EQUI SELECT SERIES TRUST, 497, 1996-02-22

EQUI SELECT SERIES TRUST
497, 1996-02-22

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EQUI-SELECT SERIES TRUST
699 WALNUT STREET
DES MOINES, IOWA 50309

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Equi-Select Series Trust (the "Trust") is an open-end, series management
investment company which
currently offers shares of beneficial interest of ten series (the "Portfolios"),
each of which has a different investment objective and represents the entire
interest in a separate portfolio of investments. These Portfolios are currently
available to the public only through certain variable annuity contracts ("VA
Contracts") issued by Equitable Life Insurance Company of Iowa ("Life Company").
This Prospectus contains information pertaining to the Research Portfolio, Total
Return Portfolio and OTC Portfolio which are the only Portfolios of the Trust
offered under the VA Contracts described in the accompanying Life Company VA
Contract Prospectus.

This Prospectus sets forth concisely the information about the Trust that a
prospective investor should know before investing. Please read it carefully and
retain it for future reference. A Statement of Additional Information ("SAI")
dated May 1, 1995 is available without charge upon request and may be obtained
by calling the Life Company at (800) 648-6810 or by writing to the Life Company,
P.O. Box 9271, Des Moines, Iowa 50306-9271. Some of the discussions contained in
this Prospectus refer to the more detailed descriptions contained in the SAI,
which is incorporated by reference into this Prospectus and has been filed with
the Securities and Exchange Commission.

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

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.

PROSPECTUS DATED MAY 1, 1995
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TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY............................................................................... 1
The Trust........................................................................... 1
Investment Adviser and Sub-Adviser.................................................. 1
The Portfolios...................................................................... 1
Investment Risks.................................................................... 2
Sales and Redemptions............................................................... 2
FINANCIAL HIGHLIGHTS.................................................................. 3
Equi-Select Series Trust............................................................ 3
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS.................................. 5
OTC Portfolio.................................................................... 5
Research Portfolio............................................................... 7
Total Return Portfolio........................................................... 9
MANAGEMENT OF THE TRUST............................................................... 11
Investment Adviser.................................................................. 11
Advisory Fee Waiver and Expense Cap................................................. 12
Expenses of the Trust............................................................... 12
Sub-Adviser......................................................................... 12
Sub-Advisory Fee Waiver............................................................. 13
SALES AND REDEMPTIONS................................................................. 13
NET ASSET VALUE....................................................................... 14
TAX STATUS, DIVIDENDS, AND DISTRIBUTIONS.............................................. 14
ADDITIONAL INFORMATION................................................................ 15
APPENDIX.............................................................................. A-1
</TABLE>

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SUMMARY

THE TRUST

The Trust is an open-end management investment company established as a
Massachusetts business trust under a Declaration of Trust dated May 11, 1994.
Each Portfolio issues a separate class of shares. The Declaration of Trust
permits the Trustees to issue an unlimited number of full or fractional shares
of each class of stock.

Each Portfolio has distinct investment objectives and policies. (See
"Investment Objectives and Policies of the Portfolios.") Additional Portfolios
may be added to the Trust in the future. Only shares of the Research, Total
Return and OTC Portfolios are offered herein. (The Research, Total Return and
OTC Portfolios may be referred to herein as "the Portfolios".)

INVESTMENT ADVISER AND SUB-ADVISER

Subject to the authority of the Board of Trustees of the Trust, Equitable
Investment Services, Inc. (the "Adviser") serves as the Trust's investment
adviser and has responsibility for the overall management of the investment
strategies and policies of the Portfolios. The Adviser has engaged Massachusetts
Financial Services Company as a Sub-Adviser to make investment decisions and
place orders for the Portfolios. For additional information concerning the
Adviser and the Sub-Adviser, including a description of advisory and
sub-advisory fees, see "Management of the Trust."

THE PORTFOLIOS

OTC PORTFOLIO. The primary investment objective of the OTC Portfolio is to
seek to obtain long-term growth of capital. The Portfolio seeks to achieve this
objective by investing at least 65% of its assets, under normal circumstances,
in securities principally traded on the over-the-counter (OTC) securities
market. The Portfolio is intended for investors who understand and are willing
to accept the risks entailed in seeking long-term growth of capital. The
Portfolio may invest 10% or more of its total assets in foreign securities (not
including American Depositary Receipts ("ADRs"); however, under normal market
conditions, the Portfolio expects to invest less than 35% of its total assets in
foreign securities. The Portfolio may invest up to 10% of its total assets in
emerging markets or countries with limited or developing capital markets. (See
"Appendix -- Foreign Investments" and the SAI for a discussion of the risks
involved in foreign investing.) The Portfolio may invest a portion of its assets
in lower-grade corporate debt securities commonly known as "junk bonds."
Investors should be aware that such investments involve a significant degree of
risk. (See "Appendix -- Lower-Rated Securities" and the SAI for a discussion of
the risks involved in investing in lower-rated securities.)

RESEARCH PORTFOLIO. The Research Portfolio seeks to provide long-term
growth of capital and future income by investing a substantial portion of its
assets in common stocks or securities convertible into common stocks of
companies believed to possess better than average prospects for long-term
growth. A smaller proportion of the assets may be invested in bonds, short-term
obligations, preferred stocks or common stocks whose principal characteristic is
income production rather than growth. The Portfolio may invest up to 20% (and
generally expects to invest between 10% and 20%) of its total assets in foreign
securities (not including ADRs). (See "Appendix -- Foreign Investments" and the
SAI for a discussion of the risks involved in foreign investing.) The Portfolio
may invest up to 10% of its assets in lower-grade corporate debt securities
commonly known as "junk bonds." Investors should be aware that such investments
involve a significant degree of risk. (See "Appendix -- Lower-Rated Securities"
and the SAI for a discussion of the risks involved in investing in lower-rated
securities.)

TOTAL RETURN PORTFOLIO. The Total Return Portfolio primarily seeks to
obtain above-average income (compared to a portfolio entirely invested in equity
securities) consistent with the prudent employment of capital. The Portfolio's
secondary objective is to take advantage of opportunities for growth of capital
and income. Generally, at least 40% of the Portfolio's assets will be invested
in equity securities, which include: common and preferred stocks; securities
such as bonds, warrants or rights that are convertible into stock; and

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depository receipts for those securities. The Portfolio may invest up to 20%
(and generally expects to invest between 10% and 20%) of its total assets in
foreign securities (not including ADRs). (See "Appendix -- Foreign Investments"
and the SAI for a discussion of the risks involved in foreign investing.) The
Portfolio may invest a portion of its assets in lower-grade corporate debt
securities commonly known as "junk bonds." Investors should be aware that such
investments involve a significant degree of risk. (See "Appendix -- Lower-Rated
Securities" and the SAI for a discussion of the risks involved in investing in
lower-rated securities.)

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

INVESTMENT RISKS

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

SALES AND REDEMPTIONS

The Trust sells shares only to the separate accounts of the Life Company as
a funding vehicle for the VA Contracts offered by the Life Company. No fee is
charged upon the sale or redemption of the Trust's shares. Expenses of the Trust
are passed through to the separate accounts of the Life Company, and therefore,
are ultimately borne by VA Contract owners. In addition, other fees and expenses
are assessed by the Life Company at the separate account level. (See the
Prospectus for the VA Contract for a description of all fees and charges
relating to the VA Contract.)

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FINANCIAL HIGHLIGHTS
EQUI-SELECT SERIES TRUST

The following tables include selected data, derived from the Financial
Statements, for a share outstanding throughout the period shown for each of the
Research, Total Return and OTC Portfolios. The tables should be read in
conjunction with the Financial Statements and notes thereto included in the
Trust's Annual Report to Shareholders which are included in the Statement of
Additional Information in reliance upon the report of Ernst & Young LLP,
independent auditors.

Further information about the performance of the Trust is contained in the
Trust's December 31, 1994 Annual Report which may be obtained without charge by
calling the Life Company at (800) 344-6864.

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EQUI-SELECT SERIES TRUST
FINANCIAL HIGHLIGHTS
For a share of stock outstanding for the period October 4, 1994
(commencement of investment operations) through December 31, 1994
<TABLE>
<CAPTION>
NET
REALIZED AND
NET ASSET UNREALIZED TOTAL DISTRIBUTIONS NET ASSET
VALUE AT NET GAIN (LOSS) FROM FROM NET NET VALUE AT
BEGINNING INVESTMENT ON INVESTMENT INVESTMENT CAPITAL GAINS TOTAL END OF
OF PERIOD INCOME(1) INVESTMENTS OPERATIONS INCOME DISTRIBUTIONS DISTRIBUTION PERIOD
--------- ---------- ------------ ---------- ------------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OTC Portfolio $ 10.00 $ 0.00 $ 0.36 $ 0.36 $ 0.00 $0.00 $ 0.00 $ 10.36
Research Portfolio 10.00 0.09 (0.41) (0.32) (0.09) 0.00 (0.09) 9.59
Total Return
Portfolio 10.00 0.09 (0.24) (0.15) (0.09) 0.00 (0.09) 9.76

<CAPTION>
RATIO OF
OPERATING RATIO OF NET
EXPENSES INVESTMENT
NET ASSETS TO AVERAGE INCOME TO PORTFOLIO
TOTAL END NET ASSETS AVERAGE TURNOVER
RETURN(2) OF PERIOD (1)(3) NET ASSETS(3) RATE(4)
--------- ---------- ---------- ------------- --------
<S> <C> <C> <C> <C> <C>
OTC Portfolio 3.59% $1,695,685 0.75% 0.16% 6%
Research Portfolio (3.22) 1,626,521 0.75 4.65 85
Total Return
Portfolio (1.47) 1,298,365 0.75 4.58 45
</TABLE>

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(1) Net investment income is after reimbursement of certain fees and expenses by
Equitable Investment Services, Inc. ("EISI") (See Note 3 to the financial
statements). Had EISI not undertaken to reimburse expenses related to the
Portfolios, net investment income (loss) per share and ratio of operating
expenses to average net assets would have been as follows: OTC Portfolio,
$(0.12) and 7.10%, Research Portfolio, $(0.04) and 7.48%, and Total Return
Portfolio, $(0.06) and 8.31%.
(2) Total return figures are not annualized. Total return does not reflect
expenses that apply to the separate account or related variable insurance
contracts and inclusion of these charges would result in reducing the total
return figures for the period shown.
(3) Annualized.
(4) Portfolio turnover rates are not annualized.

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INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS

Each Portfolio of the Trust has a different investment objective or
objectives which it pursues through separate investment policies as described
below. The differences in objectives and policies among the Portfolios can be
expected to affect the return of each Portfolio and the degree of market and
financial risk to which each Portfolio is subject. An investment in a single
Portfolio should not be considered a complete investment program. The investment
objective(s) and policies of each Portfolio, unless otherwise specifically
stated, are non-fundamental and may be changed by the Trustees of the Trust
without a vote of the shareholders. Such changes may result in a Portfolio
having an investment objective(s) which differs from that which an investor may
have considered at the time of investment. There is no assurance that any
Portfolio will achieve its objective(s). United States Treasury Regulations
applicable to portfolios that serve as the funding vehicles for variable annuity
and variable life insurance contracts generally require that such portfolios
invest no more than 55% of the value of their assets in one investment, 70% in
two investments, 80% in three investments, and 90% in four investments. The
Portfolios intend to comply with the requirements of these Regulations.

In order to comply with regulations which may be issued by the U.S.
Treasury, the Trust may be required to limit the availability or change the
investment policies of one or more Portfolios or to take steps to liquidate one
or more Portfolios. The Trust will not change any fundamental investment policy
of a Portfolio without a vote of shareholders of that Portfolio.

Except as otherwise noted herein, if the securities rating of a debt
security held by a Portfolio declines below the minimum rating for securities in
which the Portfolio may invest, the Portfolio will not be required to dispose of
the security, but the Portfolio's Sub-Adviser will consider whether continued
investment in the security is consistent with the Portfolio's investment
objective.

In implementing its investment objectives and policies, each Portfolio uses
a variety of instruments, strategies and techniques which are described in more
detail in the Appendix and the SAI. With respect to each Portfolio's investment
policies, use of the term "primarily" means that under normal circumstances, at
least 65% of such Portfolio's assets will be invested as indicated. A
description of the ratings systems used by the following nationally recognized
statistical rating organizations ("NRSROs") is also contained in the SAI:
Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Corporation
("S&P"), Duff & Phelps, Inc. ("Duff"), Fitch Investors Service, Inc. ("Fitch"),
Thomson Bankwatch, Inc., IBCA Limited and IBCA Inc. New instruments, strategies
and techniques, however, are evolving continually and the Trust reserves
authority to invest in or implement them to the extent consistent with its
investment objectives and policies. If new instruments, strategies or techniques
would involve a material change to the information contained herein, they will
not be purchased or implemented until this Prospectus is appropriately
supplemented.

OTC PORTFOLIO

The investment objective of the OTC Portfolio is to seek to obtain
long-term growth of capital.

Investment Policies. The Portfolio seeks to achieve its objective by
investing at least 65% of its assets, under normal circumstances, in securities
principally traded on the over-the-counter (OTC) securities market. OTC
securities tend to be securities of companies which are smaller or newer than
those listed on the New York or American Stock Exchanges. Issuers of the
securities of companies which are traded on the OTC market include, among
others, industrial corporations, financial service institutions, public
utilities, and transportation companies. OTC securities include both equity and
debt securities (including obligations of the U.S. government). The Portfolio
may also invest in securities of companies that are not traded on the OTC
securities market that represent opportunities for capital appreciation. The
Portfolio will seek to invest in companies that are undervalued relative to
present or future earnings, cash flow or book value. While the Portfolio intends
to invest primarily in equity securities, the Portfolio may also invest in fixed
income securities as described below. Equity securities include: common and
preferred stocks; securities such as bonds, warrants or rights that are
convertible into stock; and depositary receipts for those securities.

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The Portfolio will not purchase a security, under normal circumstances, if
it would result in less than 65% of its assets being invested in OTC securities
(the "65% limitation"). Securities that were principally traded on the OTC
securities market when purchased but which have since been listed on the New
York or American Stock Exchange or a foreign exchange will be considered to fall
within the Portfolio's 65% limitation for 12 months after the date the security
was listed on an exchange.

Debt securities of issuers in which the Portfolio may invest include all
types of long- or short-term debt obligations, such as bonds, debentures, notes
and commercial paper. Fixed income securities in which the Portfolio may invest
include securities in the lower rating categories of recognized rating agencies
(and comparable unrated securities). Fixed income securities in which the
Portfolio may invest also include zero coupon bonds, deferred interest bonds and
bonds on which the interest is payable in kind. Such investments involve certain
risks. See "Appendix -- Lower-Rated Securities" and the SAI for a discussion of
the risks involved in investing in lower-rated securities.

Investing in securities traded on the OTC securities market can involve
greater risk than is customarily associated with investing in securities traded
on the New York or American Stock Exchanges since OTC securities are generally
securities of companies which are smaller or newer than those listed on the New
York or American Stock Exchange. For example, these companies often have limited
product lines, markets, or financial resources, may be dependent for management
on one or a few key persons, and can be more susceptible to losses. Also, their
securities may be thinly traded (and therefore have to be sold at a discount
from current prices or sold in small lots over an extended period of time), may
be followed by fewer investment research analysts and may be subject to wider
price swings and thus may create a greater risk of loss than securities of
larger capitalization or established companies. Shares of the Portfolio,
therefore, are subject to greater fluctuation in value than shares of a
conservative equity fund or of a growth fund which invests entirely in proven
growth stocks. Therefore, the Portfolio is intended for long-term investors who
understand and can accept the risks entailed in seeking long-term growth of
capital. The Portfolio is not meant to provide a vehicle for those who wish to
play short-term swings in the stock market. Accordingly, an investment in shares
of the Portfolio should not be considered a complete investment program. Each
prospective purchaser should take into account his investment objectives as well
as his other investments when considering the purchase of shares of the
Portfolio.

When the Sub-Adviser believes that investing for defensive purposes is
appropriate, such as during periods of unusual market conditions, part or all of
the Portfolio's assets may be temporarily invested in cash (including foreign
currency) or cash equivalent short-term obligations including, but not limited
to, certificates of deposit, commercial paper, short-term notes, obligations
issued or guaranteed by the U.S. government or any of its agencies or
instrumentalities and repurchase agreements.

The Portfolio may invest 10% or more of its total assets in foreign
securities (not including ADRs); however, under normal market conditions, the
Portfolio expects to invest less than 35% of its total assets in foreign
securities. The Portfolio may invest up to 10% of its total assets in emerging
markets or countries with limited or developing capital markets. Investing in
securities of foreign issuers generally involves risks not ordinarily associated
with investing in securities of domestic issuers. (See "Appendix -- Foreign
Investments" and the SAI for a discussion of the risks involved in foreign
investing.)

The Portfolio may invest in ADRs which are certificates issued by a U.S.
depository (usually a bank) and represent a specified quantity of shares of an
underlying non-U.S. stock on deposit with a custodian bank as collateral.
Although ADRs are issued by a U.S. depository, they are subject to many of the
risks of foreign securities such as changes in exchange rates and more limited
information about foreign issuers.

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liquidity of Rule 144A securities. The Board, however, will retain sufficient
oversight and be ultimately responsible for the determinations. The Board will
carefully monitor the Portfolio's investments in Rule 144A securities, focusing
on factors such as, among others, valuation, liquidity and availability of
information. This investment practice could have the effect of increasing the
level of illiquidity in a Portfolio to the extent that qualified institutional
buyers become for a time uninterested in purchasing Rule 144A securities held in
the investment portfolio.

The Portfolio is classified as a "non-diversified" investment company. As a
result, the Portfolio is limited as to the percentage of its assets which may be
invested in the securities of any one issuer only by its own investment
restrictions and the diversification requirements imposed by the Internal
Revenue Code of 1986, as amended. U.S. Government securities which are generally
considered free of credit risk and are assured as to payment of principal and
interest if held to maturity are not subject to any investment limitation. Since
the Portfolio may invest a relatively high percentage of its assets in a limited
number of issuers, the Portfolio may be more susceptible to any single economic,
political or regulatory occurrence and to the financial conditions of the
issuers in which it invests. For these reasons, an investment in shares of the
Portfolio should not be considered to constitute a complete investment program.

While it is not generally the Portfolio's policy to invest or trade for
short-term profits, the Portfolio may dispose of a portfolio security whenever
the Sub-Adviser is of the opinion that such security no longer has an
appropriate appreciation potential or when another security appears to offer
relatively greater appreciation potential. Portfolio changes are made without
regard to the length of time a security has been held, or whether a sale would
result in a profit or loss. Therefore, the rate of portfolio turnover is not a
limiting factor when a change in the portfolio is otherwise appropriate. It is
anticipated that the Portfolio's portfolio turnover rate will not exceed 100%
during the Portfolio's first fiscal year. (See "Portfolio Turnover" in the SAI.)
The portfolio turnover rate of the Portfolio for the period ended December 31,
1994 is set forth herein under "Financial Highlights."

Additional Portfolio Investments and Transactions. The Portfolio may enter
into repurchase agreements to earn additional income on available cash or as a
temporary defensive measure. The Portfolio may seek to increase its income by
lending portfolio securities. The Portfolio may purchase securities on a "when
issued" or on a "forward delivery" basis, which means that the securities will
be delivered to the Portfolio at a future date usually beyond customary
settlement time.

The Portfolio may invest in indexed securities whose value is linked to
foreign currencies, commodities, indices, or other financial indicators. The
Portfolio may enter into mortgage "dollar roll" transactions with selected banks
and broker-dealers.

The Portfolio also may purchase restricted securities, corporate
asset-backed securities, options on securities, options on stock indices,
options on foreign currencies, futures contracts, options on futures contracts
and forward foreign currency exchange contracts.

All of the Portfolio investments and transactions described in this section
are described in greater detail in the Appendix and the SAI.

RESEARCH PORTFOLIO

The investment objective of the Research Portfolio is to provide long-term
growth of capital and future income.

The portfolio securities of the Research Portfolio are selected by the
investment research analysts in the Equity Research Group of the Sub-Adviser.
The Portfolio's assets are allocated to economic sectors (e.g. health care,
technology, consumer staples), and then to industry groups within these sectors
(e.g. within the health care sector, the managed care, drug and medical supply
industries). The allocation by sector and industry is determined by the analysts
acting together as a group. Individual analysts are then responsible for
selecting what they view as the best securities for capital appreciation and
future income within their assigned industries. While the research analysts are
overseen by the Sub-Adviser's Director of Equity Research, investment decisions
are made by the analysts.

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Investment Policies. The Portfolio's policy is to invest a substantial
proportion of its assets in the common stocks or securities convertible into
common stocks of companies believed to possess better than average prospects for
long-term growth. A smaller proportion of the assets may be invested in bonds,
short-term obligations, preferred stocks or common stocks whose principal
characteristic is income production rather than growth. Such securities may also
offer opportunities for growth of capital as well as income. In the case of both
growth stocks and income issues, emphasis is placed on the selection of
progressive, well-managed companies. The Portfolio's debt investments, if any,
may consist of "investment grade" securities (rated Baa or better by Moody's) or
BBB or better by S&P or Fitch, and, with respect to no more than 10% of its
assets, securities in the lower rated categories (rated Ba or lower by Moody's
or BB or lower by S&P or Fitch), or securities which the Sub-Adviser believes to
be of similar quality to these lower rated securities (commonly known as "junk
bonds"). For a description of bond ratings, see the SAI. It is not the
Portfolio's policy to rely exclusively on ratings issued by established credit
rating agencies but rather to supplement such ratings with the Sub-Adviser's own
independent and ongoing review of credit quality. The Portfolio's achievement of
its investment objective may be more dependent on the Sub-Adviser's own credit
analysis than in the case of a fund investing in primarily higher quality bonds.
From time to time, the Portfolio's management will exercise its judgment with
respect to the proportions invested in growth stocks, income-producing
securities or cash (including foreign currency) and cash equivalents depending
on its view of their relative attractiveness.

The Portfolio may enter into repurchase agreements in order to earn
additional income on available cash or as a temporary defensive measure. The
Portfolio may make loans of its fixed income portfolio securities. (See
"Appendix" for a further description of these investments.)

The Portfolio may invest in American Depositary Receipts ("ADRs") which are
certificates issued by a U.S. depository (usually a bank) and represent a
specified quantity of shares of an underlying non-U.S. stock on deposit with a
custodian bank as collateral. Although ADRs are issued by a U.S. depository,
they are subject to many of the risks of foreign securities such as changes in
exchange rates and more limited information about foreign issuers.

The Portfolio may invest up to 20% (and generally expects to invest between
10% and 20%) of its total assets in foreign securities (not including ADRs).
Investing in securities of foreign issuers generally involves risks not
ordinarily associated with investing in securities of domestic issuers. (See
"Appendix -- Foreign Investments" and the SAI for a discussion of the risks
involved in foreign investing.)

As described above, the Portfolio may invest in fixed income (i.e., debt)
securities rated Baa by Moody's or BBB by S&P or Fitch and comparable unrated
securities. These securities, while normally exhibiting adequate protection
parameters, have speculative characteristics and changes in economic conditions
or other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than in the case of higher grade fixed income
securities. (See "Appendix -- Lower-Rated Securities" and the SAI for a
discussion of the risks involved in investing in lower-rated securities.)

The Portfolio may also purchase securities that are not registered under
the Securities Act of 1933 ("1933 Act") ("restricted securities"), including
those that can be offered and sold to "qualified institutional buyers" under
Rule 144A under the 1933 Act ("Rule 144A securities"). The Trust's Board of
Trustees determines, based upon a continuing review of the trading markets for a
specific Rule 144A security, whether such security is illiquid and thus subject
to the Portfolio's limitation on investing not more than 10% of its net assets
in illiquid investments, or liquid and thus not subject to such limitation. The
Board of Trustees has adopted guidelines and has delegated to the Sub-Adviser
the daily function of determining and monitoring the liquidity of Rule 144A
securities. The Board, however, will retain sufficient oversight and be
ultimately responsible for the determinations. The Board will carefully monitor
the Portfolio's investments in Rule 144A securities, focusing on such important
factors, among others, as valuation, liquidity and availability of information.
This investment practice could have the effect of increasing the level of
illiquidity in the Portfolio to the extent that qualified institutional buyers
become for a time uninterested in purchasing Rule 144A securities held in the
investment portfolio. Subject to the Portfolio's 10% limitation on investments
in illiquid investments and subject to the diversification requirements of the
Internal Revenue Code of 1986, as amended (the "Code"), the Portfolio may also
invest in restricted securities that may not be sold under Rule 144A,

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which presents certain risks. As a result, the Portfolio might not be able to
sell these securities when the Sub-Adviser wishes to do so, or might have to
sell them at less than fair value. In addition, market quotations are less
readily available. Therefore, judgment may at times play a greater role in
valuing these securities than in the case of unrestricted securities.

While it is not generally the Portfolio's policy to invest or trade for
short-term profits, the Portfolio may dispose of a portfolio security whenever
the Sub-Adviser is of the opinion that such security no longer has an
appropriate appreciation potential or when another security appears to offer
relatively greater appreciation potential. Portfolio changes are made without
regard to the length of time a security has been held, or whether a sale would
result in a profit or loss. Therefore, the rate of portfolio turnover is not a
limiting factor when a change in the portfolio is otherwise appropriate. It is
anticipated that the Portfolio's portfolio turnover rate will not exceed 200%
during the Portfolio's first fiscal year. (See "Portfolio Turnover" in the SAI.)
The portfolio turnover rate of the Portfolio for the period ended December 31,
1994 is set forth herein under "Financial Highlights."

TOTAL RETURN PORTFOLIO

The primary investment objective of the Total Return Portfolio is to obtain
above-average income (compared to a portfolio entirely invested in equity
securities) consistent with the prudent employment of capital. While current
income is the primary objective, the Portfolio believes that there should also
be a reasonable opportunity for growth of capital and income, since many
securities offering a better than average yield may also possess growth
potential. Thus, in selecting securities for its portfolio, the Portfolio
considers each of these objectives. Generally, at least 40% of the Portfolio's
assets are invested in equity securities.

Investment Policies. The Portfolio's policy is to invest in a broad list of
securities, including short-term obligations. The list may be diversified not
only by companies and industries, but also by type of security. Fixed income
securities and equity securities (which include: common and preferred stocks;
securities such as bonds, warrants or rights that are convertible into stock;
and depository receipts for those securities) may be held by the Portfolio. Some
fixed income securities may also have a call on common stock by means of a
conversion privilege or attached warrants. The Portfolio may vary the percentage
of assets invested in any one type of security in accordance with the
Sub-Adviser's interpretation of economic and money market conditions, fiscal and
monetary policy and underlying security values. The Portfolio's debt investments
may consist of both "investment grade" securities (rated Baa or better by
Moody's or BBB or better by S&P or Fitch) and securities that are unrated or are
in the lower rating categories (rated Ba or lower by Moody's or BB or lower by
S&P or Fitch) (commonly known as "junk bonds") including up to 20% of its assets
in nonconvertible fixed income securities that are in these lower rating
categories and comparable unrated securities. Generally, most of the Portfolio's
long-term debt investments will consist of "investment grade" securities. See
the SAI for a description of these ratings. It is not the Portfolio's policy to
rely exclusively on ratings issued by established credit rating agencies but
rather to supplement such ratings with the Sub-Adviser's own independent and
ongoing review of credit quality.

U.S. Government Securities. The Portfolio may also invest in U.S.
government securities, including: (1) U.S. Treasury obligations, which differ
only in their interest rates, maturities and times of issuance: U.S. Treasury
bills (maturities of one year or less); U.S. Treasury notes (maturities of one
to ten years); and U.S. Treasury bonds (generally maturities of greater than ten
years), all of which are backed by the full faith and credit of the U.S.
Government; and (2) obligations issued or guaranteed by U.S. Government agencies
or instrumentalities, some of which are backed by the full faith and credit of
the U.S. Treasury, e.g., direct pass-through certificates of GNMA; some of which
are supported by the right of the issuer to borrow from the U.S. Government,
e.g., obligations of Federal Home Loan Banks; and some of which are backed only
by the credit of the issuer itself, e.g., obligations of the Student Loan
Marketing Association.

Mortgage Pass-Through Securities. The Portfolio may invest in mortgage
pass-through securities. Mortgage pass-through securities are securities
representing interests in "pools" of mortgage loans. Monthly payments of
interest and principal by the individual borrowers on mortgages are passed
through to the holders of the securities (net of fees paid to the issuer or
guarantor of the securities) as the mortgages in the

9
<PAGE> 12

underlying mortgage pools are paid off. Payment of principal and interest on
some mortgage pass-through securities (but not the market value of the
securities themselves) may be guaranteed by the full faith and credit of the
U.S. government (in the case of securities guaranteed by GNMA); or guaranteed by
U.S. government-sponsored corporations (such as FNMA or FHLMC, which are
supported only by the discretionary authority of the U.S. government to purchase
the agency's obligations). Mortgage pass-through securities may also be issued
by non-governmental issuers (such as commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers and other
secondary market issuers). See the Appendix for a further discussion of these
securities.

Zero Coupon Bonds, Deferred Interest Bonds and PIK Bonds. Fixed income
securities that the Portfolio may invest in also include zero coupon bonds,
deferred interest bonds and bonds on which the interest is payable in kind ("PIK
bonds"). Zero coupon and deferred interest bonds are debt obligations which are
issued or purchased at a significant discount from face value. The discount
approximates the total amount of interest the bonds will accrue and compound
over the period until maturity or the first interest payment date at a rate of
interest reflecting the market rate of the security at the time of issuance.
While zero coupon bonds do not require the periodic payment of interest,
deferred interest bonds provide that the issuer thereof may, at its option, pay
interest on such bonds in cash or in the form of additional debt obligations.
Such investments benefit the issuer by mitigating its need for cash to meet debt
service, but also require a higher rate of return to attract investors who are
willing to defer receipt of such cash. Such investments may experience greater
volatility in market value due to changes in interest rates than debt
obligations which make regular payments of interest. The Portfolio will accrue
income on such investments for tax and accounting purposes, as required, which
is distributable to shareholders and which, because no cash is received at the
time of accrual, may require the liquidation of other portfolio securities to
satisfy the Portfolio's distribution obligations.

American Depositary Receipts. The Portfolio may invest in American
Depositary Receipts ("ADRs") which are certificates issued by a U.S. depository
(usually a bank), that represent a specified quantity of shares of an underlying
non-U.S. stock on deposit with a custodian bank as collateral. Although ADRs are
issued by a U.S. depository, they are subject to many of the risks of foreign
securities such as changes in exchange rates and more limited information about
foreign issuers.

The Portfolio may invest up to 20% (and generally expects to invest between
10% and 20%) of its total assets in foreign securities (including investments in
emerging markets or countries with limited or developing capital markets) (not
including ADRs). Investing in securities of foreign issuers generally involves
risks not ordinarily associated with investing in securities of domestic
issuers. (See "Appendix -- Foreign Investments" and the SAI for a discussion of
the risks involved in foreign investing.)

In order to protect the value of the Portfolio's investments from interest
rate fluctuations, the Portfolio may enter into various hedging transactions,
such as interest rate swaps, and the purchase or sale of interest rate caps,
floors and collars. (See the SAI for information relating to these transactions
including related risks.)

The Portfolio may also purchase securities that are not registered under
the 1933 Act ("restricted securities"), including those that can be offered and
sold to "qualified institutional buyers" under Rule 144A under the 1933 Act
("Rule 144A securities"). The Trust's Board of Trustees determines, based upon a
continuing review of the trading markets for a specific Rule 144A security,
whether such security is illiquid and thus subject to the Portfolio's limitation
on investing not more than 15% of its net assets in illiquid investments, or
liquid and thus not subject to such limitation. The Board of Trustees will adopt
guidelines and delegate to the Sub-Adviser the daily function of determining and
monitoring the liquidity of Rule 144A securities. The Board, however, will
retain sufficient oversight and be ultimately responsible for the
determinations. The Board will carefully monitor the Portfolio's investments in
Rule 144A securities, focusing on such important factors, among others, as
valuation, liquidity and availability of information. This investment practice
could have the effect of increasing the level of illiquidity in a Portfolio to
the extent that qualified institutional buyers become for a time uninterested in
purchasing Rule 144A securities held in the investment portfolio. Subject to the
Portfolio's 15% limitation on investments in illiquid investments and subject to
the diversification requirements of the Code, the Portfolio may also invest in
restricted securities

10
<PAGE> 13

that may not be sold under Rule 144A, which presents certain risks. As a result,
the Portfolio might not be able to sell these securities when the Sub-Adviser
wishes to do so, or might have to sell them at less than fair value. In
addition, market quotations are less readily available. Therefore, judgment may
at times play a greater role in valuing these securities than in the case of
unrestricted securities.

Additional Portfolio Investments and Transactions. The Portfolio may enter
into repurchase agreements to earn additional income on available cash or as a
temporary defensive measure. The Portfolio may seek to increase its income by
lending portfolio securities. The Portfolio may purchase securities on a "when
issued" or on a "delayed delivery" basis, which means that the securities will
be delivered to the Portfolio at a future date usually beyond customary
settlement time.

The Portfolio may invest in indexed securities whose value is linked to
foreign currencies, indices, or other financial indicators. The Portfolio may
enter into mortgage "dollar roll" transactions with selected banks and
broker-dealers. The Portfolio may invest a portion of its assets in loan
participations and other direct indebtedness.

All of the Portfolio investments and transactions described in this section
are described in greater detail in the Appendix and the SAI.

MANAGEMENT OF THE TRUST

INVESTMENT ADVISER

Under an Investment Advisory Agreement dated October 1, 1994, Equitable
Investment Services, Inc., 699 Walnut Street, Des Moines, Iowa 50309 (the
"Adviser"), manages the business and affairs of the Portfolios and the Trust,
subject to the control of the Trustees.

The Adviser is an Iowa corporation which was incorporated in 1969. The
Adviser is engaged in the business of providing investment advice to affiliated
insurance companies.

Under the Investment Advisory Agreement, the Adviser is obligated to
formulate a continuing program for the investment of the assets of each
Portfolio of the Trust in a manner consistent with each Portfolio's investment
objectives, policies and restrictions and to determine from time to time
securities to be purchased, sold, retained or lent by the Trust and implement
those decisions. The Investment Advisory Agreement also provides that the
Adviser shall manage the Trust's business and affairs and shall provide such
services required for effective administration of the Trust as are now provided
by employees or other agents engaged by the Trust. The Investment Advisory
Agreement further provides that the Adviser shall furnish the Trust with office
space and necessary personnel, pay ordinary office expenses, pay all executive
salaries of the Trust and furnish, without expense to the Trust, the services of
such members of its organization as may be duly elected officers or Trustees of
the Trust. The Investment Advisory Agreement provides that Adviser may retain
sub-advisers, at the Adviser's own cost and expense, for the purpose of making
investment recommendations and research information available to the Trust.

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<PAGE> 14

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

<TABLE>
<CAPTION>
ADVISORY FEE
(Annual Rate based on average daily net assets
PORTFOLIO of each Portfolio)
- ------------------------------ ------------------------------------------------
<S> <C>
OTC .80% of first $300 million
.55% of average net assets over and above $300
million
Research .80% of first $300 million
.55% of average net assets over and above $300
million
Total Return .80% of first $300 million
.55% of average net assets over and above $300
million
</TABLE>

ADVISORY FEE WAIVER AND EXPENSE CAP

Adviser has agreed to waive its advisory fee for each of the Portfolios for
the initial twelve (12) months of each Portfolio's investment operations (until
October 6, 1995) or until the net assets of a Portfolio equal or exceed $25
million, whichever is earlier. In addition, Adviser has undertaken to bear all
operating expenses of each Portfolio, excluding the compensation of the Adviser,
that exceed .75% of each Portfolio's average daily net assets. This undertaking
is subject to termination at any time without notice to shareholders. For the
period ended December 31, 1994, for all Portfolios of the Trust the advisory fee
waivers amounted to $43,970 and Adviser had reimbursed the Trust $159,015 for
expenses in excess of the voluntary expense limitations for that same period.

EXPENSES OF THE TRUST

The organizational expenses of the Trust are being amortized on a
straight-line basis over a period of five years (beginning with the commencement
of operations). If any of the initial shares (purchased by the Life Company
through its contribution of the initial "seed money" to the Trust totaling
$10,000 per Portfolio) are redeemed during the amortization period by the holder
thereof, the redemption proceeds will be reduced by any unamortized
organizational expenses in the same proportion as the number of initial shares
being redeemed bears to the number of initial shares outstanding at the time of
the redemption.

SUB-ADVISER

In accordance with each Portfolio's investment objective and policies and
under the supervision of Adviser and the Trust's Board of Trustees, the
Sub-Adviser is responsible for the day to day investment management of the
Portfolio, makes investment decisions for the Portfolio and places orders on
behalf of the Portfolio to effect the investment decisions made as provided in a
Sub-Advisory Agreement among the Sub-Adviser, the Adviser and the Trust.

MASSACHUSETTS FINANCIAL SERVICES COMPANY ("MFS"), 500 Boylston Street,
Boston, Massachusetts 02116, is the Sub-Adviser for the OTC Portfolio, the
Research Portfolio and the Total Return Portfolio of the Trust.

MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the United States, Massachusetts Investors
Trust. Net assets under the management of the MFS organization were
approximately $35 billion on behalf of approximately 1.6 million investor
accounts as of March 31, 1995. As of such date, the MFS organization managed
approximately $12 billion of assets in equity securities and $19.2 billion of
assets in fixed income securities. Approximately $2.9 billion of assets managed
by MFS are invested in securities of foreign issuers and non-U.S. dollar
denominated securities of U.S. issuers. MFS is a subsidiary of Sun Life
Assurance Company of Canada (U.S.) which in turn is a subsidiary of Sun Life
Assurance Company of Canada ("Sun Life"). The Directors of MFS are A. Keith
Brodkin, Jeffrey L. Shames, John R. Gardner, John D. McNeil and Arnold D. Scott.
Mr. Brodkin is the Chairman, Mr. Shames is the President

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<PAGE> 15

and Mr. Scott is the Secretary and a Senior Executive Vice President of MFS.
Messrs. McNeil and Gardner are the Chairman and the President, respectively, of
Sun Life. Sun Life, a mutual life insurance company, is one of the largest
international life insurance companies and has been operating in the U.S. since
1895, establishing a headquarters office in the U.S. in 1973. The executive
officers of MFS report to the Chairman of Sun Life.

John W. Ballen is the portfolio manager of MFS for the OTC Portfolio. Mr.
Ballen is a Senior Vice President of MFS and has been employed by MFS since
1984.

Kevin R. Parke is the portfolio manager of MFS for the Research Portfolio.
Mr. Parke is a Senior Vice President -- Investments of MFS and has been employed
by MFS since 1985.

Richard E. Dahlberg is the portfolio manager of MFS for the Total Return
Portfolio. Mr. Dahlberg is a Senior Vice President of MFS and has been employed
by MFS since 1968.

Under the terms of the Sub-Advisory Agreement, the Adviser shall pay to
MFS, as full compensation for services rendered under the Sub-Advisory Agreement
with respect to the OTC, Research and Total Return Portfolios, the following
annual fees:

<TABLE>
<S> <C>
OTC Portfolio .40% of first $300 million
.25% of average net assets over and above $300 million
Research Portfolio .40% of first $300 million
.25% of average net assets over and above $300 million
Total Return Portfolio .40% of first $300 million
.25% of average net assets over and above $300 million
</TABLE>

SUB-ADVISORY FEE WAIVER

In the same manner as the Adviser, the Sub-Adviser has agreed to waive its
sub-advisory fees due under the Sub-Advisory Agreement for the initial twelve
(12) months of each respective Portfolio's investment operations (until October
6, 1995) or until the net assets of a Portfolio equal or exceed $25 million,
whichever is earlier.

SALES AND REDEMPTIONS

The separate account of the Life Company places orders to purchase and
redeem shares of each Portfolio based on, among other things, the amount of
premium payments to be invested and surrender and transfer requests to be
effected on that day pursuant to the VA contracts issued by the Life Company.
Orders received by the Trust are effected on days on which the New York Stock
Exchange is open for trading, at the net asset value per share next determined
after receipt of the order. For orders received before 4:00 p.m. New York time,
such purchases and redemptions of shares of each Portfolio are effected at the
respective net asset values per share determined as of 4:00 p.m. New York time
on that day. See "Net Asset Value," below and "Determination of Net Asset Value"
in the Trust's SAI. Payment for redemptions will be made within seven days after
receipt of a redemption request in good order. No fee is charged the separate
account of the Life Company when it redeems Portfolio shares. The Trust may
suspend the sale of shares at any time and may refuse any order to purchase
shares.

The Trust may suspend the right of redemption of shares of any Portfolio
and may postpone payment for any period: (i) during which the New York Stock
Exchange is closed other than for customary weekend and holiday closings or
during which trading on the New York Stock Exchange is restricted; (ii) when the
Securities and Exchange Commission determines that a state of emergency exists
which makes the sale of portfolio securities or the determination of net asset
value not reasonably practicable; (iii) as the Securities and Exchange
Commission may by order permit for the protection of the security holders of the
Trust; or (iv) at any time when the Trust may, under applicable laws and
regulations, suspend payment on the redemption of its shares.

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<PAGE> 16

NET ASSET VALUE

Each Portfolio calculates the net asset value of a share by dividing the
total value of its assets, less liabilities, by the number of shares
outstanding. Shares are valued as of 4:00 p.m. New York time on each day the New
York Stock Exchange is open.

Because foreign securities are quoted in foreign currencies which will be
translated into U.S. dollars at the New York cable transfer rates or at such
other rates as the Trustees may determine in computing net asset value,
fluctuations in the value of such currencies in relation to the U.S. dollar will
affect the net asset value of shares of a Portfolio investing in foreign
securities even though there has not been any change in the local currency
values of such securities.

Performance information for the Portfolios may also be presented from time
to time in advertisements and sales literature. The Portfolios may advertise
several types of performance information. These are the "yield," "average annual
total return" and "aggregate total return". Each of these figures is based upon
historical results and is not necessarily representative of the future
performance of any Portfolio.

The yield of a Portfolio's shares is determined by annualizing net
investment income earned per share for a stated period (normally one month or
thirty days) and dividing the result by the net asset value per share at the end
of the valuation period. The average annual total return and aggregate total
return figures measure both the net investment income generated by, and the
effect of any realized or unrealized appreciation or depreciation of the
underlying investments in, the Portfolio's portfolio for the period in question,
assuming the reinvestment of all dividends. Thus, these figures reflect the
change in the value of an investment in a Portfolio's shares during a specified
period. Average annual total return will be quoted for at least the one, five
and ten year periods ending on a recent calendar quarter (or if such periods
have not yet elapsed, at the end of a shorter period corresponding to the life
of the Portfolio). Average annual total return figures are annualized and,
therefore, represent the average annual percentage change over the period in
question. Total return figures are not annualized and represent the aggregate
percentage or dollar value change over the period in question. For more
information regarding the computation of yield, average annual total return and
aggregate total return, see "Performance Information" in the SAI.

Any Portfolio performance information presented will also include
performance information for the insurance company separate accounts investing in
the Trust which will take into account insurance-related charges and expenses
under such insurance policies and contracts.

Advertisements concerning the Trust may from time to time compare the
performance of one or more Portfolios to various indices. Advertisements may
also contain the performance rankings assigned certain Portfolios or their
advisers by various publications and statistical services, including, for
example, SEI, Lipper Analytical Services Mutual Funds Survey, Lipper Variable
Insurance Products Performance Analysis Service, Morningstar, Intersec Research
Survey of Non-U.S. Equity Fund Returns, Frank Russell International Universe,
Sylvia Porter Personal Finance, and Financial Services Week. Any such
comparisons or rankings are based on past performance and the statistical
computation performed by publications and services, and are not necessarily
indications of future performance. Because the Portfolios are managed investment
vehicles investing in a wide variety of securities, the securities owned by a
Portfolio will not match those making up an index.

TAX STATUS, DIVIDENDS, AND DISTRIBUTIONS

Each Portfolio of the Trust intends to qualify and elect to be treated as a
regulated investment company that is taxed under the rules of Subchapter M of
the Internal Revenue Code. As such an electing regulated investment company, a
Portfolio will not be subject to federal income tax on its net ordinary income
and net realized capital gains to the extent such income and gains are
distributed to the separate account of the Life Company which hold its shares.
For further information concerning federal income tax consequences for the
holders of the VA contracts of the Life Company, investors should consult the
prospectus used in connection with the issuance of their VA contracts.

14
<PAGE> 17

The Portfolios will declare and distribute dividends from net ordinary
income at least annually and will distribute its net realized capital gains, if
any, at least annually. Distributions of ordinary income and capital gains will
be made in shares of such Portfolios unless an election is made on behalf of a
separate account to receive distributions in cash. The Life Company will be
informed at least annually about the amount and character of distributions from
the Trust for federal income tax purposes.

ADDITIONAL INFORMATION

The Trust was established as a Massachusetts business trust under the laws
of Massachusetts by a Declaration of Trust dated May 11, 1994 (the "Declaration
of Trust"). Under Massachusetts law, shareholders of such a trust may, under
certain circumstances, be held personally liable as partners for the obligations
of the trust. The Declaration of Trust contains an express disclaimer of
shareholder liability in connection with Trust property or the acts,
obligations, or affairs of the Trust. The Declaration of Trust also provides for
indemnification out of a Portfolio's property of any shareholder of that
Portfolio held personally liable for the claims and liabilities to which a
shareholder may become subject by reason of being or having been a shareholder.
Thus, the risk of a shareholder's incurring financial loss on account of
shareholder liability is limited to circumstances in which the Portfolio itself
would be unable to meet its obligations. A copy of the Declaration of Trust is
on file with the Secretary of State of The Commonwealth of Massachusetts.

The Trust has an unlimited authorized number of shares of beneficial
interest. Shares of the Trust are entitled to one vote per share (with
proportional voting for fractional shares) and are freely transferable, and, in
liquidation of a Portfolio, shareholders of the Portfolio are entitled to
receive pro rata the net assets of the Portfolio. Although no Portfolio is
required to hold annual meetings of its shareholders, shareholders have the
right to call a meeting to elect or remove Trustees or to take other actions as
provided in the Declaration of Trust. Shareholders have no preemptive rights.
The Trust's custodian, transfer and dividend-paying agent is State Street Bank
and Trust Company.

To mitigate the possibility that a Portfolio will be adversely affected by
personal trading of employees, the Trust, the Adviser and the Sub-Adviser have
adopted policies that restrict securities trading in personal accounts of the
portfolio managers and others who normally come into possession of information
on portfolio transactions. These policies comply, in all material respects, with
the recommendations of the Investment Company Institute.

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<PAGE> 18

APPENDIX

SECURITIES AND INVESTMENT PRACTICES

In attempting to achieve its investment objective or policies each
Portfolio employs a variety of instruments, strategies and techniques, which are
described in greater detail below. Risks and restrictions associated with these
practices are also described. Policies and limitations are considered at the
time a security or instrument is purchased or a practice initiated. Generally,
securities need not be sold if subsequent changes in market value result in
applicable limitations not being met.

A Portfolio might not buy all of these securities or use all of these
techniques to the full extent permitted unless the Sub-Adviser, subject to
oversight by Adviser, believes that doing so will help the Portfolio achieve its
goal. As a shareholder, you will receive Portfolio reports every six months
detailing the Trust's holdings and describing recent investment practices.

The investment guidelines set forth below may be changed at any time
without shareholder consent by vote of the Board of Trustees of the Trust. A
complete list of investment restrictions that identifies additional restrictions
that cannot be changed without the approval of a majority of an affected
Portfolio's outstanding shares is contained in the SAI.

AMERICAN DEPOSITARY RECEIPTS AND EUROPEAN DEPOSITARY RECEIPTS

Certain of the Portfolios may invest in securities of foreign issuers
directly or in the form of American Depositary Receipts ("ADRs"), European
Depositary Receipts ("EDRs") or other similar securities representing securities
of foreign issuers. These securities may not necessarily be denominated in the
same currency as the securities they represent. ADRs are receipts typically
issued by a United States bank or trust company evidencing beneficial ownership
of the underlying foreign securities. EDRs are receipts issued by a European
financial institution evidencing a similar arrangement. Generally, ADRs, in
registered form, are designed for use in the United States securities markets,
and EDRs, in bearer form, are designed for use in European securities markets.

ASSET-BACKED SECURITIES

Certain of the Portfolios may purchase asset-backed securities, which
represent a participation in, or are secured by and payable from, a stream of
payments generated by particular assets, most often a pool of assets similar to
one another. Assets generating such payments may include motor vehicle
installment purchase obligations, credit card receivables and home equity loans.

BANK OBLIGATIONS

All of the Portfolios may invest in Bank Obligations, which include
certificates of deposit, time deposits and bankers' acceptances of U.S.
commercial banks or savings and loan institutions which are determined by the
Sub-Adviser to present minimal credit risks. Certain of the Portfolios may
invest in foreign-currency denominated Bank Obligations, including Euro-currency
instruments and securities of U.S. and foreign banks and thrifts.

BORROWING

Each of the Portfolios may borrow money (up to 33 1/3% of its assets) for
temporary or emergency purposes. If a Portfolio borrows money, its share price
may be subject to greater fluctuation until the borrowing is paid off. If the
Portfolio makes additional investments while borrowings are outstanding, this
may be construed as a form of leverage.

Borrowing, including reverse repurchase agreements and, in certain
circumstances, dollar rolls, creates leverage which increases a Portfolio's
investment risk. If the income and gains on the securities purchased with the
proceeds of borrowings exceed the cost of the arrangements, the Portfolio's
earnings or net asset value

A-1
<PAGE> 19

will increase faster than would be the case otherwise. Conversely, if the income
and gains fail to exceed the costs, earnings or net asset value will decline
faster than would otherwise be the case.

COMMON STOCK AND OTHER EQUITY SECURITIES

Common Stocks represent an equity (ownership) interest in a corporation.
This ownership interest generally gives a Portfolio the right to vote on
measures affecting the company's organization and operations.

Certain of the Portfolios may also buy securities such as convertible debt,
preferred stock, warrants or other securities exchangeable for shares of Common
Stock. In selecting equity investments for a Portfolio, the Sub-Adviser will
generally invest the Portfolio's assets in industries and companies that it
believes are experiencing favorable demand for their products and services and
which operate in a favorable competitive and regulatory climate.

CONVERTIBLE SECURITIES

A convertible security is a security that may be converted either at a
stated price or rate within a specified period of time into a specified number
of shares of Common Stock. By investing in Convertible Securities, a Portfolio
seeks the opportunity, through the conversion feature, to participate in the
capital appreciation of the Common Stock into which the securities are
convertible, while earning a higher fixed rate of return than is available in
Common Stocks.

CURRENCY MANAGEMENT

A Portfolio's flexibility to participate in higher yielding debt markets
outside of the United States may allow the Portfolio to achieve higher yields
than those generally obtained by domestic money market funds and short-term bond
investments. When a Portfolio invests significantly in securities denominated in
foreign currencies, however, movements in foreign currency exchange rates versus
the U.S. dollar are likely to impact the Portfolio's share price stability
relative to domestic short-term income funds. Fluctuations in foreign currencies
can have a positive or negative impact on returns. Normally, to the extent that
the Portfolio is invested in foreign securities, a weakening in the U.S. dollar
relative to the foreign currencies underlying a Portfolio's investments should
help increase the net asset value of the Portfolio. Conversely, a strengthening
in the U.S. dollar versus the foreign currencies in which a Portfolio's
securities are denominated will generally lower the net asset value of the
Portfolio. The Portfolio's Sub-Adviser attempts to minimize exchange rate risk
through active portfolio management, including hedging currency exposure through
the use of futures, options and forward currency transactions and attempting to
identify bond markets with strong or stable currencies. There can be no
assurance that such hedging will be successful and such transactions, if
unsuccessful, could result in additional losses or expenses to a Portfolio.

DOLLAR ROLL TRANSACTIONS

Certain Portfolios seeking a high level of current income may enter into
dollar rolls or "covered rolls" in which the Portfolio sells securities (usually
Mortgage-Backed Securities) and simultaneously contracts to purchase, typically
in 30 to 60 days, substantially similar, but not identical securities, on a
specified future date. The proceeds of the initial sale of securities in the
Dollar Roll Transactions may be used to purchase long-term securities which will
be held during the roll period. During the roll period, the Portfolio forgoes
principal and interest paid on the securities sold at the beginning of the roll
period. The Portfolio is compensated by the difference between the current sales
price and the forward price for the future purchase (often referred to as the
"drop") as well as by the interest earned on the cash proceeds of the initial
sale. A "covered roll" is a specific type of dollar roll for which there is an
offsetting cash position or cash equivalent securities position that matures on
or before the forward settlement date of the dollar roll transaction. As used
herein the term "dollar roll" refers to dollar rolls that are not "covered
rolls." At the end of the roll commitment period, the Portfolio may or may not
take delivery of the securities the Portfolio has contracted to purchase.

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The Portfolio will establish a segregated account with its custodian in
which it will maintain cash, U.S. Government Securities or other liquid
high-grade debt obligations equal in value at all times to its obligations in
respect of dollar rolls, and, accordingly, the Portfolio will not treat such
obligations as senior securities for purposes of the 1940 Act. "Covered rolls"
are not subject to these segregation requirements. Dollar Roll Transactions may
be considered borrowings and are, therefore, subject to the borrowing
limitations applicable to the Portfolios.

EQUITY AND DEBT SECURITIES ISSUED OR GUARANTEED BY SUPRANATIONAL ORGANIZATIONS

Portfolios authorized to invest in securities of foreign issuers may invest
assets in equity and debt securities issued or guaranteed by Supranational
Organizations, such as obligations issued or guaranteed by the Asian Development
Bank, Inter-American Development Bank, International Bank for Reconstruction and
Development (World Bank), African Development Bank, European Coal and Steel
Community, European Economic Community, European Investment Bank and the Nordic
Investment Bank.

EXCHANGE RATE-RELATED SECURITIES

Certain of the Portfolios may invest in securities which are indexed to
certain specific foreign currency exchange rates. The terms of such security
would provide that the principal amount or interest payments are adjusted
upwards or downwards (but not below zero) at payment to reflect fluctuations in
the exchange rate between two currencies while the obligation is outstanding,
depending on the terms of the specific security. A Portfolio will purchase such
security with the currency in which it is denominated and will receive interest
and principal payments thereon in the currency, but the amount of principal or
interest payable by the issuer will vary in proportion to the change (if any) in
the exchange rate between the two specific currencies between the date the
instrument is issued and the date the principal or interest payment is due. The
staff of the SEC is currently considering whether a mutual fund's purchase of
this type of security would result in the issuance of a "senior security" within
the meaning of the 1940 Act. The Trust believes that such investments do not
involve the creation of such a senior security, but nevertheless undertakes,
pending the resolution of this issue by the staff, to establish a segregated
account with respect to such investments and to maintain in such account cash
not available for investment or U.S. Government Securities or other liquid high
quality debt securities having a value equal to the aggregate principal amount
of outstanding securities of this type.

Investment in Exchange Rate-Related Securities entails certain risks. There
is the possibility of significant changes in rates of exchange between the U.S.
dollar and any foreign currency to which an Exchange Rate-Related Security is
linked. In addition, there is no assurance that sufficient trading interest to
create a liquid secondary market will exist for a particular Exchange
Rate-Related Security due to conditions in the debt and foreign currency
markets. Illiquidity in the forward foreign exchange market and the high
volatility of the foreign exchange market may from time to time combine to make
it difficult to sell an Exchange Rate-Related Security prior to maturity without
incurring a significant price loss.

FIXED-INCOME SECURITIES

The market value of fixed-income obligations held by the Portfolios and,
consequently, the net asset value per share of the Portfolios can be expected to
vary inversely to changes in prevailing interest rates. Investors should also
recognize that, in periods of declining interest rates, to the extent the
Portfolios are invested in fixed income obligations, the yields of the
Portfolios will tend to be somewhat higher than prevailing market rates and, in
periods of rising interest rates, the Portfolios' yields will tend to be
somewhat lower. Also, when interest rates are falling, the inflow of net new
money to the Portfolios from the continuous sales of their shares will, to the
extent that their assets are to be invested in fixed income obligations, likely
be invested in instruments producing lower yields than the balance of their
assets, thereby reducing current yields. In periods of rising interest rates,
the opposite can be expected to occur. Prices of longer term securities
generally increase or decrease more sharply than those of shorter term
securities in response to interest rate changes. In addition, obligations
purchased by the Portfolios that are rated in the lower of the top four ratings
(Baa by Moody's or BBB by S&P, Duff or Fitch) are considered to have speculative
characteristics and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make principal

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and interest payments than is the case with higher grade securities. (See "Lower
Rated Securities" in this Appendix.)

FOREIGN CURRENCY EXCHANGE TRANSACTIONS

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

A forward foreign currency exchange contract is an obligation by a
Portfolio to purchase or sell a specific currency at a future date, which may be
any fixed number of days from the date of the contract. Forward foreign currency
exchange contracts establish an exchange rate at a future date. These contracts
are transferable in the interbank market conducted directly between currency
traders (usually large commercial banks) and their customers. A forward foreign
currency exchange contract generally has no deposit requirement, and is traded
at a net price without a commission. When a Portfolio engages in forward
contracts for the sale or purchase of currencies, the Portfolio will either
cover its position or establish a segregated account. The Portfolio will
consider its position covered if it has securities in the currency subject to
the forward contract, or otherwise has the right to obtain that currency at no
additional cost. In the alternative, the Trust, on behalf of the Portfolio, will
place cash which is not available for investment, liquid, high-grade debt
securities or other securities (denominated in the foreign currency subject to
the forward contract) in a separate account. The amounts in such separate
account will equal the value of the Portfolio's total assets which are committed
to the consummation of foreign currency exchange contracts. If the value of the
securities placed in the separate account declines, the Trust, on behalf of the
Portfolio, will place additional cash or securities in the account on a daily
basis so that the value of the account will equal the amount of the Portfolio's
commitments with respect to such contracts. Neither spot transactions nor
forward foreign currency exchange contracts eliminate fluctuations in the prices
of the Portfolio's portfolio securities or in foreign exchange rates, or prevent
loss if the prices of these securities should decline.

A Portfolio may enter into foreign currency exchange transactions for
hedging purposes as well as for non-hedging purposes. Transactions are entered
into for hedging purposes in an attempt to protect against changes in foreign
currency exchange rates between the trade and settlement dates of specific
securities transactions or changes in foreign currency exchange rates that would
adversely affect a portfolio position or an anticipated portfolio position.
Although these transactions tend to minimize the risk of loss due to a decline
in the value of the hedged currency, at the same time they tend to limit any
potential gain that might be realized should the value of the hedged currency
increase. The precise matching of the forward contract amounts and the value of
the securities involved will not generally be possible because the future value
of these securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures. The projection of currency market
movements is extremely difficult, and the successful execution of a hedging
strategy is highly uncertain. In addition, when the Sub-Adviser believes that
the currency of a specific country may deteriorate against another currency, it
may enter into a forward contract to sell the less attractive currency and buy
the more attractive one. The amount in question could be less than or equal to
the value of the Portfolio's securities denominated in the less attractive
currency. The Portfolio may also enter into a forward contract to sell a
currency which is linked to a currency or currencies in which some or all of the
Portfolio's portfolio securities are or could be denominated, and to buy U.S.
dollars. These practices are referred to as "cross hedging" and "proxy hedging."

A Portfolio may enter into foreign currency exchange transactions for other
than hedging purposes which presents greater profit potential but also involves
increased risk. For example, if the Sub-Adviser believes that the value of a
particular foreign currency will increase or decrease relative to the value of
the U.S. dollar, the Portfolio may purchase or sell such currency, respectively,
through a forward foreign currency exchange contract. If the expected changes in
the value of the currency occur, the Portfolio will realize profits which will

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increase its gross income. Where exchange rates do not move in the direction or
to the extent anticipated, however, the Portfolio may sustain losses which will
reduce its gross income. Such transactions, therefore, could be considered
speculative.

Forward currency exchange contracts are agreements to exchange one currency
for another -- for example, to exchange a certain amount of U.S. dollars for a
certain amount of Japanese Yen -- at a future date and specified price.
Typically, the other party to a currency exchange contract will be a commercial
bank or other financial institution. Because there is a risk of loss to the
Portfolio if the other party does not complete the transaction, the Portfolio's
Sub-Adviser will enter into foreign currency exchange contracts only with
parties approved by the Trust's Board of Trustees.

A Portfolio may maintain "short" positions in forward currency exchange
transactions in which the Portfolio agrees to exchange currency that it
currently does not own for another currency -- for example, to exchange an
amount of Japanese Yen that it does not own for a certain amount of U.S.
dollars -- at a future date and specified price in anticipation of a decline in
the value of the currency sold short relative to the currency that the Portfolio
has contracted to receive in the exchange.

While such actions are intended to protect the Portfolio from adverse
currency movements, there is a risk that currency movements involved will not be
properly anticipated. Use of this technique may also be limited by management's
need to protect the status of the Portfolio as a regulated investment company
under the Internal Revenue Code of 1986, as amended. The projection of currency
market movements is extremely difficult, and the successful execution of
currency strategies is highly uncertain.

FOREIGN INVESTMENTS

Certain Portfolios may invest in securities of foreign issuers. There are
certain risks involved in investing in foreign securities, including those
resulting from fluctuations in currency exchange rates, devaluation of
currencies, future political or economic developments and the possible
imposition of currency exchange blockages or other foreign governmental laws or
restrictions, reduced availability of public information concerning issuers, and
the fact that foreign companies are not generally subject to uniform accounting,
auditing and financial reporting standards or to other regulatory practices and
requirements comparable to those applicable to domestic companies. Moreover,
securities of many foreign companies may be less liquid and the prices more
volatile than those of securities of comparable domestic companies. With respect
to certain foreign countries, there is the possibility of expropriation,
nationalization, confiscatory taxation and limitations on the use or removal of
funds or other assets of the Portfolios, including the withholding of dividends.

Because foreign securities generally are denominated and pay dividends or
interest in foreign currencies, and the Portfolios hold various foreign
currencies from time to time, the value of the net assets of the Portfolios as
measured in U.S. dollars will be affected favorably or unfavorably by changes in
exchange rates. The cost of the Portfolio's currency exchange transactions will
generally be the difference between the bid and offer spot rate of the currency
being purchased or sold. In order to protect against uncertainty in the level of
future foreign currency exchange rates, the Portfolios are authorized to enter
into certain foreign currency exchange transactions. Investors should be aware
that exchange rate movements can be significant and can endure for long periods
of time. Extensive research of the economic, political and social factors that
influence global markets is conducted by the Sub-Adviser. Particular attention
is given to country-specific analysis, reviewing the strength or weakness of a
country's overall economy, the government policies influencing business
conditions and the outlook for the country's currency. Certain Portfolios are
authorized to engage in foreign currency options, futures, options on futures
and forward currency contract transactions for hedging and/or other permissible
purposes.

In addition, while the volume of transactions effected on foreign stock
exchanges has increased in recent years, in most cases it remains appreciably
below that of the NYSE. Accordingly, the Portfolios' foreign investments may be
less liquid and their prices may be more volatile than comparable investments in
securities of United States companies. Moreover, the settlement periods for
foreign securities, which are often longer than those for securities of United
States issuers, may affect portfolio liquidity. In buying and selling securities

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on foreign exchanges, the Portfolio normally pays fixed commissions that are
generally higher than the negotiated commissions charged in the United States.
In addition, there is generally less governmental supervision and regulation of
securities exchanges, brokers and issuers in foreign countries than in the
United States.

Certain of the Portfolios may invest, as described below, in countries or
regions with relatively low gross national product per capita compared to the
world's major economies, and in countries or regions with the potential for
rapid economic growth (emerging markets). Emerging markets will include any
country: (i) having an "emerging stock market" as defined by the International
Finance Corporation; (ii) with low- to middle-income economies according to the
International Bank for Reconstruction and Development (the World Bank); (iii)
listed in World Bank publications as developing; or (iv) determined by the
Sub-Adviser to be an emerging market as defined above. The Portfolio may invest
in securities of: (i) companies the principal securities trading market for
which is an emerging market country; (ii) companies organized under the laws of,
and with a principal office in, an emerging market country; (iii) companies
whose principal activities are located in emerging market countries; or (iv)
companies traded in any market that derive 50% or more of their total revenue
from either goods or services produced in an emerging market or sold in an
emerging market.

The risks of investing in foreign securities may be intensified in the case
of investments in emerging markets. Securities prices in emerging markets can be
significantly more volatile than in the more developed nations of the world,
reflecting the greater uncertainties of investing in less established markets
and economies. In particular, countries with emerging markets may have
relatively unstable governments, present the risk of nationalization of
businesses, restrictions on foreign ownership, or prohibitions of repatriation
of assets, and may have less protection of property rights than more developed
countries. The economies of countries with emerging markets may be predominantly
based on only a few industries, may be highly vulnerable to changes in local or
global trade conditions, and may suffer from extreme and volatile debt burdens
or inflation rates. Local securities markets may trade a small number of
securities and may be unable to respond effectively to increases in trading
volume, potentially making prompt liquidation of substantial holdings difficult
or impossible at times. Securities of issuers located in countries with emerging
markets may have limited marketability and may be subject to more abrupt or
erratic price movements.

FUTURES AND OPTIONS ON FUTURES

When deemed appropriate by its Sub-Adviser, certain Portfolios may enter
into financial or currency futures and related options that are traded on a U.S.
exchange or board of trade or, to the extent permitted by applicable law, on
exchanges located outside the U.S., for hedging purposes or for non-hedging
purposes to the extent permitted by applicable law. A Portfolio may not enter
into futures and options contracts for which aggregate initial margin deposits
and premiums paid for unexpired futures options entered into for purposes other
than "bona fide hedging" positioning as defined in regulations adopted by the
Commodity Future Trading Commission exceed 5% of the fair market value of the
Portfolio's net assets, after taking into account unrealized profits and
unrealized losses on futures contracts into which it has entered. With respect
to each long position in a futures contract or option thereon, the underlying
commodity value of such contract will always be covered by cash and cash
equivalents set aside plus accrued profits held at the futures commission
merchant.

A financial or currency futures contract provides for the future sale by
one party and the purchase by the other party of a specified amount of a
particular financial instrument or currency (e.g., debt security or currency) at
a specified price, date, time and place. An index futures contract is an
agreement pursuant to which two parties agree to take or make delivery of an
amount of cash equal to the difference between the value of the index at the
close of the last trading day of the contract and the price at which the index
contract was originally written. An option on a futures contract generally 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 prior to the
expiration date of the option.

The purpose of entering into a futures contract by a Portfolio is to either
enhance return or to protect the Portfolio from fluctuations in the value of its
securities caused by anticipated changes in interest rates,

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currency or market conditions without necessarily buying or selling the
securities. The use of futures contracts and options on futures contracts
involves several risks. There can be no assurance that there will be a
correlation between price movements in the underlying securities, currencies or
index, on the one hand, and price movements in the securities which are the
subject of the futures contract or option on futures contract, on the other
hand. Positions in futures contracts and options on futures contracts may be
closed out only on the exchange or board of trade on which they were entered
into, and there can be no assurance that an active market will exist for a
particular contract or option at any particular time. If a Portfolio has hedged
against the possibility of an increase in interest rates or bond prices
adversely affecting the value of securities held in its portfolio and rates or
prices decrease instead, a Portfolio will lose part or all of the benefit of the
increased value of securities that it has hedged because it will have offsetting
losses in its futures positions. In addition, in such situations, if a Portfolio
had insufficient cash, it may have to sell securities to meet daily variation
margin requirements at a time when it may be disadvantageous to do so. These
sales of securities may, but will not necessarily, be at increased prices that
reflect the decline in interest rates or bond prices, as the case may be. In
addition, the Portfolio would pay commissions and other costs in connection with
such investments, which may increase the Portfolio's expenses and reduce its
return. While utilization of options, futures contracts and similar instruments
may be advantageous to the Portfolio, if the Portfolio's Sub-Adviser is not
successful in employing such instruments in managing the Portfolio's
investments, the Portfolio's performance will be worse than if the Portfolio did
not make such investments.

Losses incurred in futures contracts and options on futures contracts and
the costs of these transactions will adversely affect a Portfolio's performance.

GEOGRAPHICAL AND INDUSTRY CONCENTRATION

Where a Portfolio invests at least 25% of its assets in Bank Obligations,
the Portfolio's investments may be subject to greater risk than a Portfolio that
does not concentrate in the banking industry. In particular, Bank Obligations
may be subject to the risks associated with interest rate volatility, changes in
federal and state laws and regulations governing banking and the inability of
borrowers to pay principal and interest when due. In addition, foreign banks
present the risks of investing in foreign securities generally and are not
subject to reserve requirements and other regulations comparable to those of
U.S. Banks.

GOVERNMENT STRIPPED MORTGAGE-BACKED SECURITIES

Certain Portfolios may invest in Government Stripped Mortgage-Backed
Securities issued or guaranteed by the Government National Mortgage Association
("GNMA"), Federal National Mortgage Association ("FNMA") and Federal Home Loan
Mortgage Corporation ("FHLMC"). These securities represent beneficial ownership
interests in either periodic principal distributions ("principal-only") or
interest distributions ("interest-only") on mortgage-backed certificates issued
by GNMA, FNMA or FHLMC, as the case may be. The certificates underlying the
Government Stripped Mortgage-Backed Securities represent all or part of the
beneficial interest in pools of mortgage loans. The Portfolios will invest in
interest-only Government Stripped Mortgage-Backed Securities in order to enhance
yield or to benefit from anticipated appreciation in value of the securities at
times when the appropriate Sub-Adviser believes that interest rates will remain
stable or increase. In periods of rising interest rates, the value of
interest-only Government Stripped Mortgage-Backed Securities may be expected to
increase because of the diminished expectation that the underlying mortgages
will be prepaid. In this situation the expected increase in the value of
interest-only Government Stripped Mortgage-Backed Securities may offset all or a
portion of any decline in value of the portfolio securities of the Portfolios.
Investing in Government Stripped Mortgage-Backed Securities involves the risks
normally associated with investing in mortgage-backed securities issued by
government or government-related entities. See "Mortgage-Backed Securities"
below. In addition, the yields on interest-only and principal-only Government
Stripped Mortgage-Backed Securities are extremely sensitive to the prepayment
experience on the mortgage loans underlying the certificates collateralizing the
securities. If a decline in the level of prevailing interest rates results in a
rate of principal prepayments higher than anticipated, distributions of
principal will be accelerated, thereby reducing the yield to maturity on
interest-only Government Stripped Mortgage-Backed Securities and increasing the
yield to maturity on principal-only Government Stripped

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Mortgage-Backed Securities. Conversely, if an increase in the level of
prevailing interest rates results in a rate of principal prepayments lower than
anticipated, distributions of principal will be deferred, thereby increasing the
yield to maturity on interest-only Government Stripped Mortgage-Backed
Securities and decreasing the yield to maturity on principal-only Government
Stripped Mortgage-Backed Securities. Sufficiently high prepayment rates could
result in the Portfolio not fully recovering its initial investment in an
interest-only Government Stripped Mortgage-Backed Security. Government Stripped
Mortgage-Backed Securities are currently traded in an over-the-counter market
maintained by several large investment banking firms. There can be no assurance
that the Portfolio will be able to effect a trade of a Government Stripped
Mortgage-Backed Security at a time when it wishes to do so. The Portfolios will
acquire Government Stripped Mortgage-Backed Securities only if a liquid
secondary market for the securities exists at the time of acquisition.

INTEREST RATE TRANSACTIONS

Certain Portfolios may engage in certain Interest Rate Transactions, such
as swaps, caps, floors and collars. Interest rate swaps involve the exchange
with another party of 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 notional
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 notional principal amount from the party selling such interest rate floor.
An interest rate collar combines the elements of purchasing a cap and selling a
floor. The collar protects against an interest rate rise above the maximum
amount but gives up the benefits of an interest rate decline below the minimum
amount. The net amount of the excess, if any, of a Portfolio's obligations over
its entitlements with respect to each interest rate swap will be accrued on a
daily basis and an amount of cash or liquid securities having an aggregate net
asset value at least equal to the accrued excess will be maintained in a
segregated account with the Trust's custodian. If there is a default by the
other party to the transaction, the Portfolio will have contractual remedies
pursuant to the agreements related to the transactions.

ILLIQUID SECURITIES

Up to 10% (15% for the OTC Portfolio and Total Return Portfolio) of the net
assets of a Portfolio may be invested in securities that are not readily
marketable, including, where applicable: (1) Repurchase Agreements with
maturities greater than seven calendar days; (2) time deposits maturing in more
than seven calendar days; (3) to the extent a liquid secondary market does not
exist for the instruments, futures contracts and options thereon; (4) certain
over-the-counter options, as described in the SAI; (5) certain variable rate
demand notes having a demand period of more than seven days; and (6) securities
the disposition of which is restricted under Federal securities laws (excluding
Rule 144A Securities, described below). The Portfolios will not include for
purposes of the restrictions on illiquid investments, securities sold pursuant
to Rule 144A under the Securities Act of 1933, as amended, so long as such
securities meet liquidity guidelines established by the Trust's Board of
Trustees. Under Rule 144A, securities which would otherwise be restricted may be
sold by persons other than issuers or dealers to qualified institutional buyers.

INVESTMENT COMPANIES

When a Portfolio's Sub-Adviser believes that it would be beneficial for the
Portfolio and appropriate under the circumstances, the Sub-Adviser may invest up
to 10% of the Portfolio's assets in securities of mutual funds. As a shareholder
in any such mutual fund, the Portfolio will bear its ratable share of the mutual
fund's expenses, including management fees, and will remain subject to the
Portfolio's advisory and administration fees with respect to the assets so
invested.

LEASE OBLIGATION BONDS

Lease Obligation Bonds are mortgages on a facility that is secured by the
facility and are paid by a lessee over a long term. The rental stream to service
the debt as well as the mortgage are held by a collateral trustee

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on behalf of the public bondholders. The primary risk of such instrument is the
risk of default. Under the lease indenture, the failure to pay rent is an event
of default. The remedy to cure default is to rescind the lease and sell the
assets. If the lease obligation is not readily marketable or market quotations
are not readily available, such lease obligations will be subject to a
Portfolio's limit on Illiquid Securities.

LENDING OF SECURITIES

All of the Portfolios have the ability to lend portfolio securities to
brokers and other financial organizations. By lending its securities, a
Portfolio can increase its income by continuing to receive interest on the
loaned securities as well as by either investing the cash collateral in
short-term instruments or obtaining yield in the form of interest paid by the
borrower when U.S. Government Securities are used as collateral. These loans, if
and when made, may not exceed 20% of a Portfolio's total assets taken at value.
Loans of portfolio securities by a Portfolio will be collateralized by cash,
letters of credit or U.S. Government Securities that are maintained at all times
in an amount at least equal to the current market value of the loaned
securities. Any gain or loss in the market price of the securities loaned that
might occur during the term of the loan would be for the account of the
Portfolio involved. The Sub-Adviser will monitor on an ongoing basis the credit
worthiness of the institutions to which the Portfolio lends securities.

LOWER-RATED SECURITIES

Certain Portfolios may invest in debt securities rated lower than BBB by
S&P or Baa by Moody's, or of equivalent quality as determined by the
Sub-Adviser. Securities rated BB, Ba or lower are commonly referred to as "junk
bonds."

Securities rated below investment grade as well as unrated securities are
often considered to be speculative and usually entail greater risk (including
the possibility of default or bankruptcy of the issuers). Such securities
generally involve greater price volatility and risk of principal and income, and
may be less liquid, than securities in higher rated categories. Both price
volatility and illiquidity may make it difficult for the Portfolio to value
certain of these securities at certain times and these securities may be
difficult to sell under certain market conditions. Prices for securities rated
below investment grade may be affected by legislative and regulatory
developments. (See SAI for additional information pertaining to lower-rated
securities including risks.)

MORTGAGE-BACKED SECURITIES

Certain of the Portfolios may invest in Mortgage-Backed Securities, which
represent an interest in a pool of mortgage loans. The primary government
issuers or guarantors of Mortgage-Backed Securities are GNMA, FHMA and FHLMC.
Mortgage-Backed Securities provide a monthly payment consisting of interest and
principal payments. Additional payments may be made out of unscheduled
repayments of principal resulting from the sale of the underlying residential
property, refinancing or foreclosure, net of fees or costs that may be incurred.
Prepayments of principal on Mortgage-Backed Securities may tend to increase due
to refinancing of mortgages as interest rates decline. Prompt payment of
principal and interest on GNMA mortgage pass-through certificates is backed by
the full faith and credit of the U.S. government. FNMA guaranteed mortgage
pass-through certificates and FHLMC participation certificates are solely the
obligations of those entities but are supported by the discretionary authority
of the U.S. Government to purchase the agencies' obligations. Collateralized
Mortgage Obligations are a type of bond secured by an underlying pool of
mortgages or mortgage pass-through certificates that are structured to direct
payments on underlying collateral to different series or classes of the
obligations.

To the extent that a Portfolio purchases mortgage-related or
mortgage-backed securities at a premium, prepayments may result in some loss of
the Portfolio's principal investment to the extent of the premium paid. The
yield of the Portfolio may be affected by reinvestment of prepayments at higher
or lower rates than the original investment. In addition, like other debt
securities, the value of mortgage-related securities, including government and
government-related mortgage pools, will generally fluctuate in response to
market interest rates.

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NEW ISSUERS

A Portfolio may invest up to 5% (except for the OTC Portfolio which may
invest without limitation) of its assets in the securities of issuers which have
been in continuous operation for less than three years.

OPTIONS ON SECURITIES

Option Purchase. Certain Portfolios may purchase put and call options on
portfolio securities in which they may invest that are traded on a U.S. or
foreign securities exchange or in the over-the-counter market. A Portfolio may
utilize up to 10% of its assets to purchase put options on portfolio securities
and may do so at or about the same time that it purchases the underlying
security or at a later time and may also utilize up to 10% of its assets to
purchase call options on securities in which it is authorized to invest. By
buying a put, the Portfolios limit their risk of loss from a decline in the
market value of the security until the put expires. Any appreciation in the
value of the underlying security, however, will be partially offset by the
amount of the premium paid for the put option and any related transaction costs.
Call options may be purchased by the Portfolio in order to acquire the
underlying securities for the Portfolio at a price that avoids any additional
cost that would result from a substantial increase in the market value of a
security. The Portfolios may also purchase call options to increase their return
to investors at a time when the call is expected to increase in value due to
anticipated appreciation of the underlying security. Prior to their expirations,
put and call options may be sold in closing sale transactions (sales by the
Portfolio, prior to the exercise of options that it has purchased, of options of
the same series), and profit or loss from the sale will depend on whether the
amount received is more or less than the premium paid for the option plus the
related transaction costs.

Covered Option Writing. Certain Portfolios may write put and call options
on securities for hedging purposes. The Portfolios realize fees (referred to as
"premiums") for granting the rights evidenced by the options. A put option
embodies the right of its purchaser to compel the writer of the option to
purchase from the option holder an underlying security at a specified price at
any time during the option period. In contrast, a call option embodies the right
of its purchaser to compel the writer of the option to sell to the option holder
an underlying security at a specified price at anytime during the option period.

Upon the exercise of a put option written by a Portfolio, the Portfolio may
suffer a loss equal to the difference between the price at which the Portfolio
is required to purchase the underlying security and its market value at the time
of the option exercise, less the premium received for writing the option. Upon
the exercise of a call option written by the Portfolio, the Portfolio may suffer
a loss equal to the excess of the security's market value at the time of the
option exercise over the Portfolio's acquisition cost of the security, less the
premium received for writing the option.

Each Portfolio will comply with regulatory requirements of the SEC and the
Commodity Futures Trading Commission with respect to coverage of options and
futures positions by registered investment companies and, if the guidelines so
require, will set aside cash and/or appropriate liquid assets in a segregated
custodial account in the amount prescribed. Securities held in a segregated
account cannot be sold while the futures or options position is outstanding,
unless replaced with other permissible assets. As a result, there is a
possibility that the segregation of a large percentage of a Portfolio's assets
may force the Portfolio to close out futures and options positions and/or
liquidate other portfolio securities, any of which may occur at disadvantageous
prices, in order for the Portfolio to meet redemption requests or other current
obligations.

The principal reason for writing covered call and put options on a
securities portfolio is to attempt to realize, through the receipt of premiums,
a greater return than would be realized on the securities alone. In return for a
premium, the writer of a covered call option forfeits the rights to any
appreciation in the value of the underlying security above the strike price for
the life of the option (or until a closing purchase transaction can be
effected). Nevertheless, the call writer retains the risk of a decline in the
price of the underlying security. Similarly, the principal reason for writing
covered put options is to realize income in the form of premiums. The writer of
the covered put option accepts the risk of a decline in the price of the
underlying security. The size of the premiums that the Portfolios may receive
may be adversely affected as new or existing institutions, including other
investment companies, engage in or increase their option-writing activities.

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The Portfolios may engage in closing purchase transactions to realize a
profit, to prevent an underlying security from being called or put or, in the
case of a call option, to unfreeze an underlying security (thereby permitting
its sale or the writing of a new option on the security prior to the outstanding
option's expiration). To effect a closing purchase transaction, the Portfolios
would purchase, prior to the holder's exercise of an option that the Portfolio
has written, an option of the same series as that on which the Portfolio desires
to terminate its obligation. The obligation of the Portfolio under an option
that it has written would be terminated by a closing purchase transaction, but
the Portfolio would not be deemed to own an option as the result of the
transaction. There can be no assurance that the Portfolio will be able to effect
closing purchase transactions at a time when it wishes to do so. The ability of
the Portfolio to engage in closing transactions with respect to options depends
on the existence of a liquid secondary market. While the Portfolio will
generally purchase or write options only if there appears to be a liquid
secondary market for the options purchased or sold, for some options no such
secondary market may exist or the market may cease to exist. To facilitate
closing purchase transactions, however, the Portfolio will ordinarily write
options only if a secondary market for the options exists on a U.S. securities
exchange or in the over-the-counter market.

Option writing for the Portfolios may be limited by position and exercise
limits established by U.S. securities exchanges and the National Association of
Securities Dealers, Inc. and by requirements of the Code for qualification as a
regulated investment company. In addition to writing covered put and call
options to generate current income, the Portfolios may enter into options
transactions as hedges to reduce investment risk, generally by making an
investment expected to move in the opposite direction of a portfolio position. A
hedge is designed to offset a loss on a portfolio position with a gain on the
hedge position; at the same time, however, a properly correlated hedge will
result in a gain on the portfolio position's being offset by a loss on the hedge
position. The Portfolios bear the risk that the prices of the securities being
hedged will not move in the same amount as the hedge. A Portfolio will engage in
hedging transactions only when deemed advisable by its Sub-Adviser. Successful
use by the Portfolio of options will depend on its Sub-Adviser's ability to
correctly predict movements in the direction of the stock underlying the option
used as a hedge. Losses incurred in hedging transactions and the costs of these
transactions will adversely affect the Portfolio's performance.

OPTIONS ON FOREIGN CURRENCIES

A Portfolio may purchase and write put and call options on foreign
currencies for the purpose of hedging against declines in the U.S. dollar value
of foreign currency-denominated portfolio securities and against increases in
the U.S. dollar cost of such securities to be acquired. Generally, transactions
relating to Options on Foreign Currencies occur in the over-the-counter market.
As in the case of other kinds of options, however, the writing of an option on a
foreign currency constitutes only a partial hedge, up to the amount of the
premium received, and the Portfolio could be required to purchase or sell
foreign currencies at disadvantageous exchange rates, thereby incurring losses.
The purchase of an option on a foreign currency may constitute an effective
hedge against fluctuations in exchange rates, although, in the event of rate
movements adverse to the Portfolio's position, it may forfeit the entire amount
of the premium plus related transaction costs. There is no specific percentage
limitation on the Portfolio's investments in Options on Foreign Currencies. See
the SAI for further discussion of the use, risks and costs of Options on Foreign
Currencies and Over the Counter Options.

OPTIONS ON INDEXES

A Portfolio may, subject to applicable securities regulations, purchase and
write put and call options on stock and fixed-income indexes listed on foreign
and domestic stock exchanges. A stock index fluctuates with changes in the
market values of the stocks included in the index. An example of a domestic
stock index is the Standard and Poor's 500 Stock Index. Examples of foreign
stock indexes are the Canadian Market Portfolio Index (Montreal Stock Exchange),
The Financial Times -- Stock Exchange 100 (London Stock Exchange) and the
Toronto Stock Exchange Composite 300 (Toronto Stock Exchange). Examples of
fixed-income indexes include the Lehman Government/Corporate Bond Index and the
Lehman Treasury Bond Index.

Options on Indexes are generally similar to options on securities except
that the delivery requirements are different. Instead of giving the right to
take or make delivery of a security at a specified price, an option on an

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index gives the holder the right to receive a cash "exercise settlement amount"
equal to (a) the amount, if any, by which the fixed exercise price of the option
exceeds (in the case of a put) or is less than (in the case of a call) the
closing value of the underlying index on the date of exercise, multiplied by (b)
a fixed "index multiplier." Receipt of this cash amount will depend upon the
closing level of the index upon which the option is based being greater than, in
the case of a call, or less than, in the case of a put, the exercise price of
the option. The amount of cash received will be equal to such difference between
the closing price of the index and the exercise price of the option expressed in
dollars or a foreign currency, as the case may be, times a specified multiple.
The writer of the option is obligated, in return for the premium received, to
make a delivery of this amount. The writer may offset its position in index
options prior to expiration by entering into a closing transaction on an
exchange or the option may expire unexercised.

The effectiveness of purchasing or writing options as a hedging technique
will depend upon the extent to which price movements in the portion of the
securities portfolio of a Portfolio correlate with price movements of the stock
index selected. Because the value of an index option depends upon movements in
the level of the index rather than the price of a particular stock, whether a
Portfolio will realize a gain or loss from the purchase or writing of options on
an index depends upon movements in the level of stock prices in the stock market
generally or, in the case of certain indexes, in an industry or market segment,
rather than movements in the price of a particular stock. Accordingly,
successful use of Options on Indexes by a Portfolio will be subject to its
Sub-Adviser's ability to predict correctly movements in the direction of the
market generally or of a particular industry. This requires different skills and
techniques than predicting changes in the price of individual stocks.

Options on securities indexes entail risks in addition to the risks of
options on securities. Because exchange trading of options on securities indexes
is relatively new, the absence of a liquid secondary market to close out an
option position is more likely to occur, although a Portfolio generally will
only purchase or write such an option if the Sub-Adviser believes the option can
be closed out. Because options on securities indexes require settlement in cash,
a Portfolio may be forced to liquidate portfolio securities to meet settlement
obligations. A Portfolio will engage in stock index options transactions only
when determined by its Sub-Adviser to be consistent with its efforts to control
risk. There can be no assurance that such judgement will be accurate or that the
use of these portfolio strategies will be successful.

OVER THE COUNTER OPTIONS

Certain Portfolios may write or purchase options in privately negotiated
domestic or foreign transactions ("OTC Options"), as well as exchange-traded or
"listed" options. OTC Options can be closed out only by agreement with the other
party to the transaction, and thus any OTC Options purchased by a Portfolio will
be considered an Illiquid Security. In addition, certain OTC Options on foreign
currencies are traded through financial institutions acting as market-makers in
such options and the underlying currencies.

The staff of the SEC has taken the position that purchased over-the-counter
options and assets used to cover written over-the-counter options are illiquid
and, therefore, together with other illiquid securities, cannot exceed a certain
percentage of a Portfolio's assets (the "SEC illiquidity ceiling"). Except as
provided below, the Portfolios intend to write over-the-counter options only
with primary U.S. Government securities dealers recognized by the Federal
Reserve Bank of New York. Also, the contracts which such Portfolios have in
place with such primary dealers will provide that each Portfolio has the
absolute right to repurchase any option it writes at any time at a price which
represents the fair market value, as determined in good faith through
negotiation between the parties, but which in no event will exceed a price
determined pursuant to a formula in the contract. Although the specific formula
may vary between contracts with different primary dealers, the formula will
generally be based on a multiple of the premium received by the Portfolio for
writing the option, plus the amount, if any, of the option's intrinsic value
(i.e., the amount that the option is in-the-money). The formula may also include
a factor to account for the difference between the price of the security and the
strike price of the option if the option is written out-of-money. A Portfolio
will treat all or a part of the formula price as illiquid for purposes of the
SEC illiquidity ceiling. Certain Portfolios may also write over-the-counter
options with non-primary dealers, including foreign dealers, and will treat the
assets used to cover these options as illiquid for purposes of such SEC
illiquidity ceiling.

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OTC Options entail risks in addition to the risks of exchange-traded
options. Exchange-traded options are in effect guaranteed by the Options
Clearing Corporation, while a Portfolio relies on the party from whom it
purchases an OTC Option to perform if the Portfolio exercises the option. With
OTC Options, if the transacting dealer fails to make or take delivery of the
securities or amount of foreign currency underlying an option it has written, in
accordance with the terms of that option, the Portfolio will lose the premium
paid for the option as well as any anticipated benefit of the transaction.
Furthermore, OTC Options are less liquid than exchange-traded options.

REPURCHASE AGREEMENTS

Repurchase Agreements are agreements to purchase underlying debt
obligations from financial institutions, such as banks and broker-dealers,
subject to the seller's agreement to repurchase the obligations at an
established time and price. The collateral for such Repurchase Agreements will
be held by the Portfolio's custodian or a duly appointed sub-custodian. The
Portfolio will enter into Repurchase Agreements only with banks and
broker-dealers that have been determined to be creditworthy by the Trust's Board
of Trustees under criteria established in consultation with the Adviser and the
Sub-Adviser. The seller under a Repurchase Agreement would be required to
maintain the value of the obligations subject to the Repurchase Agreement at not
less than the repurchase price. Default by the seller would, however, expose the
Portfolio to possible loss because of adverse market action or delay in
connection with the disposition of the underlying obligations. In addition, if
bankruptcy proceedings are commenced with respect to the seller of the
obligations, the Portfolio may be delayed or limited in its ability to sell the
collateral.

REVERSE REPURCHASE AGREEMENTS

Reverse Repurchase Agreements are the same as repurchase agreements except
that, in this instance, the Portfolios would assume the role of seller/borrower
in the transaction. The Portfolios will maintain segregated accounts with the
Custodian consisting of U.S. Government Securities, cash or money market
instruments that at all times are in an amount equal to their obligations under
Reverse Repurchase Agreements. Reverse Repurchase Agreements involve the risk
that the market value of the securities sold by a Portfolio may decline below
the repurchase price of the securities and, if the proceeds from the reverse
repurchase agreement are invested in securities, that the market value of the
securities sold may decline below the repurchase price of the securities sold.
Each Portfolio's Sub-Adviser, acting under the supervision of the Board of
Trustees, reviews on an on-going basis the creditworthiness of the parties with
which it enters into Reverse Repurchase Agreements. Under the 1940 Act, Reverse
Repurchase Agreements may be considered borrowings by the seller. Whenever
borrowings by a fund, including Reverse Repurchase Agreements, exceed 5% of the
value of a Portfolio's total assets, the Portfolio will not purchase any
securities.

SMALL COMPANIES

Certain of the Portfolios may invest in small companies, some of which may
be unseasoned. While smaller companies generally have potential for rapid
growth, investments in such companies often involve higher risks because the
companies may lack the management experience, financial resources, product
diversification and competitive strengths of larger corporations. Moreover, the
markets for the shares of such companies typically are less liquid than those
for the shares of larger companies.

STRATEGIC TRANSACTIONS

Subject to the investment limitations and restrictions for each of the
Portfolios as stated elsewhere in the Prospectus and SAI of the Trust, each of
the Portfolios may, but is not required to, utilize various investment
strategies as described in this Appendix to hedge various market risks, to
manage the effective maturity or duration of Fixed-Income Securities, or to seek
potentially higher returns. Utilizing these investment strategies, the Portfolio
may purchase and sell, to the extent not otherwise limited or restricted for
such Portfolio, exchange-listed and over-the-counter put and call options on
securities, equity and fixed-income indexes and other financial instruments,
purchase and sell financial futures contracts and options thereon, enter into
various Interest Rate Transactions such as swaps, caps, floors or collars, and
enter into various

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currency transactions such as currency forward contracts, currency futures
contracts, currency swaps or options on currencies or currency futures
(collectively, all the above are called "Strategic Transactions").

Strategic Transactions may be used to attempt to protect against possible
changes in the market value of securities held in or to be purchased for the
Portfolio's portfolio resulting from securities markets or currency exchange
rate fluctuations, to protect the Portfolio's unrealized gains in the value of
its portfolio securities, to facilitate the sale of such securities for
investment purposes, to manage the effective maturity or duration of the
Portfolio's portfolio, or to establish a position in the derivatives markets as
a temporary substitute for purchasing or selling particular securities. Some
Strategic Transactions may also be used to seek potentially higher returns,
although no more than 5% of the Portfolio's assets will be used as the initial
margin or purchase price of options for Strategic Transactions entered into for
purposes other than "bona fide hedging" positions as defined in the regulations
adopted by the Commodity Futures Trading Commission. Any or all of these
investment techniques may be used at any time, as use of any Strategic
Transaction is a function of numerous variables including market conditions. The
ability of the Portfolio to utilize these Strategic Transactions successfully
will depend on the Sub-Adviser's ability to predict, which cannot be assured,
pertinent market movements. The Portfolio will comply with applicable regulatory
requirements when utilizing Strategic Transactions. Strategic Transactions
involving financial futures and options thereon will be purchased, sold or
entered into only for bona fide hedging, risk management or portfolio management
purposes.

U.S. GOVERNMENT SECURITIES

U.S. Government Securities include direct obligations of the U.S. Treasury
(such as U.S. Treasury bills, notes and bonds) and obligations directly issued
or guaranteed by U.S. Government agencies or instrumentalities. Some obligations
issued or guaranteed by agencies or instrumentalities of the U.S. Government are
backed by the full faith and credit of the U.S. Government (such as GNMA
certificates), others are backed only by the right of the issuer to borrow from
the U.S. Treasury (such as securities of Federal Home Loan Banks) and still
others are backed only by the credit of the instrumentality (such as FNMA and
FHLMC certificates).

WHEN ISSUED SECURITIES AND DELAYED-DELIVERY TRANSACTIONS

In order to secure yields or prices deemed advantageous at the time,
certain Portfolios may purchase or sell securities on a when-issued or a
delayed-delivery basis. The Portfolios will enter into a when-issued transaction
for the purpose of acquiring portfolio securities and not for the purpose of
leverage. In such transactions, delivery of the securities occurs beyond the
normal settlement periods, but no payment or delivery is made by, and no
interest accrues to, the Portfolios prior to the actual delivery or payment by
the other party to the transaction. Due to fluctuations in the value of
securities purchased on a when-issued or a delayed-delivery basis, the yields
obtained on such securities may be higher or lower than the yields available in
the market on the dates when the investments are actually delivered to the
buyers. Similarly, the sale of securities for delayed-delivery can involve the
risk that the prices available in the market when delivery is made may actually
be higher than those obtained in the transaction itself. The Portfolios will
establish a segregated account with the Custodian consisting of cash, U.S.
Government-securities or other high grade debt obligations in an amount equal to
the amount of its when-issued and delayed-delivery commitments.

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