations under call options written by the Government Portfolio. See
"Additional Investment Techniques--Options." In addition, options are generally
entered into for hedging purposes on a quarterly basis and the Government
Portfolio's options holdings may be adjusted at the end of each quarter.
Although it is anticipated that the annual portfolio turnover rate will exceed
100%, portfolio turnover is not expected to exceed 200%. Generally, a 100%
turnover rate would occur if all of the securities in the portfolio (except
those excluded from the calculation of portfolio turnover by the Securities and
Exchange Commission (the" SEC")) were sold and either repurchased or replaced
within one year. While the Government Portfolio will pay commissions in
connection with its options transactions, U.S. Government Securities are
generally traded on a "net" basis with dealers acting as principal for their own
accounts without a stated commission. Nevertheless, high portfolio turnover may
involve correspondingly greater brokerage commissions and other transaction
costs, which will be borne directly by the Government Portfolio. See "Portfolio
Transactions," "Portfolio Turnover" and "Certain Tax Matters" in the Statement
of Additional Information.

Risk Factors. There are risks in any investment program, and there is no
assurance that the Government Portfolio will achieve its investment objective.
The securities in which the Government Portfolio may invest are subject to
relative degrees of credit risk and market volatility. Credit risk relates to
the issuer's (and any guarantor's) ability to make timely payments of principal
and interest. Market volatility relates to the changes in market price that
occur as a result of variations in the level of prevailing interest rates and
yield relationships between sectors in the market and other market factors. The
net asset value of a share of the Government Portfolio will fluctuate as market
conditions change. The amount received upon redemption may be more or less than
a purchaser's original cost.

Investment Restrictions. In seeking to reduce investment risk, the Government
Portfolio operates under certain investment restrictions. The restrictions in
the following paragraph may not be changed except by a vote of the shareholders
of the Government Portfolio. The remaining restrictions and policies are subject
to change by the Trustees.

The Government Portfolio may not invest in a security if, at the time of
purchase, the transaction would result in: (a) more than 5% of the Government
Portfolio's total assets being invested in any one issuer; or (b) more than 25%
of its assets being invested in any one industry. These restrictions do not
apply to investments in securities issued or guaranteed by the U.S. Government
or its agencies or instrumentalities.

The Government Portfolio may not: (a) purchase more than 10% of any class of
securities of any one issuer (except

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<PAGE>

U.S. Government Securities); (b) purchase securities of any other investment
company, except in the open market in a transaction involving no commission or
profit to a sponsor or dealer (other than the customary brokerage commission)
and only to the extent of 10% of its assets or as part of a merger,
consolidation, reorganization or acquisition of assets; (c) invest in or retain
the securities of any issuer, if, to the knowledge of the Trust, the officers
and Trustees of the Trust who individually own in excess of 1/2 of 1% of the
issuer's securities own more than 5% of such securities in the aggregate. For
further information on these and other investment restrictions, including other
non-fundamental investment restrictions which may be changed without a
shareholder vote, see the Statement of Additional Information.

The GNA Value Portfolio

The investment objective of the GNA Value Portfolio (the "Value Portfolio") is
to provide long-term growth of capital and an above-average level of dividend
income by investing in equity securities.

The Value Portfolio invests primarily in equity securities, including common
stock, preferred stock, warrants and "investment grade" securities convertible
into common stock. Under normal market conditions, the Value Portfolio's
sub-adviser, Duff & Phelps Investment Management Co. ("Duff & Phelps") will seek
to invest substantially all of the Value Portfolio's assets in a diversified
portfolio of equity securities. It is a fundamental policy of the Value
Portfolio under normal market conditions to invest at least 65% of its total
assets in such equity securities. The Value Portfolio will attempt to generate
relatively high levels of dividend income and provide the potential for capital
appreciation. The Value Portfolio seeks to provide a higher total return than
that of the S&P 500 Index. No assurance can be given that the Value Portfolio
will achieve its objective.

In seeking an above-average level of dividend income, the Value Portfolio will
invest primarily in companies with established operating histories, potential
for dividend growth and low price-to-earnings ratios relative to the S&P 500
Index. The Value Portfolio's investments will tend to be in issuers with medium
to large capitalizations, although the Value Portfolio is not limited by issuer
size in selecting equity securities for investment. It is anticipated that a
majority of the equity securities in which the Value Portfolio invests will be
listed on a national securities exchange.

The Value Portfolio will generally consider debt securities to be "investment
grade" if such securities are rated investment grade by a nationally recognized
statistical rating agency (i.e., BBB or better by S&P or Baa or better by
Moody's, or if such securities are not so rated but are considered by Duff &
Phelps to be of equivalent investment quality. Bonds rated BBB by S&P or Baa by
Moody's or unrated securities of comparable investment quality lack outstanding
characteristics and in fact have speculative characteristics as well, and
changes in economic conditions and other circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal. In the event the
rating of a security is downgraded, Duff & Phelps will determine whether the
security should be retained or sold depending on an assessment of all facts and
circumstances at that time. For further information concerning the ratings of
debt securities, see the Statement of Additional Information. The mix of
convertible and nonconvertible securities in different rating categories varies
over time depending on, among other factors, changes in investment strategy.

Securities Lending. The Value Portfolio may lend its portfolio securities to
qualified institutional investors for the purpose of realizing additional
income. Loans may be made pursuant to agreements which provide safeguards for
the Value Portfolio, e.g., that the loans will be continuously secured by
collateral in any combination of cash, letters of credit and securities of the
U.S. Government or its agencies, equal to at least the market value at all times
of the securities lent. The bank or banks issuing any such letters of credit
must meet creditworthiness standards approved by the Trustees. The Value
Portfolio will not make securities loans if as a result the aggregate of all
outstanding securities loans exceeds one-third of the value of the Value
Portfolio's total assets. The Value Portfolio receives compensation for lending
its securities in the form of fees or it retains a portion of interest on the
investment of any cash collateral it receives. The Value Portfolio also
continues to receive interest or dividends on the securities lent.

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<PAGE>

However, the amounts received by the Value Portfolio may be reduced by finders'
fees paid to broker-dealers and related expenses.

The primary risk in lending securities is that the borrower may become insolvent
at a time at which the loaned security is rapidly increasing in value. In such
event, if the borrower fails to return the loaned security, the existing
collateral might be insufficient to purchase back the full amount of the
security loaned, and the borrower would be unable to furnish additional
collateral. The borrower would be liable for any shortage, but the lending Value
Portfolio would be an unsecured creditor with respect to such shortage and might
not be able to recover all or any thereof. However, this may be minimized by a
careful selection of borrowers and securities to be lent and by monitoring
collateral.

Other Investment Techniques. The Value Portfolio may engage in when issued and
delayed delivery transactions, short sales against the box, payment of premiums
with respect to straddles and real estate investment trusts but presently has no
intention to engage in any such investment techniques to the extent that more
than 5% of the Value Portfolio's net assets would be at risk. For further
information on these investment techniques, see the Statement of Additional
Information.

The Value Portfolio may invest in restricted securities in accordance with Rule
144A under the Securities Act of 1933, which allows for the resale of such
securities among certain qualified institutional buyers. Because the market for
such securities is still developing, such securities could possibly become
illiquid in particular circumstances. See the Statement of Additional
Information.

Investments in Foreign Companies. The Value Portfolio may invest up to 10% of
its total assets in U.S. dollar denominated American Depository Receipts which
represent securities of foreign companies. ADRs are traded in the United States
on national securities exchanges or over-the-counter and are issued by domestic
banks. The Value Portfolio will not make investments in foreign securities other
than through ADRs.

When investing in ADRs, the Value Portfolio assumes certain additional risks
that are not present with investments in stocks of domestic companies. These
risks include political and economic developments such as possible expropriation
or confiscatory taxation that might adversely affect the market value of such
ADRs. In addition, there might be less publicly available information about such
foreign issuers than about domestic issuers, and such foreign issuers may not be
subject to the same accounting, auditing and financial standards and
requirements as domestic issuers.

Temporary Investments. The Value Portfolio may hold up to 100% of its assets in
cash or short-term debt securities for temporary, defensive purposes if, in the
opinion of Duff & Phelps, unusual market conditions warrant such a position. The
types of short-term instruments in which the Value Portfolio may invest for such
purposes include short-term money market securities such as repurchase
agreements and securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities, certificates of deposit, master notes, time
deposits and bankers' acceptances of certain qualified financial institutions
and corporate commercial paper rated at the time of purchase at least "A" by S&P
or "Prime" by Moody's (or, if not rated, issued by companies having an
outstanding long-term unsecured debt issue rated at least "A" by S&P or
Moody's). See the Statement of Additional Information.

Portfolio Turnover. It is the Value Portfolio's policy not to purchase and sell
securities with a view toward obtaining short-term profits. The Value Portfolio
will not ordinarily trade in securities for short-term profits. However, when
circumstances warrant, securities may be sold without regard to the length of
time held. Duff & Phelps anticipates that the Value Portfolio's annual portfolio
turnover rate may exceed 50% but generally will not exceed 100%. A high
portfolio turnover rate in any year will increase brokerage commissions paid and
could result in a high amount of realized investment gain. See "Portfolio
Transactions," "Portfolio Turnover" and "Certain Tax Matters" in the Statement
of Additional Information.

19
<PAGE>

Risk Factors. Because the Value Portfolio invests primarily in equity
securities, it is subject to market risk--i.e., the possibility that stock
prices in general will decline over short or even extended periods. The stock
market tends to be cyclical, with periods when stock prices generally rise and
periods when stock prices generally decline. The net asset value of a share of
the Value Portfolio will fluctuate as market conditions change. The amount
received upon redemption may be more or less than a purchaser's original cost.

Investment Restrictions

In seeking to reduce investment risk, the Value Portfolio operates under certain
investment restrictions. The restrictions in the following paragraph may not be
changed except by a vote of the shareholders of the Value Portfolio. The
remaining restrictions and policies are subject to change by the Trustees.

The Value Portfolio may not invest in a security if, at the time of purchase,
the transaction would result in: (a) more than 5% of the Value Portfolio's total
assets being invested in any one issuer; (b) the Value Portfolio's owning more
than 5% of the outstanding voting securities of an issuer; (c) more than 5% of
the Value Portfolio's total assets being invested in securities of issuers
(including predecessors) with less than three years of continuous operations
except in the case of debt securities rated BBB or higher by S&P or Baa or
higher by Moody's; (d) more than 5% of the Value Portfolio's total assets being
invested in warrants of all types, or more than 2% of the Value Portfolio's
total assets being invested in warrants other than warrants attached to the
other securities; or (e) more than 20% of the Value Portfolio's total assets
being invested in any one industry. These restrictions do not apply to
investments in securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities.

The Value Portfolio may not: (a) invest more than 15% of its net assets in
illiquid securities, including securities restricted as to resale (which
restricted securities are limited to 5% of total assets), repurchase agreements
extending for more than seven days and other securities which are not readily
marketable; (b) invest in securities of foreign issuers other than through ADRs;
(c) borrow in excess of 10% of the value of its total assets and then only as a
temporary measure; or (d) make cash loans except that it may purchase debt
obligations, including money market instruments, directly from the issuer
thereof or in the open market and may engage in repurchase transactions
collateralized by obligations of the U.S. Government and its agencies and
instrumentalities. For further information on these and other investment
restrictions, including other non-fundamental investment restrictions which may
be changed without a shareholder vote, see the Statement of Additional
Information.

The GNA Growth Portfolio

The investment objective of the GNA Growth Portfolio (the "Growth Portfolio") is
to provide long-term growth of capital.

The Growth Portfolio will seek to achieve its investment objective by investing
substantially all of its assets in common stocks under normal market conditions.
However, a portion of the Growth Portfolio's assets may be held from time to
time in other equity securities including preferred stock and warrants. The
Growth Portfolio intends to invest in securities of companies which, in the
opinion of the Growth Portfolio's sub-adviser, Value Line, Inc. ("Value Line"),
have above average prospects for growth. No assurance can be given that the
Growth Portfolio will achieve its objective. The Growth Portfolio may also
invest less than 5% of its total assets in equity securities convertible into
common stocks.

In seeking long-term growth of capital, the Growth Portfolio will invest
primarily in companies whose earnings and/or assets are expected to grow at a
rate above the average for the Standard & Poor's 500 Stock Index (the "S&P 500
Index") over the long term. Consequently, the Growth Portfolio's sub-adviser,
Value Line, seeks to identify those industries which offer the greatest
possibilities for profitable expansion and, within such industries, those
companies which appear most capable of sustained growth. Investments may also be
made in securities of companies which Value Line believes are selling below
their intrinsic values or in securities of cyclical companies

20
<PAGE>

which Value Line
believes are at a low point in their cycles. It is anticipated that the Growth
Portfolio will have a higher level of price volatility than the S&P 500 Index.
The Growth Portfolio's investments will tend to be in issuers with small to
medium capitalizations, although the Growth Portfolio is not limited by issuer
size in selecting equity securities for investment. It is anticipated that a
majority of the equity securities in which the Growth Portfolio invests will be
listed on a national securities exchange.

In selecting securities for purchase or sale, Value Line will rely on the Value
Line Ranking System for Timeliness which has evolved after many years of
research and has been used in substantially its present form since 1965. The
Value Line Ranking System is based upon historical prices and reported earnings,
recent earnings and price momentum and the degree to which the latest reported
earnings deviate from estimated earnings. The Rankings are published weekly in
The Value Line Investment Survey for approximately 1,700 stocks. On a scale of 1
(highest) to 5 (lowest), the Rankings compare Value Line's estimate of the
probable market performance of each stock during the coming twelve months
relative to all 1,700 stocks under review. The Value Line Rankings are updated
weekly to reflect the most recent information. The Value Line Rankings do not
eliminate market risk, but Value Line believes that they provide objective
standards for determining whether the market is undervaluing or overvaluing a
particular security. The Growth Portfolio will usually invest in securities
ranked 1 or 2, although it may invest in securities ranked 3 if Value Line
believes such securities are appropriate for the Growth Portfolio. Reliance on
the Rankings is no assurance that the Growth Portfolio will perform more
favorably than the market in general over any particular period.

Securities Lending. The Growth Portfolio may lend its portfolio securities to
qualified institutional investors for the purpose of realizing additional
income. Loans may be made pursuant to agreements which provide safeguards for
the Growth Portfolio, e.g., that the loans will be continuously secured by
collateral in any combination of cash, letters of credit and securities of the
U.S. Government or its agencies, equal to at least the market value at all times
of the securities lent. The bank or banks issuing any such letters of credit
must meet creditworthiness standards approved by the Trustees. The Growth
Portfolio will not make securities loans if as a result the aggregate of all
outstanding securities loans exceeds one-third of the value of the Growth
Portfolio's total assets. The Growth Portfolio receives compensation for lending
its securities in the form of fees or it retains a portion of interest on the
investment of any cash collateral it receives. The Growth Portfolio also
continues to receive interest or dividends on the securities lent. However, the
amounts received by the Growth Portfolio may be reduced by finders' fees paid to
broker-dealers and related expenses.

The primary risk in lending securities is that the borrower may become insolvent
at a time at which the loaned security is rapidly increasing in value. In such
event, if the borrower fails to return the loaned security, the existing
collateral might be insufficient to purchase back the full amount of the
security loaned, and the borrower would be unable to furnish additional
collateral. The borrower would be liable for any shortage, but the lending
Growth Portfolio would be an unsecured creditor with respect to such shortage
and might not be able to recover all or any thereof. However, this risk may be
minimized by a careful selection of borrowers and securities to be lent and by
monitoring collateral.

Other Investment Techniques. The Growth Portfolio may engage in when issued and
delayed delivery transactions, short sales against the box and payment of
premiums with respect to straddles and real estate investment trusts but
presently has no intention to engage in any such investment techniques to the
extent that more than 5% of the Growth Portfolio's net assets would be at risk.
For further information on these investment techniques, see the Statement of
Additional Information.

The Growth Portfolio may invest in restricted securities in accordance with Rule
144A under the Securities Act of 1933, which allows for the resale of such
securities among certain qualified institutional buyers. Because the market for
such securities is still developing, such securities could possibly become
illiquid in particular circumstances. See the Statement of Additional
Information.

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<PAGE>

Investments in Issuers with Small to Medium Capitalizations. Value Line
considers issuers with small to medium capitalization to be those companies
which are less mature and have the potential to grow substantially faster than
the economy. Investments in these securities may involve greater than average
risks because of the possible limited marketability of such securities and the
possibility that their prices may fluctuate more widely than the securities of
larger more established companies or than the market as a whole.

Investments in Foreign Companies. The Growth Portfolio may invest up to 10% of
its total assets in U.S. dollar denominated American Depository Receipts
("ADRs") which represent securities of foreign companies. ADRs are traded in the
United States on national securities exchanges or over-the-counter and are
issued by domestic banks. The Growth Portfolio will not make investments in
foreign securities other than through ADRs.

When investing in ADRs, the Growth Portfolio assumes certain additional risks
that are not present with investments in stocks of domestic companies. These
risks include political and economic developments such as possible expropriation
or confiscatory taxation that might adversely affect the market value of such
ADRs. In addition, there might be less publicly available information about such
foreign issuers than about domestic issuers, and such foreign issuers may not be
subject to the same accounting, auditing and financial standards and
requirements as domestic issuers.

Temporary Investments. The Growth Portfolio may hold up to 100% of its assets in
cash or short-term, high-grade debt securities for temporary defensive purposes
if, in the opinion of Value Line, unusual market conditions warrant such a
position. The types of short-term instruments in which the Growth Portfolios may
invest for such purposes include short-term money market securities such as
repurchase agreements and securities issued or guaranteed by the U.S. Government
or its agencies or instrumentalities, certificates of deposit, time deposits and
bankers' acceptances of certain qualified financial institutions and corporate
commercial paper rated at the time of purchase at least "A" by S&P or "Prime" by
Moody's Investor's Services, Inc. ("Moody's") (or, if not rated, issued by
companies having an outstanding long-term unsecured debt issue rated at least
"A" by S&P or Moody's). See the Statement of Additional Information.

Portfolio Turnover. The Growth Portfolio may trade in securities for short-term
profits in order to achieve its objective. Value Line anticipates that the
Growth Portfolio's annual portfolio turnover rate may exceed 100% but generally
will not exceed 200%. A high portfolio turnover rate in any year will increase
brokerage commissions paid and could result in high amount of realized
investment gain. See "Portfolio Transactions," "Portfolio Turnover" and "Certain
Tax Matters" in the Statement of Additional Information.

Risk Factors. Because the Growth Portfolio invests primarily in equity
securities, it is subject to market risk--i.e., the possibility that stock
prices in general will decline over short or even extended periods. The stock
market tends to be cyclical, with periods when stock prices generally rise and
periods when stock prices generally decline. The net asset value of a share of
the Growth Portfolio will fluctuate as market conditions change. The amount
received upon redemption may be more or less than a purchaser's original cost.

Investment Restrictions

In seeking to reduce investment risk, the Growth Portfolio operates under
certain investment restrictions. The restrictions in the following paragraph may
not be changed except by a vote of the shareholders of the Growth Portfolio. The
remaining restrictions and policies are subject to change by the Trustees.

The Growth Portfolio may not invest in a security if, at the time of purchase,
the transaction would result in: (a) more than 5% of the Growth Portfolio's
total assets being invested in any one issuer; (b) the Growth Portfolio's owning
more than 10% of the outstanding voting securities of an issuer; (c) more than
5% of the Growth Portfolio's total assets being invested in securities of
issuers (including predecessors) with less than three years continuous
operations except in the case of debt securities rated BBB or higher by S&P or
Baa or higher by Moody's; (d) more

22
<PAGE>

than 5% of the Growth Portfolio's total
assets being invested in warrants of all types, or more than 2% of the Growth
Portfolio's total assets being invested in warrants other than warrants attached
to other securities; or (e) more than 25% of the Growth Portfolio's total assets
being invested in any one industry. These restrictions do not apply to
investments in securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities.

The Growth Portfolio may not: (a) invest more than 15% of its net assets in
illiquid securities, including securities restricted as to resale (which
restricted securities are limited to 5% of total assets), repurchase agreements
extending for more than seven days and other securities which are not readily
marketable; (b) invest in securities of foreign issuers other than through ADRs;
(c) borrow in excess of 10% of the value of its total assets and then only as a
temporary measure; or (d) make cash loans except that it may purchase debt
obligations, including money market instruments, directly from the issuer
thereof or in the open market and may engage in repurchase transactions
collateralized by obligations of the U.S. Government and its agencies and
instrumentalities. For further information on these and other investment
restrictions, including other non-fundamental investment restrictions which may
be changed without a shareholder vote, see the Statement of Additional
Information.

Additional Investment Techniques

Some or all of the Portfolios may invest in the types of instruments and engage
in the types of strategies described in detail below.

Repurchase Agreements. A Portfolio may enter into repurchase agreements in order
to generate additional income. When a Portfolio acquires securities from a bank
or broker-dealer, it may simultaneously enter into a repurchase agreement with
the seller wherein the seller agrees at the time of sale to repurchase the
security at the cost plus interest within a specified time (normally one day).
Except as further provided, each repurchase agreement entered into by a
Portfolio will provide that the value of the collateral underlying the
repurchase agreement will always be at least 102% of the repurchase price,
including accrued interest. With respect to repurchase agreements entered into
with a broker/dealer or bank whose unsecured debt is rated AAA or whose
commercial paper is rated A-1+ by S&P, the value of the collateral will always
be at least 100% of the repurchase price, including accrued interest. In the
event of default or bankruptcy by the seller, the Portfolio will seek to
liquidate such collateral. The exercise of the Portfolio's right to such a
liquidation could involve certain costs or delays and, to the extent that
proceeds from any sale upon a default of the obligation to repurchase are less
than the repurchase price, the Portfolio could suffer a loss. In addition, if
the seller becomes involved in and subject to liquidation or reorganization
under the Bankruptcy Code or other laws, a court may determine that the
underlying security is collateral for a loan by the Portfolio not within the
control of the Portfolio and therefore subject to sale by the trustee in
bankruptcy. Finally, it is possible that the Portfolio may not be able to
substantiate its interest in the underlying security and may be deemed an
unsecured creditor of the other party to the agreement. While each Portfolio
acknowledges these risks, it is expected that they can be controlled through
careful monitoring procedures, including the monitoring by each Portfolio's
Adviser or relevant sub-adviser of the creditworthiness of broker-dealers or the
financial institutions engaging in repurchase agreements with the Portfolio. A
Portfolio will not enter into a repurchase agreement having more than seven days
remaining to maturity if, as a result, such agreements, together with any other
securities which are not readily marketable, would exceed 10% of the net assets
of the Portfolio. In addition, not more than one-third of the current market
value of a Portfolio's total assets shall constitute secured "loans" by the
Portfolio under repurchase agreements.

Borrowing. A Portfolio may borrow for temporary purposes in an aggregate amount
of up to 10% of its total assets. As a non-fundamental policy, a Portfolio will
not purchase any security while borrowings representing more than 5% of the
Portfolio's total assets are outstanding. Such borrowing may be made by
obtaining a loan from a bank or by entering into a reverse purchase agreement
with a bank or broker-dealer. Reverse repurchase agreements involve the sale of
a security held by a Portfolio and its agreement to repurchase the instrument at
a stated price, date and interest payment. A Portfolio will use the proceeds of
a reverse repurchase agreement to purchase securities or to honor redemption
requests made of the Portfolio. The use of reverse repurchase agreements to
purchase portfolio

<PAGE>

securities involves the borrowing of money to purchase
securities and entails additional risks such as the incurrence of interest
expenses and fluctuation of the Portfolio's net asset value. There is no
guarantee that the securities purchased will maintain a value equal to or
greater than the amount borrowed to purchase them. The technique of leveraging
the value of portfolio securities for the purpose of purchasing additional
portfolio securities is speculative. A Portfolio may not enter into reverse
repurchase agreements with broker-dealers if its obligations under such
agreements would exceed 5% of the current market value of its total assets.

Options. A Portfolio may write or purchase options on securities held in its
portfolio. By purchasing a call, a Portfolio pays a premium for the right to buy
the underlying security at the exercise price at any time during the option
period. When a Portfolio purchases a put, it pays a premium in return for the
right to sell the underlying security at the exercise price at any time during
the option period. If any call or put purchased by the Portfolio is not
exercised or sold, it will become worthless on its expiration date. A Portfolio
will not purchase puts or calls if more than 5% of its total assets would be
invested in premiums on puts or calls. A Portfolio will write and purchase only
exchange-traded options. A Portfolio's option positions may be closed only in a
secondary market for options written or purchased by the Portfolio. Each
Portfolio's Adviser or relevant sub-adviser will consider the liquidity of the
secondary market in writing or purchasing options for the Portfolio, but there
can be no assurance that a liquid secondary market will exist at a given time
for any particular option. A Portfolio could be unable to control losses by
closing the position where a liquid secondary market does not exist.

A Portfolio may write (i.e., sell) options to increase the return of the
Portfolio and to hedge against a decline in the market value of the underlying
securities held by the Portfolio to the extent of the premium income received. A
covered call option is an option to purchase underlying securities which a
Portfolio either owns or has the right to acquire, or for which a Portfolio
maintains a segregated account with its Custodian of cash, cash equivalents or
U.S. Government Securities having a value sufficient to meet its obligations
under the call. By writing a covered call option a Portfolio might lose the
potential for gain on the underlying security while the option is open. When a
Portfolio writes a "secured" put option, it receives a premium and gives the
purchaser of the put the right to sell the underlying security to the Portfolio
at a specified price ("exercise price") at any time during the option period. A
put is "secured" if the Portfolio maintains with the Custodian cash, cash
equivalents, or U.S. Government Securities having a value equal to the exercise
price or holds a put on the same underlying security at an equal or greater
exercise price. A Portfolio will write only covered call options and secured put
options. The Government Portfolio will not write puts if more than 50% of its
total assets would be needed to cover its obligations in connection therewith,
and will not write calls if more than 100% of its total assets would be needed
to cover its obligations in connection with such calls. Each of the other
Portfolio's will not write puts if more than 25% of its total assets would be
needed to cover its obligations in connection therewith, and will not write
calls if more than 25% of its total assets would be needed to cover its
obligations in connection with such calls.

Futures Contracts and Options on Such Contracts. A Portfolio may purchase and
sell futures contracts, subject to certain limitations. A futures contract is an
agreement between two parties to buy and sell a security for a set price on a
future date. Futures contracts are traded on designated "contracts markets"
which, through their clearing corporations, guarantee performance of the
contracts.

Typically, maintaining a futures contract or selling an option thereon requires
a Portfolio to deposit with a financial intermediary as security for its
obligations an amount of cash or other specified assets (initial margin) which
initially is typically 1% to 10% of the face amount of the contract (but may be
higher in some circumstances). Additional cash or assets (variation margin) may
be required to be deposited thereafter on a daily basis as the value of the
contract fluctuates. The purchase of an option on a futures contract involves
payment of a premium for the option without any further obligation on the part
of a Portfolio. If a Portfolio exercises an option on a futures contract it will
be obligated to post initial margin (and potential subsequent variation margin)
for the resulting futures position just as it would for any position.

Positions in futures may be closed out by an offsetting transaction only on an
exchange which provides a secondary

24
<PAGE>

market for such futures. A Portfolio will enter into a futures contract only if
there appears to be a liquid secondary market for such futures contract.
However, there can be no assurance that a liquid secondary market will exist at
a specific time.

Utilization of futures transactions involves the risk of imperfect correlation
in movements in the price of futures contracts and movements in the price of the
securities which are the subject of the transaction. If the price of the futures
contract moves more or less than the price of the security, the Portfolio will
experience a gain or loss which will not be completely offset by movements in
the price of the securities which are the subject of the transaction. There is
also a risk of imperfect correlation where the securities underlying the futures
contract have different maturities than the portfolio securities. Transactions
in options on futures contracts involve similar risks.

A Portfolio also may purchase and sell listed put and call options on futures
contracts. An option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract, at a
specified exercise price at any time during the option period. When an option on
a futures contract is exercised, settlement is effected by the payment of cash
representing the difference between the current market price of the futures
contract and the exercise price of the option.

Options on futures contracts do not require the purchaser to enter into the
futures contract, but rather grant the purchaser the right to do so. Thus, the
risk of loss to the purchaser of an option is limited to the premium paid for
the option.

The success of a Portfolio's transactions in futures contracts and options
thereon is dependent upon the ability of that Portfolio's Adviser or relevant
sub-adviser to predict fluctuations in interest rates and the price of futures
contracts and options thereon, as the case may be. A Portfolio may suffer losses
on futures contracts or options thereon, as well as on the underlying
securities. There is no limit to the potential exposure of a Portfolio from
investments in futures contracts. There can be no assurance that a Portfolio's
transactions in futures contracts and options thereon will be successful.

A Portfolio's use of financial futures and options thereon will in all cases be
consistent with the applicable regulatory requirements and in particular the
regulations of the Commodity Futures Trading Commission relating to exclusions
from regulation as a commodity pool operator. Those regulations currently
provide that a Portfolio may use commodity futures and option positions (i) for
bona fide hedging purposes without regard to the percentage of assets committed
to margin and option premiums, or (ii) for other purposes permitted by the
entity's principal regulator (in the case of the Portfolios, the Securities and
Exchange Commission) to the extent that the aggregate initial margin and option
premiums required to establish such non-hedging positions do not exceed 5% of
the liquidation value (i.e., the net asset value) of the Portfolio. For further
information regarding futures contracts and options thereon, see the Statement
of Additional Information.

Other Interest Rate Transactions. To preserve a return or spread on a particular
investment or portion of its portfolio, to create synthetic adjustable rate
mortgage securities or for other nonspeculative purposes, the Adjustable Rate
Portfolio may enter into various transactions, such as interest rate swaps and
the purchase or sale of interest rate collars, caps and floors. The Adjustable
Rate Portfolio will not use these transactions for speculative purposes and will
not sell interest collars, caps or floors with respect to a position that it
does not own. Interest rate swaps involve the exchange by the Adjustable Rate
Portfolio with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed-rate payments.
The purchase of an interest rate cap entitles the purchaser, to the extent that
a specified index exceeds a predetermined interest rate, to receive payments of
interest on a contractually-based principal amount from the party selling such
interest rate cap. The purchase of an interest rate floor entitles the
purchaser, to the extent that a specified index falls below a predetermined
interest rate, to receive payments of interest on a contractually-based
principal amount from the party selling such interest rate floor. In an interest
rate collar, the Adjustable Rate Portfolio combines the elements of purchasing a
cap and selling a floor. The collar protects the Adjustable Rate Portfolio
against an interest rate rise

25
<PAGE>

above the maximum amount but causes the Adjustable
Rate Portfolio to forego the benefits of an interest rate decline below the
minimum amount.

The Adjustable Rate Portfolio may enter into interest rate swaps, collars, caps
and floors on either an asset-based or liability-based basis, depending upon
whether it is hedging its assets or its liabilities, and will usually enter into
interest rate swaps on a net basis, i.e., the two payment streams are netted
out, with the Adjustable Rate Portfolio receiving or paying, as the case may be,
only the net amount of the two payments. The Adjustable Rate Portfolio will not
enter into any interest rate swap, collar, cap or floor transaction unless the
unsecured senior debt or the claims paying ability of the other party thereto is
rated at least AA by S&P or Aa by Moody's. If there is a default by the other
party to such a transaction, the Adjustable Rate Portfolio will have contractual
remedies pursuant to the agreements related to the transaction. The swap market
has grown substantially in recent years with a large number of banks and
investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Collars, caps and floors are more recent innovations for
which standardized documentation has not yet been developed and, accordingly,
they are less liquid than swaps. The use of interest rate swaps is a highly
specialized activity which involves investment techniques and risks different
from those associated with ordinary portfolio securities transactions. If
Standish, Ayer & Wood is incorrect in its forecasts of market values, interest
rates and other applicable factors, the investment performance of the Adjustable
Rate Portfolio would diminish compared with what it would have been if these
investment techniques were not used. Moreover, even if Standish, Ayer & Wood is
correct in its forecasts, there is a risk that the swap position may correlate
imperfectly with the price of the asset or liability being hedged. In connection
with entering rate swaps, collars, and floors, the Adjustable Rate Portfolio
will create and maintain a segregated account with the Custodian consisting of
U.S. Government Securities or cash or cash equivalents in accordance with
current policies determined by the Securities and Exchange Commission.

PURCHASES AND REDEMPTIONS

Shares of each Portfolio are offered only to the insurance company separate
accounts that fund the Contracts, and may at any time be offered to other
separate accounts of Great Northern Insured Annuity Corporation ("GNA") or any
of its affiliates or any other insurer approved by the Trustees. Shares of each
Portfolio may be purchased and redeemed by the separate accounts without any
sales charge at net asset value. State Street Bank and Trust Company, through
its affiliate, National Financial Data Services, P.O. Box 419031, Kansas City,
MO 64141-6031, acts as each Portfolio's transfer agent and shareholder servicing
agent ("Transfer Agent"). The Contracts are described in the separate
prospectuses issued by GNA or any of its affiliates and any other insurance
company which has established separate accounts which invest in the Portfolios.

Purchase and redemption orders will be processed at the net asset value next
determined after such order has been received in proper form by the Transfer
Agent. See "Net Asset Value." Orders for purchases or sales of each Portfolio
must be received by the Transfer Agent before the close of regular trading on
the New York Stock Exchange in order to receive that day's net asset value.
Proceeds from redemption orders will be wired to the insurance company on or
before the [seventh] day following the request for redemption. Under unusual
circumstances, a Portfolio may suspend redemptions or postpone payment of
redemption proceeds, as permitted by applicable law. Each Portfolio reserves the
right to suspend the offering of shares for a period of time. Each Portfolio
also reserves the right to reject any specific purchase order.

Due to differences in tax treatment or other considerations, the interests of
various Contract owners might at some time be in conflict. The Trust currently
does not foresee any such conflict. If such a conflict were to occur, one or
more insurance companies' separate accounts might be required to withdraw its
investments in a Portfolio. This might force such Portfolio to sell securities
at disadvantageous prices or otherwise adversely affect such Portfolio.

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<PAGE>

EXCHANGE PRIVILEGE

A separate account may exchange shares of a Portfolio for shares, when
available, of any of the other Portfolios at any time on the basis of the
relative net asset values of the respective shares to be exchanged, subject to
compliance with applicable securities laws. Exchange orders will be processed at
the net asset value next determined after an exchange order has been received
and accepted by the Transfer Agent.

Under an exchange privilege offered by the Trust, shares of each Portfolio may
be exchanged for shares of any of the other Portfolios, all of which are
described in this Prospectus, at their respective net asset values. Exchanges
are treated as a redemption of shares of one Portfolio and a purchase of shares
of another portfolio. The Trust may, upon 60 days prior written notice,
materially modify or terminate the exchange privilege with respect to the
Portfolios.

Shareholders exercising the exchange privilege should carefully review the
prospectus disclosure for the Portfolio they are considering investing in prior
to making an exchange.

NET ASSET VALUE

The price of one share of each Portfolio is its net asset value ("NAV") which
such Portfolio's Custodian calculates as of 4:00 p.m. eastern time, Monday
through Friday, exclusive of national business holidays during which the New
York Stock Exchange is closed.

The Adjustable Rate Portfolio

Securities in the Adjustable Rate Portfolio are valued primarily based on
pricing services provided by Merrill Lynch, Pierce, Fenner & Smith and market
quotations provided by dealers of adjustable rate securities and U.S. Government
Securities. Investments in certain long-term debt securities not traded in an
organized market are valued on the basis of valuations furnished by independent
pricing services or broker/dealers which utilize information with respect to
market transactions and other information in such securities or comparable
securities. Certain short-term obligations are valued at amortized cost which
approximates market value. If quotations are not available, securities are
valued by a method that the Trustees believe accurately reflects fair value.

The Government Portfolio

Securities in the Government Portfolio are valued primarily based on market
quotations provided by recognized dealers of U.S. Government Securities.
Investments in certain long-term debt securities not traded in an organized
market are valued on the basis of valuations furnished by independent pricing
services or broker/dealers which utilize information with respect to market
transactions and other information in such securities or comparable securities.
Certain short-term obligations are valued at amortized cost which approximates
market value. If quotations are not available, securities are valued by a method
that the Trustees believe accurately reflects fair value.

The Value Portfolio

Assets held by the Value Portfolio are valued on the basis of the last reported
sale price or quotations as of the close of business on the valuation date,
except that securities and assets for which market quotations are not readily
available are valued as determined in good faith by or under the authority of
the Trustees of the Trust. In determining the value of certain assets for which
market quotations are not readily available, the Value Portfolio may use one or
more pricing services. The pricing services utilize information with respect to
market transactions, quotations from dealers and various relationships among
securities in determining value and may provide prices determined as of times
prior to the close of the New York Stock Exchange.

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The Growth Portfolio

Assets held by the Growth Portfolio are valued on the basis of the last reported
sale price or quotations as of the close of business on the valuation date,
except that securities and assets for which market quotations are not readily
available are valued as determined in good faith by or under the authority of
the Trustees of the Trust. In determining the value of certain assets for which
market quotations are not readily available, the Growth Portfolio may use one or
more pricing services. The pricing services utilize information with respect to
market transactions, quotations from dealers and various relationships among
securities in determining value and may provide prices determined as of times
prior to the close of the New York Stock Exchange.

DIVIDENDS, DISTRIBUTIONS AND TAXES

The Adjustable Rate Portfolio and Government Portfolio will declare dividends
from net investment income daily and pay such dividends monthly. The Value
Portfolio will declare and pay dividends from net investment income quarterly.
The Growth Portfolio will declare and pay dividends from net investment income
annually. Distributions from each Portfolio will automatically be reinvested in
additional shares of the Portfolio.

Each Portfolio intends to qualify and elect to be treated each taxable year as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"). Accordingly, a Portfolio will not be liable
for federal income taxes to the extent its taxable investment income and net
capital gain are distributed to its shareholders, provided that at least 90% of
its net investment income and net short-term capital gain for the taxable year
are distributed.

Each Portfolio is subject to a nondeductible 4% excise tax calculated as a
percentage of certain undistributed amounts of taxable ordinary income and
capital gain net income. Each Portfolio intends to make such additional
distributions of taxable ordinary income and capital gain net income as may be
necessary to avoid this excise tax.

Shares of each Portfolio are offered only to insurance company separate accounts
that fund variable annuity and variable life insurance contracts. Under the
Internal Revenue Code, no tax is imposed on an insurance company with respect to
income of a qualifying separate account properly allocable to the value of
eligible variable annuity or variable life insurance contracts. See the
applicable Contract prospectus for a discussion of the federal income tax status
of (1) the separate accounts that purchase and hold shares of a Portfolio and
(2) the holders of Contracts funded through those accounts.

Each Portfolio intends to comply with the diversification requirements imposed
by section 817(h) of the Internal Revenue Code and the regulations thereunder.
These requirements, which are in addition to the diversification requirements
imposed on a Portfolio by the 1940 Act and Subchapter M of the Internal Revenue
Code, place certain limitations on the assets of each separate account
and--because section 817(h) and those regulations treat the assets of a
Portfolio as assets of the related separate account--the assets of a Portfolio,
that may be invested in securities of a single issuer. Specifically, the
regulations provide that, except as permitted by the "safe harbor" described
below, as of the end of each calendar quarter or within 30 days thereafter no
more than 55% of the total assets of a Portfolio may be represented by any one
investment, no more than 70% by any two investments, no more than 80% by any
three investments and no more than 90% by any four investments. For this
purpose, all securities of the same issuer are considered a single investment,
and while each U.S. government agency and instrumentality is considered a
separate issuer, a particular foreign government and its agencies,
instrumentalities and political subdivisions all will be considered the same
issuer. Section 817(h) provides, as a safe harbor, that a separate account will
be treated as being adequately diversified if the diversification requirements
under Subchapter M are satisfied and no more than 55% of the value of the
account's total assets are cash and cash items, government securities and
securities of other registered investment companies. Failure by a Portfolio to
satisfy the section 817(h) requirements would result in taxation of the
insurance company issuing the Contracts and treatment of the Contract holders
other than as

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described in the applicable Contract prospectus.

The foregoing is only a summary of some of the important federal income tax
considerations generally affecting each Portfolio and its respective
shareholders; see the Statement of Additional Information for a more detailed
discussion. Prospective shareholders are urged to consult their tax advisers.

PERFORMANCE INFORMATION

Yield

From time to time the Trust may advertise the 30-day yields for each of the
Portfolios if accompanied by performance at the insurance company's separate
account. The yield of a Portfolio refers to the income generated by an
investment in the Portfolio over the 30-day period identified in the
advertisement, and is computed by dividing the net investment income per share
earned by the Portfolio during the period by the net asset value per share of
the Portfolio on the last day of the period. The result is "annualized" by
assuming that the amount of income is generated each month over a one-year
period and is compounded semiannually. The annualized income is then shown as a
percentage.

The Trust may quote yields for each of the Portfolios in advertisements or in
reports to shareholders. Yield information may be useful in reviewing the
performance of a Portfolio and for providing a basis for comparison with other
investment alternatives. However, since net investment income of a Portfolio
changes in response to fluctuations in interest rates and Portfolio expenses,
any given yield quotation should not be considered representative of a
Portfolio's yield for any future period. Investors reviewing yield comparisons
of a Portfolio should also bear in mind that the net asset value per share of a
Portfolio fluctuates.

Total Return

The Trust may advertise "average annual total return" over various periods of
time for each of the Portfolios if accompanied by performance at the insurance
company's separate account. Average annual total return figures show the average
percentage change in value of an investment in a Portfolio from the beginning
date of the measuring period to the end of the measuring period. These figures
reflect changes in the price of a Portfolio's shares, assume that any income
dividends and/or capital gains distributions made by the Portfolio during the
period were reinvested in shares of the same Portfolio. Figures will be given
for recent one-, five- and ten-year periods (if applicable), and may be given
for other periods as well (such as from commencement of a Portfolio's
operations, or on a year-by-year basis). When considering "average" total return
figures for periods longer than one year, it is important to note that a
Portfolio's annual total return for any one year in the period might have been
greater or less than the average for the entire period.

The Trust may also use "aggregate total return" figures for various periods,
representing the cumulative change in value of an investment in a Portfolio for
the specific period (again reflecting changes in Portfolio share prices and
assuming reinvestment of dividends and distributions). Aggregate total returns
may be shown by means of schedules, charts, or graphs, and may indicate
subtotals of the various components of total return (that is, the change in
value of initial investment, income dividends, and capital gains distributions).

The Trust may, in addition to quoting a Portfolio's average annual and aggregate
total returns, advertise the actual annual and annualized total return
performance data for various periods of time. Actual annual and annualized total
returns may be shown by means of schedules, charts or graphs. Actual annual and
annualized total return data generally will be lower than average total return
data, which reflects compounding.

Any Portfolio performance information presented will also include performance
information for the insurance company separate accounts that fund Contracts
investing in the Trust, which will take into account insurance-related

29
<PAGE>

charges and expenses under such contracts.

Additional performance information is contained in each Fund's annual report
which may be obtained without charge, by contacting the Trust at (800) 455-0870.
See "Performance Information" in the Statement of Additional Information.

Periodicals and Indices

In advertisements or in reports to shareholders, the Trust may compare a
Portfolio's performance to that of other mutual funds with similar investment
objectives and to other relevant indices. For example, a Portfolio may compare
its performance to rankings prepared by Lipper Analytical Services, Inc. or
Morningstar, Inc., widely recognized independent services which monitor the
performance of mutual funds, to a government bond index, or to the Consumer
Price Index.

THE TRUST, THE PORTFOLIOS AND MANAGEMENT

GNA Variable Series Trust is an open-end diversified management investment
company established as a Delaware business trust on March 25, 1994. Each of the
Portfolios is a series of the Trust. Overall responsibility for management and
supervision of each Portfolio rests with the Board of Trustees in accordance
with the laws of the State of Delaware. The Trustees approve all significant
agreements between the Trust and the persons and companies that furnish services
to the Trust and each Portfolio, including agreements with each Portfolio's
investment adviser, custodian and transfer agent.

The rights of holders of shares of a Portfolio may be modified by the Trustees
at any time, so long as such modifications do not have a material, adverse
effect on the rights of any shareholder.

The Trust is not required to hold annual shareholder meetings and, at this time,
does not intend to do so. However, special meetings may be called for a
Portfolio or the Trust as a whole for purposes such as electing or removing
Trustees, changing fundamental policies or approving an advisory contract. On
any matter submitted to the shareholders, the holder of each share of a
Portfolio is entitled to one vote per share (with proportionate voting for
fractional shares) regardless of the relative net asset value thereof. An
insurance company issuing a Contract that participates in a Portfolio will vote
shares in the applicable separate account as required by law and interpretation
thereof, as such may be amended or changed from time to time. In accordance with
current law and interpretations thereof, a participating insurance company is
required to request voting instructions from Contract owners and must vote
shares in the applicable separate account in proportion to the voting
instructions received. For further discussion, please refer to the prospectus of
your Contract.

GNA Capital Management, Inc. (the "Adviser") is the investment adviser of each
Portfolio and is a wholly-owned subsidiary of GNA Corporation having its
principal business at Suite 5600, Two Union Square, 601 Union Street, Seattle,
Washington 98101. GNA Capital Management, Inc. also serves as investment adviser
to Investors Trust, an open-end diversified management investment company
established as a Massachusetts business trust. As each Portfolio's adviser, the
Adviser shall manage, supervise and conduct the affairs of each Portfolio,
including the selection of sub-advisers to furnish an investment program for any
Portfolio as described below. GNA Corporation also is the parent company of GNA
Securities, Inc. and GNA Distributors, Inc. GNA Corporation is a direct
subsidiary of General Electric Capital Corporation. The officers of the Adviser
manage the investments of 10 affiliated companies: General Electric Capital
Assurance Company, Great Northern Insured Annuity Corporation, GE Capital Life
Assurance Company of New York, Federal Home Life Insurance Company, The Harvest
Life Insurance Company, PHF Life Insurance Company, The Life Insurance Company
of Virginia, First Colony Life Insurance Company, Jamestown Life Insurance
Company, and American Mayflower Life Insurance Company of New York which had
combined assets of approximately $44 billion as of December 31, 1996.

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Sub-Advisers

The Adjustable Rate Portfolio

Standish, Ayer & Wood, Inc. ("Standish, Ayer & Wood"), One Financial Center,
Boston, Massachusetts 02111, a registered investment adviser, has been retained
by the Adviser to act as portfolio manger of the Adjustable Rate Portfolio under
a sub-advisory contract with the Adviser dated September 19, 1994. Standish,
Ayer & Wood acted as investment adviser for total assets in excess of $30.6
billion as of December 31, 1996. As portfolio manager, Standish, Ayer & Wood is
responsible for the actual investment management of the Adjustable Rate
Portfolio's assets including the responsibility for making decisions and placing
orders to buy, sell or hold a particular security, under the general supervision
of the Adviser and the Board of Trustees. Pursuant to the sub-advisory contract,
the Adviser periodically reviews the investment activities of Standish, Ayer &
Wood, and the Adviser has the right to terminate the sub-advisory contract upon
60 days written notice to the Standish, Ayer & Wood.

Overall portfolio management strategy for the Adjustable Rate Portfolio is
determined by Standish, Ayer & Wood under the supervision and direction of
Dolores S. Driscoll, a Managing Director of Standish, Ayer & Wood. Ms.
Driscoll has been employed by Standish, Ayer & Wood since 1974. Ms. Driscoll
previously worked as a bond manager for Davis L. Babson, Inc. Ms. Driscoll
holds a B.A. degree in Mathematics from Indiana University and an M.B.A.
degree in Finance from Boston University and is a Chartered Financial Analyst.

The Adviser receives an investment advisory fee, payable monthly, based upon the
Adjustable Rate Portfolio's average daily net assets, equal to an annual rate of
.40% of the Adjustable Rate Portfolio's average daily net assets. Until the
Adjustable Rate Portfolio grows large enough to achieve additional economies of
scale, the sharing of fixed costs among a relatively small base of net assets
may result in certain operating expenses, such as custodial and transfer agency
fees, being substantially higher, as a percentage of average daily net assets,
than those of comparable funds. The Adviser has indicated that it intends to
reimburse such portion of these expenses as is necessary to cause the total
annual operating expenses not to exceed .70% of the Adjustable Rate Portfolio's
average daily net asset value through the fiscal year ending December 31, 1997.
The Adviser may also elect to continue these voluntary expense reimbursements
with respect to subsequent fiscal years.

For its services under its sub-advisory agreement, Standish, Ayer & Wood
receives from the Adviser a fee, payable monthly, based upon the Adjustable Rate
Portfolio's average daily net assets equal to an annual rate of .20% of the
Adjustable Rate Portfolio's average daily net assets.

For the year ended December 31, 1996, the Adjustable Rate Portfolio's fee to the
Adviser was $24,168 or .40% (annualized) of the average daily net assets of the
Adjustable Rate Portfolio.

The Government Portfolio

GNA Capital Management, Inc. (the "Adviser"), Suite 5600, Two Union Square, 601
Union Street, Seattle, Washington 98101, a registered investment adviser, acts
as the portfolio manager of the Government Portfolio under an advisory agreement
with the Trust dated September 19, 1994. As portfolio manager, the Adviser is
responsible for the actual investment management of the Portfolio's assets
including the responsibility for making decisions and placing orders to buy,
sell or hold a particular security, under the general supervision of the Board
of Trustees.

Overall portfolio management strategy for the Government Portfolio is determined
by the Adviser under the supervision and direction of Charles A. Kaminski, a
Senior Vice President of the Adviser. Mr. Kaminski is also an officer of Great
Northern Insured Annuity Corporation, General Electric Capital Assurance
Company, GNA Securities, Inc., Investors Trust and the Trust. Mr. Kaminski
previously served as Vice President of Investments for the Adviser, and prior to
joining the Adviser in 1992 he was Vice President and Director of Baring America
Asset

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Management.

Mr. Kaminski holds B.S. and M.S. degrees in Electrical Engineering from the
Massachusetts Institute of Technology and an M.B.A. from the Harvard Business
School.

The Adviser receives an investment advisory fee, payable monthly, based upon the
Government Portfolio's average daily net assets, equal to an annual rate of .65%
of the Government Portfolio's average daily net assets if the combined average
daily net assets of the Government Portfolio and the Investors Trust Government
Fund equals $500 million or less, .60% of the Government Portfolio's average
daily net assets if the combined average daily net assets of the Government
Portfolio and the Investors Trust Government Fund is greater than $500 million
and is equal to or less than $750 million, .55% of the Government Portfolio's
average daily net assets if the combined average daily net assets of the
Government Portfolio and the Investors Trust Government Fund is greater than
$750 million and is equal to or less than $1.25 billion, .50% of the Government
Portfolio's average daily net assets if the combined average daily net assets of
the Government Portfolio and the Investors Trust Government Fund is greater than
$1.25 billion and is equal to or less than $1.5 billion and .45% of the
Government Portfolio's average daily net assets if the combined average daily
net assets of the Government Portfolio and the Investors Trust Government Fund
exceed $1.5 billion. Until the Government Portfolio grows large enough to
achieve additional economies of scale, the sharing of fixed costs among a
relatively small base of net assets may result in certain operating expenses,
such as custodial and transfer agency fees, being substantially higher, as a
percentage of average daily net assets, than those of comparable funds. The
Adviser has indicated that it intends to reimburse such portion of these
expenses as is necessary to cause the total annualized operating expenses not to
exceed .90% of the Government Portfolio's average daily net asset value through
the fiscal year ending December 31, 1997. The Adviser may also elect to continue
these voluntary expense reimbursements with respect to subsequent fiscal years.

For the year ended December 31, 1996, the Government Portfolio's fee to the
Adviser was $43,375 or .55% (annualized) of the average daily net assets of the
Government Portfolio.

The Value Portfolio

Duff & Phelps Investment Management Co. ("Duff & Phelps"), Suite 3800, 55 East
Monroe Street, Chicago, Illinois 60603, a registered investment adviser, has
been retained by the Adviser to act as portfolio manager of the Value Portfolio
under a sub-advisory contract with Adviser dated September 19, 1994. Duff &
Phelps acted as investment adviser for total assets in excess of $36.0 billion
as of December 31, 1996. Duff & Phelps is a wholly owned subsidiary of Phoenix
Duff & Phelps Corporation, which itself is a majority owned subsidiary of
Phoenix Home Life Mutual Insurance Company. As portfolio manager, Duff & Phelps
is responsible for the actual investment management of the Value Portfolio's
assets including the responsibility for making decisions and placing orders to
buy, sell or hold a particular security, under the general supervision of the
Adviser and the Board of Trustees. Pursuant to the sub-advisory contract, the
Adviser periodically reviews the investment activities of Duff & Phelps, and the
Adviser has the right to terminate the sub-advisory contract upon 60 days
written notice to Duff & Phelps.

Overall portfolio management strategy for the Value Portfolio is
determined by Duff & Phelps under the supervision and direction of Jeff
Simmons, a Vice President of Duff & Phelps. Mr. Simmons has been employed by
Duff & Phelps since 1989 and has worked on the Value Portfolio since its
inception. Mr. Simmons worked as a financial analyst at the Northern Trust
Bank in Chicago, Illinois prior to joining Duff & Phelps. Mr. Simmons is a
Chartered Financial Analyst (CFA) and holds a B.S. degree from Northern
Illinois University and an M.B.A. degree from the University of Chicago
Graduate School of Business. He is a member of the Investment Analyst
Society of Chicago.

The Adviser receives an investment advisory fee, payable monthly, based upon the
Value Portfolio's average daily net assets, equal to an annual rate of .80% of
the Value Portfolio's average daily net assets if the combined average daily net
assets of the Value Portfolio and the Investors Trust Value Fund equal $100
million or less and .70% of the

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Value Portfolio's average daily net assets if
the combined average daily net assets of the Value Portfolio and the Investors
Trust Value Fund exceed $100 million. Until the Value Portfolio grows large
enough to achieve additional economies of scale, the sharing of fixed costs
among a relatively small base of net assets may result in certain operating
expenses, such as custodial and transfer agency fees, being substantially
higher, as a percentage of average daily net assets, than those of comparable
funds. The Adviser has indicated that it intends to reimburse such portion of
these expenses as is necessary to cause the total annual operating expenses not
to exceed 1.10% of the Value Portfolio's average daily net asset value through
the fiscal year ending December 31, 1997. The Adviser may also elect to continue
these voluntary expense reimbursements with respect to subsequent fiscal years.

For its services under its sub-advisory agreement, Duff & Phelps receives from
the Adviser a fee, payable monthly, based upon the Value Portfolio's average
daily net assets equal to an annual rate of .30% of the Value Portfolio's
average daily net assets if the combined average daily net assets of the Value
Portfolio and the Investors Trust Value Fund equal $100 million or less and .20%
of the Value Portfolio's average daily net assets if the combined average daily
net assets of the Value Portfolio and the Investors Trust Value Fund exceed $100
million.

For the year ended December 31, 1996, the Value Portfolio's fee to the Adviser
was $66,119 or .80% (annualized) of the average daily net assets of the Value
Portfolio.

The Growth Portfolio

Value Line, Inc. ("Value Line"), 220 East 42nd Street, New York, New York 10017,
a registered investment adviser, has been retained by the Adviser to act as
portfolio manager of the Growth Portfolio under a sub-advisory contract with
Adviser dated September 19, 1994. Value Line managed total assets of
approximately $5.7 billion as of December 31, 1996. As portfolio manager, Value
Line is responsible for the actual investment management of the Portfolio's
assets including the responsibility for making decisions and placing orders to
buy, sell or hold a particular security, under the general supervision of the
Adviser and the Board of Trustees. Pursuant to the sub-advisory contract, the
Adviser will periodically review the investment activities of Value Line, and
the Adviser will have the right to terminate the sub-advisory contract upon 60
days written notice to Value Line.

Overall portfolio management strategy for the Growth Portfolio is determined by
committee. No person is primarily responsible for making recommendations to the
committee.

The Adviser receives an investment advisory fee, payable monthly, based upon the
Growth Portfolio's average daily net assets, equal to an annual rate of .80% of
the first $100 million of the Growth Portfolio's average daily net assets and
.70% of the Growth Portfolio's average daily net assets in excess of $100
million. Until the Growth Portfolio grows large enough to achieve additional
economies of scale, the sharing of fixed costs among a relatively small base of
net assets may result in certain operating expenses, such as custodial and
transfer agency fees, being substantially higher, as a percentage of average
daily net assets, than those of comparable funds. The Adviser has indicated that
it intends to reimburse such portion of these expenses as is necessary to cause
the total annualized operating expenses not to exceed 1.10% of the Growth
Portfolio's average daily net asset value through the fiscal year ending
December 31, 1997. The Adviser may also elect to continue these voluntary
expense reimbursements with respect to subsequent fiscal years.

For its services under its sub-advisory agreement, Value Line receives from the
Adviser a fee, payable monthly, based upon the Growth Portfolio's average daily
net assets equal to an annual rate of .45% of the Growth Portfolio's average
daily net assets.

For the year ended December 31, 1996, the Growth Portfolio's fee to the
Adviser was $84,327 or .80% (annualized) of the average daily net assets of the
Growth Portfolio.

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<PAGE>

ADDITIONAL INFORMATION

Transfer Agent and Custodian. State Street Bank and Trust Company acts as
transfer agent for each Portfolio. State Street Bank and Trust Company also
holds all cash and securities of each Portfolio, as custodian.

Independent Accountants and Counsel. For the year of the Trust ended December
31, 1996, Coopers & Lybrand L.L.P., One Post Office Square, Boston,
Massachusetts 02109, was the independent accountants for each Portfolio. Messrs.
Goodwin, Procter & Hoar, Exchange Place, Boston, Massachusetts 02109, was
counsel to each Portfolio.

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PART B

35
<PAGE>

STATEMENT OF ADDITIONAL INFORMATION
Dated May 1, 1997

GNA VARIABLE SERIES TRUST SM
consisting of four series,
GNA Adjustable Rate Portfolio
GNA Government Portfolio
GNA Value Portfolio
GNA Growth Portfolio

TABLE OF CONTENTS

General Information...................................................

Additional Information Concerning Certain Investment Techniques.......

Debt Instruments and Permitted Cash Investments.......................

Debt Securities Ratings...............................................

Investment Restrictions...............................................

Portfolio Transactions................................................

Portfolio Turnover....................................................

Purchase and Redemption Information...................................

Net Asset Value.......................................................

Certain Tax Matters...................................................

Management of the Trust...............................................

The Investment Adviser and Sub-Advisers...............................

Performance Information...............................................

Independent Accountants...............................................

Custodian.............................................................

Financial Statements..................................................

This Statement of Additional Information is not a prospectus but should be
read in conjunction with the Prospectus dated May 1, 1997, for GNA Variable
Series Trust (the "Trust") which may be obtained without charge by contacting
the Trust at Two Union Square, 601 Union Street, Suite 5600, Seattle, Washington
98101-2336 or by telephoning (800) 455-0870. Unless otherwise defined herein,
capitalized terms have the meanings given to them in the Prospectus.

<PAGE>

GENERAL INFORMATION

GNA Variable Series Trust (the "Trust") is an open-end, diversified,
management investment company organized as a Delaware business trust on March
25, 1994. The Trust currently has four series of shares, GNA Adjustable Rate
Portfolio (the "Adjustable Rate Portfolio"), GNA Government Portfolio (the
"Government Portfolio"), GNA Value Portfolio (the "Value Portfolio") and GNA
Growth Portfolio (the "Growth Portfolio"). The Trustees of the Trust have the
authority to create additional series. Shares of the Portfolios are currently
offered only to insurance company separate accounts that fund certain variable
contracts (the "Contracts").

The rights of holders of shares of the Trust may be modified by the
Trustees at any time, so long as such modifications do not adversely affect the
rights of any shareholder. On any matter submitted to the shareholders, the
holder of each share is entitled to one vote per share (with proportionate
voting for fractional shares) regardless of the relative net asset value
thereof. Shareholders of a Portfolio are not entitled to vote on any matter
which does not affect that Portfolio.

The assets received by the Trust from the sale of shares of a Portfolio,
and all income, earnings, profits and proceeds thereof, subject only to the
rights of creditors, constitute the underlying assets of that Portfolio. The
underlying assets of each Portfolio are required to be segregated on the books
of account and are to be charged with the expenses in respect of that Portfolio
and the Trust. Any general expenses of the Trust not readily identifiable as
belonging to a particular Portfolio shall be allocated by or under the direction
of the Trustees in such manner as the Trustees determine to be fair and
equitable, taking into consideration, among other things, the nature and type of
expense and the relative sizes of the Portfolios.

Each share of a Portfolio represents an equal proportionate interest in
that Portfolio with each other share and is entitled to such dividends and
distributions out of the income belonging to such Portfolio as are declared by
the Trustees. Upon liquidation of a Portfolio, shareholders of that Portfolio
are entitled to share pro rata in the net assets belonging to such Portfolio
available for distribution.

Under the Trust's Master Trust Agreement, no annual or regular meeting of
shareholders is required. In addition, after the Trustees have been initially
elected by shareholders, the Board of Trustees is a self-perpetuating body.
Thus, there will ordinarily be no shareholder meetings unless otherwise required
by the Investment Company Act of 1940, as amended (the "1940 Act").

Shares do not have cumulative voting rights, which means that in situations
in which shareholders elect trustees, holders of more than 50% of the shares
voting for the election of trustees can elect 100% of the Trust's trustees, and
the holders of less than 50% of the shares voting for the election of trustees
will not be able to elect any person as a trustee.

Shares have no preemptive or subscription rights and are fully
transferable.

ADDITIONAL INFORMATION CONCERNING
CERTAIN INVESTMENT TECHNIQUES

The Portfolios may buy and sell options, future contracts and options on
futures contracts with respect to interest rates, securities and securities
indices and use other instruments and techniques as described below under
circumstances in which such instruments and techniques are expected by a
Portfolio's Adviser or relevant Sub-Adviser to aid in achieving the investment
objectives of such Portfolio.

<PAGE>

Repurchase Agreements

Each Portfolio may enter into repurchase agreements with banks,
broker-dealers or other financial institutions in order to generate additional
current income. A repurchase agreement is an agreement under which a Portfolio
acquires a security from a seller subject to resale to the seller at an agreed
upon price and date. The resale price reflects an agreed upon interest rate
effective for the time period the security is held by the Portfolio and is
unrelated to the interest rate on the security. Repurchase agreements usually
are for short periods, such as one week or less, but may be for longer periods.
However, as a matter of investment policy, the Portfolios will not enter into
repurchase agreements of more than one week's duration if, as a result, such
agreements (together with any other securities which are not readily marketable)
would exceed 10% of the Portfolio's net assets.

Under the 1940 Act, repurchase agreements are considered to be loans by the
purchaser collateralized by the underlying securities. Each Portfolio's Adviser
or relevant Sub-Adviser monitors the value of the underlying securities at the
time the repurchase agreement is entered into and at all times during the term
of the agreement to ensure that their market value always equals or exceeds the
agreed-upon repurchase price to be paid to the Portfolio. In addition, not more
than one-third of the current market value of a Portfolio's total assets shall
constitute secured "loans" by such Portfolio under repurchase agreements. Each
Portfolio will maintain a segregated account with its Custodian for the
securities and other collateral, if any, acquired under a repurchase agreement
with a broker-dealer for the term of the agreement.

In addition to the risk of the seller's default or a decline in value of
the underlying security (see "Investment Objective and Policies--Repurchase
Agreements" in each Portfolio's Prospectus), a Portfolio also might incur
disposition costs in connection with liquidating the securities. If the seller
becomes insolvent and subject to liquidation or reorganization under the
Bankruptcy Code or other laws, a court may determine that the underlying
security is collateral for a loan by the Portfolio not within the control of the
Portfolio and therefore subject to sale by the trustee in bankruptcy. Finally,
it is possible that the Portfolio may not be able to substantiate its interest
in the underlying security and may be deemed an unsecured creditor of the other
party to the agreement. While the Portfolios acknowledge these risks, it is
expected that they can be controlled through careful monitoring procedures,
including the monitoring by the Adviser or relevant Sub-Adviser of the
credit-worthiness of broker-dealers or other financial institutions engaging in
repurchase agreements with a Portfolio.

Borrowing

Each Portfolio may borrow for temporary purposes in an aggregate amount up
to 10% of its total assets. Such borrowings may be made by obtaining a loan from
a bank or by entering into a reverse repurchase agreement with a bank or broker
dealer. Reverse repurchase agreements involve the sale of a security held by a
Portfolio and its agreement to repurchase the instrument at a stated price, date
and interest payment. A Portfolio may use the proceeds of a reverse repurchase
agreement to purchase other securities which either mature at a date
simultaneous with or prior to the expiration of the reverse repurchase agreement
or which are held under an agreement to resell maturing as of that time.

In connection with entering into reverse repurchase agreements, a Portfolio
will create and maintain a segregated account with the Custodian consisting of
U.S. Government Securities or cash or cash equivalents of an aggregate current
value sufficient to repurchase the securities or equal to the proceeds received
upon the sale plus accrued interest. A Portfolio may not enter into reverse
repurchase agreements with broker-dealers if its obligations under such
agreements, together with other outstanding borrowings, would exceed 5% of the
market value of its total assets.

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Firm Commitment Agreements

Each Portfolio may enter into firm commitment agreements ("when-issued"
purchases) for the purchase of securities at an agreed upon price on a specified
future date. A Portfolio will not enter into such agreements for the purpose of
investment leverage.

Liability for the purchase price and all the rights and risks of ownership
of the securities accrue to a Portfolio at the time it becomes obligated to
purchase the securities, although delivery and payment occur at a later date,
generally within 45 days of the date of the commitment to purchase. Accordingly,
if the market price of the security should decline, the effect of the agreement
would be to obligate the Portfolio to purchase the security at a price above the
current market price on the date of delivery and payment. During the time the
Portfolio is obligated to purchase such securities, it will maintain with the
Custodian a segregated account with U.S. Government Securities or cash or cash
equivalents of an aggregate current value sufficient to make payment for the
securities.

Loans of Portfolio Securities

Each Portfolio may lend its portfolio securities to qualified brokers,
dealers or other financial institutions as long as the terms, the structure and
the aggregate amount of such loans are not inconsistent with the 1940 Act, or
the rules and regulations or interpretations of the Securities and Exchange
Commission (the "SEC") thereunder. Loan arrangements made by a Portfolio will
comply with all other applicable regulatory requirements, including the rules of
the New York Stock Exchange (the "NYSE") which presently require the borrower,
after notice, to redeliver the securities within the normal settlement time of
five (5) business days.

At the present time the staff of the SEC does not object if an investment
company pays reasonable negotiated fees to its custodian in connection with
loaned securities as long as such fees are pursuant to a contract approved by
the investment company's trustees. In addition, voting rights may pass with the
loaned securities, but if a material event will occur affecting a security on
loan, the loan must be called and the security voted. The Portfolios do not
presently intend to engage in lending securities. Should a Portfolio wish to
commence any such activities, such Portfolio may seek to enter into an agreement
with the Custodian which complies with the position of the staff of the SEC.

Rule 144A Securities

Subject to the limitations on illiquid and restricted securities noted
below, a Portfolio may buy or sell restricted securities in accordance with Rule
144A under the Securities Act of 1933 ("Rule 144A Securities"). Securities may
be resold pursuant to Rule 144A under certain circumstances only to qualified
institutional buyers as defined in the rule, and the markets and trading
practices for such securities are relatively new and still developing.

Options

Each Portfolio may engage, at such time and from time to time as such
Portfolio's Adviser or relevant Sub-Adviser shall determine to be appropriate,
in the writing of covered call option contracts ("calls"). A covered call is an
option to purchase securities which the Portfolio owns or has the right to
acquire or for which the Portfolio maintains a segregated account with the
Custodian of cash, cash equivalents or U.S. Government Securities having a value
sufficient to meet its obligations under the call.

When a Portfolio writes a call, it receives a premium and gives the
purchaser the right to buy the underlying security at any time during the call
period (usually less than nine months) or at the end of the call period at a
fixed exercise price regardless of market price changes during the call period.
If the call is exercised, the Portfolio forgoes any gain from an increase in the
market price of the underlying security over the exercise price.

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When a covered call is written by a Portfolio, the Portfolio will make
arrangements with the Custodian to segregate the underlying securities or an
equivalent value in cash, cash equivalents or U.S. Government Securities until
the option is either exercised or has lapsed or the Portfolio closes out the
option as described below.

A Portfolio may purchase a call, for example, to effect a "closing purchase
transaction," which is the purchase of a call on the same security with the same
exercise price and expiration date as the call which it has previously written.
When a security on which the Portfolio has written a call is to be sold from the
Portfolio's portfolio, the Portfolio will first effect a closing purchase
transaction so as to close out the existing call option contract on that
security. The Portfolio will realize a profit (or loss) from a closing purchase
transaction if the amount paid to purchase a call option contract is less (or
more) than the amount received from the sale thereof.

A Portfolio also may purchase and write (i.e., sell) put options ("puts")
on securities. A put option is a contract that grants the right to sell at a
specified price a specified number of securities by a certain date. A Portfolio
may write puts only if they are secured. A put is "secured" if the Portfolio
maintains cash, cash equivalents or securities with a value equal to the
exercise price in a segregated account with the Custodian or holds a put on the
same underlying security at an equal or greater exercise price.

The purchase and sale of option contracts is a highly specialized activity
which involves investment techniques and risks different from those ordinarily
associated with investment companies. It should be noted that transaction costs
relating to options transactions may tend to be higher than the transaction
costs with respect to transactions in securities. In addition, if a Portfolio
were to write a substantial number of option contracts which are exercised, the
portfolio turnover rate of such Portfolio could increase.

Securities for a Portfolio's portfolio will continue to be bought and sold
solely on the basis of appropriateness to fulfill the Portfolio's investment
objective. Option transactions can be used, among other things, to increase the
return on portfolio positions.

A Portfolio will not write option contracts in an amount such that the
income derived from such activity would, in the opinion of the Trust's counsel,
disqualify the Trust as a regulated investment company under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code") if such qualification is
in the best interests of the Trust's shareholders.

Futures Contracts and Options Thereon

Each Portfolio may purchase and sell futures contracts ("futures
contracts"). Futures contracts are publicly traded contracts to buy or sell
underlying assets, such as certain securities or an index of securities, at a
future time at a specified price. A contract to buy establishes a "long"
position while a contract to sell establishes a "short" position.

The purchase of a futures contract on an equity security or an index of
equity securities normally enables a buyer to participate in the market movement
of the underlying asset or index after paying a transaction charge and posting
margin in an amount equal to a small percentage of the value of the underlying
asset or index. This characteristic makes futures useful for hedging purposes.

Futures contracts can also be used as a hedge against changes in interest
rates. Generally, if market interest rates increase, the value of outstanding
debt securities declines (and vice versa). If, for example, a Portfolio holds
long-term U.S. Government Securities and such Portfolio's Adviser or relevant
Sub-Adviser anticipates a rise in long-term interest rates, it could, in lieu of
disposing of its portfolio securities, enter into futures contracts for the sale
of similar long-term securities. If rates increased and the value of the
Portfolio's portfolio securities declined, the value of the Portfolio's futures
contract would increase, thereby protecting the Portfolio by preventing net
asset value from declining as much as it otherwise would have. If such
Portfolio's Adviser or relevant

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Sub-Adviser expects long-term interest rates to
decline, the Portfolio might enter into futures contracts for the purchase of
long-term securities, so that it could offset anticipated increases in the cost
of such securities it intends to purchase while continuing to hold
higher-yielding short-term securities or waiting for the long-term market to
stabilize.

Each Portfolio also may purchase and sell listed put and call options on
futures contracts. An option on a futures contract gives the purchaser the
right, in return for the premium paid, to assume a position in a futures
contract (a long position if the option is a call and a short position if the
option is a put), at a specified exercise price at any time during the option
period. When an option on a futures contract is exercised, settlement is
effected by the payment of cash representing the difference between the current
market price of the futures contract and the exercise price of the option.

A basic option strategy for protecting a Portfolio against a decline in
securities prices could involve (a) the purchase of a put--thus "locking in" the
selling price of the underlying securities or securities indices--or (b) the
writing of a call on securities or securities indices held by a
Portfolio--thereby generating income (the premium paid by the buyer) by giving
the holder of such call the option to buy the underlying asset at a fixed price.
The premium will offset, in whole or in part, a decline in portfolio value;
however, if prices of the relevant securities or securities indices rose instead
of falling, the call might be exercised, thereby resulting in a potential loss
of appreciation in the underlying securities or securities indices.

A basic option strategy when a rise in securities prices is anticipated is
the purchase of a call--thus "locking in" the purchase price of the underlying
security or other asset. In transactions involving the purchase of call options
by a Portfolio, money market instruments equal to the aggregate exercise price
of the options will be identified by that Portfolio to the Trust's custodian to
insure that the use of such investments is unleveraged.

A Portfolio may also purchase put options on interest rate futures
contracts in lieu of, and for the same purpose as, its sale of a futures
contract: to hedge a long position in the underlying futures contract. The
purchase of call options on interest rate futures contracts is intended to serve
the same purpose as the actual purchase of the futures contract, and the
Portfolio will make arrangements with the Custodian to segregate cash, cash
equivalents or U.S. Government Securities sufficient to purchase the amount of
portfolio securities represented by the underlying futures contracts.

A Portfolio would write a call option on a futures contract in order to
hedge against a decline in the prices of the securities underlying the futures
contracts. If the price of the futures contract at expiration is below the
exercise price, the Portfolio would retain the option premium, which would
offset, in part, any decline in the value of its portfolio securities.

The writing of a put option on a futures contract is similar to the
purchase of the futures contract, except that, if market price declines, the
Portfolio would pay more than the market price for the underlying securities.
The net cost to the Portfolio will be reduced, however, by the premium received
on the sale of the put, less any transaction costs.

<PAGE>

"Straddle" Transactions

Each Portfolio may engage in "straddle" transactions, which involve the
purchase or sale of combinations of call and put options on the same underlying
securities or futures contracts. A Portfolio will not purchase calls or puts, in
connection with such straddle transactions, if the aggregate premiums paid for
such options will exceed 5% of its net assets.

Limitations and Risks Related to Options and Futures Transactions

The Portfolios will engage in transactions in futures contracts or options
only as a hedge against changes resulting from market conditions which produce
changes in the values of their securities or the securities which they intend to
purchase (e.g., to replace portfolio securities which will mature in the near
future) and, subject to the limitations described below, to enhance return. No
Portfolio will purchase any futures contract or purchase any call option if,
immediately thereafter, more than one-third of the Portfolio's net assets would
be represented by long futures contracts or call options. No Portfolio will
write a covered call or put option if, immediately thereafter, the aggregate
value of the assets (securities in the case of written calls and cash or cash
equivalents in the case of written puts) underlying all such options, determined
as of the dates such options were written, would exceed 25% of that Portfolio's
net assets. In addition, no Portfolio may establish a position in a futures
contract or purchase or sell an option for other than bona fide hedging purposes
if immediately thereafter the sum of the amount of initial margin deposits and
premiums on open positions with respect to futures and options used for such
non-hedging purposes would exceed 5% of the market value of the Portfolio's net
assets.

Although effective hedging can generally capture the bulk of a desired risk
adjustment, no hedge is completely effective. Each Portfolio's ability to hedge
effectively through transactions in futures or options depends on the degree to
which price movements in its holdings correlate with price movements of the
futures and options. The prices of the assets being hedged may not move in the
same amount as the hedging instrument, or there may be a negative correlation
which would result in an ineffective hedge and a loss to a Portfolio.

Positions in futures and options may be closed out only on an exchange
which provides a secondary market therefor. There can be no assurance that a
liquid secondary market will exist for any particular futures contract or option
at any specific time. Thus, it may not be possible to close such an option or
futures position prior to maturity. The inability to close options and futures
positions also could have an adverse impact on a Portfolio's ability to
effectively hedge its securities and might in some cases require a Portfolio to
deposit cash to meet applicable margin requirements. Each Portfolio will enter
into an option or futures position only if it appears to be a liquid investment.

DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS

As indicated in each Portfolio's Prospectus, a Portfolio may invest in
long-term and short-term debt securities. A Portfolio may invest in cash and
short-term securities for temporary, defensive purposes when, in the opinion of
such Portfolio's Adviser or relevant Sub-Adviser, such investments are more
likely to provide protection against unfavorable market conditions than
adherence to other investment policies. Certain debt securities and money market
instruments in which the Portfolios, particularly the Adjustable Rate Portfolio,
may invest are described below.

Tax-Exempt Bonds. As used in this Statement of Additional Information, the
term "tax-exempt" obligations refers to debt obligations the interest on which
was at the time of issuance, in the opinion of bond counsel to the issuer,
exempt from federal income tax. Tax-exempt bonds include debt obligations issued
by a state, the District of Columbia or a territory or possession of the United
States, or any political subdivision thereof, in order to obtain funds for
various public purposes, including the construction of such public facilities as
airports, bridges, highways, housing, mass transportation, roads, schools and
water and sewer works. Other public purposes for which tax-exempt bonds may be
issued include refunding outstanding obligations, obtaining funds for general
operating

<PAGE>

expenses and obtaining funds to lend to other public institutions and
facilities. In addition, certain debt obligations known as industrial
development bonds may be issued by or on behalf of public authorities to obtain
funds to provide privately-operated housing facilities, sports facilities,
conventions or trade show facilities, airports, mass transit, port or parking
facilities, air or water pollution control facilities and certain local
facilities for water supply, gas, electricity or sewage or solid waste disposal.
Such obligations are included within the term tax-exempt bonds if the interest
paid thereon is exempt from federal income tax. Interest on industrial
development bonds used to fund the acquisition, construction, equipment, repair
or improvement of privately operated industrial or commercial facilities may
also be exempt from federal income tax, but the size of such issues is limited
under current federal tax law.

The two principal classifications of tax-exempt bonds are general
obligation bonds and limited obligation (or revenue) bonds.

General obligation bonds are obligations involving the credit of an issuer
possessing taxing power and are payable from the issuer's general unrestricted
revenues and not from any particular fund or source. The characteristics and
method of enforcement of general obligation bonds vary according to the law
applicable to the particular issuer, and payment may be dependent upon
appropriation by the issuer's legislative body.

Limited obligation bonds are payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the proceeds
of a special excise or other specific revenue source. Tax-exempt industrial
development bonds generally are revenue bonds and thus not payable from the
unrestricted revenues of the issuer. The credit and quality of industrial
development revenue bonds is usually directly related to the credit of the
corporate user of the facilities. Payment of principal of and interest on
industrial development revenue bonds is the responsibility of the corporate user
(and any guarantor).

Prices and yields on tax-exempt bonds are dependent on a variety of
factors, including general money market conditions, the financial condition of
the issuer, general conditions in the tax-exempt bond market, the size of a
particular offering, the maturity of the obligation and ratings of particular
issues, and are subject to change from time to time. Information about the
financial condition of an issuer of tax-exempt bonds may not be as extensive as
that which is made available by corporations whose securities are publicly
traded.

The ratings of Moody's Investors Service, Inc. ("Moody's") and Standard &
Poor's Corporation ("S&P") represent their opinions and are not absolute
standards of quality. Tax-exempt bonds with the same maturity, interest rate and
rating may have different yields while tax-exempt bonds of the same maturity and
interest rate with different ratings may have the same yield.

Obligations of issuers of tax-exempt bonds are subject to the provisions of
bankruptcy, insolvency and other laws, such as the Federal Bankruptcy Reform Act
of 1978, affecting the rights and remedies of creditors. Congress or state
legislators may seek to extend the time for payment of principal or interest, or
both, or to impose other constraints upon enforcement of such obligations. There
is also the possibility that, as a result of litigation or other conditions, the
power or ability of issuers to meet their obligations to pay interest on and
principal of their tax-exempt bonds may be materially impaired or their
obligations may be found to be invalid or unenforceable. Such litigation or
conditions may from time to time have the effect of introducing uncertainties in
the market for tax-exempt bonds or certain segments thereof, or materially
affecting the credit risk with respect to particular bonds. Adverse economic,
business, legal or political developments might affect tax-exempt bonds in the
same manner.

Refunded Municipal Bonds. Refunded municipal bonds are general obligation
or revenue bonds that have been fully secured or collateralized by an "escrow
fund" consisting of U.S. Government obligations in an amount adequate to meet
all interest and principal payments as such payments become due.

Mortgage-Backed Securities. Generally, mortgage-backed securities are
securities representing interest in a

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pool of mortgages. Principal and interest
payments made on the mortgages in the underlying mortgage pool are passed
through to holders of securities issued by such pools. Unscheduled prepayments
of principal shorten the securities' weighted average life and may lower their
total return. (When a mortgage in the underlying mortgage pool is prepaid, an
unscheduled principal prepayment is passed through to holders of securities
issued by such pools. This principal is returned to holders of securities issued
by such pools at par. As a result, if a mortgage security were trading at a
premium, its total return would be lowered by prepayments, and if a mortgage
security were trading at a discount, its total return would be increased by
prepayments.) The value of these securities also may change because of changes
in the market's perception of the creditworthiness of the federal agency that
issued them. In addition, the mortgage securities market in general may be
adversely affected by changes in governmental regulation or tax policies.

U.S. Government Agency Mortgage-Backed Securities . These are obligations
issued or guaranteed by the United States Government or one of its agencies or
instrumentalities, such as the Government National Mortgage Association ("Ginnie
Mae" or "GNMA"), the Federal National Mortgage Association ("Fannie Mae" or
"FNMA"), the Federal Home Loan Mortgage Corporation ("Freddie Mac" or "FHLMC")
and the Federal Housing Administration ("FHA"). FNMA, FHLMC and FHA obligations
are not backed by the full faith and credit of the U.S. Government as GNMA
certificates are, but FNMA, FHLMC and FHA securities are supported by the
instrumentality's right to borrow from the United States Treasury. U.S.
government agency mortgage-backed certificates provide for the pass-through to
investors of their pro-rata share of monthly payments (including any
prepayments) made by the individual borrowers on the pooled mortgage loans, net
of any fees paid to the guarantor of such securities and the servicer of the
underlying mortgage loans. Each of GNMA, FNMA and FHLMC guarantees timely
distributions of interest to certificate holders. GNMA and FNMA guarantee timely
distributions of scheduled principal. FHLMC has in the past guaranteed only the
ultimate collection of principal of the underlying mortgage loan; however, FHLMC
now issues Mortgage-Backed Securities (FHLMC Gold PCs) which also guarantee
timely payment of monthly principal reductions. FHA generally guarantees only
the ultimate collection of 99% of the principal of the underlying mortgage
loans.

Ginnie Mae Certificates. Ginnie Mae is a wholly-owned corporate
instrumentality of the United States within the Department of Housing and Urban
Development. The National Housing Act of 1934, as amended (the "Housing Act"),
authorizes Ginnie Mae to guarantee the timely payment of the principal of and
interest on certificates that are based on and backed by a pool of mortgage
loans insured by the Federal Housing Administration under the Housing Act, or
Title V of the Housing Act of 1949 ("FHA Loans"), or guaranteed by the
Department of Veteran Affairs under the Servicemen's Readjustment Act of 1944,
as amended ("VA Loans"), or by pools of other eligible mortgage loans. The
Housing Act provides that the full faith and credit of the United States
Government is pledged to the payment of all amounts that may be required to be
paid under any guaranty. In order to meet its obligations under such guaranty,
Ginnie Mae is authorized to borrow from the United States Treasury with no
limitations as to amount.

The Ginnie Mae Certificates in which the Portfolios may invest generally
will represent a pro-rata interest in one or more pools of the following types
of mortgage loans: (i) fixed rate level payment mortgage loans; (ii) fixed rate
graduated payment mortgage loans; (iii) fixed rate growing equity mortgage
loans; (iv) fixed rate mortgage loans secured by manufactured (mobile) homes;
(v) mortgage loans on completed multifamily projects; (vii) fixed rate mortgage
loans as to which escrowed funds are used to reduce the borrower's monthly
payments during the early years of the mortgage loans ("buydown" mortgage
loans); (viii) mortgage loans that provide for adjustments in payments based on
periodic changes in interest rates or in other payment terms of the mortgage
loans; and (ix) mortgage-backed serial notes. All of these mortgage loans will
be FHA Loans or VA Loans and, except as otherwise specified above, will be
fully-amortizing loans secured by first liens on one- to four-family housing
units.

Fannie Mae Certificates. Fannie Mae is a federally chartered and
privately owned corporation organized and existing under the Federal National
Mortgage Association Charter Act of 1938. The obligations of FNMA are not
backed by the full faith and credit of the U.S. Government.

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Each Fannie Mae Certificate will generally represent a pro-rata interest in
one or more pools of FHA Loans or VA Loans of the following types: (i) fixed
rate level payment mortgage loans; (ii) fixed rate growing equity mortgage
loans; (iii) fixed rate graduated payment mortgage loans; (iv) variable rate
California mortgage loans; (v) other adjustable rate mortgage loans; and (vi)
fixed rate and adjustable mortgage loans secured by multifamily projects.

Freddie Mac Certificates. Freddie Mac is a corporate instrumentality of
the United States created pursuant to the Emergency Home Finance Act of 1970,
as amended (the "FHLMC Act"). The obligations of Freddie Mac are obligations
solely of Freddie Mac and are not backed by the full faith and credit of the
U.S. Government.

Freddie Mac Certificates represent a pro-rata interest in a group of
mortgage loans (a "Freddie Mac Certificate group") purchased by Freddie Mac. The
mortgage loans underlying the Freddie Mac Certificates will consist of fixed
rate or adjustable rate mortgage loans with original terms to maturity of
between 10 and 30 years, substantially all of which are secured by first liens
on one- to four-family residential properties or multifamily projects. Each
mortgage loan must meet the applicable standards set forth in the FHLMC Act. A
Freddie Mac Certificate group may include whole loans, participation interests
in whole loans and undivided interests in whole loans and participations
comprising another Freddie Mac Certificate group.

FHA. FHA was created in 1934 under the Housing Act and incorporated into
HUD in 1965. The obligations of FHA are not backed by the full faith and
credit of the U.S. Government.

Project Loans. Project Loan securities are backed by GNMA or FHA insured
mortgage loans made by HUD-approved public and private lenders for (i) the
construction or substantial rehabilitation of moderate-income multi family
housing and retirement centers, (ii) the construction, substantial
rehabilitation or refinancing of nursing houses, (iii) the purchase or
refinancing of existing multi family projects and (iv) the refinancing of
existing HUD-insured mortgages.

Project loans are generally structured in one of two ways: as Construction
Loan Certificates/Permanent Loan Certificates ("CLC/PLCs") or as Permanent Loan
Certificates ("PLCs"). Project Loan lenders, subject to HUD guidelines,
typically include various prepayment penalties and/or lockout periods that are
applicable during the early years of the permanent phase of CLC/PLC loans. The
majority of newly issued PLC loans also contain provisions that inhibit
prepayment during the earlier years of the loan. Although amortized over a
period of 30-40 years, Project loans are typically prepaid after a period of
approximately 8 to 12 years.

Certain Project Loans originated before 1985 contain a provision allowing
the investor to "put" the loan to FHA twenty years after origination, Project
Loans which are putable prior to November 1995 are putable at par. Project Loans
which are putable after November 1995 are putable into an equal amount of "MM
Debentures," which are semi-annual pay, interest only, 20-year maturity
securities backed by the full faith and credit of the U.S.
Government, callable every six months at par.

In the event of a default on the underlying mortgage, holders of GNMA
Project Loans will continue to receive scheduled principal and interest payments
until payment of the insurance claim. The final distribution to holders of GNMA
Project Loans will include 100% of the outstanding amount of the Project Loan
certificate plus accrued interest. In the event of a default on the underlying
mortgage, holders of FHA Project Loans will generally receive 99% of the
outstanding amount of the Project Loan certificates paid either in cash or MM
Debentures.

Adjustable Rate Mortgages--Interest Rate Indices. The "One Year Treasury
Index" is the figure derived from the average weekly quoted yield on U.S.
Treasury Securities adjusted to a constant maturity of one year. The "Cost of
Funds Index" reflects the monthly weighted average cost of funds of savings and
loan associations and savings banks whose home offices are located in Arizona,
California and Nevada (the "FHLB Eleventh District") that are

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member institutions of the Federal Home Loan Bank of San Francisco (the "FHLB of
San Francisco"), as computed from statistics tabulated and published by the FHLB
of San Francisco. The FHLB of San Francisco normally announces the Cost of Funds
Index on the last working day of the month following the month in which the cost
of funds was incurred.

A number of factors affect the performance of the Cost of Funds Index and
may cause the Cost of Funds Index to move in a manner different from indices
based upon specific interest rates, such as the One Year Treasury Index. Because
of the various origination dates and maturities of the liabilities of member
institutions of the FHLB Eleventh District upon which the Cost of Funds Index is
based, among other things, at any time the Cost of Funds Index may not reflect
the average of prevailing market interest rates on new liabilities of similar
maturities. There can be no assurance that the Cost of Funds Index will
necessarily move in the same direction or at the same rate as prevailing
interest rates because as longer term deposits or borrowings mature and are
renewed at market interest rates, the Cost of Funds Index will rise or fall
depending upon the differential between the prior and the new rates on such
deposits and borrowings. In addition, dislocations in the thrift industry in
recent years have caused and may continue to cause the cost of funds of thrift
institutions to change for reasons unrelated to changes in general interest rate
levels. Furthermore, any movement in the Cost of Funds Index as compared to
other indices based upon specific interest rates may be affected by changes
instituted by the FHLB of San Francisco in the method used to calculate the Cost
of Funds Index. To the extent that the Cost of Funds Index may reflect interest
changes on a more delayed basis than other indices, in a period of rising
interest rates, any increase may produce a higher yield later than would be
produced by such other indices, and in a period of declining interest rates
which may result in a higher level of principal prepayments on mortgage loans
which adjust in accordance with the Cost of Funds Index than mortgage loans
which adjust in accordance with other indices.

LIBOR, the London interbank offered rate, is the interest rate that the
most creditworthy international banks dealing in U.S. dollar-denominated
deposits and loans charge each other for large dollar-denominated loans. LIBOR
is also usually the base rate for large dollar-denominated loans in the
international market. LIBOR is generally quoted for loans having rate
adjustments at one, three, six or 12 month intervals.

Stripped Agency Mortgage-Backed Securities. These are securities
representing interests in a pool of mortgages, the cash flow of which has been
separated into its interest and principal components. "IOs" (interest only
securities) receive the interest portion of the cash flow while "POs" (principal
only securities) receive the principal portion. Stripped Agency Mortgage-Backed
Securities may be issued by U.S. Government Agencies or by private issuers
similar to those described below with respect to CMOs and privately-issued
mortgage-backed certificates. As interest rates rise and fall, the value of IOs
tends to move in the same direction as interest rates. The value of the other
mortgage-backed securities described herein, like other debt instruments, will
tend to move in the opposite direction compared to interest rates. Accordingly,
for example, investing in IOs may offset fluctuations in the value of other
mortgage-backed securities which are owned by the Portfolios. Under the Internal
Revenue Code of 1986, as amended (the "Code"), POs may generate taxable income
from the current accrual of original issue discount, without a corresponding
distribution of cash to the Portfolio which owns them.

The cash flows and yields on IO and PO classes are extremely sensitive to
the rate of principal payments (including prepayments) on the related underlying
mortgage assets. For example, a rapid or slow rate of principal payments may
have a material adverse effect on the yield to maturity of IOs or POs,
respectively. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, an investor may fail to recoup fully its
initial investment in an IO class of a stripped mortgage-backed security, even
if the IO class is rated AAA or Aaa. Conversely, if the underlying mortgage
assets experience slower than anticipated prepayments of principal, the yield on
a PO class will be affected more severely than would be the case with a
traditional mortgage-backed security.

A Portfolio will generally treat IOs and POs, other than IOs or POs backed
by fixed rate mortgages issued or guaranteed by the U.S. Government or one of
its agencies or instrumentalities, as illiquid securities and, accordingly,
limit its investment in such securities, together with all other illiquid
securities, to 15% of the

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Portfolio's net assets, except that the Government
Portfolio will limit its investment in such securities, together with all other
illiquid securities, to 10% of the Government Portfolio's net assets.

Inverse Floating Obligations. The Portfolios may invest in mortgage
securities and other instruments that are "inverse floating obligations."

One such instrument is an inverse floating rate bond, which pays a rate of
interest that fluctuates inversely with changes in a floating rate index such as
LIBOR. As the index decreases, the formula used to set the interest rate on such
a bond results in an increased yield. Conversely, as the index increases, the
formula used to set the interest rate on such a bond results in a decreased
yield. Although the right of the holder to a return of principal is not affected
by changes in interest rates, in a rising interest rate environment repayment of
principal will usually be slower than expected due to a decrease in prepayment
speeds usually associated with higher interest rates. Under such circumstances,
the market value of such instruments can be expected to decline.

Another such instrument is an "inverse IO," which is created by dividing a
fixed-rate bond class into floating and inverse floating components based upon a
market interest rate index, such that, at any time, the sum of the interest
payments to the two classes is no greater than the coupon on the fixed-rate
bond. As the index rises, more interest is required for the floating rate
component and therefore less is available to the holder of the inverse floating
rate holder. In a rising interest rate environment, the lower coupon payments
due to the inverse IO holder may be partially offset by the IO structure of the
security. With rising rates, slower prepayments will still enable the inverse IO
holder to recognize a decreased coupon on an outstanding balance for a longer
period. Unlike an inverse floating rate bond, an inverse IO does not entitle the
holder to receive a payment of principal and accordingly may have incremental
risk.

Inverse floating rate obligations generally increase or decrease in value
in response to changes in market interest rates at a rate which is a multiple of
the rate at which fixed-rate securities increase or decrease in response to such
changes. As a result, the market values of such securities will generally be
more volatile than the market values of conventional securities.

Collateralized Mortgage Obligations (CMOs). CMOs are obligations fully
collateralized by a portfolio of mortgages or mortgage-related securities.
Payments of principal and interest on the mortgages are passed through to the
holders of the CMOs on the same schedule as they are received, although certain
classes of CMOs have priority over others with respect to the receipt of
prepayments on the mortgages. Therefore, depending on the type of CMOs in which
a Portfolio invests, the investment may be subject to a greater or lesser risk
of prepayment than other types of mortgage-related securities. All CMOs
purchased by the Portfolios will be either issued by a Government agency or
rated in the two highest credit categories by a nationally recognized rating
agency.

U.S. Government Agency Multiclass Pass-Through Securities. Unlike CMOs,
U.S. Government Agency Multiclass Pass-Through Securities, which include FNMA
Guaranteed REMIC Pass-Through Certificates and FHLMC Multi-Class Mortgage
Participation Certificates, are ownership interests in a pool of Mortgage
Assets. Unless the context indicates otherwise, all references herein to CMOs
include such multiclass pass-through securities.

Privately-Issued Mortgage-Backed Certificates that Represent Interests in
U.S. Government Agency Mortgage-Backed Certificates. These are privately-issued
mortgage pass-through securities which represent interests in GNMA, FNMA and
FHLMC mortgage certificates but are generally divided into several classes in
the same manner as CMOs.

The Government Portfolio will invest in privately-issued mortgage-backed
securities only if they are rated at the time of investment AAA by S&P. Each of
the other Portfolios will invest in privately-issued mortgage-backed securities
only if they are rated at the time of investment A or better by S&P or A or
better by Moody's. While U.S.

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Government Securities and U.S. Government Agency
Mortgage-Backed Securities are guaranteed, as described above, as to the timely
payment of principal and interest, the market value of such obligations is not
guaranteed and may rise and fall in response to changes in interest rates and
other factors.

After purchase by a Portfolio, a security may cease to be rated or its
rating may be reduced below the minimum required for purchase by such Portfolio.
Neither event will require a sale of such security by the Portfolio. However,
each Portfolio's Adviser or relevant Sub-Adviser will consider such event in its
determination of whether such Portfolio should continue to hold the security. To
the extent that the ratings given by Moody's or S&P may change as a result of
changes in such organizations or their rating systems, the Adviser or relevant
Sub-Adviser for each Portfolio will attempt to use comparable ratings as
standards for investments in accordance with the investment policies contained
in the prospectus.

Highly rated mortgage- and asset-backed securities carry a relatively low
risk of default. Like all investors in interest-bearing securities, however, a
Portfolio is exposed to the risk that the prices of individual securities held
by it can fluctuate, in some cases significantly, in response to changes in
prevailing levels of interest rates. In addition, a Portfolio could experience a
loss on an investment in a Stripped Mortgage-Backed Security held by it if the
mortgage loans underlying such security experienced a rapid rate of prepayment.

Adjustable Rate Securities. Certain securities may be issued with
adjustable interest rates that are reset periodically by predetermined formulas
or indexes in order to minimize movements in the principal value of the
investment. Such securities may have long-term maturities, but may be treated as
a short-term investment under certain conditions. Generally, as interest rates
decrease or increase, the potential for capital appreciation or depreciation on
these securities is less than for fixed-rate obligations. These securities may
take the following forms:

Variable Rate Securities. Variable rate instruments are those whose terms
provide for the adjustment of their interest rates on set dates and which, upon
such adjustment, can reasonably be expected to have a market value that
approximates its par value. A variable rate instrument, the principal amount of
which is scheduled to be paid in 397 days or less, is deemed to have a maturity
equal to the period remaining until the next readjustment of the interest. A
variable rate instrument which is subject to a demand feature entitles the
purchaser to receive the principal amount of the underlying security or
securities, either (i) upon notice of no more than 30 days or (ii) at specified
intervals not exceeding 397 days and upon no more than 30 days notice is deemed
to have a maturity equal to the longer of the period remaining until the next
readjustment of the interest rate or the period remaining until the principal
amount can be recovered through demand.

Floating Rate Securities. Floating rate instruments are those whose terms
provide for the adjustment of their interest rates whenever a specified interest
rate changes and which, at any time, can reasonably be expected to have a market
value that approximates its par value. The maturity of a floating rate
instrument is deemed to be the period remaining until the date (noted on the
face of the instrument) on which the principal amount must be paid, or in the
case of an instrument called for redemption, the date on which the redemption
payment must be made. Floating rate instruments with demand features are deemed
to have a maturity equal to the period remaining until the principal amount can
be recovered through demand.

Put Option Bonds. Long-term obligations with maturities longer than one
year may provide purchasers an optional or mandatory tender of the security at
par value at predetermined intervals, often ranging from one month to several
years (e.g., a 30-year bond with a five-year tender period). These instruments
are deemed to have a maturity equal to the period remaining to the put date.

Asset-Backed Securities. A Portfolio may invest a portion of its assets in
debt obligations known as asset-backed securities. The credit quality of most
asset-backed securities depends primarily on the credit quality of the assets
underlying such securities, how well the entity issuing the security is
insulated from the credit risk of the originator or any other affiliated
entities and the amount and quality of any credit support provided to the
securities.

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The rate of principal payment on asset-backed securities generally
depends on the rate of principal payments received on the underlying assets
which in turn may be affected by a variety of economic and other factors. As a
result, the yield on any asset-backed security is difficult to predict with
precision and actual yield to maturity may be more or less than the anticipated
yield to maturity. Asset-backed securities may be classified either as
pass-through certificates or collateralized obligations.

Pass-through certificates are asset-backed securities which represent an
undivided fractional ownership interest in an underlying pool of assets.
Pass-through certificates usually provide for payments of principal and interest
received to be passed through to their holders, usually after deduction for
certain costs and expenses incurred in administering the pool. Because
pass-through certificates represent an ownership interest in the underlying
assets, the holders thereof bear directly the risk of any defaults by the
obligors on the underlying assets not covered by any credit support. See "Types
of Credit Support."

Asset-backed securities issued in the form of debt instruments, also known
as collateralized obligations, are generally issued as the debt of a special
purpose entity organized solely for the purpose of owning such assets and
issuing such debt. Such assets may be credit card or automobile receivables,
home equity loans or other consumer or commercial obligations. The assets
collateralizing such asset-backed securities are pledged to a trustee or
custodian for the benefit of the holders thereof. Such issuers generally hold no
assets other than those underlying the asset-backed securities and any credit
support provided. As a result, although payments on such asset-backed securities
are obligations of the issuers, in the event of defaults on the underlying
assets not covered by any credit support (see "Types of Credit Support"), the
issuing entities are unlikely to have sufficient assets to satisfy their
obligations on the related asset-backed securities.

Methods of Allocating Cash Flows. While many asset-backed securities are
issued with only one class of security, many asset-backed securities are issued
in more than one class, each with different payment terms. Multiple class
asset-backed securities are issued for two main reasons. First, multiple classes
may be used as a method of providing credit support. This is accomplished
typically through creation of one or more classes whose right to such payments
on the asset-backed security is made subordinate to the right to such payments
of the remaining class or classes. See "Types of Credit Support". Second,
multiple classes may permit the issuance of securities with payment terms,
interest rates or other characteristics differing both from those of each other
and from those of the underlying assets. Examples include so-called "strips"
(asset-backed securities entitling the holder to disproportionate interests with
respect to the allocation of interest and principal of the assets backing the
security), and securities with a class or classes having characteristics which
mimic the characteristics of non-asset-backed securities, such as floating
interest rates (i.e., interest rates which adjust as a specified benchmark
change) or scheduled amortization of principal.

Asset-backed securities in which the payment streams on the underlying
assets are allocated in a manner different than those described above may be
issued in the future. A Portfolio may invest in such asset-backed securities if
such investment is otherwise consistent with its investment objective and
policies and with the investment restrictions of the Portfolio.

Types of Credit Support. Asset-backed securities are often backed by a pool
of assets representing the obligations of a number of different parties. To
lessen the effect of failures by obligors on underlying assets to make payments,
such securities may contain elements of credit support. Such credit support
falls into two classes: Liquidity protection and protection against ultimate
default by an obligor on the underlying assets. Liquidity protection refers to
the provision of advances, generally by the entity administering the pool of
assets, to ensure that scheduled payments on the underlying pool are made in a
timely fashion. Protection against ultimate default ensures ultimate payment of
the obligations on at least a portion of the assets in the pool. Such protection
may be provided through guarantees, insurance policies or letters of credit
obtained from third parties, through various means of structuring the
transaction or through a combination of such approaches. Examples of
asset-backed securities with credit support arising out of the structure of the
transaction include "senior-subordinated securities" (multiple class

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asset-backed securities with certain classes subordinate to other classes as to
the payment of principal thereon, with the result that defaults on the
underlying assets are borne first by the holders of the subordinated class) and
asset-backed securities that have "reserve funds" (where cash or investments,
sometimes funded from a portion of the initial payments on the underlying
assets, are held in reserve against future losses) or that have been
"overcollateralized" (where the scheduled payments on, or the principal amount
of, the underlying assets substantially exceeds that required to make payment of
the asset-backed securities and pay any servicing or other fees). The degree of
credit support provided on each issue is based generally on historical
information respecting the level of credit risk associated with such payments.
Delinquency or loss in excess of that anticipated could adversely affect the
return on an investment in an asset-backed security.

Automobile Receivable Securities. A Portfolio may invest in Asset Backed
Securities which are backed by receivables from motor vehicle installment sales
contracts or installment loans secured by motor vehicles ("Automobile Receivable
Securities"). Since installment sales contracts for motor vehicles or
installment loans related thereto ("Automobile Contracts") typically have
shorter durations and lower incidences of prepayment, Automobile Receivable
Securities generally will exhibit a shorter average life and are less
susceptible to prepayment risk.

Most entities that issue Automobile Receivable Securities create an
enforceable interest in their respective Automobile Contracts only by filing a
financing statement and by having the servicer of the Automobile Contracts,
which is usually the originator of the Automobile Contracts, take custody
thereof. In such circumstances, if the servicer of the Automobile Contracts were
to sell the same Automobile Contracts to another party, in violation of its
obligation not to do so, there is a risk that such party could acquire an
interest in the Automobile Contracts superior to that of the holders of
Automobile Receivable Securities. Also although most Automobile Contracts grant
a security interest in the motor vehicle being financed, in most states the
security interest in a motor vehicle must be noted on the certificate of title
to create an enforceable security interest against competing claims of other
parties. Due to the large number of vehicles involved, however, the certificate
of title to each vehicle financed, pursuant to the Automobile Contracts
underlying the Automobile Receivable Security, usually is not amended to reflect
the assignment of the seller's security interest for the benefit of the holders
of the Automobile Receivable Securities. Therefore, there is the possibility
that recoveries on repossessed collateral may not, in some case, be available to
support payments on the securities. In addition, various state and federal
securities laws give the motor vehicle owner the right to assert against the
holder of the owner's Automobile Contract certain defenses such owner would have
against the seller of the motor vehicle. The assertion of such defenses could
reduce payments on the Automobile Receivable Securities.

Credit Card Receivable Securities. A Portfolio may invest in Asset Backed
Securities backed by receivables from revolving credit card agreements ("Credit
Card Receivable Securities"). Credit balances on revolving credit card
agreements ("Accounts") are generally paid down more rapidly than the 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
Receivables Securities thus depends upon the continued generation of additional
principal amounts in the underlying accounts during the initial period and
non-occurrence of specified events. 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 shorten the
weighted average life and yield of the Credit Card Receivable Security.

Credit cardholders are entitled to the protection of a number of state and
federal consumer credit laws, many of

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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 most other Asset Backed
Securities, Accounts are unsecured obligations of the cardholder.

Other Assets. The Sub-Advisers anticipate that Asset Backed Securities
backed by assets other than those described above will be issued in the future.
A Portfolio may invest in such securities in the future if such investment is
otherwise consistent with its investment objective and policies.

There are, of course, other types of securities that are, or may become,
available, which are similar to the foregoing.

U.S. Government Securities. U.S. Government securities consist of
various types of marketable securities issued by the U.S. Treasury, i.e.,
bills, notes and bonds. Such securities are direct obligations of the U.S.
Government and differ mainly in the lengths of their maturities. Treasury
bills, the most frequently issued marketable government security, have a
maturity of up to one year and are issued on a discount basis.

Securities issued or guaranteed as to principal and interest by the U.S.
Government may be acquired by a Portfolio in the form of separately traded
principal and interest components of securities issued or guaranteed by the U.S.
Treasury. The principal and interest components of selected securities are
currently traded independently under the Separate Trading of Registered Interest
and Principal of Securities ("STRIPS") program. Under the STRIPS program, the
principal and interest components are individually numbered and separately
issued by the U.S. Treasury at the request of depository financial institutions,
which then trade the component parts independently. The interest and principal
payments on the U.S. Treasury securities underlying STRIPS are direct
obligations of the U.S. Government.

Bank Money Investments. Bank money investments include but are not limited
to certificates of deposit, bankers' acceptances and time deposits. Certificates
of deposit are generally short-term (i.e., less than one year), interest-bearing
negotiable certificates issued by commercial banks or savings and loan
associations against funds deposited in the issuing institution. A bankers'
acceptance is a time draft drawn on a commercial bank by a borrower, usually in
connection with an international commercial transaction (to finance the import,
export, transfer or storage of goods). A bankers' acceptance may be obtained
from a domestic or foreign bank including a U.S. branch or agency of a foreign
bank. The borrower is liable for payment as well as the bank, which
unconditionally guarantees to pay the draft at its face amount on the maturity
date. Most acceptances have maturities of six months or less and are traded in
secondary markets prior to maturity. Time deposits are nonnegotiable deposits
for a fixed period of time at a stated interest rate. A Portfolio will not
invest in any such bank money investment unless the investment is issued by a
U.S. bank that is a member of the Federal Deposit Insurance Corporation
("FDIC"), including any foreign branch thereof, a U.S. branch or agency of a
foreign bank, or a savings bank or savings and loan association that is a member
of the FDIC and which at the date of investment has capital, surplus and
undivided profits (as of the date of its most recently published financial
statements) in excess of $1 billion. A Portfolio will not invest in time
deposits maturing in more than seven days and will not invest more than 10% of
its total assets in time deposits maturing in two to seven days.

U.S. branches and agencies of foreign banks are offices of foreign banks
and are not separately incorporated entities. They are chartered and regulated
either federally or under state law. U.S. federal branches or agencies of
foreign banks are chartered and regulated by the Comptroller of the
Currency, while state branches and agencies are chartered and regulated by
authorities of the respective states or the District of Columbia. U.S.
branches of foreign banks may accept deposits and thus are eligible for FDIC
insurance; however, not all such branches elect FDIC insurance. Unlike U.S.
branches of foreign banks, U.S. agencies of foreign banks may not accept
deposits and thus are not eligible for FDIC insurance. Both branches and
agencies can maintain credit balances, which are funds received by the office
incidental to or arising out of the exercise of their banking powers and can
exercise other commercial functions, such as lending activities.

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Short-Term Corporate Debt Instruments. Short-term corporate debt
instruments include commercial paper to finance short-term credit needs (i.e.,
short-term, unsecured promissory notes) issued by corporations including but not
limited to (a) domestic or foreign bank holding companies or (b) their
subsidiaries or affiliates where the debt instrument is guaranteed by the bank
holding company or an affiliated bank or where the bank holding company or the
affiliated bank is unconditionally liable for the debt instrument. Commercial
paper is usually sold on a discounted basis and has a maturity at the time of
issuance not exceeding nine months.

Commercial paper investments at the time of purchase will be rated A by S&P
or Prime by Moody's, or, if not rated, issued by companies having an outstanding
long-term unsecured debt issue rated at least A by S&P or by Moody's. The money
market investments in corporate bonds and debentures (which must have maturities
at the date of settlement of one year or less) must be rated at the time of
purchase at least A by S&P or by Moody's.

Commercial Paper Ratings. Commercial paper rated A (highest quality) by S&P
is issued by entities which have liquidity ratios which are adequate to meet
cash requirements. Long-term senior debt is rated A or better, although in some
cases BBB credits may be allowed. The issuer has access to at least two
additional channels of borrowing. Basic earnings and cash flow have an upward
trend with allowance made for unusual circumstances. Typically, the issuer's
industry is well established and the issuer has a strong position within the
industry. The reliability and quality of management are unquestioned. The
relative strength or weakness of the above factors determines whether the
issuer's commercial paper is rated A-1, A-2 or A-3. (Those A-1 issues determined
to possess overwhelming safety characteristics are denoted with a plus (+) sign:
A-1+.)

The rating Prime is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following: evaluation of the management of the issuer; economic evaluation of
the issuer's industry or industries and an appraisal of speculative-type risks
which may be inherent in certain areas; evaluation of the issuer's products in
relation to competition and customer acceptance; liquidity; amount and quality
of long-term debt; trend of earnings over a period of 10 years; financial
management of obligations which may be present or may arise as a result of
public interest questions and preparations to meet such obligations. These
factors are all considered in determining whether the commercial paper is rated
Prime-1, Prime-2 or Prime-3.

In the event the lowering of ratings of a Portfolio's portfolio holdings by
applicable rating agencies results in a material decline in the overall quality
of the Portfolio's portfolio, the Trustees will review the situation and take
such action as they deem in the best interests of such Portfolio's shareholders,
including, if necessary, changing the composition of the portfolio.

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DEBT SECURITIES RATINGS

Standard & Poor's Corporation

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

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

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

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

Debt rated BB, B, CCC, CC and C is regarded as having speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.

BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.

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

CCC: Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.

CC: The rating CC is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC debt rating.

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

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

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

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bankruptcy petition if debt service payments are jeopardized.

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

SP-1: Notes rated SP-1 are of the highest quality with very strong or
strong capacity to pay principal and interest. Issues determined to possess
overwhelming safety characteristics are given a plus (+) designation.

SP-2: Notes rated SP-2 are of high quality with satisfactory capacity to
pay principal and interest.

Moody's Investors Service, Inc.

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

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

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

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

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

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

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

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

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

1, 2 or 3: The ratings from Aa through B may be modified by the addition of
a numeral indicating a bond's rank within its rating category.

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MIG-1: Notes bearing this designation are the best quality, enjoying strong
protection from established cash flows of funds for their servicing or from
established and broad-based access to the market for refinancing, or both.

MIG-2: Notes bearing this designation are of high quality, with margins of
protection ample although not so large as in the preceding group.

INVESTMENT RESTRICTIONS

Adjustable Rate Portfolio

The Trust has adopted the following investment restrictions for the
Adjustable Rate Portfolio. Restrictions 1, 2, 14, 15 and 18 may not be changed
without approval of the holders of a majority of the Adjustable Rate Portfolio's
outstanding shares as defined by the 1940 Act. The other investment restrictions
may be changed by the Trustees without a vote of the shareholders. So long as
these restrictions are in effect, the Adjustable Rate Portfolio may not:

1. Purchase more than 10% of any class of securities of any one
issuer (except securities issued or guaranteed by the U.S. Government,
its agencies and instrumentalities).

2. Invest more than 5% of its total assets in the securities of any
one issuer (except securities issued or guaranteed by the U.S. Government,
its agencies and instrumentalities and options thereon) or in securities of
issuers (including predecessors) with less than three years of continuous
operations except in the case of debt securities rated BBB or higher by S&P
or Baa or higher by Moody's, and except that this restriction shall not
apply to investments in securities issued or guaranteed by the U.S.
Government, its agencies and instrumentalities.

3. Purchase or sell commodities (other than the options and futures
contracts described in the Prospectus and Statement of Additional
Information) or real estate (other than securities secured by real estate
or interests therein, or issued by entities which invest in real estate or
interests therein), but it may lease office space for its own use and
invest up to 5% of its assets in publicly held real estate investment
trusts.

4. Borrow amounts in excess of 10% of its total assets and then only
as a temporary measure for extraordinary or emergency purposes. This
restriction shall not prohibit entry into reverse repurchase agreements if
as a result the Portfolio's current obligations under such agreements would
not exceed one-third of the current market value of its total assets (less
its liabilities other than under reverse repurchase agreements).

5. Make loans, except that this restriction shall not prohibit the
purchase and holding of a portion of an issue of publicly distributed debt
securities, the lending of portfolio securities (not more than 5 percent of
the Portfolio's net assets) and the entry into repurchase agreements (not
more than one-third of the current market value of the Adjustable Rate
Portfolio's total assets shall constitute secured "loans" by the Adjustable
Rate Portfolio under repurchase agreements).

6. Engage in the business of underwriting securities of others, except
that the Trust may be deemed to be an underwriter under the Securities Act
of 1933, as amended, when it purchases or sells portfolio securities.

7. Invest in the securities of an issuer for the purpose of exercising
control or management, but it may do so where it is deemed advisable to
protect or enhance the value of an existing investment.

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only to the
extent of 10% of its assets or as part of a merger, consolidation,
reorganization, or acquisition of assets.

9. Invest in or retain the securities of any issuer, if, to the
knowledge of the Trust, the officers and trustees of the Trust who
individually own in excess of 1/2 of 1% of the issuer's securities own more
than 5% of such securities in the aggregate.

10. Invest in securities which are not registered under the Securities
Act of 1933, as amended, or the marketability of which is restricted
including securities restricted as to resale (limited to 5% of total
assets), if as a result, more than 10% of its total assets would consist of
such securities; provided, however, that this restriction shall not apply
to securities which are not required to be registered under the Securities
Act of 1933, as amended, or to repurchase agreements having less than seven
days to maturity, reverse repurchase agreements, firm commitment
agreements, and futures contracts and options thereon.

11. Purchase securities on margin, except any short-term credits which
may be necessary for the clearance of transactions and the initial or
maintenance margin in connection with options and futures contracts and
related options.

12. Make short sales of securities, unless the Adjustable Rate
Portfolio owns an equal amount of the securities or securities convertible
into or exchangeable without further consideration for securities of the
same issue as the securities sold short; provided that this restriction
shall not prohibit the use of options and futures contracts for hedging
purposes.

13. Invest more than 25% of its total assets in any one industry
(except U.S. Government Securities).

14. Issue senior securities, as defined in the 1940 Act, except as
permitted by Section 18(f)(2) of that Act and the rules under such Act, as
set forth herein, or as permitted by an SEC exemptive order.

15. Change the nature of its business so as to cease to be an
investment company.

16. Conduct arbitrage transactions (provided that investments in
futures and options for hedging purposes shall not be deemed arbitrage
transactions).

17. Invest in oil, gas or other mineral leases or exploration or
development programs (provided that the Portfolio may invest in securities
issued by or which are based, directly or indirectly, on the credit of
companies which invest in or sponsor such programs).

18. Invest more than 5% of its total assets in warrants of all types,
or more than 2% of its total assets in warrants other than warrants
attached to other securities.

19. Invest in securities of foreign issuers other than through ADRs.

20. Invest in real estate limited partnership.

21. Purchase any security while borrowings representing more than 5%
of the Portfolio's net assets (including loans, reverse repurchase
agreements, forward rolls or other borrowings) are outstanding.

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Government Portfolio

The Trust has adopted the following investment restrictions for the
Government Portfolio. Restrictions 2, 3, 4, 6, 14, 15 and 16 may not be changed
without approval of the holders of a majority of the Government Portfolio's
outstanding shares as defined by the 1940 Act. The other investment restrictions
may be changed by the Trustees without a vote of the shareholders. So long as
these restrictions are in effect, the Portfolio may not:

1. Purchase more than 10% of any class of securities of any one
issuer (except U.S. Government Securities as defined in the Government
Portfolio Prospectus).

2. Invest more than 5% of its total assets in the securities of any
one issuer (except U.S. Government Securities and options thereon) or
in securities of issuers (other than issuers of U.S. Government
Securities) with less than three years of continuous operations.

3. Purchase or sell commodities (other than the options and interest
rate futures contracts described in the Prospectus and Statement of
Additional Information) or real estate (other than securities secured by
real estate or interests therein, or issued by entities which invest in
real estate or interests therein), but it may lease office space for its
own use and invest up to 5% of its assets in publicly held real estate
investment trusts.

5. Make loans, except that this restriction shall not prohibit the
purchase and holding of a portion of an issue of publicly distributed debt
securities, the lending of portfolio securities (not more than 5 percent of
the Portfolio's net assets) and the entry into repurchase agreements (not
more than one-third of the current market value of the Portfolio's total
assets shall constitute secured "loans" by the Portfolio under repurchase
agreements).

7. Invest in the securities of an issuer for the purpose of exercising
control or management, but it may do so where it is deemed advisable to
protect or enhance the value of an existing investment.

8. Purchase securities of any other investment company, except in the
open market in a transaction involving no commission or profit to a sponsor
or dealer (other than the customary brokerage commission) and only to the
extent of 10% of its assets or as part of a merger, consolidation,
reorganization, or acquisition of assets.

9. Participate on a joint or joint and several basis in any securities
trading account; provided, however, that combining or "bunching" of the
orders of other accounts under the investment management of the Adviser
shall not be considered participation in a joint securities trading
account;

10. Invest in or retain the securities of any issuer, if, to the
knowledge of the Trust, the officers and trustees of the Trust who
individually own in excess of 1/2 of 1% of the issuer's securities own more
than 5% of such securities in the aggregate.

11. Invest in securities which are not registered under the Securities
Act of 1933, as amended, or the

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marketability of which is restricted, if as
a result, more than 10% of its total assets would consist of such
securities; provided, however, that this restriction shall not apply to
securities which are not required to be registered under the Securities Act
of 1933, as amended, or to repurchase agreements having less than seven
days to maturity, reverse repurchase agreements, firm commitment
agreements, and futures contracts and options thereon.

12. Purchase securities on margin, except any short-term credits which
may be necessary for the clearance of transactions and the initial or
maintenance margin in connection with options and futures contracts and
related options.

13. Make short sales of securities, unless the Portfolio owns an equal
amount of the securities or securities convertible into or exchangeable
without further consideration for securities of the same issue as the
securities sold short.

14. Invest more than 25% of its total assets in any one industry
(except U.S. Government Securities).

15. Issue senior securities, as defined in the 1940 Act, except as
permitted by Section 18(f)(2) of that Act and the rules under such Act, as
set forth herein, or as permitted by an SEC exemptive order.

16. Change the nature of its business so as to cease to be an
investment company.

17. Invest in real estate limited partnerships.

18. Purchase any security while borrowings representing more than 5%
of the Portfolio's net assets (including loans, reverse repurchase
agreements or other borrowings) are outstanding.

Value Portfolio

The Trust has adopted the following investment restrictions for the Value
Portfolio. Restrictions 1, 2, 14, 15 and 18 may not be changed without approval
of the holders of a majority of the Value Portfolio's outstanding shares as
defined by the 1940 Act. The other investment restrictions may be changed by the
Trustees without a vote of the shareholders. So long as these restrictions are
in effect, the Value Portfolio may not:

1. Purchase more than 5% of any class of securities of any one
issuer (except securities issued or guaranteed by the U.S. Government,
its agencies and instrumentalities).

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of the current market value of its total assets (less
its liabilities other than under reverse repurchase agreements).

5. Make loans, except that this restriction shall not prohibit the
purchase and holding of a portion of an issue of publicly distributed debt
securities, the lending of portfolio securities (not more than 5 percent of
the Portfolio's net assets) and the entry into repurchase agreements (not
more than one-third of the current market value of the Value Portfolio's
total assets shall constitute secured "loans" by the Value Portfolio under
repurchase agreements).

7. Invest in the securities of an issuer for the purpose of exercising
control or management, but it may do so where it is deemed advisable to
protect or enhance the value of an existing investment.

12. Make short sales of securities, unless the Value Portfolio owns an
equal amount of the securities or securities convertible into or
exchangeable without further consideration for securities of the same issue
as the securities sold short; provided that this restriction shall not
prohibit the use of options and futures contracts for hedging purposes.

13. Invest more than 20% of its total assets in any one industry
(except U.S. Government Securities).

15. Change the nature of its business so as to cease to be an
investment company.

16. Conduct arbitrage transactions (provided that investments in
futures and options for hedging purposes shall not be deemed arbitrage
transactions).

17. Invest in oil, gas or other mineral leases or exploration or
development programs (provided that the

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Portfolio may invest in securities
issued by or which are based, directly or indirectly, on the credit of
companies which invest in or sponsor such programs).

18. Invest more than 5% of its total assets in warrants of all types,
or more than 2% of its total assets in warrants other than warrants
attached to other securities.

19. Invest in securities of foreign issuers other than through ADRs.

20. Invest in real estate limited partnerships.

21. Purchase any security while borrowings representing more than 5%
of the Portfolio's net assets (including loans, reverse repurchase
agreements or other borrowings) are outstanding.

Growth Portfolio

The Trust has adopted the following investment restrictions for the Growth
Portfolio. Restrictions 1, 2, 14, 15 and 18 may not be changed without approval
of the holders of a majority of the Growth Portfolio's outstanding shares as
defined by the 1940 Act. The other investment restrictions may be changed by the
Trustees without a vote of the shareholders. So long as these restrictions are
in effect, the Growth Portfolio may not:

1. Purchase more than 10% of any class of securities of any one
issuer (except securities issued or guaranteed by the U.S. Government,
its agencies and instrumentalities).

5. Make loans, except that this restriction shall not prohibit the
purchase and holding of a portion of an issue of publicly distributed debt
securities, the lending of portfolio securities (not more than 5 percent of
the Portfolio's net assets) and the entry into repurchase agreements (not
more than one-third of the current market value of the Growth Portfolio's
total assets shall constitute secured "loans" by the Growth Portfolio under
repurchase agreements).

7. Invest in the securities of an issuer for the purpose of exercising
control or management, but it may do

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so where it is deemed advisable to
protect or enhance the value of an existing investment.

12. Make short sales of securities, unless the Growth Portfolio owns
an equal amount of the securities or securities convertible into or
exchangeable without further consideration for securities of the same issue
as the securities sold short; provided that this restriction shall not
prohibit the use of options and futures contracts for hedging purposes.

13. Invest more than 25% of its total assets in any one industry
(except U.S. Government Securities).

15. Change the nature of its business so as to cease to be an
investment company.

16. Conduct arbitrage transactions (provided that investments in
futures and options for hedging purposes shall not be deemed arbitrage
transactions).

18. Invest more than 5% of its total assets in warrants of all types,
or more than 2% of its total assets in warrants other than warrants
attached to other securities.

19. Invest in securities of foreign issuers other than through
U.S. dollar denominated American Depository Receipts ("ADRs").

20. Invest in real estate limited partnerships.

21. Purchase any security while borrowings representing more than 5%
of the Portfolio's net assets (including loans, reverse repurchase
agreements or other borrowings) are outstanding.

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Percentage Limitations

In connection with the investment restrictions of each Portfolio, all
percentage limitations apply only at the time a transaction is entered.
Accordingly, if a percentage restriction is adhered to at the time of
investment, a later increase or decrease in the percentage which results from a
relative change in values or from a change in a Portfolio's net assets will not
be treated as a violation. Under the 1940 Act, each Portfolio will be required
to maintain an asset coverage of at least 300% for borrowings from a bank. In
the event that such asset coverage is below 300%, the Portfolio will be required
to reduce the amount of its borrowings to obtain 300% asset coverage, within
three days (not including Sundays and holidays) or such longer period as the
rules and regulations of the SEC prescribe.

PORTFOLIO TRANSACTIONS

It is the general policy of the Portfolios, the Adviser and the
Sub-Advisers not to employ any broker in the purchase or sale of securities for
any Portfolio's portfolio unless the Adviser or a Sub-Adviser believes that the
broker will obtain the best results for the Portfolio, taking into consideration
such relevant factors as price, the ability of the broker to effect the
transaction and the broker's facilities, reliability and financial
responsibility. Commission rates, being a component of price, are considered
together with such factors.

U.S. Government Securities and municipal securities are traded primarily in
the over-the-counter market. Transactions in the over-the-counter market are
generally principal transactions with dealers and the costs of such transactions
involve dealer spreads rather than brokerage commissions. With respect to any
over-the-counter transactions, the Adviser or relevant Sub-Adviser, where
possible, deals directly with the dealers who make a market in the securities
involved except in those circumstances where better prices and execution are
available elsewhere.

Under the 1940 Act, persons affiliated with the Trust are prohibited from
dealing with the Trust as a principal in the purchase and sale of securities.
Since transactions in the over-the-counter market usually involve transactions
with dealers acting as principal for their own account, affiliated persons of a
Portfolio may not serve as such Portfolio's dealer in connection with such
transactions. However, affiliated persons of the Trust, including Value Line
Securities, Inc. ("Value Line Securities"), an affiliate of the Growth
Portfolio's Sub-Adviser, may serve as a broker in transactions for a Portfolio
conducted on an exchange or over-the-counter transactions conducted on an agency
basis. The Trust is not obligated to deal with any broker or group of brokers in
the execution of transactions in portfolio securities.

The commission rate on all exchange orders is subject to negotiation.
Section 17(e) of the 1940 Act limits to "the usual and customary broker's
commission" the amount which can be paid by the Trust to an affiliated person
acting as broker in connection with transactions effected on a securities
exchange. The Trustees of the Trust, including a majority of the Trustees who
are not "interested persons" of the Trust, the Adviser, or the Sub-Advisers,
have adopted procedures designed to comply with the requirements of Section
17(e) and Rule 17e-1 of the 1940 Act if an affiliated person acts as such a
broker, to ensure a broker's commission that is "reasonable and fair compared to
the commission, fee or other remuneration 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 .
. . ."

A transaction will not be placed with any affiliated party if a Portfolio
would have to pay a commission rate less favorable than such affiliated party's
contemporaneous charges for comparable transactions for its other most favored,
but unaffiliated, customers except for accounts for which the affiliated party
acts as a clearing broker for another brokerage firm, and any customers of the
affiliated party determined by a majority of the Trustees who are not
"interested persons" of the Trust, the Adviser, or such affiliated party not to
be comparable to the Trust.

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Since Value Line, Inc. as an affiliate of Value Line Securities, has, as a
Sub-Adviser to a Portfolio, the obligation to provide investment management
services, which include elements of research and related investment skills, such
research and related investment skills will not be used by Value Line Securities
as a basis for negotiating commissions at a rate higher than that determined in
accordance with the above criteria. When appropriate, orders for the account of
the Growth Portfolio may be combined with orders for the account of other funds
of which Value Line Securities is affiliated in order to obtain a more favorable
commission rate.

In selecting brokers to effect transactions on securities exchanges, each
Portfolio's Adviser or relevant Sub-Adviser considers the factors set forth in
the first paragraph under this heading and any investment information provided
by such brokers, subject to the criteria of Section 28(e) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Accordingly, if a
Portfolio's Adviser or relevant Sub-Adviser determines in good faith that the
amount of commissions charged by a broker is reasonable in relation to the value
of the brokerage and research services provided by such broker, such Adviser or
relevant Sub-Adviser may pay commissions to such broker in an amount greater
than the amount another firm might charge. Research services provided to a
Portfolio include research reports on particular industries and companies,
economic surveys and analyses, and recommendations as to specific securities.
From time to time brokerage for a Portfolio may be allocated on the basis of
sales of the shares of such Portfolio.

Each year, each Portfolio's Adviser or relevant Sub-Adviser will consider
the amount and nature of the research services provided by other brokers as well
as the extent to which such services provided by other brokers are relied upon,
and attempts to allocate a portion of the brokerage business of its clients,
such as the Portfolios, on the basis of that consideration. In addition, brokers
sometimes suggest a level of business they would like to receive in return for
the various services they provide. Actual brokerage business received by any
broker 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 excluded from
receiving business because it has not been identified as providing research
services. As permitted by Section 28(e), the investment information received
from other brokers may be used by the Adviser or relevant Sub-Adviser (and its
subsidiaries) in servicing all its accounts and not all such information may be
used by the Adviser or relevant Sub-Adviser in connection with the applicable
Portfolio. Nonetheless, the Portfolios believes that such investment information
provides the Portfolios with benefits by supplementing the research otherwise
available to the Trust.

The Growth Portfolio may employ Value Line Securities, as its principal
broker on exchange transactions. Section 11(a) of the Exchange Act provides that
a member firm of a national securities exchange (such as Value Line Securities)
may not effect transactions on such exchange for the account of an investment
company (such as the Trust) of which the member firm or its affiliate (such as
the Sub-Adviser) is the investment adviser. However, the SEC has adopted a rule,
Rule 11a2-2(T) (the "Rule"), which permits member firms which are subject to
Section 11(a) to effect exchange transactions otherwise prohibited by Section
11(a), provided such transactions are initiated from off the floor of the
exchange and are executed on the floor, or through use of the facilities of the
exchange, by another member which is not an "associated person" (as defined in
the Exchange Act) of the member firm which initiated the transaction. The Rule
also permits the initiating member to retain compensation in connection with
effecting such transactions if expressly so authorized in a written contract
with the investment company. The Growth Portfolio and Value Line Securities will
enter into such a contract if Value Line Securities is employed as such a
broker. Any such transactions effected by Value Line Securities on the NYSE for
the account of the Growth Portfolio, will be made in the manner prescribed by
the Rule. The Trust, of course, will continue to effect its portfolio
transactions in a manner consistent with the Exchange Act and the rules and
regulations thereunder.

Value Line Securities will furnish the Growth Portfolio, at least annually
a statement setting forth the total amount of all compensation retained by Value
Line Securities, or any associated person of Value Line Securities, in
connection with effecting transactions for the account of the Growth Portfolio,
and the Trustees of the Trust will review and approve all the Growth Portfolio's
portfolio transactions and the compensation received by Value Line

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Securities, in connection therewith.

Value Line Securities will not knowingly participate in commissions paid by
the Growth Portfolio to other brokers or dealers and does not seek or knowingly
receive any reciprocal business as the result of the payment of such
commissions. In the event Value Line Securities at any time learns that it has
knowingly received reciprocal business, it will so inform the Trustees of the
Trust.

During the year ended December 31, 1996, the Value Portfolio and Growth
Portfolio paid $17,241, and $11,690, respectively, in brokerage commissions. No
brokerage commissions were paid by the Adjustable Rate Portfolio or the
Government Portfolio. There were no brokerage commissions paid to affiliates of
the Portfolios.

Subject to general supervision by the Trustees and the Adviser, all
investment decisions of each Portfolio are made by such Portfolio's Adviser or
relevant Sub-Adviser, which places orders for all purchases and sales of
portfolio securities for such Portfolio with brokers and dealers.

PORTFOLIO TURNOVER

In determining a Portfolio's portfolio turnover, securities (including
options) which have maturities at the time of acquisition of one year or less
("short-term securities") are excluded. The annual portfolio turnover rate is
calculated by dividing the lesser of the purchase or sales of portfolio
securities for the year by the monthly average of the value of the portfolio
securities owned by the Portfolio during the year. The monthly average is
calculated by totaling the values of the portfolio securities as of the
beginning and end of the first month of the year and as of the end of the
succeeding 11 months and dividing the sum by 13. A turnover rate of 100% would
occur if all of a Portfolio's portfolio securities (other than short-term
securities) were replaced once in a period of one year. It should be noted that
if a Portfolio were to write a substantial number of option contracts which are
exercised, the portfolio turnover rate of such Portfolio would increase.

The Government Portfolio anticipates that its annual portfolio turnover
rate will not exceed 200%. The Government Portfolio will trade its portfolio
securities without regard to the length of time for which they have been held.
The Growth Portfolio may trade in securities for short-term profits in order to
achieve its objective. The Growth Portfolio anticipates that its annual
portfolio turnover rate may exceed 100% but generally will not exceed 200%. It
is the policy of each of the Value Portfolio and the Adjustable Rate Portfolio
not to trade in securities with a view toward obtaining short term profits.
However, when circumstances warrant, such Portfolios may sell securities without
regard to the length of time held. The Value Portfolio anticipates that its
annual portfolio turnover rate may exceed 100% but generally will not exceed
175%. The Adjustable Rate Portfolio anticipates that it annual portfolio
turnover rate may exceed 100% but generally will not exceed 150%. A high
portfolio turnover rate in any year will increase brokerage commissions paid by
a fund and could result in higher expenses.

To the extent that its portfolio is traded for short-term market
considerations and turnover exceeds 100%, the annual portfolio turnover rate of
a Portfolio could be higher than most mutual funds.

No Portfolio will engage in short-term trading to an extent which would in
the opinion of the Trust's counsel disqualify the Trust as a regulated
investment company under Subchapter M of the Code.

PURCHASE AND REDEMPTION INFORMATION

The insurance company separate accounts may purchase and redeem shares of
the Portfolios on each day, Monday through Friday, on which the NYSE is open for
trading based on, among other things, the amount of premium payments to be
invested and surrendered and transfer requests to be effected on that day
pursuant to the variable contracts. The NYSE will be closed on the following
national business holidays: New Year's Day,

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Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas. Such
purchases and redemptions of shares of each Portfolio are effected at their
respective net asset values per share determined as of 4:00 p.m. on that day.
Payment for redemptions are made by the Portfolios within seven days thereafter.
No fee is charged the separate accounts when they purchase or redeem Portfolio
shares.

The Portfolios may not suspend redemption privileges or postpone the date
of payment on shares of the Portfolios for more than seven days except during
any period (1) when the NYSE is closed or trading on the Exchange is restricted
as determined by the SEC; (2) when an emergency exists, as defined by the SEC,
which makes it not reasonably practicable for the Portfolio to dispose of
securities owned by it or fairly to determine the value of its assets; or (3) as
the SEC may otherwise permit.

The value of the shares on redemption may be more or less than the
shareholder's cost, depending upon the market value of the portfolio securities
at the time of redemption.

Reorganizations--In the event of mergers or reorganizations with other
public or private collective investment entities, including investment companies
as defined in the 1940 Act, a Portfolio may issue its shares at net asset value
(or more) to such entities or to their security holders.

NET ASSET VALUE

The net asset value per share of each Portfolio is determined as of 4:00
p.m. Eastern time, Monday through Friday, exclusive of national business
holidays on which the NYSE is closed.

The following is a description of the procedures used by each Portfolio to
value assets. Net asset value per share is computed by taking the market value
of all assets of a Portfolio (including interest accrued but not collected),
less liabilities (including accrued expenses but excluding capital and surplus),
and dividing by the total number of shares of the Portfolio outstanding.
Portfolio securities for which market quotations are readily available are
stated at market value. A security (including an option) listed or traded on an
exchange or quoted on NASDAQ is valued at its last sale price prior to the time
when assets are valued. Lacking any sales on that day, the security is valued at
the mean between the current closing bid and asked prices. Other securities are,
in general, valued at the mean of the bid and asked quotations last quoted prior
to the time when assets are valued if there are market quotations readily
available, or in the absence of such market quotations, then at the fair value
thereof as determined by or under authority of the Trustees of the Trust
utilizing such pricing services as may be deemed appropriate. Investments in
certain long-term debt securities not traded in an organized market are valued
on the basis of valuations furnished by independent pricing services or
broker/dealers which utilize information with respect to market transactions and
other information in such securities or comparable securities. Securities deemed
restricted as to resale are valued at the fair value thereof as determined by or
in accordance with methods adopted by the Trustees of the Trust.

Short-term debt instruments issued with a maturity of one year or less
which have a remaining maturity of 60 days or less are valued using the
amortized cost method, provided that during any period in which more than 25% of
a Portfolio's total assets is invested in short-term debt securities the current
market value of such securities will be used in calculating net asset value per
share in lieu of the amortized cost method.

The amortized cost method is used when the value obtained is fair value.
Under the amortized cost method of valuation, the security is initially valued
at cost on the date of purchase (or in the case of short-term debt instruments
purchased with more than 60 days remaining to maturity, the market value on the
61st day prior to maturity), and thereafter a constant amortization to maturity
of any discount or premium is assumed regardless of the impact of fluctuating
interest rates on the market value of the security.

Generally, trading in mortgage-backed or other securities issued or
guaranteed by U.S. Government agencies or

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instrumentalities is substantially
completed each day at various times prior to 4:15 P.M., Eastern time. The value
of such securities used in computing the net asset value of a Portfolio's shares
are determined as of such times. Occasionally, events affecting the values of
such securities may occur between the times at which they are determined and the
time the Portfolio determines its net asset value which will not be reflected in
the computation of the Portfolio's net asset value. If events materially
affecting the value of such securities occur during such period, then these
securities will be valued at their fair value as determined in good faith by the
Trustees.

CERTAIN TAX MATTERS

Shares of the Portfolios are currently offered only to insurance company
separate asset accounts that fund certain variable annuity contracts. See the
applicable Contract prospectus for a discussion of the special taxation of
insurance companies with respect to such accounts and of Contact holders.

Federal Taxation of the Portfolios--In General

Each Portfolio intends to qualify and elect to be treated each taxable year
as a "regulated investment company" under Subchapter M of the Code. To so
qualify, a Portfolio must, among other things, (a) derive at least 90% of its
gross income from dividends, interest, payments with respect to securities
loans, gains from the sale or other disposition of stock, securities or foreign
currencies, or other income (including gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies (the "90% test"); (b) derive less than 30% of its gross
income from the sale or other disposition of any of the following which was held
less than three months (the "30% test"): (i) stock or securities; (ii) options,
futures or forward contracts (other than on foreign currencies); or (iii)
foreign currencies (or options, futures or forward contracts on foreign
currencies) but only if such currencies (or options, futures or forward
contracts) are not directly related to a Portfolio's principal business of
investing in stock or securities; and (c) satisfy certain diversification
requirements.

As noted in the Prospectus, each Portfolio must, and intends to continue
to, comply with the diversification requirements imposed by Section 817(h) of
the Internal Revenue Code and the regulations thereunder. These requirements,
which are in addition to the diversification requirements mentioned above, place
certain limitations on the proportion of each Portfolio's assets that may be
represented by any single investment (which includes all securities of the same
issuer).

As a regulated investment company, the Portfolios will not be subject to
federal income tax on its net investment income (including net short-term
capital gains) and net capital gain that it distributes to shareholders if at
least 90% of its net investment income and net short-term capital gains and net
tax-exempt income for the taxable year are distributed. However, if for any
taxable year any Portfolio does not satisfy the requirements of Subchapter M of
the Code, all of its taxable income will be subject to tax at regular corporate
rates without any deduction for distributions to shareholders, and such
distributions will be taxable to shareholders as ordinary income to the extent
of such Portfolio's current or accumulated earnings or profits.

A Portfolio will be liable for a nondeductible 4% excise tax on amounts not
distributed on a timely basis in accordance with a calendar year distribution
requirement. To avoid the tax, during each calendar year a Portfolio must
distribute (i) at least 98% of its ordinary income (not taking into account any
net tax-exempt income or capital gains or losses) for the calendar year, (ii) at
least 98% of its capital gain net income for the twelve month period ending on
October 31 (or December 31, if a Portfolio so elects), and (iii) any portion
(not taxed to a Portfolio) of the respective 2% undistributed balances from the
prior year. Each Portfolio intends to make sufficient distributions to avoid
this 4% excise tax.

A Portfolio's ability to make certain investments may be limited by
provisions of the Code that require inclusion of certain unrealized gains or
losses in a Portfolio's income for purposes of the 90% test, the 30% test, the
excise tax and the distribution requirements of the Code, and by provisions of
the Code that characterize certain

66
<PAGE>

income or loss as ordinary income or loss
rather than capital gain or loss. Such recognition, characterization and timing
rules generally apply to investments in certain options, futures contracts and
debt securities with original issue or market discount.

As of December 31, 1996, the Portfolios had net tax basis capital loss
carryforwards which may be applied against taxable gains until their expiration
date as follows:

Expiration
Dates
Portfolio Amount December 31,
--------- ------ ------------
GNA Growth Portfolio................... $136,024 2004
GNA Government Portfolio............... 25,224 2004
GNA Adjustable Rate Portfolio.......... 10,947 2004

Additionally, net capital losses of $207,356 and $14,527 attributable to
security transactions in the GNA Growth Portfolio and GNA Government Portfolio,
respectively, incurred after October 31, 1996 are treated as arising on January
1, 1997, the first day of the Portfolios' next taxable year.

Taxation of the Portfolios' Investments

Original Issue Discount. For federal income tax purposes, debt securities
purchased by a Portfolio may be treated as having original issue discount.
Original issue discount represents interest for federal income tax purposes and
can generally be defined as the excess of the stated redemption price at
maturity of a debt obligation over the issue price. Original issue discount is
treated for federal income tax purposes as income earned by a Portfolio, whether
or not any income is actually received, and therefore is subject to the
distribution requirements of the Code. Generally, the amount of original issue
discount is determined on the basis of a constant yield to maturity which takes
into account the compounding of accrued interest. Under Section 1286 of the
Code, an investment in a stripped bond or stripped coupon may result in original
issue discount.

Debt securities may be purchased by a Portfolio at a discount that exceeds
the original issue discount plus previously accrued original issue discount
remaining on the securities, if any, at the time a Portfolio purchases the
securities. This additional discount represents market discount for income tax
purposes. In the case of any debt security issued after July 18, 1984, having a
fixed maturity date of more than one year from the date of issue and having
market discount, the gain realized on disposition will be treated as interest to
the extent it does not exceed the accrued market discount on the security
(unless a Portfolio elects to include such accrued market discount in income in
the tax year to which it is attributable). Generally, market discount is accrued
on a daily basis. A Portfolio may be required to capitalize, rather than deduct
currently, part or all of any direct interest expense incurred or continued to
purchase or carry any debt security having market discount, unless a Portfolio
makes the election to include market discount currently. Because each Portfolio
must include original issue discount in income, it will be more difficult for
such Portfolio to make the distributions required for such Portfolio to maintain
its status as a regulated investment company under Subchapter M of the Code or
to avoid the 4% excise tax described above.

Options and Futures Transactions. Certain of a Portfolio's investments may
be subject to provisions of the Code that (i) require inclusion of unrealized
gains or losses in a Portfolio's income for purposes of the 90% test, the 30%
test, the excise tax and the distribution requirements applicable to regulated
investment companies; (ii) defer recognition of realized losses; and (iii)
characterize both realized and unrealized gain or loss as short-term or
long-term gain or loss. Such provisions generally apply to, among other
investments, options on debt securities, indices on securities and futures
contracts.

The foregoing is only a general summary of some of the important federal
income tax considerations generally affecting the Portfolios and their
shareholders. No attempt is made to present a complete explanation of the
federal tax treatment of the Portfolios' activities, and this discussion is not
intended as a substitute for careful tax planning. Accordingly, potential
investors are urged to consult their own tax advisers for more detailed
information and for information regarding any state, local or foreign taxes
applicable to the Portfolios and to dividends and other distributions therefrom.

MANAGEMENT OF THE TRUST

The Trustees and executive officers of the Trust and their principal
occupations during the past five years are set forth below. Unless otherwise
indicated, the business address of each is Suite 5600, Two Union Square, 601
Union Street, Seattle, Washington 98101.

Principal Occupation(s)
Name Title During the Past Five Years
- ---- ----- --------------------------

Pierce T. Lindberg Trustee Mr. Lindberg was Assistant Treasurer
4501 Grandview Dr., and Director of Money Management for

67
<PAGE>

W #307T Weyerhaeuser Company until his
Tacoma, WA 98466 retirement in 1984. Trustee, Investors
Trust.

Edward R. McMillan Trustee Investment consultant to several
1600 Crista Shores Lane, private concerns and is presently
#302 Vice Chairman of the Seattle
Silverdale, WA 98383 Pacific University Foundation and
Member of the Investment Committee,
Blue Cross of Washington and Alaska.
Senior Vice President and Chief
Economist for Rainier National Bank
until his retirement in 1983 and
formerly a Member of the Government
Securities Committee, Public Securities
Association. Trustee, Investors Trust.

Douglas H. Pedersen Trustee Mr. Pedersen is a Seattle-based
13190 Phelps Road business economist and principal of
Bainbridge Island, WA 98110 Pedersen & Associates, a consulting
firm. Mr. Pedersen is also co-publisher
of "The Puget Sound Economic Fore-
caster," a quarterly newsletter.
Formerly, Vice President and Economist
for Security Pacific Bank.
Mr. Pedersen is a member of the
Governor's Council of Economic Advisors
for Washington State, a participant on
the Western Blue Chip Economic Panel and
past President of the Seattle Chapter of
the National Association of Business
Economists. He also serves as a
Director of the Washington Research
Council. Trustee, Investors Trust.

Geoffrey S. Stiff President President and Chief Executive Officer of
and General Electric Capital Assurance
Chief Company and Great Northern Insured
Executive Annuity Corporation since 1997.
Officer Senior Vice President and Chief
Financial Officer and Treasurer of GNA
Corporation and its subsidiaries 1993 -
1996. Director, VP and CFO of
Employers Reinsurance Corporation 1987 -
1993.

Victor C. Moses Senior Senior Vice President of GNA
Vice Corporation and its
President subsidiaries since 1992.
Chief Actuary since 1993.

<PAGE>

Principal Occupation(s)
Name Title During the Past Five Years
- ---- ----- --------------------------

Charles A. Kaminski Senior Senior Vice President of GNA
Vice Corporation and its subsidiaries
President since 1993. Vice President of
Investments for GNA 1992 - 1993.
Member of the Washington Investment
Board.

Edward J. Wiles, Jr. Vice Vice President and Counsel of GNA
President Corporation and its subsidiaries
& since 1989.
Secretary

Thomas W. Casey Vice Chief Financial Officer of GNA
President Corporation and its subsidiaries since
and 1996. Vice President since 1993
Treasurer and Controller 1993 - 1996. Technical
Adviser, General Electric Capital
Corporation 1992 - 1993.

Scott A. Curtis Vice Vice President of General Electric
President Capital Assurance Company, Great
Northern Insured Annuity Corporation,
GNA Securities, Inc., and GNA
Distributors, Inc. since 1996. Employed
by GNA since 1990.

Stephen N. DeVos Vice Vice President and Controller of GNA
President Corporation and its subsidiaries since
and 1996. Technical Adviser,
Controller General Electric Capital Corporation
1994 - 1996. Manager, Coopers & Lybrand
L.L.P. 1986 - 1994.

Jerome R. Powers Vice Vice President of General Electric
President Capital Assurance Company and Great
Northern Insured Annuity Corporation,
Inc. since 1995. Vice President of
Northwestern Mutual Life Insurance
Company 1993-1995, and Director
1991-1993.

Messrs. Casey, Curtis, DeVos, Kaminski, Moses, Powers, Stiff, and Wiles
are all directors or officers of the Adviser as well as the Trust.

No remuneration will be paid by the Trust to any Trustee or officer of the
Trust who is affiliated with the Adviser. The Trust maintains a policy of paying
all Trustees who are not "interested persons" of the Trust an annual fee of
$2,000 and a fee of $250 for attendance at each meeting of the Board of Trustees
plus reasonable expenses associated with their attendance at such meetings. The
Board of Trustees generally meets quarterly.

The following table summarizes the compensation paid to Trustees of the
Trust for the year ended December 31, 1996.

COMPENSATION OF TRUSTEES

Pension or
Aggregate Retirement Total
Compensation Benefits Estimated Compensation
from Aggregate Accrued as Annual from GNA Variable
Name of GNA Variable Compensation Part of Fund Benefits Upon Series Trust and
Trustee Series Trust from Investors Trust Expenses Retirement Investors Trust
- ------- ------------ -------------------- ------------ ------------- -----------------
<S> <C>
Edward R. McMillan $3,000 $6,000 none none $9,000

Pierce T. Lindberg $3,000 $6,000 none none $9,000

Douglas H. Pedersen $3,000 $6,000 none none $9,000
</TABLE>

To the best knowledge of the Trust, there are no persons owning 5% or more
of the outstanding shares of any Portfolio, except the GNA Variable Investment
Account of Great Northern Insured Annuity Corporation which currently holds 100%
of the shares of each of the Portfolios.

THE INVESTMENT ADVISER AND SUB-ADVISERS

Investment Adviser

The investment adviser for each Portfolio is GNA Capital Management, Inc.,
a Washington corporation (the "Adviser"), with offices at Two Union Square, 601
Union Street, Suite 5600, Seattle, Washington 98101-2336. The Adviser is a
registered investment advisory firm which maintains a securities research
department, the efforts of which will be made available to the Portfolios.

The Adviser is a wholly-owned subsidiary of GNA Corporation. GNA
Corporation also is the parent company

69
<PAGE>

of GNA Securities, Inc. and GNA Distributors, Inc. which acts as the Trust's
Distributor. GNA Corporation is a subsidiary of General Electric Capital
Corporation. The officers of the Adviser also manage the investments of ten
affiliated companies which had combined assets of approximately $44.0 billion as
of December 31, 1996.

The services provided to the Portfolios by the Adviser are described in the
Prospectus of each Portfolio.

The advisory fee, payable monthly by the Adjustable Rate Portfolio to the
Adviser, is based upon the Adjustable Rate Portfolio's average daily net assets,
and is equal to an annual rate of .40% of the Adjustable Rate Portfolio's
average daily net assets.

The advisory fee, payable monthly by the Government Portfolio to the
Adviser, is based upon the Government Portfolio's average daily net assets, and
is equal to an annual rate of .65% of the Government Portfolio's average daily
net assets if the combined average daily net assets of the Government Portfolio
and the Investors Trust Government Fund equals $500 million or less, .60% of the
Government Portfolio's average daily net assets if the combined average daily
net assets of the Government Portfolio and the Investors Trust Government Fund
is greater than $500 million and is equal to or less than $750 million, .55% of
the Government Portfolio's average daily net assets if the combined average
daily net assets of the Government Portfolio and the Investors Trust Government
Fund is greater than $750 million and is equal to or less than $1.25 billion,
.50% of the Government Portfolio's average daily net assets if the combined
average daily net assets of the Government Portfolio and the Investors Trust
Government Fund is greater than $1.25 billion and is equal to or less than $1.5
billion and .45% of the Government Portfolio's average daily net assets if the
combined average daily net assets of the Government Portfolio and the Investors
Trust Government Fund exceed $1.5 billion.

The advisory fee, payable monthly by the Value Portfolio to the Adviser, is
based upon the Value Portfolio's average daily net assets, and is equal to an
annual rate of .80% of the Value Portfolio's average daily net assets if the
combined average daily net assets of the Value Portfolio and the Investors Trust
Value Fund equals $100 million or less and .70% of the Value Portfolio's average
daily net assets if the combined average daily net assets of the Value Portfolio
and the Investors Trust Value Fund exceed $100 million.

The advisory fee, payable monthly by the Growth Portfolio to the Adviser,
is based upon the Growth Portfolio's average daily net assets, and is equal to
an annual rate of .80% of the first $100 million of the Growth Portfolio's
average daily net assets and .70% of the Growth Portfolio's average daily net
assets in excess of $100 million.

Advisory fees incurred by each Portfolio were as follows:

Adjustable Rate Government Value Growth
Portfolio Portfolio Portfolio Portfolio
Year ended December 31, 1996 $24,168 $43,375 $66,119 $84,327
Year ended December 31, 1995 $21,241 $31,935 $20,356 $34,065

GNA Capital Management, Inc. (the "Adviser"), Suite 5600, Two Union Square,
601 Union Street, Seattle, Washington 98101, a registered investment adviser,
acts as the portfolio manager of the Government Portfolio under an advisory
agreement with the Trust dated September 19, 1994. As portfolio manager, the
Adviser is responsible for the actual investment management of the Portfolio's
assets including the responsibility for making decisions and placing orders to
buy, sell or hold a particular security, under the general supervision of the
Board of Trustees.

Standish, Ayer & Wood, Inc. ("Standish"), One Financial Center, Boston,
Massachusetts 02111, a registered investment adviser, has been retained by the
Adviser to act as portfolio manger of the Adjustable Rate Portfolio under a
sub-advisory contract with the Adviser dated September 19, 1994. Standish acted
as investment adviser for

<PAGE>

total assets in excess of $30.6 billion as of December
31, 1996. As portfolio manager, Standish is responsible for the actual
investment management of the Adjustable Rate Portfolio's assets including the
responsibility for making decisions and placing orders to buy, sell or hold a
particular security, under the general supervision of the Adviser and the Board
of Trustees. Pursuant to the sub-advisory contract, the Adviser will
periodically review the investment activities of Standish, and the Adviser will
have the right to terminate the sub-advisory contract upon 60 days written
notice to the Standish.

Overall portfolio management strategy for the Adjustable Rate Portfolio
is determined by Standish under the supervision and direction of Dolores S.
Driscoll, a Managing Director of Standish. Ms. Driscoll had been employed by
Standish since 1974. Ms. Driscoll previously worked as a bond manager for
Davis L. Babson, Inc. Ms. Driscoll holds a B.A. degree in Mathematics from
Indiana University and an M.B.A degree in Finance from Boston University and
is a Chartered Financial Analyst.

For its services under its Sub-Advisory Agreement, Standish receives from
the Adviser a fee, payable monthly, based upon the Adjustable Rate Portfolio's
average daily net assets equal to an annual rate of .20% of the Adjustable Rate
Portfolio's average daily net assets.

Overall portfolio management strategy for the Government Portfolio is
determined by the Adviser under the supervision and direction of Charles A.
Kaminski, a Senior Vice President of the Adviser. Mr. Kaminski is also an
officer of Great Northern Insured Annuity Corporation, General Electric Capital
Assurance Company, GNA Securities, Inc., Investors Trust and the Trust. Mr.
Kaminski previously served as Vice President of Investments for the Adviser, and
prior to joining the Adviser in 1992 he was Vice President and Director of
Baring America Asset Management.

Mr. Kaminski holds B.S. and M.S. degrees in Electrical Engineering
from the Massachusetts Institute of Technology and an M.B.A. from the Harvard
Business School.

Duff & Phelps Investment Management Co. ("Duff & Phelps"), Suite 3800, 55
East Monroe Street, Chicago, Illinois 60603, a registered investment adviser,
has been retained by the Adviser to act as portfolio manager of the Value
Portfolio under a sub-advisory contract with Adviser dated September 19, 1994.
Duff & Phelps acted as investment adviser for total assets in excess of $36.0
billion as of December 31, 1996. Duff & Phelps is a wholly owned subsidiary of
Phoenix Duff & Phelps Corporation, which is itself a majority owned subsidiary
of Phoenix Home Life Mutual Insurance Company. As portfolio manager, Duff &
Phelps is responsible for the actual investment management of the Value
Portfolio's assets including the responsibility for making decisions and placing
orders to buy, sell or hold a particular security, under the general supervision
of the Adviser and the Board of Trustees. Pursuant to the sub-advisory contract,
the Adviser will periodically review the investment activities of Duff & Phelps,
and the Adviser will have the right to terminate the sub-advisory contract upon
60 days written notice to Duff & Phelps.

For its services under its Sub-Advisory Agreement, Duff & Phelps receives
from the Adviser a fee, payable monthly, based upon the Value Portfolio's
average daily net assets equal to an annual rate of .30% of the Value
Portfolio's average daily net assets if the combined average daily net assets of
the Value Portfolio and the Investors Trust Value Fund equal $100 million or
less, and .20% of the Value Portfolio's average daily net assets if combined

71
<PAGE>

average daily net assets of the Value Portfolio and the Investors Trust Value
Fund exceed $100 million.

Value Line, Inc. ("Value Line"), 220 East 42nd Street, New York, New York
10017, a registered investment adviser, has been retained by the Adviser to act
as portfolio manager of the Growth Portfolio under a sub-advisory contract with
Adviser dated September 19, 1994. Value Line acted as investment adviser for
total assets of approximately $5.7 billion as of December 31, 1996. As portfolio
manager, Value Line is responsible for the actual investment management of the
Growth Portfolio's assets including the responsibility for making decisions and
placing orders to buy, sell or hold a particular security, under the general
supervision of the Adviser and the Board of Trustees. Pursuant to the
sub-advisory contract, the Adviser will periodically review the investment
activities of Value Line, and the Adviser will have the right to terminate the
sub-advisory contract upon 60 days written notice to Value Line.

Overall portfolio management strategy for the Growth Portfolio is
determined by committee. No person is primarily responsible for making
recommendations to the committee.

For its services under its Sub-Advisory Agreement, Value Line receives from
the Adviser a fee, payable monthly, based upon the Growth Portfolio's average
daily net assets equal to an annual rate of .45% of the Growth Portfolio's
average daily net assets.

From time to time certain of the states in which the shares of the
Portfolio are qualified for sale may impose limitations on the expenses of the
Portfolios. The Advisory Agreement provides that if, in any fiscal year, the
total expenses of any Portfolio (excluding taxes, distribution expenses,
interest, brokerage commissions and extraordinary items, but including the
management fee) exceed the expense limitations applicable to the Portfolios
imposed by the securities regulations of any state in which it is then
registered to sell shares, the Adviser will waive all or a portion of its annual
investment advisory fee equal to such excess. The Adviser is only required to
reimburse the Portfolios for any expenses which exceed state expense limitations
up to the amount of advisory fees paid or payable by such Portfolio during such
fiscal year. Although there is no certainty that these limitations will be in
effect in the future, the most restrictive of these limitations, in the states
in which the Portfolio are to be sold, on an annual basis currently is 2.5% of
the first $30,000,000 of average net assets of the Portfolio, 2.0% of the next
$70,000,000 of average net assets, and 1.5% of average net assets over
$100,000,000.

The Advisory Agreement for the Trust and the Sub-Advisory Agreements for
each of the Adjustable Rate Portfolio, Value Portfolio and Growth Portfolio were
originally approved by all of the Trustees, including all of the Trustees who
are not parties to the Advisory Agreement or any such Sub-Advisory Agreement or
"interested persons" (as defined in the 1940 Act) of any such party on March 18,
1994, and were last approved by all of the Trustees, including all of the
Trustees who are not parties to the Advisory Agreement or such Sub-advisory
Agreements or "interested persons" of any such party, on March 28, 1996. The
Advisory Agreement for the Trust and the Sub-Advisory Agreements for each of the
Growth Portfolio, Value Portfolio and Adjustable Rate Portfolio were approved by
the sole shareholder of each such Portfolio on September 19, 1994. The Advisory
Agreement and Sub-Advisory Agreements will continue in effect for two years
following the date of their approval, and thereafter from year to year, provided
that their continuance is approved annually both (i) by the holders of a
majority of the outstanding voting securities of the applicable Portfolio or by
the Board of Trustees, and (ii) by a majority of the Trustees who are not
parties to the Advisory Agreement or any such Sub-Advisory Agreements or
"interested persons" of any such party. The Advisory Agreement and Sub-Advisory
Agreements may be terminated on sixty (60) days written notice by any party and
will terminate automatically if they are assigned.

PERFORMANCE INFORMATION

General

As described in the Prospectus, a Portfolio's historical performance or
return may be shown in the form of

72
<PAGE>

"average annual total return," "aggregate
total return" and "yield." These various measures of performance are described
below.

Average annual total return and aggregate total return measure both the net
investment income generated by, and the effect of any realized and unrealized
appreciation or depreciation of, the underlying investments of a Portfolio.
Yield is a measure of the net investment income per share earned over a specific
one month or thirty (30) day period expressed as a percentage of the net asset
value.

Calculation of a Portfolio's aggregate total return is not subject to a
standardized formula. Aggregate total return performance for a specific period
is calculated by first taking an investment in a Portfolio's shares on the first
day of the period at the offering price, which is the net asset value per share
("initial investment") and computing the "ending value" of that investment at
the end of the period. The aggregate total return percentage is then determined
by subtracting the initial investment from the ending value and dividing the
remainder by the initial investment and expressing the result as a percentage.
The calculation assumes that all income and capital gains dividends by a
Portfolio have been reinvested at net asset value on the reinvestment dates
during the period. Aggregate total return may also be shown as the increased
dollar value of the hypothetical investment over the period.

A Portfolio's performance quotations are based upon historical results and
are not necessarily representative of future performance. A Portfolio's shares
are sold at net asset value. Returns and net asset value will fluctuate. Factors
affecting a Portfolio's performance include general market conditions, operating
expenses and investment management. Any additional fees charged by a dealer or
other financial services firm would reduce the returns described in this
section. Shares of a Portfolio are redeemable at net asset value, which may be
more or less than original cost.

Yield

Each Portfolio's 30-day yield figure described and shown below is
calculated according to a formula prescribed by the Securities and Exchange
Commission. The formula can be expressed as follows:

YIELD = 2[(a-b +1)/6/ -1]
---
cd

Where:
a = dividends and interest earned during the period.

b = expenses accrued for the period (net of reimbursement).

c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends.

d = the net asset value per share on the last day of the
period.

In computing the foregoing yield, each Portfolio follows certain
standardized accounting practices specified by Securities and Exchange
Commission rules. These practices are not necessarily consistent with those that
a Portfolio uses to prepare its interim and annual financial statements in
accordance with generally accepted accounting principles.

Yield information is useful in reviewing a Portfolio's performance, but
because yields fluctuate, such information cannot necessarily be used to compare
an investment in the Portfolio's shares with bank deposits, savings accounts and
similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a stated period of time. Shareholders should remember that yield
is a function of the kind and quality of the instruments in a Portfolio's
portfolio, portfolio maturity, operating expenses and market conditions.

<PAGE>

The annualized yield for each of the Adjustable Rate Portfolio and
Government Portfolio for the 30 days ended December 31, 1996 were 6.23%, and
6.15%, respectively.

Average Annual Total Return

A Portfolio's "average annual total return" figures described and shown
below are computed according to a formula prescribed by the Securities and
Exchange Commission. The formula can be expressed as follows:

n
P(1+T) = ERV

Where:
P = a hypothetical initial payment of $1000

T = average annual total return

n = number of years

ERV = Ending Redeemable Value of a hypothetical $1000
payment made at the beginning of the 1, 5, or 10
years (or other) periods at the end of the 1, 5, or
10 years (or other) periods (or fractional portion
thereof);

The calculation is based on the further assumption that all dividends and
distributions by a Portfolio are reinvested at net asset value on the
reinvestment dates during the periods.

The average annual total return for the Adjustable Rate Portfolio,
Government Portfolio, Value Portfolio and Growth Portfolio for the year ended
December 31, 1996, was 5.60%, 3.38%, 22.29% and 17.48%, respectively. The
average annual total return for the period beginning January 3, 1995
(commencement of operations) and ending December 31, 1996, was 8.55% for the
Adjustable Rate Portfolio, 9.55% for the Government Portfolio , 24.95% for the
Value Portfolio and 25.18% for the Growth Portfolio.

The yield and average annual total return calculations include all
recurring expenses that are charged to all shareholder accounts. The yield and
average annual total return results do not take into account recurring and
non-recurring charges for optional services which only certain shareholders
elect and which involve nominal fees.

Yields and average annual total returns quoted for each Portfolio include
the effect of deducting the Portfolio's expenses, but do not include charges and
expenses attributable to any particular insurance product. Since shares of a
Portfolio may only be purchased through a variable annuity or variable life
contract, you should carefully review the prospectus of the insurance product
you have chosen for information on relevant charges and expenses. Excluding
these charges from quotations of a Portfolio's performance has the effect of
increasing the performance quoted. You should bear in mind the effect of these
charges when comparing a Portfolio's performance to that of other mutual funds.

INDEPENDENT ACCOUNTANTS

Coopers & Lybrand L.L.P., One Post Office Square, Boston, Massachusetts
02109, serves as the Trust's independent accountants, providing audit and tax
services including (1) an audit of the annual financial statements, (2)
assistance and consultation in connection with SEC filings and (3) review of tax
returns filed on behalf of the Trust.

74
<PAGE>

CUSTODIAN

State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is the Trust's custodian. As custodian, State Street Bank
and Trust Company is responsible for, among other things, safeguarding and
controlling the Portfolios' cash and securities and handling the receipt and
delivery of securities and investments. State Street Bank and Trust Company is
not an affiliate of the Adviser or its affiliates.

FINANCIAL STATEMENTS

The audited statement of assets and liabilities for each of the four
Portfolios of the Trust as of December 31, 1996, together with the related notes
thereto and report of independent accountants thereon are attached to this
Statement of Additional Information.

75
<PAGE>

18 GNA Variable Series Trust-GNA Growth Portfolio
- --------------------------------------------------------------------------------

INVESTMENT PORTFOLIO
DECEMBER 31, 1996

<TABLE>
<CAPTION>
% OF NET NUMBER MARKET
ASSETS OF SHARES VALUE ($)
-------- ---------- -----------
<S> <C>
COMMON STOCKS 93.7
BASIC INDUSTRIES-6.4
CHEMICALS-4.4%
Airgas, Incorporated (a)......................................... 7,200 158,400
Millipore Corporation............................................ 3,000 124,125
Monsanto Company................................................. 3,400 132,175
Praxair, Incorporated............................................ 3,000 138,375
-----------
553,075
-----------
CONSTRUCTION-0.8%
Texas Industries, Incorporated................................... 2,000 101,250
-----------
CONTAINERS & GLASS-1.2%
Sealed Air Corporation (a)....................................... 3,500 145,688
-----------
800,013
-----------
CAPITAL GOODS-2.5
AGRICULTURAL MACHINERY-0.9%
Deere & Company.................................................. 2,700 109,688
-----------
CONSTRUCTION & MINING EQUIPMENT-1.6%
Dover Corporation................................................ 4,000 201,000
-----------
310,688
-----------
CONGLOMERATES-2.8
Danaher Corporation.............................................. 4,600 214,475
Thermo Electron Corporation...................................... 3,150 129,938
-----------
344,413
-----------
CONSUMER BASICS-18.3
DRUGS & HEALTH CARE-15.0%
Amgen, Incorporated (a).......................................... 2,600 141,375
Boston Scientific Corporation (a)................................ 2,100 126,000
HBO & Company.................................................... 1,600 95,000
HealthCare Compare Corporation (a)............................... 2,200 93,225
Invacare Corporation............................................. 4,800 132,000
Johnson & Johnson................................................ 2,200 109,450
Medtronic, Incorporated.......................................... 2,600 176,800
Merck & Company, Incorporated.................................... 1,600 126,800
Omnicare, Incorporated........................................... 3,600 115,650
Oxford Health Plans, Incorporated (a)............................ 2,900 169,831
Pfizer, Incorporated............................................. 2,000 165,750
</TABLE>

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

<PAGE>

GNA Variable Series Trust-GNA Growth Portfolio 19
- --------------------------------------------------------------------------------

INVESTMENT PORTFOLIO
DECEMBER 31, 1996, CONTINUED
<TABLE>
<CAPTION>
% OF NET NUMBER MARKET
ASSETS OF SHARES VALUE ($)
-------- ---------- -----------
<S> <C>
Schering Plough Corporation...................................... 2,000 129,500
Stryker Corporation.............................................. 5,600 167,300
U.S. Surgical Corporation........................................ 3,000 118,125
-----------
1,866,806
-----------
FOOD & BEVERAGES-0.9%
Coca-Cola Company................................................ 2,200 115,775
-----------
HOUSEHOLD PRODUCTS-1.2%
Tupperware Corporation........................................... 2,800 150,150
-----------
RETAIL GROCERY-1.2%
Great Atlantic & Pacific Tea, Incorporated....................... 4,700 149,813
-----------
2,282,544
-----------
CONSUMER DURABLE GOODS-1.7
AUTOMOBILES-1.7%
Harley Davidson, Incorporated.................................... 4,400 206,800
-----------
CONSUMER NON-DURABLE GOODS-8.7
APPAREL & TEXTILES-2.0%
Albany International Corporation................................. 5,400 124,875
Nike, Incorporated............................................... 2,000 119,500
-----------
244,375
-----------
COSMETICS & TOILETRIES-1.2%
Gillette Company................................................. 2,000 155,500
-----------
RETAIL TRADE-5.5%
CompUSA, Incorporated (a)........................................ 6,000 123,750
Dollar General Corporation....................................... 3,843 122,976
Gap, Incorporated................................................ 3,600 108,450
Home Depot, Incorporated......................................... 2,300 115,287
Kohl's Corporation (a)........................................... 2,800 109,900
Petsmart, Incorporated (a)....................................... 4,800 105,000
-----------
685,363
-----------
1,085,238
-----------
CONSUMER SERVICES-3.0
HOTELS & RESTAURANTS-3.0%
Hilton Hotels Corporation........................................ 4,000 104,500
La Quinta Inns, Incorporated..................................... 6,000 114,750
McDonald's Corporation........................................... 3,400 153,850
-----------
373,100
-----------
</TABLE>

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

<PAGE>

20 GNA Variable Series Trust-GNA Growth Portfolio
- --------------------------------------------------------------------------------

INVESTMENT PORTFOLIO
DECEMBER 31, 1996, CONTINUED
<TABLE>
<CAPTION>
% OF NET NUMBER MARKET
ASSETS OF SHARES VALUE ($)
-------- ---------- -----------
ENERGY-2.1
<S> <C>
DOMESTIC OIL-1.0%
Louisiana Land & Exploration Company............................. 2,200 117,975
-----------
GAS EXPLORATION-1.1%
BJ Services Company (a).......................................... 2,800 142,800
-----------
260,775
-----------
FINANCE-14.2
BANKS-6.8%
Bank of Boston Corporation....................................... 2,100 134,925
Citicorp......................................................... 1,300 133,900
Fifth Third Bancorp.............................................. 3,000 188,437
Star Banc Corporation............................................ 2,000 183,750
Zions Bancorp.................................................... 2,000 208,000
-----------
849,012
-----------
FINANCIAL SERVICES-3.5%
CUC International, Incorporated (a).............................. 6,300 149,625
Finova Group, Incorporated....................................... 2,600 167,050
Green Tree Financial Corporation................................. 3,000 115,875
-----------
432,550
-----------
INSURANCE-3.9%
American International Group, Incorporated....................... 1,200 129,900
MGIC Investment Corporation...................................... 2,400 182,400
SunAmerica, Incorporated......................................... 4,000 177,500
-----------
489,800
-----------
1,771,362
-----------
GENERAL BUSINESS-7.0
BUSINESS SERVICES-4.4%
First Data Corporation........................................... 3,000 109,500
FIserv, Incorporated (a)......................................... 5,400 198,450
Omnicom Group.................................................... 2,800 128,100
Robert Half International, Incorporated (a)...................... 3,400 116,875
-----------
552,925
-----------
COMMUNICATION SERVICES-1.1%
Cascade Communications Corporation (a)........................... 1,900 104,737
Loral Space & Communications (a)................................. 1,800 33,075
-----------
137,812
-----------
</TABLE>

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

<PAGE>
GNA Variable Series Trust-GNA Growth Portfolio 21
- --------------------------------------------------------------------------------

INVESTMENT PORTFOLIO
DECEMBER 31, 1996, CONTINUED
<TABLE>
<CAPTION>
% OF NET NUMBER MARKET
ASSETS OF SHARES VALUE ($)
-------- ---------- -----------
<S> <C>
OFFICE FURNISHINGS & SUPPLIES-1.5%
Danka Business Systems........................................... 2,400 84,900
Staples, Incorporated (a)........................................ 5,500 99,344
-----------
184,244
-----------
874,981
-----------
TECHNOLOGY-25.0
AEROSPACE-1.2%
McDonnell Douglas Corporation.................................... 2,400 153,600
-----------
COMPUTERS & BUSINESS EQUIPMENT-9.5%
3Com Corporation (a)............................................. 4,200 308,175
Cabletron Systems, Incorporated (a).............................. 2,400 79,800
Ceridian Corporation (a)......................................... 2,700 109,350
Cisco Systems, Incorporated (a).................................. 2,000 127,250
Dell Computer Corporation (a).................................... 4,400 233,750
EMC Corporation Massachusetts (a)................................ 3,600 119,250
Hewlett Packard Company.......................................... 2,000 100,500
Sun Microsystems, Incorporated (a)............................... 4,000 102,750
-----------
1,180,825
-----------
ELECTRONICS-3.3%
Avnet, Incorporated.............................................. 2,000 116,500
Intel Corporation................................................ 1,500 196,406
Newbridge Networks Corporation (a)............................... 3,400 96,050
-----------
408,956
-----------
SOFTWARE-7.4%
America Online, Incorporated (a)................................. 10,800 359,100
Computer Associates International, Incorporated.................. 2,400 119,400
Microsoft Corporation (a)........................................ 1,800 148,725
Oracle Systems Corporation (a)................................... 3,225 134,644
Parametric Technology Corporation (a)............................ 3,000 154,125
-----------
915,994
-----------
TELECOMMUNICATION EQUIPMENT-3.6%
ADC Telecommunications, Incorporated (a)......................... 5,600 174,300
Andrew Corporation (a)........................................... 2,400 127,350
Tellabs, Incorporated (a)........................................ 4,000 150,500
-----------
452,150
-----------
3,111,525
-----------
</TABLE>

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

<PAGE>
22 GNA Variable Series Trust-GNA Growth Portfolio
- --------------------------------------------------------------------------------

INVESTMENT PORTFOLIO
DECEMBER 31, 1996, CONTINUED
<TABLE>
<CAPTION>
% OF NET NUMBER MARKET
ASSETS OF SHARES VALUE ($)
-------- ---------- -----------
<S> <C>
TRANSPORTATION-1.0
RAILROADS & EQUIPMENT-1.0%
Wisconsin Central Transportation Corporation (a)................. 3,000 118,875
-----------
UTILITIES-1.0
TELEPHONE-1.0%
Cincinnati Bell, Incorporated.................................... 2,000 123,250
-----------
Total Common Stocks
(Cost $8,697,933)......................................... 11,663,564
-----------
MONEY MARKET MUTUAL FUNDS 6.5
The Seven Seas Series Money Market Fund [Class A]................ 489,036 489,036
The Seven Seas Series US Government Money Market Fund............ 315,450 315,450
-----------
Total Money Market Mutual Funds
(Cost $804,486)........................................... 804,486
-------- -----------
SUMMARY
Total investments
(Cost $9,502,419) (b)..................................... 100.2 12,468,050
Other assets and liabilities, net................................ (0.2) (26,385)
-------- -----------
NET ASSETS............................................................ 100.0 $12,441,665
-------- -----------
-------- -----------
</TABLE>

- ------------
NOTES:
(a) Non-income producing security.
(b) See Note 3 in notes to financial statements for cost for federal income tax
purposes and related gross unrealized appreciation (depreciation).

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

<PAGE>
GNA Variable Series Trust-GNA Value Portfolio 23
- --------------------------------------------------------------------------------

INVESTMENT PORTFOLIO
DECEMBER 31, 1996

<TABLE>
<CAPTION>
% OF NET NUMBER MARKET
ASSETS OF SHARES VALUE ($)
-------- --------- -----------
<S> <C>
COMMON STOCKS 99.7
BASIC INDUSTRIES-7.1
CHEMICALS-7.1%
DuPont (EI) deNemours & Company..................................... 4,600 434,125
Morton International, Incorporated.................................. 2,600 105,950
PPG Industries, Incorporated........................................ 3,700 207,663
-----------
747,738
-----------
CAPITAL GOODS-9.9
AGRICULTURAL MACHINERY-1.3%
Deere & Company..................................................... 3,300 134,063
-----------
ELECTRICAL EQUIPMENT-8.6%
Emerson Electric Company............................................ 4,300 416,025
General Electric Company............................................ 4,900 484,487
-----------
900,512
-----------
1,034,575
-----------
CONGLOMERATES-3.8
Minnesota Mining & Manufacturing Company............................ 4,800 397,800
-----------
CONSUMER BASICS-20.7
DRUGS & HEALTH CARE-11.9%
American Home Products Corporation.................................. 5,600 328,300
Bristol Myers Squibb Company........................................ 1,700 184,875
Eli Lilly & Company................................................. 5,800 423,400
Pfizer, Incorporated................................................ 3,800 314,925
-----------
1,251,500
-----------
FOOD & BEVERAGES-2.5%
Campbell Soup Company............................................... 1,500 120,375
PepsiCo, Incorporated............................................... 5,000 146,250
-----------
266,625
-----------
HOUSEHOLD PRODUCTS-6.3%
Kimberly Clark Corporation.......................................... 4,300 409,575
Procter & Gamble Company............................................ 2,300 247,250
-----------
656,825
-----------
2,174,950
-----------
</TABLE>

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

<PAGE>
24 GNA Variable Series Trust-GNA Value Portfolio
- --------------------------------------------------------------------------------

INVESTMENT PORTFOLIO
DECEMBER 31, 1996, CONTINUED
<TABLE>
<CAPTION>
% OF NET NUMBER MARKET
ASSETS OF SHARES VALUE ($)
-------- --------- -----------
<S> <C>
CONSUMER DURABLE GOODS-3.9
AUTOMOBILES-3.9%
General Motors Corporation.......................................... 7,300 406,975
-----------
CONSUMER NON-DURABLE GOODS-11.2
COSMETICS & TOILETRIES-5.4%
Avon Products, Incorporated......................................... 5,000 285,625
Gillette Company.................................................... 3,600 279,900
-----------
565,525
-----------
PHOTOGRAPHY-2.0%
Eastman Kodak Company............................................... 2,700 216,675
-----------
RETAIL TRADE-3.8%
Dayton Hudson Corporation........................................... 7,100 278,675
Walgreen Company.................................................... 3,000 120,000
-----------
398,675
-----------
1,180,875
-----------
CONSUMER SERVICES-0.8
AIR TRAVEL-0.8%
AMR Corporation (a)................................................. 900 79,313
-----------
ENERGY-9.4
INTERNATIONAL OIL-8.4%
Exxon Corporation................................................... 3,500 343,000
Mobil Corporation................................................... 2,500 305,625
Royal Dutch Petroleum Company....................................... 1,400 239,050
-----------
887,675
-----------
PETROLEUM SERVICES-1.0%
Halliburton Company................................................. 1,700 102,425
-----------
990,100
-----------
FINANCE-12.5
BANKS-9.1%
Chase Manhattan Corporation......................................... 5,600 499,800
National City Corporation........................................... 10,100 453,237
-----------
953,037
-----------
</TABLE>

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

<PAGE>
GNA Variable Series Trust-GNA Value Portfolio 25
- --------------------------------------------------------------------------------

INVESTMENT PORTFOLIO
DECEMBER 31, 1996, CONTINUED
<TABLE>
<CAPTION>
% OF NET NUMBER MARKET
ASSETS OF SHARES VALUE ($)
-------- --------- -----------
<S> <C>
FINANCIAL SERVICES-2.5%
American Express Company............................................ 2,200 124,300
MBNA Corporation.................................................... 3,400 141,100
-----------
265,400
-----------
INSURANCE-0.9%
American International Group, Incorporated.......................... 900 97,425
-----------
1,315,862
-----------
GENERAL BUSINESS-0.9
NEWSPAPERS-0.9%
Gannett Company, Incorporated....................................... 1,200 89,850
-----------
SHELTER-3.2
CONSTRUCTION MATERIALS-3.2%
Masco Corporation................................................... 9,400 338,400
-----------
TECHNOLOGY-16.3
AEROSPACE-4.1%
Boeing Company...................................................... 4,000 425,500
-----------
COMPUTERS & BUSINESS EQUIPMENT-5.4%
Cisco Systems, Incorporated (a)..................................... 2,400 152,700
Compaq Computer Corporation (a)..................................... 1,600 118,800
Pitney Bowes, Incorporated.......................................... 5,500 299,750
-----------
571,250
-----------
ELECTRONICS-3.5%
Intel Corporation................................................... 2,300 301,156
Micron Technology, Incorporated..................................... 2,300 66,988
-----------
368,144
-----------
SOFTWARE-3.3%
Microsoft Corporation (a)........................................... 2,800 231,350
Oracle Systems Corporation (a)...................................... 2,650 110,637
-----------
341,987
-----------
1,706,881
-----------
Total Common Stocks
(Cost $8,938,073)............................................ 10,463,319
-----------
</TABLE>

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

<PAGE>
26 GNA Variable Series Trust-GNA Value Portfolio
- --------------------------------------------------------------------------------

INVESTMENT PORTFOLIO
DECEMBER 31, 1996, CONTINUED
<TABLE>
<CAPTION>
% OF NET NUMBER MARKET
ASSETS OF SHARES VALUE ($)
-------- --------- -----------
<S> <C>
MONEY MARKET MUTUAL FUNDS 0.1
The Seven Seas Series Money Market Fund [Class A]................... 7,764 7,764
The Seven Seas Series US Government Money Market Fund............... 2,217 2,217
-----------
Total Money Market Mutual Funds
(Cost $9,981)................................................ 9,981
-------- -----------
SUMMARY
Total investments
(Cost $8,948,054) (b)........................................ 99.8 10,473,300
Other assets and liabilities, net................................... 0.2 20,888
-------- -----------
NET ASSETS............................................................... 100.0 $10,494,188
-------- -----------
-------- -----------
</TABLE>

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

<PAGE>
GNA Variable Series Trust-GNA Government Portfolio 27
- --------------------------------------------------------------------------------

INVESTMENT PORTFOLIO
DECEMBER 31, 1996

<TABLE>
<CAPTION>
% OF NET PRINCIPAL MARKET
ASSETS AMOUNT ($) VALUE ($)
-------- ---------- ----------
<S> <C>
LONG-TERM GOVERNMENT AND AGENCY SECURITIES 96.6
FEDERAL HOME LOAN MORTGAGE CORPORATION (A)(B)-32.8
6.500%, with a maturity date of February 1, 2011.................... 59,939 59,058
7.000%, with various maturity dates to August 1, 2025............... 1,715,620 1,689,058
8.000%, with various maturity dates to April 1, 2017................ 545,060 560,529
8.500%, with various maturity dates to July 1, 2010................. 336,404 348,798
----------
Total Federal Home Loan Mortgage Corporation
(Cost $2,608,427)............................................ 2,657,443
----------
FEDERAL HOME LOAN MORTGAGE CORPORATION DEBENTURE-0.8
8.250%, with a maturity date of June 1, 2016
(Cost $72,192)............................................... 60,000 67,275
----------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
ADJUSTABLE RATE MORTGAGES (A)(B)(D)-8.3
6.000%, with a maturity date of February 20, 2026................... 75,063 76,448
6.500%, with a maturity date of February 20, 2023................... 271,685 276,438
7.000%, with various maturity dates to December 20, 2024............ 314,921 321,474
----------
Total Government National Mortgage Association
Adjustable Rate Mortgages
(Cost $634,391).............................................. 674,360
----------
UNITED STATES TREASURY BOND-6.3
7.875%, with a maturity date of February 15, 2021
(Cost $476,234).............................................. 450,000 508,640
----------
FEDERAL HOME LOAN BANK BONDS-5.6
5.720%, with a maturity date of November 22, 2000 (e)............... 360,000 351,788
7.640%, with a maturity date of May 8, 2002......................... 100,000 101,375
----------
Total Federal Home Loan Bank Bonds
(Cost $433,089).............................................. 453,163
----------
FEDERAL FARM CREDIT BANK NOTES-11.4
5.270%, with a maturity date of February 1, 1999.................... 500,000 492,578
8.600%, with a maturity date of May 30, 2006........................ 400,000 429,376
----------
Total Federal Farm Credit Bank Notes
(Cost $934,594).............................................. 921,954
----------
</TABLE>

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

<PAGE>
28 GNA Variable Series Trust-GNA Government Portfolio
- --------------------------------------------------------------------------------

INVESTMENT PORTFOLIO
DECEMBER 31, 1996, CONTINUED
<TABLE>
<CAPTION>
% OF NET PRINCIPAL MARKET
ASSETS AMOUNT ($) VALUE ($)
-------- ---------- ----------
<S> <C>
FEDERAL NATIONAL MORTGAGE ASSOCIATION
REAL ESTATE MORTGAGE INVESTMENT CONDUITS [REMIC] (B)(C)-5.7
6.000%, with a maturity date of March 25, 2019
[Series 1993-136 Class PB]........................................ 86,400 84,240
6.500%, with a maturity date of September 25, 2018
[Series 1992-150 Class GA]........................................ 175,000 175,219
7.000% with a maturity date of November 25, 2009
[Series 1992-14 Class D].......................................... 175,000 175,765
7.000%, with a maturity date of September 25, 2020
[Series 1990-109 Class J]......................................... 25,000 24,617
----------
Total Federal National Mortgage Association
Real Estate Mortgage Investment Conduits [REMIC]
(Cost $456,999).............................................. 459,841
----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION
ADJUSTABLE RATE MORTGAGE (A)(B)(D)-3.7
8.423%, with a maturity date of July 1, 2019
(Cost $289,058).............................................. 289,964 295,946
----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (A)(B)-9.3
6.000%, with a maturity date of August 1, 2008...................... 93,582 90,847
6.500%, with various maturity dates to May 1, 2024.................. 554,902 541,854
7.000%, with a maturity date of September 1, 1999................... 10,494 10,537
7.500%, with a maturity date of June 1, 2002........................ 54,227 55,023
8.000%, with various maturity dates to July 1, 1998................. 53,603 54,776
----------
Total Federal National Mortgage Association
(Cost $762,366).............................................. 753,037
----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION DEBENTURE-1.3
7.700%, with a maturity date of August 10, 2004
(Cost $103,125).............................................. 100,000 102,031
----------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (A)(B)-3.8
6.500%, with a maturity date of October 15, 2010.................... 89,941 88,900
7.500%, with a maturity date of April 15, 2001...................... 25,253 25,535
8.500%, with various maturity dates to May 15, 2003................. 182,655 190,436
----------
Total Government National Mortgage Association
(Cost $298,247).............................................. 304,871
----------
</TABLE>

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

<PAGE>
GNA Variable Series Trust-GNA Government Portfolio 29
- --------------------------------------------------------------------------------

INVESTMENT PORTFOLIO
DECEMBER 31, 1996, CONTINUED
<TABLE>
<CAPTION>
% OF NET PRINCIPAL MARKET
ASSETS AMOUNT ($) VALUE ($)
-------- ---------- ----------
<S> <C>
FEDERAL HOME LOAN MORTGAGE CORPORATION
MULTICLASS PARTICIPATION CERTIFICATES (B)(C)-3.7
5.850%, with a maturity date of February 15, 2008
[Series 1678 Class PG]............................................ 110,000 106,322
6.500%, with a maturity date of July 15, 2008
[Series 1480 Class LE]............................................ 50,000 47,140
6.500%, with a maturity date of February 15, 2021
[Series 128 Class I].............................................. 100,000 96,250
7.000%, with a maturity date of February 15, 2021
[Series 1214 Class J]............................................. 50,000 49,156
----------
Total Federal Home Loan Mortgage Corporation
Multiclass Participation Certificates
(Cost $296,481).............................................. 298,868
----------
TENNESSEE VALLEY AUTHORITY NOTE-1.6
6.125%, with a maturity date of July 15, 2003
(Cost $131,533).............................................. 133,000 128,885
----------
UNITED STATES TREASURY STRIPS-1.0
Zero Coupon, with a maturity date of February 15, 2000
(Cost $82,105)............................................... 100,000 82,957
----------
PRIVATE EXPORT FUNDING CORPORATION-1.3
9.100%, with a maturity date of October 30, 1998
(Cost $108,625).............................................. 100,000 105,245
----------
Total Long-Term Government and Agency Securities
(Cost $7,687,466)............................................ 7,814,516
----------
<CAPTION>

NUMBER OF
SHARES
----------
<S> <C>
MONEY MARKET MUTUAL FUNDS 2.8
The Seven Seas Series Money Market Fund [Class A]................... 120,907 120,907
The Seven Seas Series US Government Money Market Fund............... 107,701 107,701
----------
Total Money Market Mutual Funds
(Cost $228,608).............................................. 228,608
-------- ----------
</TABLE>

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

<PAGE>
30 GNA Variable Series Trust-GNA Government Portfolio
- --------------------------------------------------------------------------------

INVESTMENT PORTFOLIO
DECEMBER 31, 1996, CONTINUED

<TABLE>
<CAPTION>
% OF NET MARKET
ASSETS VALUE ($)
-------- ----------
<S> <C>
SUMMARY
Total investments
(Cost $7,916,074) (f)........................................ 99.4 8,043,124
Other assets and liabilities, net................................... 0.6 46,461
-------- ----------
NET ASSETS............................................................... 100.0 $8,089,585
-------- ----------
-------- ----------
</TABLE>

- ------------
NOTES:
(a) The investments in mortgage-backed securities are interests in separate
pools of mortgages. All such issues which have the same coupon rates, have
been aggregated for financial statement presentation purposes.
(b) Effective maturities for all securities may be shorter than indicated due
to prepayments.
(c) Risks associated with Collateralized Mortgage Obligations ("CMOs")--The
net asset value of the Fund is sensitive to interest rate fluctuations.
CMOs are obligations collateralized by a portfolio of mortgages or
mortgage-related securities. Payments of principal and interest on the
mortgages are passed through to the holder of the CMOs as they are
received, but certain classes of CMOs have priority over others with
respect to the receipt of prepayments on the mortgages. Therefore, an
investment in a CMO may be subject to a greater or lesser risk of
prepayment than other types of mortgage-related securities and this
uncertainty results in greater price volatility.
(d) Risks associated with Adjustable Rate Mortgage securities ("ARMs")--Most
ARMs are subject to limits on coupon changes ("caps" and "floors"). Coupon
caps/floors limit the amount the coupon can adjust on coupon reset dates,
or over the life of the loan. If interest rates change quickly, an
adjustable rate mortgage's coupon adjustment may be constrained by its
periodic or lifetime limit. For example, if rates rise quickly, since the
coupon rate cannot reset to equal the market rates, or at least cannot do
so immediately, an investment in an ARM may be subject to a decline in
price, despite the fact that ARM securities are often represented to have
less price risk than fixed rate securities. Until, and if, the ARM's coupon
rate can adjust to equal current market rates, it will be subject to price
variations, despite being an "adjustable rate" security. This exposure is
called "cap risk". Conversely, an ARM may benefit from the floor on its
rate adjustments if market rates drop below the minimum rate the ARM may
pay.
(e) Collateral for open futures contracts (Note 3).
(f) See Note 3 in the notes to financial statements for cost for federal
income tax purposes and related gross unrealized appreciation
(depreciation).
(g) At December 31, 1996, open futures contracts purchased were as follows:

<TABLE>
<CAPTION>
CONTRACTS EXPIRATION MARKET UNREALIZED
PURCHASED DESCRIPTION DATE VALUE DEPRECIATION
---------- ------------------------------------ ----------- ----------- ------------
<S> <C>
12 U.S. Treasury Note and Bond Futures March 97 $2,199,047 $(21,752)
----------- ------------
----------- ------------
</TABLE>

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

<PAGE>
GNA Variable Series Trust-GNA Adjustable Rate Portfolio 31
- --------------------------------------------------------------------------------

INVESTMENT PORTFOLIO
DECEMBER 31, 1996

<TABLE>
<CAPTION>
% OF NET PRINCIPAL MARKET
ASSETS AMOUNT ($) VALUE ($)
-------- ---------- ----------
<S> <C>
LONG-TERM GOVERNMENT AGENCY SECURITIES 76.5
FEDERAL HOME LOAN MORTGAGE CORPORATION (B)-4.9
8.000%, with a maturity date of January 1, 2000
(Cost $311,901).......................................... 311,841 314,080
----------
FEDERAL HOME LOAN MORTGAGE CORPORATION
ADJUSTABLE RATE MORTGAGES (B)(D)-13.6
4.897%, with a maturity date of April 1, 2026................... 297,270 301,173
5.707%, with a maturity date of November 1, 2026................ 150,000 151,476
7.516%, with a maturity date of January 1, 2025................. 323,989 331,483
7.754%, with a maturity date of February 1, 2025................ 79,803 81,412
----------
Total Federal Home Loan Mortgage Corporation
Adjustable Rate Mortgages
(Cost $851,774).......................................... 865,544
----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION
ADJUSTABLE RATE MORTGAGES (B)(D)-12.0
4.142%, with a maturity date of April 1, 2026................... 177,961 177,016
7.770%, with a maturity date of November 1, 2024................ 128,342 130,128
7.908%, with a maturity date of July 1, 2024.................... 158,757 162,875
8.148%, with a maturity date of November 1, 2024................ 282,754 293,623
----------
Total Federal National Mortgage Association
Adjustable Rate Mortgages
(Cost $735,105).......................................... 763,642
----------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
ADJUSTABLE RATE MORTGAGES (A)(B)(D)-38.2
5.500%, with various maturity dates to March 20, 2026........... 319,457 323,348
6.000%, with various maturity dates to October 20, 2024......... 479,978 484,550
6.500%, with various maturity dates to August 20, 2025.......... 1,224,435 1,244,573
7.000%, with a maturity date of April 20, 2024.................. 121,968 124,198
7.125%, with various maturity dates to September 20, 2024....... 250,982 256,507
----------
Total Government National Mortgage Association
Adjustable Rate Mortgages
(Cost $2,276,080)........................................ 2,433,176
----------
</TABLE>

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

<PAGE>
32 GNA Variable Series Trust-GNA Adjustable Rate Portfolio
- --------------------------------------------------------------------------------

INVESTMENT PORTFOLIO
DECEMBER 31, 1996, CONTINUED
<TABLE>
<CAPTION>
% OF NET PRINCIPAL MARKET
ASSETS AMOUNT ($) VALUE ($)
-------- ---------- ----------
<S> <C>
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (A)(B)-7.8
5.000%, with a maturity date of May 20, 2026.................... 248,518 245,915
9.000%, with various maturity dates to November 15, 2016........ 237,971 255,193
----------
Total Government National Mortgage Association
(Cost $495,684).......................................... 501,108
----------
Total Long-Term Government Agency Securities
(Cost $4,670,544)........................................ 4,877,550
----------
NON-AGENCY MORTGAGES 4.9
RESOLUTION TRUST CORPORATION MORTGAGE PASS-THROUGHS (B)(C)- 4.9
8.000%, with a maturity date of September 25, 2021.............. 161,673 162,786
9.000%, with a maturity date of September 25, 2028.............. 144,038 147,953
----------
Total Resolution Trust Corporation Mortgage Pass-Throughs
(Cost $309,130).......................................... 310,739
----------
Total Non-Agency Mortgages
(Cost $309,130).......................................... 310,739
----------
ASSET-BACKED SECURITIES 17.5
Citibank Credit Card Master Trust, 5.790%, February 7, 2003
[Series 1996-1 Class A]....................................... 175,000 134,640
Contimortgage Home Equity Loan, 6.860%, July 15, 2010 [Series
1995-3 Class A2].............................................. 225,000 226,267
EQCC Home Equity Loan Trust, 5.725%, December 15, 2008 [Series
1993-4 Class A]............................................... 78,794 76,923
Equicon Loan Trust, 5.850%, November 18, 2012
[Series 1993-1 Class A]....................................... 165,409 163,575
Household Finance Corporation, 5.700%, May 20, 2008 [Series
1993-1 Class A2].............................................. 79,752 79,976
Merrill Lynch Home Equity Loan Trust, 5.810%, February 15, 2003
[Series 1993-1 Class A]....................................... 67,855 67,909
The Money Store Home Equity Trust, 6.850%, June 15, 2019 [Series
1996-A Class A5](b)(c)........................................ 110,000 110,017
UCFC Loan Trust, 8.250%, April 10, 2016
[Series 1995-A Class A4]...................................... 250,000 257,345
----------
Total Asset-Backed Securities
(Cost $1,123,229)........................................ 1,116,652
----------
</TABLE>

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

<PAGE>
GNA Variable Series Trust-GNA Adjustable Rate Portfolio 33
- --------------------------------------------------------------------------------

INVESTMENT PORTFOLIO
DECEMBER 31, 1996, CONTINUED

<TABLE>
<CAPTION>
% OF NET NUMBER MARKET
ASSETS OF SHARES VALUE ($)
-------- --------- ----------
<S> <C>
MONEY MARKET MUTUAL FUNDS 0.9
The Seven Seas Series Money Market Fund [Class A].................. 58,981 58,981
The Seven Seas Series US Government Money Market Fund.............. 220 220
----------
Total Money Market Mutual Funds (Cost $59,201)..................... 59,201
-------- ----------
SUMMARY
Total investments
(Cost $6,162,104) (e)....................................... 99.8 6,364,142
Other assets and liabilities, net.................................. 0.2 11,282
-------- ----------
NET ASSETS.............................................................. 100.0 $6,375,424
-------- ----------
-------- ----------
</TABLE>

- ------------
NOTES:
(a) The investments in mortgage-backed securities are interests in separate
pools of mortgages. All such issues which have the same coupon rates have
been aggregated for financial statement presentation purposes.
(b) Effective maturities for all securities may be shorter than indicated due
to prepayments.
(c) Risks associated with Collateralized Mortgage Obligations ("CMOs")--The
net asset value of the Fund is sensitive to interest rate fluctuations.
CMOs are obligations collateralized by a portfolio of mortgages or
mortgage-related securities. Payments of principal and interest on the
mortgages are passed through to the holder of the CMOs as they are
received, but certain classes of CMOs have priority over others with
respect to the receipt of prepayments on the mortgages. Therefore, an
investment in a CMO may be subject to a greater or lesser risk of
prepayment than other types of mortgage-related securities and this
uncertainty results in greater price volatility.
(d) Risks associated with Adjustable Rate Mortgage securities ("ARMs")--Most
ARMs are subject to limits on coupon changes ("caps" and "floors"). Coupon
caps/floors limit the amount the coupon can adjust on coupon reset dates,
or over the life of the loan. If interest rates change quickly, an
adjustable rate mortgage's coupon adjustment may be constrained by its
periodic or lifetime limit. For example, if rates rise quickly, since the
coupon rate cannot reset to equal the market rates, or at least cannot do
so immediately, an investment in an ARM may be subject to a decline in
price, despite the fact that ARM securities are often represented to have
less price risk than fixed rate securities. Until, and if, the ARM's coupon
rate can adjust to equal current market rates, it will be subject to price
variations, despite being an "adjustable rate" security. This exposure is
called "cap risk". Conversely, an ARM may benefit from the floor on its
rate adjustments if market rates drop below the minimum rate the ARM may
pay.
(e) See Note 3 in the notes to financial statements for cost for federal
income tax purposes and related gross unrealized appreciation
(depreciation).

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

<PAGE>
34 GNA Variable Series Trust
- --------------------------------------------------------------------------------

STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1996

<TABLE>
<CAPTION>
GNA
GNA GNA GNA ADJUSTABLE
GROWTH VALUE GOVERNMENT RATE
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
----------- ----------- ---------- ----------
<S> <C>
ASSETS
Investments at market value (identified cost
$9,502,419, $8,948,054, $7,916,074 and $6,162,104,
respectively) (Notes 2 and 3)....................... $12,468,050 $10,473,300 $8,043,124 $6,364,142
Cash.................................................. 72 92 23 29
Receivables:
Fund shares sold................................. 5,871 21,379 241 57
Dividends........................................ 10,909 11,357 15,406 627
Interest......................................... -- -- 68,486 37,431
Adviser (Note 4)................................. 8,525 8,192 7,950 --
Deferred organization costs (Note 2).................. 6,993 6,993 6,993 6,993
----------- ----------- ---------- ----------
Total assets.......................................... 12,500,420 10,521,313 8,142,223 6,409,279
----------- ----------- ---------- ----------
LIABILITIES
Payables:
Fund shares redeemed............................. 28,016 852 11,268 480
Dividends........................................ -- -- 13,386 10,785
Adviser (Note 4)................................. -- -- -- 6,270
Daily variation margin on open futures contracts
(Notes 2 and 3)................................ -- -- 6,844 --
Accrued management fee (Note 4).................. 8,538 7,120 3,758 2,128
Other accrued expenses........................... 22,201 19,153 17,382 14,192
----------- ----------- ---------- ----------
Total liabilities..................................... 58,755 27,125 52,638 33,855
----------- ----------- ---------- ----------
NET ASSETS............................................ $12,441,665 $10,494,188 $8,089,585 $6,375,424
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
NET ASSETS
Net assets consist of (Note 2):
Undistributed (accumulated distributions in
excess of) net investment income............... $ 17,279 $ -- $ 5,438 $ (2,855)
Accumulated net realized gains (losses).......... (343,380) 71,954 (19,910 ) (10,947)
Unrealized appreciation (depreciation) on:
Investments (Note 3)........................... 2,965,631 1,525,246 127,050 202,038
Futures contracts (Note 3)..................... -- -- (21,752 ) --
Shares of beneficial interest.................... 9,802,135 8,896,988 7,998,759 6,187,188
----------- ----------- ---------- ----------
NET ASSETS............................................ $12,441,665 $10,494,188 $8,089,585 $6,375,424
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
Outstanding shares of beneficial
interest (No par value)............................. 321,744 294,649 312,621 245,516
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
Net asset value, offering and
redemption price per share.......................... $ 38.67 $ 35.62 $ 25.88 $ 25.97
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
</TABLE>

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

<PAGE>
GNA Variable Series Trust 35
- --------------------------------------------------------------------------------

STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
GNA
GNA GNA GNA ADJUSTABLE
GROWTH VALUE GOVERNMENT RATE
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
---------- ---------- ---------- ----------
<S> <C>
INVESTMENT INCOME:
Interest................................................. $ 14,800 $ 2,424 $555,774 $407,101
Dividends................................................ 122,910 188,968 15,407 9,227
---------- ---------- ---------- ----------
Total income............................................. 137,710 191,392 571,181 416,328
---------- ---------- ---------- ----------
EXPENSES:
Management fee (Note 4)............................. 84,327 66,119 43,375 24,168
Transfer agent fee.................................. 10,833 10,833 10,833 10,833
Custodian fee....................................... 49,851 52,964 52,929 47,160
Amortization of organization costs (Note 2)......... 2,326 2,326 2,326 2,326
Professional fees................................... 18,646 15,062 13,911 10,166
Trustees' fees and expenses......................... 920 918 269 141
Excise tax.......................................... 3,864 1,549 5,242 587
Other............................................... 429 335 394 324
---------- ---------- ---------- ----------
Total expenses before reimbursement from Adviser......... 171,196 150,106 129,279 95,705
Reimbursement of expenses from Adviser (Note 4).......... (55,247) (59,192) (58,287) (53,411)
---------- ---------- ---------- ----------
Expenses, net............................................ 115,949 90,914 70,992 42,294
---------- ---------- ---------- ----------
Net investment income.................................... 21,761 100,478 500,189 374,034
---------- ---------- ---------- ----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from:
Investment transactions (Notes 2 and 3)............. (343,380) 605,843 (18,427) (14,389)
Option contracts.................................... -- -- 31,937 --
Futures contracts................................... -- -- (28,944) --
Net increase (decrease) in unrealized appreciation
(depreciation) from:
Investment transactions............................. 2,032,735 1,044,887 (193,239) (25,781)
Futures contracts................................... -- -- (25,634) --
---------- ---------- ---------- ----------
Net realized and unrealized gain (loss) on investments... 1,689,355 1,650,730 (234,307) (40,170)
---------- ---------- ---------- ----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS..... $1,711,116 $1,751,208 $265,882 $333,864
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>

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

<PAGE>
36
- --------------------------------------------------------------------------------

STATEMENTS OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
GNA GROWTH PORTFOLIO GNA VALUE PORTFOLIO
---------------------------------------- ----------------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995 (A) DECEMBER 31, 1996 DECEMBER 31, 1995 (A)
----------------- --------------------- ----------------- ---------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income........................ $ 21,761 $ 19,700 $ 100,478 $ 51,557
Net realized gain (loss) from:
Investment transactions.................... (343,380) 115,086 605,843 87,100
Options contracts.......................... -- -- -- --
Futures contracts.......................... -- -- -- --
Net increase in unrealized appreciation from:
Investment transactions.................... 2,032,735 932,896 1,044,887 480,359
Futures contracts.......................... -- -- -- --
----------------- --------------------- ----------------- ---------------------
Net increase in net assets resulting
from operations............................. 1,711,116 1,067,682 1,751,208 619,016
----------------- --------------------- ----------------- ---------------------

DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income........................ (8,346) (20,410) (104,429) (50,166)
Net realized gains........................... (114,376) -- (619,978) --
----------------- --------------------- ----------------- ---------------------
Total distributions to shareholders........... (122,722) (20,410) (724,407) (50,166)
----------------- --------------------- ----------------- ---------------------

SHARE TRANSACTIONS:
Proceeds from sales of shares................ 4,134,849 5,851,980 4,431,471 3,925,119
Reinvestment of distributions................ 122,722 20,411 724,407 50,166
Cost of shares redeemed...................... (330,729) (18,259) (237,236) (20,415)
----------------- --------------------- ----------------- ---------------------
Increase in net assets resulting from
share transactions.......................... 3,926,842 5,854,132 4,918,642 3,954,870
----------------- --------------------- ----------------- ---------------------
INCREASE IN NET ASSETS........................ 5,515,236 6,901,404 5,945,443 4,523,720
Net assets at the beginning of period......... 6,926,429 25,025 4,548,745 25,025
----------------- --------------------- ----------------- ---------------------
NET ASSETS AT END OF PERIOD................... $12,441,665 $ 6,926,429 $10,494,188 $ 4,548,745
----------------- --------------------- ----------------- ---------------------
----------------- --------------------- ----------------- ---------------------
Undistributed (accumulated distributions
in excess of) net investment income
at end of period............................ $ 17,279 $ -- $ -- $ 1,391
----------------- --------------------- ----------------- ---------------------
----------------- --------------------- ----------------- ---------------------

PORTFOLIO SHARE INFORMATION:
Shares sold.................................. 119,100 207,331 135,933 143,157
Shares issued upon reinvestment
of distributions........................... 3,142 621 20,329 1,743
Shares redeemed.............................. (8,885) (566) (6,828) (686)
----------------- --------------------- ----------------- ---------------------
Increase in Portfolio shares outstanding..... 113,357 207,386 149,434 144,214
----------------- --------------------- ----------------- ---------------------
----------------- --------------------- ----------------- ---------------------
</TABLE>

- ------------
(a) For the period January 3, 1995 (commencement of operations) through December
31, 1995.

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

<PAGE>
GNA Variable Series Trust 37
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
GNA GOVERNMENT PORTFOLIO GNA ADJUSTABLE RATE PORTFOLIO
---------------------------------------- ----------------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995 (A) DECEMBER 31, 1996 DECEMBER 31, 1995 (A)
----------------- --------------------- ----------------- ---------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income........................ $ 500,189 $ 375,765 $ 374,034 $ 285,656
Net realized gain (loss) from:
Investment transactions.................... (18,427) 154,781 (14,389) 63,800
Options contracts.......................... 31,937 -- -- --
Futures contracts.......................... (28,944) (3,947) -- --
Net increase in unrealized appreciation from:
Investment transactions.................... (193,239) 320,289 (25,781) 227,819
Futures contracts.......................... (25,634) 3,882 -- --
----------------- --------------------- ----------------- --------------------
Net increase in net assets resulting
from operations............................. 265,882 850,770 333,864 577,275
----------------- --------------------- ----------------- --------------------

DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income........................ (500,387) (375,567) (375,605) (284,085)
Net realized gains........................... (155,115) -- (63,800) --
----------------- --------------------- ----------------- --------------------
Total distributions to shareholders........... (655,502) (375,567) (439,405) (284,085)
----------------- --------------------- ----------------- --------------------

SHARE TRANSACTIONS:
Proceeds from sales of shares................ 1,297,060 6,361,451 527,348 5,141,909
Reinvestment of distributions................ 653,972 363,712 438,576 274,129
Cost of shares redeemed...................... (648,394) (48,824) (132,937) (86,275)
----------------- --------------------- ----------------- --------------------
Increase in net assets resulting from
share transactions.......................... 1,302,638 6,676,339 832,987 5,329,763
----------------- --------------------- ----------------- --------------------
INCREASE IN NET ASSETS........................ 913,018 7,151,542 727,446 5,622,953
Net assets at the beginning of period......... 7,176,567 25,025 5,647,978 25,025
----------------- --------------------- ----------------- --------------------
NET ASSETS AT END OF PERIOD................... $ 8,089,585 $ 7,176,567 $ 6,375,424 $ 5,647,978
----------------- --------------------- ----------------- --------------------
----------------- --------------------- ----------------- --------------------
Undistributed (accumulated distributions
in excess of) net investment income
at end of period............................ $ 5,438 $ 8,138 $ (2,855) $ 13,526
----------------- --------------------- ----------------- --------------------
----------------- --------------------- ----------------- --------------------

PORTFOLIO SHARE INFORMATION:
Shares sold.................................. 48,499 250,976 20,153 205,376
Shares issued upon reinvestment
of distributions........................... 25,147 13,782 16,853 10,523
Shares redeemed.............................. (24,953) (1,831) (5,101) (3,289)
----------------- --------------------- ----------------- --------------------
Increase in Portfolio shares outstanding..... 48,693 262,927 31,905 212,610
----------------- --------------------- ----------------- --------------------
----------------- --------------------- ----------------- --------------------
</TABLE>

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

<PAGE>
38
- --------------------------------------------------------------------------------

FINANCIAL HIGHLIGHTS

The Financial Highlights set forth below include selected data for a share
outstanding thoughout each period and other performance information derived from
the financial statements.

<TABLE>
<CAPTION>
GNA GROWTH PORTFOLIO GNA VALUE PORTFOLIO
----------------------------------------- ----------------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995 (A) DECEMBER 31, 1996 DECEMBER 31, 1995 (A)
----------------- --------------------- ----------------- ---------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.......... $ 33.24 $ 25.00 $ 31.32 $ 25.00
Income from Investment Operations
Net investment income+...................... 0.08 0.10 0.40 0.55
Net realized and unrealized gains
(losses) on investments................... 5.74 8.24 6.54 6.31
------- ------- ------- -------
Total from investment operations............ 5.82 8.34 6.94 6.86
------- ------- ------- -------

LESS DISTRIBUTIONS FROM
Net investment income....................... (0.03) (0.10) (0.41) (0.54)
Net realized gains.......................... (0.36) 0.00 (2.23) 0.00
------- ------- ------- -------
Total distributions......................... (0.39) (0.10) (2.64) (0.54)
------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD................ $ 38.67 $ 33.24 $ 35.62 $ 31.32
------- ------- ------- -------
------- ------- ------- -------
TOTAL RETURN (%) (B).......................... 17.48 33.37 22.29 27.68
RATIOS/SUPPLEMENTAL DATA
Ratios to average daily net assets (%) (c)
Net expenses+............................ 1.10 1.10 1.10 1.10
Gross expenses+.......................... 1.64 2.89 1.82 3.87
Net investment income+................... 0.21 0.47 1.22 2.03

Portfolio turnover (%)...................... 42.57 65.88 98.53 41.67

Net Assets, end of period (millions)........ $ 12.4 $ 6.9 $ 10.5 $ 4.5

+Reimbursement of expenses from Adviser....... $ 0.21 $ 0.38 $ 0.24 $ 0.75

Average commission rate (d)................... $ 0.050 N/A 0.050 N/A
</TABLE>

- ------------
(a) For the period January 3, 1995 (commencement of operations) through
December 31, 1995
(b) Total returns are historical and assume changes in share price and
reinvestment of dividends and capital gains. Had the Adviser not absorbed
a portion of expenses, total return would have been lower. Periods less
than one year are not annualized.

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

<PAGE>
GNA Variable Series Trust 39
- --------------------------------------------------------------------------------

LESS DISTRIBUTIONS FROM
Net investment income....................... (1.66) (1.70) (1.62) (1.38)
Net realized gains.......................... (0.50) 0.00 (0.27) 0.00
------- ------- ------- -------
Total distributions......................... (2.16) (1.70) (1.89) (1.38)
------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD................ $ 25.88 $ 27.19 $ 25.97 $ 26.44
------- ------- ------- -------
------- ------- ------- -------
TOTAL RETURN (%) (B).......................... 3.38 15.99 5.60 11.50
RATIOS/SUPPLEMENTAL DATA
Ratios to average daily net assets (%) (c)
Net expenses+............................ 0.90 0.90 0.70 0.70
Gross expenses+.......................... 1.68 2.09 1.63 2.05
Net investment income+................... 6.34 6.51 6.19 5.38

Portfolio turnover (%)...................... 1.65 129.71 36.59 36.47

Net Assets, end of period (millions)........ $ 8.1 $ 7.2 $ 6.4 $ 5.6

+Reimbursement of expenses from Adviser....... $ 0.20 $ 0.31 $ 0.23 $ 0.35

Average commission rate (d)................... N/A N/A N/A N/A
</TABLE>

- ------------
(c) Annualized.
(d) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share of security
trades on which commissions are charged.

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

<PAGE>
40 GNA Variable Series Trust
- --------------------------------------------------------------------------------

NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION OF THE PORTFOLIOS. GNA Variable Series Trust (the "Trust") is
organized as a Delaware Business Trust under a Declaration of Trust dated March
25, 1994, amended and restated August 22, 1994 and is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company. The Trust is a series of funds, currently
comprised of four investment portfolios (the "Portfolios"), the GNA Growth
Portfolio, the GNA Value Portfolio, the GNA Government Portfolio and the GNA
Adjustable Rate Portfolio that commenced operations as of January 3, 1995.
Shares of the Trust are offered only to a separate account of Great Northern
Insured Annuity Corporation, an affiliated insurance company which funds certain
variable annuity contracts. As of December 31, 1996, the affiliated insurance
company controlled the Portfolios by virtue of ownership of all of the
Portfolios' shares of beneficial interest.

2. SIGNIFICANT ACCOUNTING POLICIES. The preparation of the Portfolios'
financial statements in accordance with generally accepted accounting
principles, requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The following is a summary of significant accounting policies
followed consistently by the Portfolios.

SECURITIES VALUATION. Securities (including options) listed or traded on an
exchange or quoted on NASDAQ are valued at their last sale prices prior to the
time when assets are valued. Lacking any sales on that day, securities are
valued at the mean between the current closing bid and asked prices. Other
securities for which market quotations are readily available are valued at the
mean of the bid and asked quotations quoted prior to the time when assets are
valued ("market value"). Certain securities are valued primarily utilizing such
pricing services as may be deemed appropriate. The pricing services utilize
information with respect to market transactions, quotations from dealers and
various relationships among securities in determining value and may provide
prices determined as of times prior to the close of the New York Stock Exchange.
Investments in certain long-term debt securities not traded in an organized
market are valued primarily based on market quotations provided by recognized
dealers of such securities. Other securities for which market quotations are not
readily available, such as restricted securities, or where pricing occurs during
periods of market disruption, are valued in good faith by or under the authority
of the Trustees of the Trust. Short-term investments maturing within 60 days are
valued at original cost plus accreted discount or accrued interest which
approximates market value.

SECURITIES TRANSACTIONS AND RELATED INVESTMENT INCOME. Sales and purchases
are accounted for as of trade date. Realized securities gains or losses are
determined using the identified cost method for both financial and tax reporting
purposes. Dividend income is recorded on the ex-dividend date. Interest income
is accrued pro rata to maturity. Original issue discount is accreted for
financial and tax accounting purposes.

FUTURES CONTRACTS. Each of the Portfolios may purchase and sell futures
contracts, subject to certain limitations. The GNA Government Portfolio uses
interest rate futures contracts as a hedge against changes in interest rates.
Upon entering into a futures contract, each Portfolio is required to deposit
with a broker an amount ("initial margin") equal to a certain percentage of the
face amount of the futures contract. Subsequent payments ("variation margin")
are made or received by the Portfolio each day, dependent on the daily

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

<PAGE>
GNA Variable Series Trust 41
- --------------------------------------------------------------------------------

NOTES TO FINANCIAL STATEMENTS, CONTINUED
fluctuations in the value of the unrealized gains and losses by the Portfolio.
If the Portfolio enters into a closing transaction, the Portfolio will realize,
for book purposes, a gain or loss equal to the difference between the value of
the futures contract to sell and the futures contract to buy. The Portfolio may
be subject to risk upon entering into futures contracts resulting from the
imperfect correlation of prices between the futures and securities markets.

OPTIONS ON FUTURES CONTRACTS. Each Portfolio may purchase and sell listed
call and put options on futures contracts. The GNA Government Portfolio uses
options on interest rate futures contracts as a hedge against changes in
interest rates. Options are valued in accordance with the securities valuation
policies described above. Transactions in options on futures contracts involve
similar risks to those on futures contracts.

When a Portfolio writes a call or put option, an amount equal to the premium
received by the Portfolio is included in the Portfolio's Statement of Assets and
Liabilities as an asset and as an equivalent liability. The amount of the
liability is subsequently marked-to-market to reflect the current market value
of the options written.

SECURITIES PURCHASED ON A WHEN-ISSUED BASIS. Each Portfolio may enter into
firm commitment agreements ("TBA" or "when-issued" purchases) for the purchase
of securities at an agreed-upon price on a specified future date. A Portfolio
will not enter into such agreements for the purpose of investment leverage.
Liability for the purchase price and all the rights and risks of ownership of
the securities accrue to a Portfolio at the time it becomes obligated to
purchase the securities, although delivery and payment occur at a later date,
generally within 45 days (but not to exceed 120 days) of the date of the
commitment to purchase. Accordingly, if the market price of the security should
decline, the effect of the agreement would be to obligate the Portfolio to
purchase the security at the price above the current market price on the date of
delivery and payment. During the time the Portfolio is obligated to purchase
such securities, it will maintain with the Custodian a segregated account with
U.S. government securities, cash or cash equivalents (or a receivable for
investment sold in connection therewith) of an aggregate current value
sufficient to make payment for the securities.

REPURCHASE AGREEMENTS. Each Portfolio may enter into repurchase agreements in
order to generate additional income. Each repurchase agreement entered into by a
Portfolio will provide that the value of the collateral underlying the
repurchase agreement will always be at least 102% of the repurchase price,
including accrued interest, except for repurchase agreements entered into with a
broker/dealer or bank whose unsecured debt is rated AAA or whose commercial
paper is rated A-1 by Standard and Poor's or P-1 by Moody's, in which case the
value of the collateral will always be at least 100% of the repurchase price,
including accrued interest. A Portfolio will not enter into a repurchase
agreement having more than seven days remaining to maturity if, as a result,
such agreements, together with any other securities which are not readily
marketable, would exceed 10% of the net assets of the Portfolio. In addition,
not more than one-third of the current market value of the Portfolio's total
assets shall constitute secured "loans" by the Portfolio under repurchase
agreements.

FEDERAL INCOME TAXES. As a Delaware Business Trust, each Portfolio is a
separate corporate taxpayer and determines its net investment income and capital
gains (or losses) and the amounts to be distributed to the

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

<PAGE>
42 GNA Variable Series Trust
- --------------------------------------------------------------------------------

NOTES TO FINANCIAL STATEMENTS, CONTINUED
Portfolio's shareholders without regard to the income and capital gains (or
losses) of the other Portfolios. It is the intent of the Portfolios to comply
with the requirements of the Internal Revenue Code which are applicable to
regulated investment companies and to distribute substantially all of their
taxable income and realized gains to their shareholders. Accordingly, the
Portfolios paid no federal income taxes and no federal income tax provisions
were required. For Federal income tax purposes, any futures contracts or options
on futures contracts which remain open at year-end are marked-to-market and the
resultant net gain or loss is included in Federal taxable income. As of December
31, 1996, the Portfolios had net tax basis capital loss carryforwards which may
be applied against taxable gains until their expiration date as follows:

EXPIRATION
DATES
PORTFOLIO AMOUNT DECEMBER 31,
- ------------------------------------------------ -------- ------------
GNA Growth Portfolio............................ $136,024 2004
GNA Government Portfolio........................ 25,224 2004
GNA Adjustable Rate Portfolio................... 10,947 2004

DISTRIBUTION OF INCOME AND GAINS. Net investment income for the GNA Growth
Portfolio is declared and paid annually. Net investment income for the GNA Value
Portfolio is declared and paid quarterly. Net investment income for the GNA
Government and GNA Adjustable Rate Portfolios are declared as dividends to
shareholders of record as of the close of business each day and are paid to
shareholders monthly. During any particular year, net realized gains from
investment transactions in excess of any available capital loss carryforwards,
would be taxable to the Portfolios if not distributed and, therefore, will be
declared and paid to their shareholders annually.

CAPITAL ACCOUNTS. The Portfolios report the undistributed net investment
income (accumulated net investment loss) and accumulated net realized gain
(loss) accounts on a basis approximating amounts available for future tax
distributions (or to offset future taxable realized gains when a capital loss
carryforward is available). Accordingly, the Portfolios may periodically make
reclassifications among certain capital accounts without impacting the net asset
value of the Portfolios.

PREPAID INSURANCE. Insurance costs are amortized on a straight-line basis
over the duration of the insurance period.

DEFERRED ORGANIZATIONAL COSTS. Costs incurred by the Trust in connection with
its organization and of the Portfolios have been deferred ratably and are being
amortized over a 60 month period on a straight-line basis beginning at the
commencement of operations of the Portfolios.

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

<PAGE>
GNA Variable Series Trust 43
- --------------------------------------------------------------------------------

NOTES TO FINANCIAL STATEMENTS, CONTINUED
EXPENSES. Expenses such as management fees, custodian fees, transfer agent
fees, and registration fees are charged directly to the Portfolios, while
indirect expenses, such as audit fees, legal fees, trustee fees and expenses,
and insurance are allocated among the Portfolios principally based on their
relative net assets.

3. PURCHASES AND SALES OF SECURITIES. The cost of purchases and the proceeds
from sales and paydowns of investments other than U.S. Government and agency
securities, short term investments and options, for the year ended December 31,
1996, were as follows:

<TABLE>
<CAPTION>
PORTFOLIO PURCHASES SALES PAYDOWNS
- ------------------------------------------ ----------- ---------- --------
<S> <C>
GNA Growth Portfolio...................... $ 8,598,755 $4,101,191 $ --
GNA Value Portfolio....................... 12,243,844 7,707,326 --
GNA Adjustable Rate Portfolio............. 1,066,005 -- 253,179
</TABLE>

The cost of purchases and the proceeds from sales and paydowns of long-term
U.S. Government and agency securities, for the year ended December 31, 1996,
were as follows:

<TABLE>
<CAPTION>
PORTFOLIO PURCHASES SALES PAYDOWNS
- ------------------------------------------- ---------- ---------- --------
<S> <C>
GNA Value Portfolio........................ $ 33,050 $ 99,564 $ --
GNA Government Portfolio................... 1,995,340 124,890 794,500
GNA Adjustable Rate Portfolio.............. 3,066,749 2,168,300 963,288
</TABLE>

At December 31, 1996, the security pledged to cover margin requirements for
open futures contracts on United States Treasury Notes and Bonds for the GNA
Government Portfolio was as follows:

<TABLE>
<CAPTION>
DESCRIPTION FACE VALUE MARKET VALUE
- ------------------------------------------------------- ---------- ------------
<S> <C>
Federal Home Loan Bank Bonds, 5.720%, 11/22/00......... $ 100,000 $ 97,719
---------- ------------
---------- ------------
</TABLE>

Transactions in options written on United States Treasury Bond Futures for the
GNA Government Portfolio were as follows:

<TABLE>
<CAPTION>
NUMBER OF NET
CONTRACTS OF PREMIUMS
WRITTEN OPTIONS RECEIVED
--------------- --------
<S> <C>
Outstanding at December 31,1995...................... -- $ --
Written.............................................. 205 58,704
Closed and Expired................................... (183) (51,552)
Exercised............................................ (22) (7,152)
--------------- --------
Outstanding at December 31,1996...................... -- $ --
--------------- --------
--------------- --------
</TABLE>

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

<PAGE>
44 GNA Variable Series Trust
- --------------------------------------------------------------------------------

NOTES TO FINANCIAL STATEMENTS, CONTINUED
Aggregate federal income tax cost and gross unrealized appreciation
(depreciation) of investments for each Portfolio at December 31, 1996 was as
follows:

<TABLE>
<CAPTION>
FEDERAL GROSS GROSS NET
INCOME UNREALIZED UNREALIZED UNREALIZED
PORTFOLIO TAX COST APPRECIATION (DEPRECIATION) APPRECIATION
- --------------------------------------- ---------- ------------ -------------- ------------
<S> <C>
GNA Growth Portfolio................... $9,502,419 $ 3,057,745 $ (92,114) $ 2,965,631
GNA Value Portfolio.................... 8,954,190 1,535,451 (16,341) 1,519,110
GNA Government Portfolio............... 7,916,074 179,441 (52,391) 127,050
GNA Adjustable Rate Portfolio.......... 6,162,104 211,588 (9,550) 202,038
</TABLE>

4. MANAGEMENT, DISTRIBUTION AND TRUSTEES' FEES. Under Advisory agreements
between the Portfolios and GNA Capital Management, Inc. (the "Adviser"), each
Portfolio agrees to pay the Adviser a fee based on its average daily net assets
as follows:

GNA GROWTH PORTFOLIO. The Adviser's fee is calculated based upon the
Portfolio's average daily net assets, equal to an annual rate of .80% of the
first $100 million and .70% of average daily net assets in excess of $100
million.

GNA VALUE PORTFOLIO. The Adviser's fee is calculated at an annual rate of
0.80% of the average daily net assets of the Portfolio if the average daily net
assets of the Portfolio and the Investors Trust Value Fund, a series of another
affiliated registered investment company, ("Combined Average Daily Net Assets")
equals to $100 million or less, and 0.70% of the Portfolio's average daily net
assets if the Combined Average Daily Net Assets exceeds $100 million. For the
year ended December 31, 1996, the Adviser's fee was equivalent to an annual
effective rate of 0.80%.

GNA GOVERNMENT PORTFOLIO. The Adviser's fee is calculated at an annual rate
of 0.65% of the average daily net assets of the Portfolio if the average daily
net assets of the Portfolio and the Investors Trust Government Fund, a series of
another affiliated registered investment company, ("Combined Average Daily Net
Assets") equals to $500 million or less, 0.60% of the Portfolio's average daily
net assets if the Combined Average Daily Net Assets is greater than $500 million
and is equal to or less than $750 million, 0.55% of the Portfolio's average
daily net assets if the Combined Average Daily Net Assets is greater than $750
million and is equal to or less than $1.25 billion, 0.50% of the Portfolio's
average daily net assets if the Combined Average Daily Net Assets is equal to or
less than $1.5 billion and 0.45% of the Portfolio's average daily net assets if
the Combined Average Daily Net Assets exceed $1.5 billion. For the year ended
December 31, 1996, the Adviser's fee was equivalent to an annual effective rate
of 0.55%.

GNA ADJUSTABLE RATE PORTFOLIO. The Adviser's fee is calculated at an annual
rate of .40% of the Portfolio's average daily net assets.

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

<PAGE>
GNA Variable Series Trust 45
- --------------------------------------------------------------------------------

NOTES TO FINANCIAL STATEMENTS, CONTINUED
The Adviser has agreed to reimburse the Portfolios, for expenses incurred by
the Portfolios to the extent that such expenses exceed the following percentages
of each Portfolio's average daily net assets during the year ended December 31,
1996:

<TABLE>
<CAPTION>
PORTFOLIO PERCENTAGES
- ---------------------------------------------------------------------- -----------
<S> <C>
GNA Growth Portfolio.................................................. 1.10%
GNA Value Portfolio................................................... 1.10%
GNA Government Portfolio.............................................. 0.90%
GNA Adjustable Rate Portfolio......................................... 0.70%
</TABLE>

The expense reimbursement may be extended or modified by the Adviser. The
reimbursement for expenses by the Adviser is being offset by the payables to the
Adviser monthly. Any amount due from the Adviser in excess of the amounts due to
the Adviser is settled in cash within 15 days following month end.

The Portfolios' Advisory agreements also provide that if, in any year, the
total of certain specified expenses of any of the Portfolios exceed the expense
limitations applicable to the Portfolios imposed by the securities regulations
of any state in which they are then registered to sell shares, the Adviser will
waive all or a portion of its management fee equal to such excess. The Adviser
is only required to reimburse the Portfolios for any expenses which exceed state
expense limitations up to the amount of management fees paid or payable by the
Portfolios during such year.

The Adviser has retained the following portfolio managers (the "Sub-Advisers")
for the Portfolios. These Sub-Advisers are responsible for the actual investment
management of the Portfolio's assets (including the placement of brokerage
orders), under the general supervision of the Adviser and the Board of Trustees.

<TABLE>
<CAPTION>
PORTFOLIO SUB-ADVISERS
- ------------------------------------ -----------------------------------------
<S> <C>
GNA Growth Portfolio................ Value Line, Inc.
GNA Value Portfolio................. Duff & Phelps Investment Management, Co.
GNA Adjustable Rate Portfolio....... Standish, Ayer & Wood, Inc.
</TABLE>

The Adviser has not retained a Sub-Adviser for the GNA Government Portfolio.

The Trust pays each Trustee not affiliated with the Adviser its proportionate
share of a fee of: (1) an annual fee of $2,000; and (2) a fee of $250 for each
meeting of the Board of Trustees attended plus all reasonable expenses
associated with attendance at such meetings. The proportionate rate is allocated
among the portfolios principally based on their relative net assets. No
remuneration is paid by the Trust to any Trustee or officer of the Portfolio who
is affiliated with the Adviser.

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

<PAGE>
46 GNA Variable Series Trust
- --------------------------------------------------------------------------------

REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders and Board of Trustees of GNA Variable Series Trust:

We have audited the accompanying statements of assets and liabilities of each
of the series of GNA Variable Series Trust (in this report comprised of the GNA
Growth Portfolio, the GNA Value Portfolio, the GNA Government Portfolio and the
GNA Adjustable Rate Portfolio (the "Portfolios")) including the investment
portfolios, as of December 31, 1996, and the related statements of operations
for the year then ended, and the statements of changes in net assets and the
financial highlights for the year then ended and for the period January 3, 1995
(commencement of operations) to December 31, 1995. These financial statements
and financial highlights are the responsibility of the Portfolios' management.
Our responsibility is to express an opinion on these financial statements and
financial highlights 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 and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996 by correspondence with the custodian. 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 and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Portfolios enumerated above as of December 31, 1996, the results of their
operations for the year then ended, and the changes in their net assets and the
financial highlights for the year then ended and for the period January 3, 1995
(commencement of operations) to December 31, 1995 in conformity with generally
accepted accounting principles.

COOPERS & LYBRAND L.L.P.

Boston, Massachusetts
February 12, 1997

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

<PAGE>

PART C

77
<PAGE>

PART C

Item 24.

Financial Statements and Exhibits.

(a) Financial Statements:

(1) Financial Statements included in PART A (Prospectus)
of this Registration Statement:

Financial Highlights for each share of the GNA
Adjustable Rate Portfolio series, GNA Government
Portfolio series, GNA Value Portfolio series and GNA
Growth Portfolio series of the Trust

(2) Financial Statements included in PART B of this
Registration Statement:

Audited statements of assets and liabilities for each
of the GNA Adjustable Rate Portfolio series, GNA
Government Portfolio series, GNA Value Portfolio
series and GNA Growth Portfolio series of the Trust
as of December 31, 1996, and the related statements
of operations for the year then ended, and the
statements of changes in net assets and the financial
highlights for the year then ended and for the period
January 3, 1995 (commencement of operations) to
December 31, 1995, together with the related notes
thereto and report of independent accountants
thereon, are attached to the Statement of Additional
Information.

(b) Exhibits:

<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
1(a) Master Trust Agreement (Agreement and Declaration of Trust) dated March 25, 1994.1

1(b) First Amended and Restated Master Trust Agreement (Agreement and Declaration of Trust) dated
August 22, 1994.2

1(c) Certificate of Trust dated March 18, 1994.2

1(d) Certificate of Amendment to Certificate of Trust dated August 22, 1994.2

2 By-Laws.1

3 None.

4 Specimen share certificates.2

5(a) Advisory Agreement.2

5(b) Form of Sub-Advisory Agreement for each of the GNA Adjustable
Rate Portfolio series, GNA Government Portfolio series, GNA
Value Portfolio series and GNA Growth Portfolio series.2

6 None.

7 None.

8 Custodian Contract.2

9 Transfer Agency Agreement.2

10(a) Opinion of Counsel regarding shares of each of the GNA Adjustable Rate
Portfolio series, GNA Government Portfolio series, GNA Value Portfolio series
and GNA Growth Portfolio series.2

10(b) Consent of Counsel.

<PAGE>

11 Consent of Independent Accountant.

12 Not Applicable.

13 Not Applicable.

14 Not Applicable.

15 Not Applicable.

16 Not Applicable.

17(a) Powers of Attorney for Geoffrey S. Stiff, Pierce T. Lindberg
and Edward R. McMillan.1

17(b) Power of Attorney for Douglas H. Pedersen. 3

27 Financial Data Schedule

-------------------------------------
1 Incorporated by reference to Securities Act of 1933 Filing No.
33-77138 filed March 30, 1994.

2 Incorporated by reference to Pre-Effective Amendment No. 1 to
Securities Act of 1933 Filing No. 33-77138 filed September 20, 1994.

3 Incorporated by reference to Post-Effective Amendment No. 1 to
Securities Act of 1933 Filing No. 33-77138 filed June 30, 1995.

Item 25. Persons Controlled by or Under Common Control with Registrant.

Information regarding persons controlled by or under common control with
Registrant is hereby incorporated by reference to the section captioned "The
Trust, The Portfolio and Management" in the Prospectus, and the section
captioned "Management of the Trust" in the Statement of Additional Information.

Item 26. Number of Holders of Securities.

As of December 31, 1996, the record holders of each class of Registrant's
securities were as follows:

Title of Class Number of Record Holders

GNA Adjustable Rate Portfolio 1
GNA Government Portfolio 1
GNA Value Portfolio 1
GNA Growth Portfolio 1

Item 27. Indemnification.

Under Article VI of the Registrant's Master Trust Agreement each of its
Trustees and Officers or persons serving in such capacity with another entity at
the request of the Registrant ("Covered Person") shall be indemnified against
all liabilities, including, but not limited to, amounts paid in satisfaction of
judgments, in compromises or as fines or penalties, and expenses, including
reasonable legal and accounting fees, 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 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 belief 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"). A
determination that the Covered Person is entitled to indemnification may be made
by (i) a final decision on the merits by a court or other body before whom the
proceeding was brought that the person to be indemnified was not liable by
reason of Disabling Conduct, (ii) dismissal of a court action or an
administrative proceeding against a Covered Person for insufficiency of evidence
of Disabling Conduct, or (iii) a reasonable determination, based upon a review
of the

<PAGE>

facts, that the indemnitee was not liable by reason of Disabling Conduct by (a)
a vote of a majority of a quorum of Trustees who are neither "interested
persons" of the Trust as defined in section 2(a)(19) of the 1940 Act nor parties
to the proceeding, or (b) an independent legal counsel in a written opinion.

Item 28. Business and Other Connections of Investment Advisers.

The following information is provided with respect to each director and
executive officer of the Adviser:

</TABLE>
<TABLE>
<CAPTION>

Business and Other Positions
Name Position With Adviser Within Last Two Years
<S> <C>

Geoffrey S. Stiff Director, President and President and Chief Executive Officer
Chief Executive Officer of General Electric Capital Assurance
Company and Great Northern Insured
Annuity Corporation since 1997. Senior
Vice President and CFO of GNA Corporation
and its subsidiaries 1993-1997.

Victor C. Moses Director and Senior Vice Senior Vice President of GNA Corporation,
President Seattle, WA, and holds similar executive
positions with its subsidiaries.

Thomas W. Casey Vice President and Chief Vice President and Controller of GNA
Financial Officer Corporation and its subsidiaries since
December 1993.

Jerome R. Powers Vice President Vice President of General Electric
Capital Assurance Company, Great Northern
Insured Annuity Corporation and GE Capital
Life Assurance Company of New York since
October 1995. Previously Vice President of
Northwestern Mutual Life Insurance Company,
1993 to 1995.

Edward J. Wiles, Jr. Vice President, Counsel and Vice President, Counsel and Secretary of GNA
Secretary Corporation, GNA Distributors, Inc., GNA
Mortgage Funding Corporation and GNA
Securities, Inc. and holds similar executive
positions with GNA Corporation's other
subsidiaries.

Charles A. Kaminski Senior Vice President Senior Vice President of GNA Securities,
Inc., Senior Vice President and Director of
General Electric Capital Assurance Company
and Great Northern Insured Annuity
Corporation.

81
<PAGE>

Business and Other Positions
Name Position With Adviser Within Last Two Years
<S> <C>

John W. Attey Vice President, Counsel Vice President, Counsel and Secretary
and Assistant Secretary of GNA Corporation and its subsidiaries.
since 1994.

Scott A. Curtis Vice President Vice President of General Electric
Capital Assurance Company, Great Northern
Insured Annuity Corporation, GNA
Securities, Inc. and GNA Distributors,
Inc. since 1996. Employed by GNA since 1990.

Stephen N. DeVos Vice President Vice President and Controller
and Controller of GNA Corporation and its subsidiaries
since 1996. Technical Adviser, General
Electric Capital Corporation 1994-1996.

William D. Koski Vice President Vice President of General Electric Capital
Assurance Company and Great Northern Insured
Annuity Corporation since 1995.

Jeff Hugunin Treasurer Treasurer of GNA
Corporation and
its subsidiaries
since 1994.

</TABLE>
The business and other connections of the officers and directors of (i)
Value Line are listed on the Form ADV for Value Line as currently on file with
the Commission (File No. 801-625), (ii) Duff & Phelps are listed on the Form ADV
for Duff & Phelps as currently on file with the Commission (File No. 801-14813),
and (iii) Standish are listed on the Form ADV for Standish currently on file
with the Commission (File No. 801-584), the text of each of which is hereby
incorporated by reference.

Item 29. Principal Underwriters.

Not Applicable

Item 30. Location of Accounts and Records.

The accounts and records of the Registrant are maintained at the
offices of the Registrant at Suite 5600, Two Union Square, 601 Union Street,
Seattle, Washington 98101, and the offices of the Custodian and Transfer Agent,
P.O. Box 351, Boston, MA 02101.

Item 31. Management Services.

There are no management-related service contracts other than the
Advisory Agreement and the Sub-Advisory Agreements relating to management
services described in Parts A and B.

Item 32. Undertakings.

(a) Not applicable.

(b) Not applicable.

(c) Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest annual report to
shareholders upon request and without charge.

(d) 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 Article VI of the Registrant's Agreement
and Declaration of Trust, 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 Registration 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.

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements of Securities Act Rule 485(b) for effectiveness of this
registration statement and has duly caused this amended registration statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Seattle, and State of Washington on this 30th day of April, 1997.

GNA VARIABLE SERIES TRUST

By: /s/ Geoffrey S. Stiff
-------------------------------
Geoffrey S. Stiff, President

As required by the Securities Act of 1933, this amended registration
statement has been signed by the following persons in the capacities indicated
on this 30th day of April, 1997.

Signature Title Date
--------- ----- ----

/s/ Geoffrey S. Stiff President 6/30/97
- ---------------------------- (Principal Executive Officer)
Geoffrey S. Stiff

* Trustee 4/30/97
- ----------------------------
Douglas H. Pedersen

* Trustee 4/30/97
- ----------------------------
Pierce T. Lindberg

* Trustee 4/30/97
- ----------------------------
Edward R. McMillan

/s/ Thomas W. Casey Vice President and Treasurer 4/30/97
- ---------------------------- (Principal Accounting Officer)
Thomas W. Casey

/s/ Stephen N. DeVos Vice President and Controller 4/30/97
- ----------------------------
Stephen N. DeVos

*By /s/ Edward J. Wiles, Jr.
-------------------------
(Attorney-in-fact pursuant to Powers
of Attorneys previously filed)

<PAGE>

1933 Act File No. 33-77138
1940 Act File No. 811-8456

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. 4 |X|

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

GNA VARIABLE SERIES TRUST

(Exact Name of Registrant as Specified in Charter)

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

EXHIBITS

<PAGE>

Index to Exhibits

Sequential Page
Number

10(b) Consent of Counsel.

11 Consent of Independent Accountant.

27 Financial Data Schedule

EXHIBIT 10(B)

GOODWIN, PROCTER & HOAR LLP
COUNSELLORS AT LAW
EXCHANGE PLACE
BOSTON, MASSACHUSETTS 02109-2881

TELEPHONE (617) 570-1000
TELECOPIER (617) 523-1231

CONSENT OF COUNSEL

April 29, 1997

To the Trustees of GNA Variable Series Trust:

We hereby consent to the incorporation in Post-Effective Amendment No. 3
to the Registration Statement of GNA Variable Series Trust (the "Trust") on Form
N-1A of our opinion dated September 19, 1994 regarding shares of the GNA
Government Portfolio series, GNA Growth Portfolio series, GNA Value Portfolio
series, and GNA Adjustable Rate Portfolio series of the Trust, by reference to
Pre-Effective Amendment No. 1 to Securities Act of 1933 filing No. 33-77138
filed September 20, 1994. We also consent to being named in the Prospectus and
the Statement of Additional Information of the Trust.

Very truly yours,

/s/ GOODWIN, PROCTER & HOAR LLP
--------------------------------
GOODWIN, PROCTER & HOAR LLP

EXHIBIT 11

CONSENT OF INDEPENDENT ACCOUNTANTS

The Board of Trustees
of GNA Variable Series Trust:

We consent to the inclusion in Post-Effective Amendment No. 3 to the
Registration Statement of GNA Variable Series Trust on Form N-1A (File No.
33-77138) of our report dated February 12, 1997 on our audits of the financial
statements and financial highlights of GNA Variable Series Trust-GNA Adjustable
Rate Portfolio, GNA Government Portfolio, GNA Growth Portfolio and GNA Value
Portfolio, which report is included in the Annual Report to Shareholders for the
year ended December 31, 1996, which is included in the Post-Effective Amendment
to the Registration Statement. We also consent to the references to our Firm
under the captions "Independent Accountants" and "Financial Highlights".

Boston Massachusetts Coopers & Lybrand L.L.P.
April 28, 1997

<ARTICLE> 6
<LEGEND>
THESE SCHEDULES CONTAIN SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE GNA VARIABLE SERIES TRUST CONTAINED IN THE STATEMENT
OF ADDITIONAL INFORMATION AND ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 001
<NAME> GROWTH PORTFOLIO

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 9,502,419
<INVESTMENTS-AT-VALUE> 12,468,050
<RECEIVABLES> 25,305
<ASSETS-OTHER> 72
<OTHER-ITEMS-ASSETS> 6,993
<TOTAL-ASSETS> 12,500,420
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 58,755
<TOTAL-LIABILITIES> 58,755
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 9,802,135
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 17,279
<ACCUMULATED-NET-GAINS> (343,380)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,965,631
<NET-ASSETS> 12,441,665
<DIVIDEND-INCOME> 14,800
<INTEREST-INCOME> 122,910
<OTHER-INCOME> 0
<EXPENSES-NET> 115,949
<NET-INVESTMENT-INCOME> 21,761
<REALIZED-GAINS-CURRENT> (343,380)
<APPREC-INCREASE-CURRENT> 2,032,735
<NET-CHANGE-FROM-OPS> 1,711,116
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (8,346)
<DISTRIBUTIONS-OF-GAINS> (114,376)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,134,849
<NUMBER-OF-SHARES-REDEEMED> (330,729)
<SHARES-REINVESTED> 122,722
<NET-CHANGE-IN-ASSETS> 5,515,236
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 84,327
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 171,196
<AVERAGE-NET-ASSETS> 10,540,147
<PER-SHARE-NAV-BEGIN> 33.24
<PER-SHARE-NII> 0.08
<PER-SHARE-GAIN-APPREC> 5.74
<PER-SHARE-DIVIDEND> 5.82
<PER-SHARE-DISTRIBUTIONS> (0.39)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 38.67
<EXPENSE-RATIO> 1.10
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> VALUE PORTFOLIO

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 8,948,054
<INVESTMENTS-AT-VALUE> 10,473,300
<RECEIVABLES> 40,928
<ASSETS-OTHER> 92
<OTHER-ITEMS-ASSETS> 6,993
<TOTAL-ASSETS> 10,521,313
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 27,125
<TOTAL-LIABILITIES> 27,125
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 8,896,988
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 71,954
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,525,246
<NET-ASSETS> 10,494,188
<DIVIDEND-INCOME> 2,424
<INTEREST-INCOME> 188,968
<OTHER-INCOME> 0
<EXPENSES-NET> 90,914
<NET-INVESTMENT-INCOME> 100,478
<REALIZED-GAINS-CURRENT> 605,843
<APPREC-INCREASE-CURRENT> 1,044,887
<NET-CHANGE-FROM-OPS> 1,751,208
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (104,429)
<DISTRIBUTIONS-OF-GAINS> (619,978)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,431,471
<NUMBER-OF-SHARES-REDEEMED> (237,236)
<SHARES-REINVESTED> 724,407
<NET-CHANGE-IN-ASSETS> 5,945,443
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 66,119
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 150,106
<AVERAGE-NET-ASSETS> 8,264,493
<PER-SHARE-NAV-BEGIN> 31.32
<PER-SHARE-NII> 0.40
<PER-SHARE-GAIN-APPREC> 6.54
<PER-SHARE-DIVIDEND> 6.94
<PER-SHARE-DISTRIBUTIONS> (2.64)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 35.62
<EXPENSE-RATIO> 1.10
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 003
<NAME> GOVERNMENT PORTFOLIO

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 7,916,074
<INVESTMENTS-AT-VALUE> 8,043,124
<RECEIVABLES> 92,083
<ASSETS-OTHER> 23
<OTHER-ITEMS-ASSETS> 6,993
<TOTAL-ASSETS> 8,142,223
<PAYABLE-FOR-SECURITIES> 6,844
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 45,794
<TOTAL-LIABILITIES> 52,638
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 7,998,759
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 5,438
<ACCUMULATED-NET-GAINS> (19,910)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 105,298
<NET-ASSETS> 8,089,585
<DIVIDEND-INCOME> 555,774
<INTEREST-INCOME> 15,407
<OTHER-INCOME> 0
<EXPENSES-NET> 70,992
<NET-INVESTMENT-INCOME> 500,189
<REALIZED-GAINS-CURRENT> (15,434)
<APPREC-INCREASE-CURRENT> (218,873)
<NET-CHANGE-FROM-OPS> 265,882
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (500,387)
<DISTRIBUTIONS-OF-GAINS> (155,115)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,297,060
<NUMBER-OF-SHARES-REDEEMED> (648,394)
<SHARES-REINVESTED> 653,972
<NET-CHANGE-IN-ASSETS> 913,018
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 43,375
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 129,279
<AVERAGE-NET-ASSETS> 7,887,972
<PER-SHARE-NAV-BEGIN> 27.19
<PER-SHARE-NII> 1.64
<PER-SHARE-GAIN-APPREC> (0.79)
<PER-SHARE-DIVIDEND> 0.85
<PER-SHARE-DISTRIBUTIONS> (2.16)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 25.88
<EXPENSE-RATIO> 0.90
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 004
<NAME> ADJUSTABLE RATE PORTFOLIO

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 6,162,104
<INVESTMENTS-AT-VALUE> 6,364,142
<RECEIVABLES> 38,115
<ASSETS-OTHER> 29
<OTHER-ITEMS-ASSETS> 6,993
<TOTAL-ASSETS> 6,409,279
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 33,855
<TOTAL-LIABILITIES> 33,855
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 6,187,188
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (2,855)
<ACCUMULATED-NET-GAINS> (10,947)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 202,038
<NET-ASSETS> 6,375,424
<DIVIDEND-INCOME> 407,101
<INTEREST-INCOME> 9,227
<OTHER-INCOME> 0
<EXPENSES-NET> 42,294
<NET-INVESTMENT-INCOME> 374,034
<REALIZED-GAINS-CURRENT> (14,389)
<APPREC-INCREASE-CURRENT> (25,781)
<NET-CHANGE-FROM-OPS> 333,864
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (375,605)
<DISTRIBUTIONS-OF-GAINS> (63,800)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 527,348
<NUMBER-OF-SHARES-REDEEMED> (132,937)
<SHARES-REINVESTED> 438,576
<NET-CHANGE-IN-ASSETS> 727,446
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 24,168
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 95,705
<AVERAGE-NET-ASSETS> 6,041,947
<PER-SHARE-NAV-BEGIN> 26.44
<PER-SHARE-NII> 1.54
<PER-SHARE-GAIN-APPREC> (0.12)
<PER-SHARE-DIVIDEND> 1.42
<PER-SHARE-DISTRIBUTIONS> (1.89)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 25.97
<EXPENSE-RATIO> 0.70
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>