EQUI SELECT SERIES TRUST, 497, 1998-05-15

EQUI SELECT SERIES TRUST
497, 1998-05-15

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File Nos. 33-79166, 811-8522
Filed under Rule 497 (c)

EQUI-SELECT SERIES TRUST
909 LOCUST STREET
DES MOINES, IOWA 50309

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

Equi-Select Series Trust (the "Trust") is an open-end, series management
investment company which currently offers shares of beneficial interest of
nine 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 and variable life insurance
policies ("Variable Contracts") issued by Equitable Life Insurance Company of
Iowa and/or its affiliated life insurance companies (collectively, the "Life
Companies"). This Prospectus contains information pertaining to the OTC
Portfolio, Research Portfolio and Total Return Portfolio which are the only
Portfolios of the Trust offered under the Variable Contracts described in the
accompanying Variable 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, 1998, as amended, is available without charge upon
request and may be obtained by calling Equitable Life Insurance Company of
Iowa at (800) 344-6864 or by writing to Equitable Life Insurance Company of
Iowa, 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. The Securities and
Exchange Commission maintains a Web site (http:\\www.sec.gov) that contains
the SAI, material incorporated by reference, and other information regarding
the Trust.

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

PURCHASERS SHOULD BE AWARE THAT AN INVESTMENT IN THE MONEY MARKET PORTFOLIO IS
NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT. THERE CAN BE NO
ASSURANCE THAT THE MONEY MARKET PORTFOLIO WILL BE ABLE TO MAINTAIN A STABLE
NET ASSET VALUE OF $1.00 PER SHARE.

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

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, 1998
<PAGE>

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
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS....................... 7
OTC Portfolio............................................................ 7
Research Portfolio....................................................... 9
Total Return Portfolio................................................... 11
MANAGEMENT OF THE TRUST.................................................... 13
Investment Adviser....................................................... 13
Expenses of the Trust.................................................... 14
Sub-Adviser.............................................................. 14
SALES AND REDEMPTIONS...................................................... 15
NET ASSET VALUE............................................................ 16
PERFORMANCE INFORMATION.................................................... 16
TAX STATUS, DIVIDENDS, AND DISTRIBUTIONS................................... 16
YEAR 2000.................................................................. 17
ADDITIONAL INFORMATION..................................................... 18
APPENDIX................................................................... A-1
</TABLE>

i
<PAGE>

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 OTC, Research and
Total Return Portfolios are offered herein. (The OTC, Total Return, and
Research 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, Directed
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 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 total 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 20% or more of its net 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 net assets in foreign securities. The Portfolio may invest up to 10% of
its net 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 0% and 20%) of its net 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 net 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. Under normal market conditions, at least 25% of the
Portfolio's assets will be invested in fixed income securities and at

1
<PAGE>

least 40% and no more than 75% 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 depositary
receipts for those securities. The Portfolio may invest up to 20% (and
generally expects to invest between 5% and 20%) of its net 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.)

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 Companies
as a funding vehicle for the Variable Contracts offered by the Life Companies.
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
Companies, and therefore, are ultimately borne by Variable Contract owners. In
addition, other fees and expenses are assessed by the Life Companies at the
separate account level. (See the Prospectus for the Variable Contract for a
description of all fees and charges relating to the Variable Contract.)

2
<PAGE>

FINANCIAL HIGHLIGHTS
EQUI-SELECT SERIES TRUST

The following tables which have been audited by Ernst & Young LLP,
independent auditors, include selected data, derived from the Financial
Statements, for a share outstanding throughout the period shown for each of
the OTC, Research and Total Return Portfolios at December 31, 1997. The tables
should be read in conjunction with the Financial Statements and notes thereto
included in the Trust's Annual Report to Contractholders which is incorporated
by reference in the Statement of Additional Information. The Financial
Statements of the Trust at December 31, 1997, are incorporated herein by
reference in reliance upon the report of Ernst & Young LLP such report given
upon the authority of such firm as experts in accounting and auditing.

Further information about the performance of the Trust is contained in the
Trust's December 31, 1997 Annual Report which may be obtained without charge
by calling Equitable Life Insurance Company of Iowa at (800) 344-6864.

3
<PAGE>

EQUI-SELECT SERIES TRUST
FINANCIAL HIGHLIGHTS
OTC PORTFOLIO
(For a share of beneficial interest outstanding throughout each period)

<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Period Ended
12/31/97 12/31/96 12/31/95 12/31/94*
------------ ----------- ---------- ------------
<S> <C> <C> <C> <C>
Net asset value, beginning
of period................. $13.82 $12.08 $10.36 $10.00
------------ ----------- ---------- ----------
INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment (loss)(1)... (0.05) (0.03) (0.02) --
Net realized and unrealized
gain on investments....... 2.76 2.52 3.07 0.36
------------ ----------- ---------- ----------
Total from investment
operations................ 2.71 2.49 3.05 0.36
------------ ----------- ---------- ----------
LESS DISTRIBUTIONS:
Distributions from net
investment income......... -- -- -- --
Net capital gains
distributions............. (0.71) (0.75) (1.33) --
------------ ----------- ---------- ----------
Total distributions........ (0.71) (0.75) (1.33) --
------------ ----------- ---------- ----------
Net asset value, end of
period.................... $15.82 $13.82 $12.08 $10.36
============ =========== ========== ==========
Total Return(2)............ 19.67% 20.68% 29.23% 3.59%
============ =========== ========== ==========
RATIOS AND SUPPLEMENTAL
DATA:
Net assets, end of period.. $110,280,165 $43,321,580 $9,054,622 $1,695,685
Ratio of operating expenses
(with reimbursement) to
average net assets(1)(3).. 0.99% 1.35% 1.07% 0.75%
Ratio of operating expenses
(without reimbursement) to
average net assets(1)(3).. 0.99% 1.35% 2.52% 7.10%
Ratio of net investment
income (loss) to average
net assets(3)............. (0.44)% (0.63)% (0.22)% 0.16%
Net investment (loss)
(without
reimbursement)(1)(3)...... $(0.05) $(0.03) $(0.10) $(0.12)
Portfolio turnover
rate(4)................... 141% 122% 111% 6%
Average commission rate
paid(5)................... $0.0496 $0.0402 -- --
</TABLE>
- --------

(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 Portfolio, net investment income (loss) per share and ratio
of operating expenses to average net assets would have been as noted
above.
(2) Total return figures are not annualized for periods less than one year.
Total returns do 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 for periods less than one year.
(4) Portfolio turnover rates are not annualized.
(5) The average commission rate paid is applicable for Portfolios that invest
greater than 10% of average assets in equity security transactions for
which commissions are charged. This disclosure is required for fiscal
periods beginning on or after September 1, 1995.
* For the period October 4, 1994 (commencement of investment operations)
through December 31, 1994.

4
<PAGE>

EQUI-SELECT SERIES TRUST
FINANCIAL HIGHLIGHTS
RESEARCH PORTFOLIO
(For a share of beneficial interest outstanding throughout each period)

<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Period Ended
12/31/97 12/31/96 12/31/95 12/31/94*
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net asset value, beginning
of period................ $15.43 $12.88 $9.59 $10.00
------------ ----------- ----------- ----------
INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment income(1).. 0.03 -- 0.03 0.09
Net realized and
unrealized gain (loss) on
investments.............. 3.08 3.00 3.48 (0.41)
------------ ----------- ----------- ----------
Total from investment
operations............... 3.11 3.00 3.51 (0.32)
------------ ----------- ----------- ----------
LESS DISTRIBUTIONS:
Distributions from net
investment income........ (0.03) 0.00# (0.03) (0.09)
Net capital gains
distributions............ (0.57) (0.45) (0.19) --
------------ ----------- ----------- ----------
Total distributions....... (0.60) (0.45) (0.22) (0.09)
------------ ----------- ----------- ----------
Net asset value, end of
period................... $17.94 $15.43 $12.88 $9.59
============ =========== =========== ==========
Total Return(2)........... 20.12% 23.37% 36.58% (3.22)%
============ =========== =========== ==========
RATIOS AND SUPPLEMENTAL
DATA:
Net assets, end of
period................... $240,114,529 $75,178,842 $16,185,802 $1,626,521
Ratio of operating
expenses (with
reimbursement) to average
net assets(1)(3)......... 0.96% 1.31% 1.12% 0.75%
Ratio of operating
expenses (without
reimbursement) to average
net assets(1)(3)......... 0.96% 1.31% 2.48% 7.48%
Ratio of net investment
income to average net
assets(3)................ 0.26% 0.05% 0.58% 4.65%
Net investment income
(loss) (without
reimbursement)(1)(3)..... $0.03 -- $(0.04) $(0.04)
Portfolio turnover
rate(4).................. 80% 68% 83% 85%
Average commission rate
paid(5).................. $0.0476 $0.0281 -- --
</TABLE>
- --------
(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 Portfolio, net investment income (loss) per share and ratio
of operating expenses to average net assets would have been as noted
above.
(2) Total return figures are not annualized for periods less than one year.
Total returns do 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 for periods less than one year.
(4) Portfolio turnover rates are not annualized.
(5) The average commission rate paid is applicable for Portfolios that invest
greater than 10% of average assets in equity security transactions for
which commissions are charged. This disclosure is required for fiscal
periods beginning on or after September 1, 1995.
* For the period October 4, 1994 (commencement of investment operations)
through December 31, 1994.
# Amount is less than $0.003 per share.

5
<PAGE>

EQUI-SELECT SERIES TRUST
FINANCIAL HIGHLIGHTS
TOTAL RETURN PORTFOLIO
(For a share of beneficial interest outstanding throughout each period)

6
<PAGE>

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 Adviser or 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 AND RISKS--OTC PORTFOLIO

The Portfolio seeks to achieve its objective by investing at least 65% of
its total 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:

7
<PAGE>

common stocks and preferred stocks; securities such as bonds, warrants or
rights that are convertible into stock; and depositary receipts for those
securities.

The Portfolio will not purchase a security, under normal circumstances, if
it would result in less than 65% of its total 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 temporary 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 20% or more of its net assets in foreign securities
(not including ADRs; however, under normal market conditions, the Portfolio
expects to invest less than 35% of its net assets in foreign securities. The
Portfolio may invest up to 10% of its net 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.

8
<PAGE>

upon information and recommendations provided by the Sub-Adviser that a
specific Rule 144A security is liquid and thus not subject to the Portfolio's
limitation on investing not more than 15% of its net assets in illiquid
investments. The Board of Trustees has adopted guidelines and 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. This investment practice
could have the effect of decreasing the level of liquidity 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.
Because the Portfolio is expected to have a portfolio turnover rate of over
100%, transaction costs incurred by the Portfolio and the realized capital
gains and losses of the Portfolio may be greater than that of a portfolio with
a lesser turnover rate. Portfolio turnover generally involves some expense to
a Portfolio, including brokerage commissions or dealer markups and other
transaction costs on the sale of securities and reinvestment in other
securities. Such sales may result in realization of taxable capital gains. The
portfolio turnover rates of the Portfolio for the periods ended December 31,
1997 and 1996 are 141% and 122%, respectively. (See "Portfolio Turnover" in
the SAI.)

ADDITIONAL PORTFOLIO INVESTMENTS AND TRANSACTIONS. The Portfolio may enter
into repurchase agreements to earn 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, indexes, 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 indexes, 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.

9
<PAGE>

The portfolio securities of the Research Portfolio are selected by a
committee of investment research analysts. This committee includes investment
analysts employed not only by MFS but also by MFS International (U.K.)
Limited, a wholly-owned subsidiary of MFS. The Portfolio's assets are
allocated among industries by the analysts acting together as a group.
Individual analysts are then responsible for selecting what they view as the
securities best suited to meet the Portfolio's investment objective within
their assigned industry responsibility.

INVESTMENT POLICIES AND RISKS--RESEARCH PORTFOLIO

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 (e.g., 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 net assets, securities in the lower rated categories (e.g., 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 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 up to 20% (and generally expects to invest between
0% and 20%) of its net assets in foreign securities (not including ADRs). The
Portfolio may invest 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.)

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 confirms based upon information and recommendations provided by the
Sub-Adviser that a specific Rule 144A security is liquid and thus not subject
to the Portfolio's limitation on investing not more than 10% of its net assets
in illiquid

10
<PAGE>

investments. 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. This investment practice
could have the effect of decreasing the level of liquidity 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, 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.

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. Under normal market conditions, at least
25% of the Portfolio's assets will be invested in fixed income securities and
at least 40% and no more than 75% of the Portfolio's assets will be invested
in equity securities.

INVESTMENT POLICIES AND RISKS--TOTAL RETURN PORTFOLIO

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 stocks and preferred stocks; securities such
as bonds, warrants or rights that are convertible into stock; and depositary
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, Fitch or Duff & Phelps Credit
Rating Co. ("Duff")) 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, Fitch
or Duff) (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.

11
<PAGE>

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 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 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
5% and 20%) of its net 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 confirms based upon
information

12
<PAGE>

and recommendations provided by the Sub-Adviser that a specific Rule 144A
security is liquid and thus not subject to the Portfolio's limitation on
investing not more than 15% of its net assets in illiquid investments. The
Board of Trustees has adopted guidelines and 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. This investment practice could
have the effect of decreasing the level of liquidity 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 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.

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.
Because the Portfolio is expected to have a portfolio turnover rate of over
100%, transaction costs incurred by the Portfolio and the realized capital
gains and losses of the Portfolio may be greater than that of a portfolio with
a lesser turnover rate. The portfolio turnover rates of the Portfolio for the
periods ended December 31, 1997 and 1996 are set forth herein under "Financial
Highlights." (See also "Portfolio Turnover" in the SAI.)

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, indexes, 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, Directed
Services, Inc., 1001 Jefferson Street, Suite 400, Wilmington, DE 19801 (the
"Adviser"), an affiliate of Equitable Investment Services, Inc., the original
adviser to the Trust, manages the business and affairs of the Portfolios and
the Trust subject to the control of the Trustees.

13
<PAGE>

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.

As full compensation for its services under the Investment Advisory
Agreement, the Trust pays 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>
OTC Portfolio .80% of first $300 million
<C> <S>
.55% of average net assets over and above $300
million
Research Portfolio .80% of first $300 million
.55% of average net assets over and above $300
million
Total Return Portfolio .80% of first $300 million
.55% of average net assets over and above $300
million
</TABLE>

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 Equitable Life
Insurance Company of Iowa 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 a 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 $70.2 billion on behalf of approximately 2.7 million investor
accounts as of December 31, 1997. As of such date, the MFS organization
managed approximately $45.7 billion of assets in equity securities and $24.5
billion of assets in fixed income securities. MFS is a subsidiary of Sun Life
Assurance Company of Canada (U.S.) which in turn is a wholly-owned subsidiary
of Sun Life Assurance Company of Canada ("Sun Life"). The Directors of MFS are
Jeffrey L. Shames, Arnold D. Scott, John D. McNeil and Donald R. Stewart. Mr.
Shames is the President and Mr. Scott is the Secretary and a Senior Executive
Vice President of MFS. Messrs. McNeil and Stewart 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.

14
<PAGE>

Kevin R. Parke is the portfolio manager for the Research Portfolio. Mr.
Parke oversees the selection of portfolio securities made by various equity
research analysts employed by MFS. Mr. Parke is a Senior Vice President--
Investments of MFS and has been employed as a portfolio manager by MFS since
1985.

David M. Calabro heads a team of portfolio managers of MFS for the Total
Return Portfolio. Mr. Calabro is a Vice President--Investments of MFS and
manages the equity portion of the portfolio along with Judith N. Lamb, a Vice
President--Investments of MFS, Lisa B. Nurme, a Vice President--Investments of
MFS and Maura Shaughnessy, a Vice President--Investments of MFS. Geoffrey L.
Kurinsky, a Senior Vice President--Investment manages the fixed income portion
of the portfolio and has been employed as a portfolio manager by MFS since
1987. Mr. Calabro has been employed as a portfolio manager by MFS since 1992.
Ms. Lamb has been employed as a portfolio manager by MFS since 1992. Ms. Nurme
has been employed as a portfolio manager by MFS since 1987. Ms. Shaughnessy
has been employed as a portfolio manager by MFS since 1991.

John W. Ballen and Mark Regan are the portfolio managers for the OTC
Portfolio. Mr. Ballen is a Senior Vice President--Investments and the Chief
Equity Officer at MFS and has been employed by MFS since 1984. Mr. Regan is a
Vice President--Investments at MFS and has been employed as a portfolio
manager by MFS since 1989.

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>
<CAPTION>
OTC Portfolio .40% of first $300 million
<C> <S>
.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>

SALES AND REDEMPTIONS

The separate accounts of the Life Companies place 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 Variable Contracts issued by the Life
Companies. 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, except that, in the case of the Money
Market Portfolio, purchases will not be effected until the next determination
of net asset value after federal funds have been made available to the Trust.
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
accounts of the Life Companies when they redeem 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.

15
<PAGE>

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

Performance information for each of the other 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 separate accounts of the Life Companies
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 indexes. 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, 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 accounts of the Life Companies which hold its
shares.

16
<PAGE>

To comply with regulations under Section 817(h) of the Code, each Series of
the Trust generally will be required to diversify its investments so that on
the last day of each quarter of a calendar year, no more than 55% of the value
of its assets is represented by any one investment, no more than 70% is
represented by any two investments, no more than 80% is represented by any
three investments, and no more than 90% is represented by any four
investments. For additional information on the application of the asset
diversification requirements under Code Section 817(h), and the asset
diversification requirements applicable to regulated investment companies,
potential investors in the Market Manager Series should see "Federal Income
Tax Status" in the Market Manager Series' Prospectus.

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

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

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

In the event that unfavorable rules, regulations or positions are adopted,
there can be no assurance that the Portfolios will be able to operate as
currently described in the Prospectus, or that a Portfolio will not have to
change its investment objective or objectives, investment policies, or
investment restrictions. While a Portfolio's investment objective is
fundamental and may be changed only by a vote of a majority of its outstanding
shares, the Trustees have reserved the right to modify the investment policies
of a Portfolio as necessary to prevent any such prospective rules, regulations
and positions from causing the Variable Contract Owners to be considered the
owners of the assets underlying the Separate Accounts.

The requirements applicable to a Portfolio's qualification as a regulated
investment company and its compliance with the diversification test under Code
Section 817(h) may limit the extent to which a Portfolio will be able to
engage in transactions in options, futures contracts or forward contracts,
investments in precious metals, and in short sales.

For further information concerning federal income tax consequences for the
holders of the Variable Contracts of the Life Companies, investors should
consult the prospectus used in connection with the issuance of their Variable
Contracts.

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 Companies
will be informed at least annually about the amount and character of
distributions from the Trust for federal income tax purposes.

YEAR 2000

Based on a study of its computer software systems and hardware, the Adviser
and an affiliate, Golden American Life Insurance Company ("Golden American"),
have determined their exposure to the Year 2000 change of the century date
issue. Some of these systems support certain trust operations. The Adviser
believes

17
<PAGE>

its and Golden American's systems are or will be substantially compliant by
Year 2000 and has engaged external consultants to validate this assumption.
The Adviser is in contact with the Trust's Sub-Advisers and third party
vendors to ensure that their systems will be compliant by Year 2000. To the
extent any of these Sub-Advisers and third parties would be unable to transact
business in the Year 2000 and thereafter, the Trust's operations could be
adversely affected.

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-Advisers
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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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 Adviser or 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
Adviser or the Sub-Advisers 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.

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.

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BORROWING

Each of the Portfolios may borrow money (up to 33 1/3% of its assets) for
temporary or emergency purposes. In addition, the Money Market Portfolio may
borrow to facilitate redemptions. The Mortgage-Backed Securities Portfolio and
the International Fixed Income Portfolio may also borrow to enhance income. 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 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 Adviser or
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.

The Portfolios' investments in common stocks and other equity securities are
subject to stock market risk, which is the risk that the value of the equity
securities the Portfolios hold may decline over short or even extended
periods. Equity securities also are subject to risk that the value of a
particular issuer's securities will decline, even during periods when equity
securities traded in the stock market in general are rising.

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. Each Portfolio's Adviser
or 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.

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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.

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.

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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, the yields of the
Portfolios investing in fixed income obligations will tend to be somewhat
higher than prevailing market rates and, in periods of rising interest rates,
these Portfolios' yields will tend to be somewhat lower. Also, when interest
rates are falling, the inflow of net new money to the Portfolios investing in
fixed income obligations from the continuous sales of their shares will 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 certain of these Portfolios that are rated in the lower
categories 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 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

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extremely difficult, and the successful execution of a hedging strategy is
highly uncertain. In addition, when the Adviser or 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 Adviser or 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 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 Adviser or 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

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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 Adviser or Sub-Advisers.
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 New York Stock Exchange. 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 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 Adviser or a 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; (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; (v) companies that have 50% or
more of their assets in an emerging market country; or (vi) the security is
issued or guaranteed by the government of an emerging market country or any of
its agencies, authorities or instrumentalities.

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 Adviser or 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

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Futures 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, 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 Adviser or 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.

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 Adviser or
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

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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 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 International Fixed Income Portfolio, Mortgage-Backed
Securities Portfolio, 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
(except for the Money Market Portfolio); (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 Adviser or Sub-Adviser believes that it would be
beneficial for the Portfolio and appropriate under the circumstances, up to
10% of the Portfolio's assets may be invested in securities of mutual

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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 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% (25% with respect to the Money Market
Portfolio) of a Portfolio's total assets taken at value. Loans of portfolio
securities by a Portfolio will be collateralized by cash, irrevocable 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. Each Portfolio's Adviser or 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 in the lower NRSRO
categories (e.g., BBB - by S&P or Baa3 by Moody's), or of equivalent quality
as determined by the Adviser or Sub-Adviser. Securities rated BB+, Ba1 or
lower are commonly referred to as high yield securities or "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

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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.

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.

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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.

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 Adviser or Sub-Adviser. Successful use by the Portfolio of options will
depend on its Adviser's or 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.

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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
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 Adviser's or 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 Adviser or 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 Adviser or 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

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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.

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 Adviser or 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. Such companies may have limited product lines, markets, or
financial resources and may be dependent on a limited management group. While
the markets in securities of such companies have grown rapidly in recent
years, such

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securities may trade less frequently and in smaller volume than more widely
held securities. The values of these securities may fluctuate more sharply
than those of other securities, and a Portfolio may experience some difficulty
in establishing or closing out positions in these securities at prevailing
market prices. There may be less publicly available information about the
issuers of these securities or less market interest in such securities than in
the case of larger companies, and it may take a longer period of time for the
prices of such securities to reflect the full value of their issuers'
underlying earnings potential or assets.

Some securities of smaller issuers may be restricted as to resale or may
otherwise be highly illiquid. The ability of a Portfolio to dispose of such
securities may be greatly limited, and a Portfolio may have to continue to
hold such securities during periods when the Adviser or a Sub-Adviser would
otherwise have sold the security. It is possible that the Adviser or a Sub-
Adviser or its affiliates or clients may hold securities issued by the same
issuers, and may in some cases have acquired the securities at different
times, on more favorable terms, or at more favorable prices, than a Portfolio
which it manages.

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, certain
of the Portfolios may, but are 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 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 Adviser's or 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).

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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. A Portfolio
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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EQUI-SELECT SERIES TRUST

STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1998

This Statement of Additional Information (this "Statement") contains
information which may be of interest to investors but which is not included in
the Prospectus of Equi-Select Series Trust (the "Trust"). This Statement is
not a prospectus and is only authorized for distribution when accompanied or
preceded by the Prospectus of the Trust dated May 1, 1998. This Statement
should be read together with the Prospectus. Investors may obtain a free copy
of the Prospectus by calling Equitable Life Insurance Company of Iowa ("Life
Company") at (800) 344-6864. Certain Portfolios described in the Prospectus
and in this Statement may be unavailable for investment.

TABLE OF CONTENTS

DEFINITIONS
INVESTMENT OBJECTIVES AND POLICIES OF THE TRUST
INVESTMENT RESTRICTIONS
MANAGEMENT OF THE TRUST
DETERMINATION OF NET ASSET VALUE
TAXES
DIVIDENDS AND DISTRIBUTIONS
PERFORMANCE INFORMATION
SHAREHOLDER COMMUNICATIONS
ORGANIZATION AND CAPITALIZATION
PORTFOLIO TURNOVER
CUSTODIAN
LEGAL COUNSEL
INDEPENDENT AUDITORS
SHAREHOLDER LIABILITY
FINANCIAL STATEMENTS

EQUI-SELECT SERIES TRUST

STATEMENT OF ADDITIONAL INFORMATION

DEFINITIONS

The "Trust" -- Equi-Select Series Trust.

"Adviser" -- Directed Services, Inc.,
the Trust's investment adviser.

INVESTMENT OBJECTIVES AND POLICIES OF THE TRUST

The Trust currently offers shares of beneficial interest of nine series (the
"Portfolios") with separate investment objectives and policies. The investment
objectives and policies of each of the Portfolios of the Trust are described
in the Prospectus. This Statement contains additional information concerning
certain investment practices and investment restrictions of the Trust.

Shares of the Trust are sold only to insurance company separate accounts to
fund the benefits of variable annuity contracts and variable life insurance
policies ("Variable Contracts") owned by their respective contractholders.
Certain Portfolios of the Trust may not be available in connection with a
particular Variable Contract or in a particular state. Investors should
consult the separate account prospectus of the specific insurance product that
accompanies the Trust prospectus for information on any applicable
restrictions or limitations with respect to the Portfolios of the Trust.

Except as described below under "Investment Restrictions", the investment
objectives and policies described in the Prospectus and in this Statement are
not fundamental, and the Trustees may change the investment objectives and
policies of a Portfolio without an affirmative vote of shareholders of the
Portfolio.

Except as otherwise noted below, the following descriptions of certain
investment policies and techniques are applicable to all of the Portfolios.

OPTIONS

Each Portfolio other than the Money Market Portfolio 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.

COVERED CALL OPTIONS. Each Portfolio other than the Money Market
Portfolio may write covered call options on portfolio securities to realize a
greater current return through the receipt of premiums than it would realize
on portfolio securities alone. Such option transactions may also be used as a
limited form of hedging against a decline in the price of securities owned by
the Portfolio.

A call option gives the holder the right to purchase, and obligates the
writer to sell, a security at the exercise price at any time before the
expiration date. A call option is "covered" if the writer, at all times while
obligated as a writer, either owns the underlying securities (or comparable
securities satisfying the cover requirements of the securities exchanges), or
has the right to acquire such securities through immediate conversion of
portfolio securities.

In return for the premium received when it writes a covered call option,
the Portfolio gives up some or all of the opportunity to profit from an
increase in the market price of the securities covering the call option during
the life of the option. The Portfolio retains the risk of loss should the
price of such securities decline. If the option expires unexercised, the
Portfolio realizes a gain equal to the premium, which may be offset by a
decline in price of the underlying security. If the option is exercised, the
Portfolio realizes a gain or loss equal to the difference between the
Portfolio's cost for the underlying security and the proceeds of sale
(exercise price minus commissions) plus the amount of the premium.

A Portfolio may terminate a call option that it has written before it
expires by entering into a closing purchase transaction. A Portfolio may enter
into closing purchase transactions in order to free itself to sell the
underlying security or to write another call on the security, realize a profit
on a previously written call option, or protect a security from being called in
an unexpected market rise. Any profits from a closing purchase transaction may
be offset by a decline in the value of the underlying security. Conversely,
because increases in the market price of a call option will generally reflect
increases in the market price of the underlying security, any loss resulting
from a closing purchase transaction is likely to be offset in whole or in part
by unrealized appreciation of the underlying security owned by the Trust.

COVERED PUT OPTIONS. Each Portfolio other than the Money Market Portfolio
may write covered put options in order to enhance its current return. Such
options transactions may also be used as a limited form of hedging against an
increase in the price of securities that the Portfolio plans to purchase. A
put option gives the holder the right to sell, and obligates the writer to
buy, a security at the exercise price at any time before the expiration date.
A put option is "covered" if the writer segregates cash and high-grade
short-term debt obligations or other permissible collateral equal to the price
to be paid if the option is exercised.

In addition to the receipt of premiums and the potential gains from
terminating such options in closing purchase transactions, the Portfolio also
receives interest on the cash and debt securities maintained to cover the
exercise price of the option. By writing a put option, the Portfolio assumes
the risk that it may be required to purchase the underlying security for an
exercise price higher than its then current market value, resulting in a
potential capital loss unless the security later appreciates in value.

A Portfolio may terminate a put option that it has written before it
expires by a closing purchase transaction. Any loss from this transaction may
be partially or entirely offset by the premium received on the terminated
option.

PURCHASING PUT AND CALL OPTIONS. Each Portfolio other than the Money
Market Portfolio may also purchase put options to protect portfolio holdings
against a decline in market value. This protection lasts for the life of the
put option because the Portfolio, as a holder of the option, may sell the
underlying security at the exercise price regardless of any decline in its
market price. In order for a put option to be profitable, the market price of
the underlying security must decline sufficiently below the exercise price to
cover the premium and transaction costs that the Portfolio must pay. These
costs will reduce any profit the Portfolio might have realized had it sold the
underlying security instead of buying the put option.

Each Portfolio other than the Money Market Portfolio may purchase call
options to hedge against an increase in the price of securities that the
Portfolio wants ultimately to buy. Such hedge protection is provided during
the life of the call option since the Portfolio, as holder of the call option,
is able to buy the underlying security at the exercise price regardless of any
increase in the underlying security's market price. In order for a call option
to be profitable, the market price of the underlying security must rise
sufficiently above the exercise price to cover the premium and transaction
costs. These costs will reduce any profit the Portfolio might have realized
had it bought the underlying security at the time it purchased the call
option. A Portfolio may also purchase put and call options to enhance its
current return.

OPTIONS ON FOREIGN SECURITIES. The Trust may, on behalf of each of the
Portfolios other than the Money Market Portfolio, purchase and sell options on
foreign securities if in the opinion of the Adviser or Sub-Adviser of the
particular Portfolio the investment characteristics of such options, including
the risks of investing in such options, are consistent with the Portfolio's
investment objectives. It is expected that risks related to such options will
not differ materially from risks related to options on U.S. securities.
However, position limits and other rules of foreign exchanges may differ from
those in the U.S. In addition, options markets in some countries, many of
which are relatively new, may be less liquid than comparable markets in the
U.S.

RISKS INVOLVED IN THE SALE OF OPTIONS. Options transactions involve
certain risks, including the risks that a Portfolio's Adviser or Sub-Adviser
will not forecast interest rate or market movements correctly, that a
Portfolio may be unable at times to close out such positions, or that hedging
transactions may not accomplish their purpose because of imperfect market
correlations. The successful use of these strategies depends on the ability of
a Portfolio's Sub-Adviser to forecast market and interest rate movements
correctly.

An exchange-listed option may be closed out only on an exchange which
provides a secondary market for an option of the same series. There is no
assurance that a liquid secondary market on an exchange will exist for any
particular option or at any particular time. If no secondary market were to
exist, it would be impossible to enter into a closing transaction to close out
an option position. As a result, a Portfolio may be forced to continue to
hold, or to purchase at a fixed price, a security on which it has sold an
option at a time when a Portfolio's Adviser or Sub-Adviser believes it is
inadvisable to do so.

Higher than anticipated trading activity or order flow or other
unforeseen events might cause The Options Clearing Corporation or an exchange
to institute special trading procedures or restrictions that might restrict a
Portfolio's use of options. The exchanges have established limitations on the
maximum number of calls and puts of each class that may be held or written by
an investor or group of investors acting in concert. It is possible that the
Trust and other clients of the Adviser or Sub-Adviser may be considered such a
group. These position limits may restrict the Trust's ability to purchase or
sell options on particular securities.

Options which are not traded on national securities exchanges may be
closed out only with the other party to the option transaction. For that
reason, it may be more difficult to close out unlisted options than listed
options. Furthermore, unlisted options are not subject to the protection
afforded purchasers of listed options by The Options Clearing Corporation.

Government regulations, particularly the requirements for qualification
as a "regulated investment company" under the Internal Revenue Code, may also
restrict the Trust's use of options.

SPECIAL EXPIRATION PRICE OPTIONS

Certain of the Portfolios may purchase over-the-counter ("OTC") puts and calls
with respect to specified securities ("special expiration price options")
pursuant to which the Portfolios in effect may create a custom index relating
to a particular industry or sector that the Adviser or Sub-Adviser believes
will increase or decrease in value generally as a group. In exchange for a
premium, the counterparty, whose performance is guaranteed by a broker-dealer,
agrees to purchase (or sell) a specified number of shares of a particular
stock at a specified price and further agrees to cancel the option at a
specified price that decreases straight line over the term of the option.
Thus, the value of the special expiration price option is comprised of the
market value of the applicable underlying security relative to the option
exercise price and the value of the remaining premium. However, if the value
of the underlying security increases (or decreases) by a prenegotiated amount,
the special expiration price option is canceled and becomes worthless. A
portion of the dividends during the term of the option is applied to reduce
the exercise price if the options are exercised. Brokerage commissions and
other transaction costs will reduce these Portfolios' profits if the special
expiration price options are exercised. A Portfolio will not purchase special
expiration price options with respect to more than 25% of the value of its net
assets.

LEAPS AND BOUNDS

The Value + Growth Portfolio may purchase certain long-term exchange-traded
equity options called Long-Term Equity Anticipation Securities ("LEAPs") and
Buy-Right Options Unitary Derivatives ("BOUNDs"). LEAPs provide a holder the
opportunity to participate in the underlying securities' appreciation in
excess of a fixed dollar amount. BOUNDs provide a holder the opportunity to
retain dividends on the underlying security while potentially participating in
the underlying securities' capital appreciation up to a fixed dollar amount.
The Value + Growth Portfolio will not purchase these options with respect to
more than 25% of the value of its net assets.

LEAPs are long-term call options that allow holders the opportunity to
participate in the underlying securities' appreciation in excess of a
specified strike price, without receiving payments equivalent to any cash
dividends declared on the underlying securities. A LEAP holder will be
entitled to receive a specified number of shares of the underlying stock upon
payment of the exercise price, and therefore the LEAP will be exercisable at
any time the price of the underlying stock is above the strike price. However,
if at expiration the price of the underlying stock is at or below the strike
price, the LEAP will expire worthless.

BOUNDs are long-term options which are expected to have the same economic
characteristics as covered call options, with the added benefits that BOUNDs
can be traded in a single transaction and are not subject to early exercise.
Covered call writing is a strategy by which an investor sells a call option
while simultaneously owning the number of shares of the stock underlying the
call. BOUND holders are able to participate in a stock's price appreciation up
to but not exceeding a specified strike price while receiving payments
equivalent to any cash dividends declared on the underlying stock. At
expiration, a BOUND holder will receive a specified number of shares of the
underlying stock for each BOUND held if, on the last day of trading, the
underlying stock closes at or below the strike price. However, if at
expiration the underlying stock closes above the strike price, the BOUND
holder will receive a payment equal to a multiple of the BOUND's strike price
for each BOUND held. The terms of a BOUND are not adjusted because of cash
distributions to the shareholders of the underlying security. BOUNDs are
subject to the position limits for equity options imposed by the exchanges on
which they are traded.

The settlement mechanism for BOUNDs operates in conjunction with that of the
corresponding LEAPs. For example, if at expiration the underlying stock closes
at or below the strike price, the LEAP will expire worthless, and the holder
of a corresponding BOUND will receive a specified number of shares of stock
from the writer of the BOUND. If, on the other hand, the LEAP is "in the
money" at expiration, the holder of the LEAP is entitled to receive a
specified number of shares of the underlying stock from the LEAP writer upon
payment of the strike price, and the holder of a BOUND on such stock is
entitled to the cash equivalent of a multiple of the strike price from the
writer of the BOUND. An investor holding both a LEAP and a corresponding
BOUND, where the underlying stock closes above the strike price at expiration,
would be entitled to receive a multiple of the strike price from the writer of
the BOUND and, upon exercise of the LEAP, would be obligated to pay the same
amount to receive shares of the underlying stock. LEAPs are American-style
options (exercisable at any time prior to expiration) whereas BOUNDs are
European-style options (exercisable only on the expiration date).

FUTURES CONTRACTS

The Trust may, on behalf of each Portfolio that may invest in debt securities,
other than the Money Market Portfolio, buy and sell futures contracts on debt
securities of the type in which the Portfolio may invest and on indexes of
debt securities. In addition, the Trust may, on behalf of each Portfolio that
may invest in equity securities, purchase and sell stock index futures for
hedging and non-hedging purposes. The Trust may also, for hedging and
non-hedging purposes, purchase and write options on futures contracts of the
type which such Portfolios are authorized to buy and sell and may engage in
related closing transactions. All such futures and related options will, as
may be required by applicable law, be traded on exchanges that are licensed
and regulated by the Commodity Futures Trading Commission ("CFTC").

FUTURES ON DEBT SECURITIES AND RELATED OPTIONS. A futures contract on a
debt security is a binding contractual commitment which, if held to maturity,
will result in an obligation to make or accept delivery, during a particular
month, of securities having a standardized face value and rate of return. By
purchasing futures on debt securities -- assuming a "long" position -- the
Trust will legally obligate itself on behalf of the Portfolios to accept the
future delivery of the underlying security and pay the agreed price. By
selling futures on debt securities -- assuming a "short" position -- it will
legally obligate itself to make the future delivery of the security against
payment of the agreed price. Open futures positions on debt securities will be
valued at the most recent settlement price, unless that price does not, in the
judgment of persons acting at the direction of the Trustees as to the
valuation of the Trust's assets, reflect the fair value of the contract, in
which case the positions will be valued by or under the direction of the
Trustees or such persons.

Positions taken in the futures markets are not normally held to maturity,
but are instead liquidated through offsetting transactions which may result in
a profit or a loss. While futures positions taken by the Trust on behalf of a
Portfolio will usually be liquidated in this manner, the Trust may instead
make or take delivery of the underlying securities whenever it appears
economically advantageous to the Portfolio to do so. A clearing corporation
associated with the exchange on which futures are traded assumes
responsibility for such closing transactions and guarantees that the Trust's
sale and purchase obligations under closed-out positions will be performed at
the termination of the contract.

Hedging by use of futures on debt securities seeks to establish more
certainly than would otherwise be possible the effective rate of return on
portfolio securities. A Portfolio may, for example, take a "short" position in
the futures market by selling contracts for the future delivery of debt
securities held by the Portfolio (or securities having characteristics similar
to those held by the Portfolio) in order to hedge against an anticipated rise
in interest rates that would adversely affect the value of the Portfolio's
portfolio securities. When hedging of this character is successful, any
depreciation in the value of portfolio securities may substantially be offset
by appreciation in the value of the futures position.

On other occasions, the Portfolio may take a "long" position by
purchasing futures on debt securities. This would be done, for example, when
the Trust expects to purchase for the Portfolio particular securities when it
has the necessary cash, but expects the rate of return available in the
securities markets at that time to be less favorable than rates currently
available in the futures markets. If the anticipated rise in the price of the
securities should occur (with its concomitant reduction in yield), the
increased cost to the Portfolio of purchasing the securities may be offset, at
least to some extent, by the rise in the value of the futures position taken
in anticipation of the subsequent securities purchase.

Successful use by the Trust of futures contracts on debt securities is
subject to the ability of a Portfolio's Adviser or Sub-Adviser to predict
correctly movements in the direction of interest rates and other factors
affecting markets for debt securities. For example, if a Portfolio has hedged
against the possibility of an increase in interest rates which would adversely
affect the market prices of debt securities held by it and the prices of such
securities increase instead, the Portfolio will lose part or all of the
benefit of the increased value of its securities which it has hedged because
it will have offsetting losses in its futures positions. In addition, in such
situations, if the Portfolio has insufficient cash, it may have to sell
securities to meet daily maintenance margin requirements, and thus the
Portfolio may have to sell securities at a time when it may be disadvantageous
to do so.

The Trust may purchase and write put and call options on certain debt
futures contracts, as they become available. Such options are similar to
options on securities except that options on futures contracts give the
purchaser the right, in return for the premium paid, to assume a position in a
futures contract (a long position if the option is a call and a short position
if the option is a put) at a specified exercise price at any time during the
period of the option. As with options on securities, the holder or writer of
an option may terminate his position by selling or purchasing an option of the
same series. There is no guarantee that such closing transactions can be
effected. The Trust will be required to deposit initial margin and maintenance
margin with respect to put and call options on futures contracts written by it
pursuant to brokers' requirements, and, in addition, net option premiums
received will be included as initial margin deposits. See "Margin Payments"
below. Compared to the purchase or sale of futures contracts, the purchase of
call or put options on futures contracts involves less potential risk to the
Trust because the maximum amount at risk is the premium paid for the options
plus transactions costs. However, there may be circumstances when the purchase
of call or put options on a futures contract would result in a loss to the
Trust when the purchase or sale of the futures contracts would not, such as
when there is no movement in the prices of debt securities. The writing of a
put or call option on a futures contract involves risks similar to those risks
relating to the purchase or sale of futures contracts.

INDEX FUTURES CONTRACTS AND OPTIONS. The Trust may invest in debt index
futures contracts and stock index futures contracts, and in related options. A
debt index futures contract is a contract to buy or sell units of a specified
debt index at a specified future date at a price agreed upon when the contract
is made. A unit is the current value of the index. Debt index futures in which
the Trust presently expects to invest are not now available, although the
Trust expects such futures contracts to become available in the future. A
stock index futures contract is a contract to buy or sell units of a stock
index at a specified future date at a price agreed upon when the contract is
made. A unit is the current value of the stock index.

The following example illustrates generally the manner in which index
futures contracts operate. The Standard & Poor's 100 Stock Index (the "S&P 100
Index") is composed of 100 selected common stocks, most of which are listed on
the New York Stock Exchange. The S&P 100 Index assigns relative weightings to
the common stocks included in the Index, and the Index fluctuates with changes
in the market values of those common stocks. In the case of the S&P 100 Index,
contracts are to buy or sell 100 units. Thus, if the value of the S&P 100
Index were $180, one contract would be worth $18,000 (100 units x $180). The
stock index futures contract specifies that no delivery of the actual stocks
making up the index will take place. Instead, settlement in cash must occur
upon the termination of the contract, with the settlement being the difference
between the contract price and the actual level of the stock index at the
expiration of the contract. For example, if a Portfolio enters into a futures
contract to buy 100 units of the S&P 100 Index at a specified future date at a
contract price of $180 and the S&P 100 Index is at $184 on that future date,
the Portfolio will gain $400 (100 units x gain of $4). If the Portfolio enters
into a futures contract to sell 100 units of the stock index at a specified
future date at a contract price of $180 and the S&P 100 Index is at $182 on
that future date, the Portfolio will lose $200 (100 units x loss of $2).

The Trust does not presently expect to invest in debt index futures
contracts. Stock index futures contracts are currently traded with respect to
the S&P 100 Index on the Chicago Mercantile Exchange, and with respect to
other broad stock market indexes, such as the New York Stock Exchange
Composite Stock Index, which is traded on the New York Futures Exchange, and
the Value Line Composite Stock Index, which is traded on the Kansas City Board
of Trade, as well as with respect to narrower "sub-indexes" such as the S&P
100 Energy Stock Index and the New York Stock Exchange Utilities Stock Index.
A Portfolio may purchase or sell futures contracts with respect to any stock
indexes. Positions in index futures may be closed out only on an exchange or
board of trade which provides a secondary market for such futures.

In order to hedge a Portfolio's investments successfully using futures
contracts and related options, the Trust must invest in futures contracts with
respect to indexes or sub-indexes the movements of which will, in its
judgment, have a significant correlation with movements in the prices of the
Portfolio's securities.

Options on index futures contracts are similar to options on securities
except that options on index futures contracts give the purchaser the right,
in return for the premium paid, to assume a position in an index futures
contract (a long position if the option is a call and a short position if the
option is a put) at a specified exercise price at any time during the period
of the option. Upon exercise of the option, the holder would assume the
underlying futures position and would receive a variation margin payment of
cash or securities approximating the increase in the value of the holder's
option position. If an option is exercised on the last trading day prior to
the expiration date of the option, the settlement will be made entirely in
cash based on the difference between the exercise price of the option and the
closing level of the index on which the futures contract is based on the
expiration date. Purchasers of options who fail to exercise their options
prior to the exercise date suffer a loss of the premium paid.

As an alternative to purchasing and selling call and put options on index
futures contracts, each of the Portfolios which may purchase and sell index
futures contracts may purchase and sell call and put options on the underlying
indexes themselves to the extent that such options are traded on national
securities exchanges. Index options are similar to options on individual
securities in that the purchaser of an index option acquires the right to buy
(in the case of a call) or sell (in the case of a put), and the writer
undertakes the obligation to sell or buy (as the case may be), units of an
index at a stated exercise price during the term of the option. Instead of
giving the right to take or make actual delivery of securities, the holder of
an index option has the right to receive a cash "exercise settlement amount".
This amount is equal to the amount 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 the exercise,
multiplied by a fixed "index multiplier".

A Portfolio may purchase or sell options on stock indexes in order to
close out its outstanding positions in options on stock indexes which it has
purchased. A Portfolio may also allow such options to expire unexercised.

Compared to the purchase or sale of futures contracts, the purchase of
call or put options on an index involves less potential risk to the Trust
because the maximum amount at risk is the premium paid for the options plus
transactions costs. The writing of a put or call option on an index involves
risks similar to those risks relating to the purchase or sale of index futures
contracts.

MARGIN PAYMENTS. When a Portfolio purchases or sells a futures contract,
it is required to deposit with the Custodian an amount of cash, U.S. Treasury
bills, or other permissible collateral equal to a small percentage of the
amount of the futures contract. This amount is known as "initial margin". The
nature of initial margin is different from that of margin in security
transactions in that it does not involve borrowing money to finance
transactions. Rather, initial margin is similar to a performance bond or good
faith deposit that is returned to the Trust upon termination of the contract,
assuming the Trust satisfies its contractual obligations.

Subsequent payments to and from the broker occur on a daily basis in a
process known as "marking to market". These payments are called "variation
margin" and are made as the value of the underlying futures contract
fluctuates. For example, when a Portfolio sells a futures contract and the
price of the underlying debt security rises above the delivery price, the
Portfolio's position declines in value. The Portfolio then pays the broker a
variation margin payment equal to the difference between the delivery price of
the futures contract and the value of the index underlying the futures
contract. Conversely, if the price of the underlying index falls below the
delivery price of the contract, the Portfolio's futures position increases in
value. The broker then must make a variation margin payment equal to the
difference between the delivery price of the futures contract and the value of
the index underlying the futures contract.

When a Portfolio terminates a position in a futures contract, a final
determination of variation margin is made, additional cash is paid by or to
the Portfolio, and the Portfolio realizes a loss or a gain. Such closing
transactions involve additional commission costs.

SPECIAL RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS

LIQUIDITY RISKS. Positions in futures contracts may be closed out only on
an exchange or board of trade which provides a secondary market for such
futures. Although the Trust intends to purchase or sell futures only on
exchanges or boards of trade where there appears to be an active secondary
market, there is no assurance that a liquid secondary market on an exchange or
board of trade will exist for any particular contract or at any particular
time. If there is not a liquid secondary market at a particular time, it may
not be possible to close a futures position at such time and, in the event of
adverse price movements, a Portfolio would continue to be required to make
daily cash payments of variation margin. However, in the event financial
futures are used to hedge portfolio securities, such securities will not
generally be sold until the financial futures can be terminated. In such
circumstances, an increase in the price of the portfolio securities, if any,
may partially or completely offset losses on the financial futures.

In addition to the risks that apply to all options transactions, there
are several special risks relating to options on futures contracts. The
ability to establish and close out positions in such options will be subject
to the development and maintenance of a liquid secondary market. It is not
certain that such a market will develop. Although a Portfolio generally will
purchase only those options for which there appears to be an active secondary
market, there is no assurance that a liquid secondary market on an exchange
will exist for any particular option or at any particular time. In the event
that no such market exists for particular options, it might not be possible to
effect closing transactions in such options with the result that a Portfolio
would have to exercise the options in order to realize any profit.

HEDGING RISKS. There are several risks in connection with the use by a
Portfolio of futures contracts and related options as a hedging device. One
risk arises because of the imperfect correlation between movements in the
prices of the futures contracts and options and movements in the underlying
securities or index or movements in the prices of the Trust's securities which
are the subject of the hedge. A Portfolio's Adviser or Sub-Adviser will,
however, attempt to reduce this risk by purchasing and selling, to the extent
possible, futures contracts and related options on securities and indexes the
movements of which will, in its judgment, correlate closely with movements in
the prices of the underlying securities or index and the Trust's portfolio
securities sought to be hedged.

Successful use of futures contracts and options by a Portfolio for
hedging purposes is also subject to a Portfolio's Adviser's or Sub-Adviser's
ability to predict correctly movements in the direction of the market. It is
possible that, where a Portfolio has purchased puts on futures contracts to
hedge its portfolio against a decline in the market, the securities or index
on which the puts are purchased may increase in value and the value of
securities held in the portfolio may decline. If this occurred, the Portfolio
would lose money on the puts and also experience a decline in value in its
portfolio securities. In addition, the prices of futures, for a number of
reasons, may not correlate perfectly with movements in the underlying
securities or index due to certain market distortions. First, all participants
in the futures market are subject to margin deposit requirements. Such
requirements may cause investors to close futures contracts through offsetting
transactions which could distort the normal relationship between the
underlying security or index and futures markets. Second, the margin
requirements in the futures markets are less onerous than margin requirements
in the securities markets in general, and as a result the futures markets may
attract more speculators than the securities markets do. Increased
participation by speculators in the futures markets may also cause temporary
price distortions. Due to the possibility of price distortion, even a correct
forecast of general market trends by a Portfolio's Adviser or Sub-Adviser may
still not result in a successful hedging transaction over a very short time
period.

OTHER RISKS. Portfolios will incur brokerage fees in connection with
their futures and options transactions. In addition, while futures contracts
and options on futures will be purchased and sold to reduce certain risks,
those transactions themselves entail certain other risks. Thus, while a
Portfolio may benefit from the use of futures and related options,
unanticipated changes in interest rates or stock price movements may result in
a poorer overall performance for the Portfolio than if it had not entered into
any futures contracts or options transactions. Moreover, in the event of an
imperfect correlation between the futures position and the portfolio position
which is intended to be protected, the desired protection may not be obtained
and the Portfolio may be exposed to risk of loss.

INDEXED SECURITIES

Certain of the Portfolios may purchase securities whose prices are indexed to
the prices of other securities, securities indexes, currencies, precious
metals or other commodities, or other financial indicators. Indexed securities
typically, but not always, are debt securities or deposits whose value at
maturity or coupon rate is determined by reference to a specific instrument or
statistic. Gold-indexed securities, for example, typically provide for a
maturity value that depends on the price of gold, resulting in a security
whose price tends to rise and fall together with gold prices. Currency-indexed
securities typically are short-term to intermediate-term debt securities whose
maturity values or interest rates are determined by reference to the values of
one or more specified foreign currencies, and may offer higher yields than
U.S. dollar-denominated securities of equivalent issuers. Currency-indexed
securities may be positively or negatively indexed; that is, their maturity
value may increase when the specified currency value increases, resulting in a
security whose price characteristics are similar to a put option on the
underlying currency. Currency-indexed securities also may have prices that
depend on the values of a number of different foreign currencies relative to
each other.

The performance of indexed securities depends to a great extent on the
performance of the security, currency, commodity or other instrument to which
they are indexed, and also may be influenced by interest rate changes in the
U.S. and abroad. At the same time, indexed securities are subject to the
credit risks associated with the issuer of the security, and their values may
decline substantially if the issuer's creditworthiness deteriorates. Recent
issuers of indexed securities have included banks, corporations, and certain
U.S. Government agencies.

FORWARD COMMITMENTS

The Trust may, on behalf of each Portfolio, enter into contracts to purchase
securities for a fixed price at a future date beyond customary settlement time
("forward commitments") if the Portfolio holds, and maintains until the
settlement date in a segregated account, cash or high-grade debt obligations
in an amount sufficient to meet the purchase price, or if the Portfolio enters
into offsetting contracts for the forward sale of other securities it owns.
Forward commitments may be considered securities in themselves, and involve a
risk of loss if the value of the security to be purchased declines prior to
the settlement date, which risk is in addition to the risk of decline in the
value of the Portfolio's other assets. Where such purchases are made through
dealers, the Portfolio relies on the dealer to consummate the sale. The
dealer's failure to do so may result in the loss to the Portfolio of an
advantageous yield or price.

Although a Portfolio will generally enter into forward commitments with the
intention of acquiring securities for its portfolio or for delivery pursuant
to options contracts it has entered into, a Portfolio may dispose of a
commitment prior to settlement if a Portfolio's Adviser or Sub-Adviser deems
it appropriate to do so. A Portfolio may realize short-term profits or losses
upon the sale of forward commitments.

REPURCHASE AGREEMENTS

On behalf of each Portfolio, the Trust may enter into repurchase agreements. A
repurchase agreement is a contract under which the Portfolio acquires a
security for a relatively short period (usually not more than one week)
subject to the obligation of the seller to repurchase and the Portfolio to
resell such security at a fixed time and price (representing the Portfolio's
cost plus interest). It is the Trust's present intention to enter into
repurchase agreements only with member banks of the Federal Reserve System and
securities dealers meeting certain criteria as to creditworthiness and
financial condition established by the Trustees of the Trust and only with
respect to obligations of the U.S. government or its agencies or
instrumentalities or other high-quality, short-term debt obligations.
Repurchase agreements may also be viewed as loans made by a Portfolio which
are collateralized by the securities subject to repurchase. The Adviser and
Sub-Advisers will monitor such transactions to ensure that the value of the
underlying securities will be at least equal at all times to the total amount
of the repurchase obligation, including the interest factor. If the seller
defaults, a Portfolio could realize a loss on the sale of the underlying
security to the extent that the proceeds of sale including accrued interest
are less than the resale price provided in the agreement including interest.
In addition, if the seller should be involved in bankruptcy or insolvency
proceedings, a Portfolio may incur delay and costs in selling the underlying
security or may suffer a loss of principal and interest if a Portfolio is
treated as an unsecured creditor and required to return the underlying
collateral to the seller's estate.

LEVERAGE

Leveraging a Portfolio creates an opportunity for increased net income but, at
the same time, creates special risk considerations. For example, leveraging
may exaggerate changes in the net asset value of a Portfolio's shares and in
the yield on a Portfolio's portfolio. Although the principal of such
borrowings will be fixed, a Portfolio's assets may change in value during the
time the borrowing is outstanding. Leveraging will create interest expenses
for a Portfolio, which can exceed the income from the assets retained. To the
extent the income derived from securities purchased with borrowed funds
exceeds the interest these Portfolios will have to pay, each Portfolio's net
income will be greater than if leveraging were not used. Conversely, if the
income from the assets retained with borrowed funds is not sufficient to cover
the cost of leveraging, the net income of the Portfolio will be less than if
leveraging were not used, and therefore the amount available for distribution
to stockholders as dividends will be reduced.

REVERSE REPURCHASE AGREEMENTS

The Trust may, on behalf of each of the Portfolios, enter into reverse
repurchase agreements, which involve the sale by the Portfolio of securities
held by it with an agreement to repurchase the securities at an agreed upon
price, date, and interest payment. The Portfolios will use the proceeds of the
reverse repurchase agreements to purchase securities either maturing, or under
an agreement to resell, at a date simultaneous with or prior to the expiration
of the reverse repurchase agreement. A Portfolio will use reverse repurchase
agreements when the interest income to be earned from the investment of the
proceeds of the transaction is greater than the interest expense of the
reverse repurchase transaction. Reverse repurchase agreements into which the
Portfolios will enter require that the market value of the underlying security
and other collateral equal or exceed the repurchase price (including interest
accrued on the security), and require the Portfolios to provide additional
collateral if the market value of such security falls below the repurchase
price at any time during the term of the reverse repurchase agreement. At all
times that a reverse repurchase agreement is outstanding, the Portfolio will
maintain cash, liquid high grade debt obligations, or U.S. Government
securities, as the case may be, in a segregated account at its custodian with
a value at least equal to its obligations under the agreement.

In addition to the general risks involved in leveraging, reverse repurchase
agreements involve the risk that, in the event of the bankruptcy or insolvency
of the Portfolio's counterparty, the Portfolio would be unable to recover the
security which is the subject of the agreement, the amount of cash or other
property transferred by the counterparty to the Portfolio under the agreement
prior to such insolvency or bankruptcy is less than the value of the security
subject to the agreement, or the Portfolio may be delayed or prevented, due to
such insolvency or bankruptcy, from using such cash or property or may be
required to return it to the counterparty or its trustee or receiver.

WHEN-ISSUED SECURITIES

The Trust may, on behalf of each Portfolio, from time to time purchase
securities on a "when-issued" basis. Debt securities are often issued on this
basis. The price of such securities, which may be expressed in yield terms, is
fixed at the time a commitment to purchase is made, but delivery and payment
for the when-issued securities take place at a later date. Normally, the
settlement date occurs within one month of the purchase. During the period
between purchase and settlement, no payment is made by a Portfolio and no
interest accrues to the Portfolio. To the extent that assets of a Portfolio
are held in cash pending the settlement of a purchase of securities, that
Portfolio would earn no income. While the Trust may sell its right to acquire
when-issued securities prior to the settlement date, the Trust intends
actually to acquire such securities unless a sale prior to settlement appears
desirable for investment reasons. At the time a Portfolio makes the commitment
to purchase a security on a when-issued basis, it will record the transaction
and reflect the amount due and the value of the security in determining the
Portfolio's net asset value. The market value of the when-issued securities
may be more or less than the purchase price payable at the settlement date.
Each Portfolio will establish a segregated account in which it will maintain
cash and U.S. Government Securities or other high-grade debt obligations at
least equal in value to commitments for when-issued securities. Such
segregated securities either will mature or, if necessary, be sold on or
before the settlement date.

LOANS OF PORTFOLIO SECURITIES

The Trust may lend the portfolio securities of any Portfolio, provided: (1)
the loan is secured continuously by collateral consisting of U.S. Government
Securities, cash, or irrevocable letters of credit adjusted daily to have
market value at least equal to the current market value of the securities
loaned; (2) the Trust may at any time call the loan and regain the securities
loaned; (3) the Trust will receive any interest or dividends paid on the
loaned securities; and (4) the aggregate market value of securities of any
Portfolio loaned will not at any time exceed 20% (25% with respect to the
Money Market Portfolio) of the total assets of the Portfolio taken at value.
In addition, it is anticipated that the Portfolio may share with the borrower
some of the income received on the collateral for the loan or that it will be
paid a premium for the loan. Before the Portfolio enters into a loan, a
Portfolio's Adviser or Sub-Adviser considers all relevant facts and
circumstances including the creditworthiness of the borrower. The risks in
lending portfolio securities, as with other extensions of credit, consist of
possible delay in recovery of the securities or possible loss of rights in the
collateral should the borrower fail financially. Although voting rights, or
rights to consent, with respect to the loaned securities pass to the borrower,
the Trust retains the right to call the loans at any time on reasonable
notice, and it will do so in order that the securities may be voted by the
Trust if the holders of such securities are asked to vote upon or consent to
matters materially affecting the investment. The Trust will not lend portfolio
securities to borrowers affiliated with the Trust.

EUROPEAN AND AMERICAN DEPOSITARY RECEIPTS

Each of the Portfolios, other than the Money Market Portfolio, may invest in
foreign securities by purchasing American Depositary Receipts ("ADRs") and
also may purchase securities of foreign issuers in foreign markets and
purchase European Depositary Receipts ("EDRs") or other securities convertible
into securities or issuers based in foreign countries. These securities may
not necessarily be denominated in the same currency as the securities into
which they may be converted. Generally, ADRs, in registered form, are
denominated in U.S. dollars and are designed for use in the U.S. securities
markets, while EDRs, in bearer form, may be denominated in other currencies
and are designed for use in European securities markets. ADRs are receipts
typically issued by a U.S. Bank or trust company evidencing ownership of the
underlying securities. EDRs are European receipts evidencing similar
arrangements. For purposes of the Portfolio's investment policies, ADRs and
EDRs are deemed to have the same classification as the underlying securities
they represent. Thus, an ADR or EDR representing ownership of common stock
will be treated as common stock.

ADR facilities may be established as either "unsponsored" or "sponsored."
While ADRs issued under these two types of facilities are in some respects
similar, there are distinctions between them relating to the rights and
obligations of ADR holders and the practices of market participants. A
depository may establish an unsponsored facility without participation by (or
even necessarily the acquiescence of) the issuer of the deposited securities,
although typically the depository requests a letter of non-objection from such
issuer prior to the establishment of the facility. Holders of unsponsored ADRs
generally bear all the costs of such facilities. The depository usually
charges fees upon the deposit and withdrawal of the deposited securities, the
conversion of dividends into U.S. dollars, the disposition of non-cash
distribution, and the performance of other services. The depository of an
unsponsored facility frequently is under no obligation to distribute
shareholder communications received from the issuer of the deposited
securities or to pass through voting rights to ADR holders in respect of the
deposited securities. Sponsored ADR facilities are created in generally the
same manner as unsponsored facilities, except that the issuer of the deposited
securities enters into a deposit agreement with the depository. The deposit
agreement sets out the rights and responsibilities of the issuer, the
depository and the ADR holders. With sponsored facilities, the issuer of the
deposited securities generally will bear some of the costs relating to the
facility (such as dividend payment fees of the depository), although ADR
holders continue to bear certain other costs (such as deposit and withdrawal
fees). Under the terms of most sponsored arrangements, depositories agree to
distribute notices of shareholder meetings and voting instructions, and to
provide shareholder communications and other information to the ADR holders at
the request of the issuer of the deposited securities.

FOREIGN SECURITIES

Investments in foreign securities may involve considerations different from
investments in domestic securities due to limited publicly available
information, non-uniform accounting standards, lower trading volume and
possible consequent illiquidity, greater volatility in price, the possible
imposition of withholding or confiscatory taxes, the possible adoption of
foreign governmental restrictions affecting the payment of principal and
interest, expropriation of assets, nationalization, or other adverse political
or economic developments. Foreign companies may not be subject to auditing and
financial reporting standards and requirements comparable to those which apply
to U.S. companies. Foreign brokerage commissions and other fees are generally
higher than in the United States. It may also be more difficult to obtain and
enforce a judgment against a foreign issuer.

In addition, to the extent that any Portfolio's foreign investments are not
United States dollar-denominated, the Portfolio may be affected favorably or
unfavorably by changes in currency exchange rates or exchange control
regulations and may incur costs in connection with conversion between
currencies.

In determining whether to invest in securities of foreign issuers, the Adviser
or Sub-Adviser of a Portfolio will consider the likely impact of foreign taxes
on the net yield available to the Portfolio and its shareholders. Income
received by a Portfolio from sources within foreign countries may be reduced
by withholding and other taxes imposed by such countries. Tax conventions
between certain countries and the United States may reduce or eliminate such
taxes. It is impossible to determine the effective rate of foreign tax in
advance since the amount of a Portfolio's assets to be invested in various
countries is not known, and tax laws and their interpretations may change from
time to time and may change without advance notice. Any such taxes paid by a
Portfolio will reduce its net income available for distribution to
shareholders.

FOREIGN CURRENCY TRANSACTIONS

The Trust may engage in currency exchange transactions, on behalf of its
Portfolios which may invest in foreign securities, to protect against
uncertainty in the level of future foreign currency exchange rates and to
increase current return. The Trust may engage in both "transaction hedging"
and "position hedging".

When it engages in transaction hedging, the Trust enters into foreign currency
transactions with respect to specific receivables or payables of a Portfolio
generally arising in connection with the purchase or sale of its portfolio
securities. The Trust will engage in transaction hedging when it desires to
"lock in" the U.S. dollar price of a security it has agreed to purchase or
sell, or the U.S. dollar equivalent of a dividend or interest payment in a
foreign currency. By transaction hedging the Trust will attempt to protect a
Portfolio against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the applicable foreign currency
during the period between the date on which the security is purchased or sold
or on which the dividend or interest payment is declared, and the date on
which such payments are made or received.

The Trust may purchase or sell a foreign currency on a spot (i.e., cash) basis
at the prevailing spot rate in connection with transaction hedging. The Trust
may also enter into contracts to purchase or sell foreign currencies at a
future date ("forward contracts") and purchase and sell foreign currency
futures contracts.

For transaction hedging purposes the Trust may also purchase exchange-listed
and over-the-counter call and put options on foreign currency futures
contracts and on foreign currencies. A put option on a futures contract gives
the Trust the right to assume a short position in the futures contract until
expiration of the option. A put option on currency gives the Trust the right
to sell a currency at a specified exercise price until the expiration of the
option. A call option on a futures contract gives the Trust the right to
assume a long position in the futures contract until the expiration of the
option. A call option on currency gives the Trust the right to purchase a
currency at the exercise price until the expiration of the option. The Trust
will engage in over-the-counter transactions only when appropriate
exchange-traded transactions are unavailable and when, in the opinion of the
Portfolio's Adviser or Sub-Adviser, the pricing mechanism and liquidity are
satisfactory and the participants are responsible parties likely to meet their
contractual obligations.

When it engages in position hedging, the Trust enters into foreign currency
exchange transactions to protect against a decline in the values of the
foreign currencies in which securities held by a Portfolio are denominated or
are quoted in their principle trading markets or an increase in the value of
currency for securities which a Portfolio expects to purchase. In connection
with position hedging, the Trust may purchase put or call options on foreign
currency and foreign currency futures contracts and buy or sell forward
contracts and foreign currency futures contracts. The Trust may also purchase
or sell foreign currency on a spot basis.

The precise matching of the amounts of foreign currency exchange transactions
and the value of the portfolio securities involved will not generally be
possible since the future value of such securities in foreign currencies will
change as a consequence of market movements in the values of those securities
between the dates the currency exchange transactions are entered into and the
dates they mature.

It is impossible to forecast with precision the market value of a Portfolio's
portfolio securities at the expiration or maturity of a forward or futures
contract. Accordingly, it may be necessary for the Trust to purchase
additional foreign currency on behalf of a Portfolio on the spot market (and
bear the expense of such purchase) if the market value of the security or
securities being hedged is less than the amount of foreign currency the Trust
is obligated to deliver and if a decision is made to sell the security or
securities and make delivery of the foreign currency. Conversely, it may be
necessary to sell on the spot market some of the foreign currency received
upon the sale of the portfolio security or securities of a Portfolio if the
market value of such security or securities exceeds the amount of foreign
currency the Trust is obligated to deliver on behalf of the Portfolio.

To offset some of the costs to a Portfolio of hedging against fluctuations in
currency exchange rates, the Trust may write covered call options on those
currencies.

Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which a Portfolio owns or intends to
purchase or sell. They simply establish a rate of exchange which one can
achieve at some future point in time. Additionally, although these techniques
tend to minimize the risk of loss due to a decline in the value of the hedged
currency, they tend to limit any potential gain which might result from the
increase in the value of such currency.

A Portfolio may also seek to increase its current return by purchasing and
selling foreign currency on a spot basis, and by purchasing and selling
options on foreign currencies and on foreign currency futures contracts, and
by purchasing and selling foreign currency forward contracts.

CURRENCY FORWARD AND FUTURES CONTRACTS. A forward foreign currency
exchange contract involves an obligation 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 as agreed by the parties, at a price set at the time of the
contract. In the case of a cancelable forward contract, the holder has the
unilateral right to cancel the contract at maturity by paying a specified fee.
The contracts are traded in the interbank market conducted directly between
currency traders (usually large commercial banks) and their customers. A
forward contract generally has no deposit requirement, and no commissions are
charged at any stage for trades. A foreign currency futures contract is a
standardized contract for the future delivery of a specified amount of a
foreign currency at a future date at a price set at the time of the contract.
Foreign currency futures contracts traded in the United States are designed by
and traded on exchanges regulated by the CFTC, such as the New York Mercantile
Exchange.

Forward foreign currency exchange contracts differ from foreign currency
futures contracts in certain respects. For example, the maturity date of a
forward contract may be any fixed number of days from the date of the contract
agreed upon by the parties, rather than a predetermined date in a given month.
Forward contracts may be in any amounts agreed upon by the parties rather than
predetermined amounts. Also, forward foreign exchange contracts are traded
directly between currency traders so that no intermediary is required. A
forward contract generally requires no margin or other deposit.

At the maturity of a forward or futures contract, the Trust may either
accept or make delivery of the currency specified in the contract, or at or
prior to maturity enter into a closing transaction involving the purchase or
sale of an offsetting contract. Closing transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract. Closing transactions with respect to futures
contracts are effected on a commodities exchange; a clearing corporation
associated with the exchange assumes responsibility for closing out such
contracts.

Positions in foreign currency futures contracts and related options may
be closed out only on an exchange or board of trade which provides a secondary
market in such contracts or options. Although the Trust intends to purchase or
sell foreign currency futures contracts and related options only on exchanges
or boards of trade where there appears to be an active secondary market, there
is no assurance that a secondary market on an exchange or board of trade will
exist for any particular contract or option or at any particular time. In such
event, it may not be possible to close a futures or related option position
and, in the event of adverse price movements, the Trust would continue to be
required to make daily cash payments of variation margin on its futures
positions.

FOREIGN CURRENCY OPTIONS. Options on foreign currencies operate similarly
to options on securities, and are traded primarily in the over-the-counter
market, although options on foreign currencies have recently been listed on
several exchanges. Such options will be purchased or written only when a
Portfolio's Adviser or Sub-Adviser believes that a liquid secondary market
exists for such options. There can be no assurance that a liquid secondary
market will exist for a particular option at any specific time. Options on
foreign currencies are affected by all of those factors which influence
exchange rates and investments generally.

The value of a foreign currency option is dependent upon the value of the
foreign currency and the U.S. dollar, and may have no relationship to the
investment merits of a foreign security. Because foreign currency transactions
occurring in the interbank market involve substantially larger amounts than
those that may be involved in the use of foreign currency options, investors
may be disadvantaged by having to deal in an odd lot market (generally
consisting of transactions of less than $1 million) for the underlying foreign
currencies at prices that are less favorable than for round lots.

There is no systematic reporting of last-sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Available quotation information is generally representative of very large
transactions in the interbank market and thus may not reflect relatively
smaller transactions (less than $1 million) where rates may be less favorable.
The interbank market in foreign currencies is a global, around-the-clock
market. To the extent that the U.S. options markets are closed while the
markets for the underlying currencies remain open, significant price and rate
movements may take place in the underlying markets that cannot be reflected in
the U.S. options markets.

FOREIGN CURRENCY CONVERSION. Although foreign exchange dealers do not
charge a fee for currency conversion, they do realize a profit based on the
difference (the "spread") between prices at which they buy and sell various
currencies. Thus, a dealer may offer to sell a foreign currency to the Trust
at one rate, while offering a lesser rate of exchange should the Trust desire
to resell that currency to the dealer.

SWAPS, CAPS, FLOORS AND COLLARS. Among the Strategic Transactions into
which certain of the Portfolios may enter are interest rate, currency and
index swaps and other types of available swap agreements, such as caps, floors
and collars. A Portfolio will enter into these transactions primarily to
preserve a return or spread on a particular investment or portion of its
portfolio, to protect against currency fluctuations, as a duration management
technique or to protect against any increase in the price of securities a
Portfolio anticipates purchasing at a later date. A Portfolio will use these
transactions as hedges and not as speculative investments and will not sell
interest rate caps or floors where it does not own securities or other
instruments providing the income stream the Portfolio may be obligated to pay.
Interest rate swaps involve the exchange by the Portfolio with another party
of their respective commitments to pay or receive interest, e.g., an exchange
of floating rate payments for fixed rate payments with respect to a notional
amount of principal. A currency swap is an agreement to exchange cash flows on
a notional amount of two or more currencies based on the relative value
differential among them. An index swap is an agreement to swap cash flows on a
notional amount based on changes in the values of the reference indexes. The
purchase of a cap entitles the purchaser to receive payments on a notional
principal amount from the party selling such cap to the extent that a
specified index exceeds a predetermined interest rate or amount. The purchase
of a floor entitles the purchaser to receive payments on a notional principal
amount from the party selling such floor to the extent that a specified index
falls below a predetermined interest rate or amount. A collar is a combination
of a cap and a floor that preserves a certain return within a predetermined
range of interest rates or values.

A Portfolio will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or
dates specified in the instrument, with the Portfolio receiving or paying, as
the case may be, only the net amount of the two payments. Inasmuch as these
swaps, caps, floors and collars are entered into for good faith hedging
purposes, the Adviser, the Sub-Advisers and the Portfolios believe such
obligations do not constitute senior securities under the Investment Company
Act of 1940, as amended, and, accordingly, will not treat them as being
subject to its borrowing restrictions. If there is a default by the
counterparty, the Portfolio may have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms
acting both as principals and agents utilizing standardized swap
documentation. As a result, the swap market has become relatively liquid.
Caps, floors and collars are more recent innovations for which standardized
documentation has not yet been fully developed and, accordingly, they are less
liquid than swaps.

With respect to swaps, the Portfolio will accrue the net amount of the
excess, if any, of its obligations over its entitlements with respect to each
swap on a daily basis and will segregate with its custodian an amount of cash
or liquid high-grade securities having a value equal to the accrued excess.
Caps, floors and collars require segregation of assets with a value equal to a
Portfolio's net obligation, if any.

ZERO-COUPON DEBT SECURITIES AND PAY-IN-KIND SECURITIES

Zero-coupon securities in which a Portfolio may invest are debt obligations
which are generally issued at a discount and payable in full at maturity, and
which do not provide for current payments of interest prior to maturity.
Zero-coupon securities usually trade at a deep discount from their face or par
value and are subject to greater market value fluctuations from changing
interest rates than debt obligations of comparable maturities which make
current distributions of interest. As a result, the net asset value of shares
of a Portfolio investing in zero-coupon securities may fluctuate over a
greater range than shares of other Portfolios of the Trust and other mutual
funds investing in securities making current distributions of interest and
having similar maturities.

Zero-coupon securities may include U.S. Treasury bills issued directly by the
U.S. Treasury or other short-term debt obligations, and longer-term bonds or
notes and their unmatured interest coupons which have been separated by their
holder, typically a custodian bank or investment brokerage firm. A number of
securities firms and banks have stripped the interest coupons from the
underlying principal (the "corpus") of U.S. Treasury securities and resold
them in custodial receipt programs with a number of different names, including
Treasury Income Growth Receipts ("TIGRS") and Certificates of Accrual on
Treasuries ("CATS"). The underlying U.S. Treasury bonds and notes themselves
are held in book-entry form at the Federal Reserve Bank or, in the case of
bearer securities (i.e., unregistered securities which are owned ostensibly by
the bearer or holder thereof), in trust on behalf of the owners thereof.

In addition, the Treasury has facilitated transfers of ownership of
zero-coupon securities by accounting separately for the beneficial ownership
of particular interest coupons and corpus payments on Treasury securities
through the Federal Reserve book-entry record-keeping system. The Federal
Reserve program as established by the Treasury Department is known as "STRIPS"
or "Separate Trading of Registered Interest and Principal of Securities."
Under the STRIPS program, a Portfolio will be able to have its beneficial
ownership of U.S. Treasury zero-coupon securities recorded directly in the
book-entry record-keeping system in lieu of having to hold certificates or
other evidences of ownership of the underlying U.S. Treasury securities. When
debt obligations have been stripped of their unmatured interest coupons by the
holder, the stripped coupons are sold separately. The principal or corpus is
sold at a deep discount because the buyer receives only the right to receive a
future fixed payment on the security and does not receive any rights to
periodic cash interest payments. Once stripped or separated, the corpus and
coupons may be sold separately. Typically, the coupons are sold separately or
grouped with other coupons with like maturity dates and sold in such bundled
form. Purchasers of stripped obligations acquire, in effect, discount
obligations that are economically identical to the zero-coupon securities
issued directly by the obligor.

Zero-coupon securities allow an issuer to avoid the need to generate cash to
meet current interest payments. Even though zero-coupon securities do not pay
current interest in cash, a Portfolio is nonetheless required to accrue
interest income on them and to distribute the amount of that interest at least
annually to shareholders. Thus, a Portfolio could be required at times to
liquidate other investments in order to satisfy its distribution requirement.

A Portfolio also may purchase pay-in-kind securities. Pay-in-kind securities
pay all or a portion of their interest or dividends in the form of additional
securities.

VARIABLE- OR FLOATING-RATE SECURITIES

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

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

Variable-rate demand notes include master demand notes which are obligations
that permit a Portfolio to invest fluctuating amounts, which may change daily
without penalty, pursuant to direct arrangements between the Portfolio as
lender, and the borrower. The interest rates on these notes fluctuate from
time to time. The issuer of such obligations normally has a corresponding
right, after a given period, to prepay in its discretion the outstanding
principal amount of the obligations plus accrued interest upon a specified
number of days' notice to the holders of such obligations. The interest rate
on a floating-rate demand obligation is based on a known lending rate, such as
a bank's prime rate, and is adjusted automatically each time such rate is
adjusted. The interest rate on a variable-rate demand obligation is adjusted
automatically at specified intervals. Frequently, such obligations are secured
by letters of credit or other credit support arrangements provided by banks.
Because these obligations are direct lending arrangements between the lender
and borrower, it is not contemplated that such instruments will generally be
traded, and there generally is not an established secondary market for these
obligations, although they are redeemable at face value. Accordingly, where
these obligations are not secured by letters of credit or other credit support
arrangements, the Portfolio's right to redeem is dependent on the ability of
the borrower to pay principal and interest on demand. Such obligations
frequently are not rated by credit rating agencies. If not so rated, a
Portfolio may invest in them only if the Portfolio's Adviser or Sub-Adviser
determines that, at the time of investment, the obligations are of comparable
quality to the other obligations in which the Portfolio may invest. The
Adviser or Sub-Adviser, on behalf of a Portfolio, will consider on an ongoing
basis the creditworthiness of the issuers of the floating- and variable-rate
demand obligations in the Portfolio's portfolio.

LOWER GRADE SECURITIES

Certain of the Portfolios may invest in lower-grade income securities. Such
lower-grade securities are commonly referred to as "junk bonds". Investment in
such securities involves special risks, as described herein. Liquidity relates
to the ability of a Portfolio to sell a security in a timely manner at a price
which reflects the value of that security. As discussed below, the market for
lower grade securities is considered generally to be less liquid than the
market for investment grade securities. The relative illiquidity of some of a
Portfolio's portfolio securities may adversely affect the ability of the
Portfolio to dispose of such securities in a timely manner and at a price
which reflects the value of such security in the Adviser's or Sub-Adviser's
judgment. The market for less liquid securities tends to be more volatile than
the market for more liquid securities and market values of relatively illiquid
securities may be more susceptible to change as a result of adverse publicity
and investor perceptions than are the market values of higher grade, more
liquid securities.

A Portfolio's net asset value will change with changes in the value of its
portfolio securities. If a Portfolio invests in fixed income securities, the
Portfolio's net asset value can be expected to change as general levels of
interest rates fluctuate. When interest rates decline, the value of a
portfolio invested in fixed income securities can be expected to rise.
Conversely, when interest rates rise, the value of a portfolio invested in
fixed income securities can be expected to decline. Net asset value and market
value may be volatile due to a Portfolio's investment in lower grade and less
liquid securities. Volatility may be greater during periods of general
economic uncertainty.

A Portfolio's investments are valued pursuant to guidelines adopted and
periodically reviewed by the Board of Trustees. To the extent that there is no
established retail market for some of the securities in which a Portfolio may
invest, there may be relatively inactive trading in such securities and the
ability of the Adviser or Sub-Adviser to accurately value such securities may
be adversely affected. During periods of reduced market liquidity and in the
absence of readily available market quotations for securities held in a
Portfolio's portfolio, the responsibility of the Sub-Adviser to value the
Portfolio's securities becomes more difficult and the Adviser's or
Sub-Adviser's judgment may play a greater role in the valuation of the
Portfolio's securities due to the reduced availability of reliable objective
data. To the extent that a Portfolio invests in illiquid securities and
securities which are restricted as to resale, the Portfolio may incur
additional risks and costs.

Lower grade securities generally involve greater credit risk than higher grade
securities. A general economic downturn or a significant increase in interest
rates could severely disrupt the market for lower grade securities and
adversely affect the market value of such securities. In addition, in such
circumstances, the ability of issuers of lower grade securities to repay
principal and to pay interest, to meet projected financial goals and to obtain
additional financing may be adversely affected. Such consequences could lead
to an increased incidence of default for such securities and adversely affect
the value of the lower grade securities in a Portfolio's portfolio and thus a
Portfolio's net asset value. The secondary market prices of lower grade
securities are less sensitive to changes in interest rates than are those for
higher rated securities, but are more sensitive to adverse economic changes or
individual issuer developments. Adverse publicity and investor perceptions,
whether or not based on rational analysis, may also affect the value and
liquidity of lower grade securities.

Yields on a Portfolio's portfolio securities can be expected to fluctuate over
time. In addition, periods of economic uncertainty and changes in interest
rates can be expected to result in increased volatility of the market prices
of the lower grade securities in a Portfolio's portfolio and thus in the net
asset value of a Portfolio. Net asset value and market value may be volatile
due to a Portfolio's investment in lower grade and less liquid securities.
Volatility may be greater during periods of general economic uncertainty. The
Portfolios may incur additional expenses to the extent they are required to
seek recovery upon a default in the payment of interest or a repayment of
principal on their portfolio holdings, and the Portfolios may be unable to
obtain full recovery thereof. In the event that an issuer of securities held
by a Portfolio experiences difficulties in the timely payment of principal or
interest and such issuer seeks to restructure the terms of its borrowings,
such Portfolio may incur additional expenses and may determine to invest
additional capital with respect to such issuer or the project or projects to
which the Portfolio's portfolio securities relate.

The Portfolios will rely on each Adviser's or Sub-Adviser's judgment, analysis
and experience in evaluating the creditworthiness of an issue. In this
evaluation, the Adviser or Sub-Adviser will take into consideration, among
other things, the issuer's financial resources, its sensitivity to economic
conditions and trends, its operating history, the quality of the issuer's
management and regulatory matters. The Adviser or Sub-Adviser also may
consider, although it does not rely primarily on, the credit ratings of S&P
and Moody's in evaluating fixed-income securities. Such ratings evaluate only
the safety of principal and interest payments, not market value risk.
Additionally, because the creditworthiness of an issuer may change more
rapidly than is able to be timely reflected in changes in credit ratings, the
Adviser or Sub-Adviser continuously monitors the issuers of such securities
held in the Portfolio's portfolio. A Portfolio may, if deemed appropriate by
the Adviser or Sub-Adviser, retain a security whose rating has been downgraded
below B by S&P or below B by Moody's, or whose rating has been withdrawn.

SHORT SALES

Certain of the Portfolios may seek to hedge investments or realize additional
gains through short sales. Short sales are transactions in which a Portfolio
sells a security it does not own, in anticipation of a decline in the market
value of that security. To complete such a transaction, a Portfolio must
borrow the security to make delivery to the buyer. A Portfolio then is
obligated to replace the security borrowed by purchasing it at the market
price at or prior to the time of replacement. The price at such time may be
more or less than the price at which the security was sold by a Portfolio.
Until the security is replaced, a Portfolio is required to repay the lender
any dividends or interest that accrue during the period of the loan. To borrow
the security, a Portfolio also may be required to pay a premium, which would
increase the cost of the security sold. The net proceeds of the short sale
will be retained by the broker (or by the Trust's custodian in a special
custody account), to the extent necessary to meet margin requirements, until
the short position is closed out. A Portfolio also will incur transaction
costs in effecting short sales.

A Portfolio will incur a loss as a result of the short sale if the price of
the security increases between the date of the short sale and the date on
which a Portfolio replaces the borrowed security. A Portfolio will realize a
gain if the security declines in price between those dates. The amount of any
gain will be decreased, and the amount of any loss increased, by the amount of
the premium, dividends, interest or expenses a Portfolio may be required to
pay in connection with a short sale.

WARRANTS

Each of the Portfolios that may invest in equity securities may acquire
warrants. Warrants are securities giving the holder the right, but not the
obligation, to buy the stock of an issuer at a given price (generally higher
than the value of the stock at the time of issuance) during a specified period
or perpetually. Warrants may be acquired separately or in connection with the
acquisition of securities. Warrants acquired by a Portfolio in units or
attached to securities are not subject to these restrictions. Warrants do not
carry with them the right to dividends or voting rights with respect to the
securities that they entitle their holder to purchase, and they do not
represent any rights in the assets of the issuer. As a result, warrants may be
considered more speculative than certain other types of investments. In
addition, the value of a warrant does not necessarily change with the value of
the underlying securities, and a warrant ceases to have value if it is not
exercised prior to its expiration date.

INVESTMENT RESTRICTIONS

FUNDAMENTAL INVESTMENT RESTRICTIONS

The following investment restrictions are fundamental and may not be changed
with respect to any Portfolio without the approval of a majority of the
outstanding voting securities of that Portfolio. Under the Investment Company
Act of 1940 and the rules thereunder, "majority of the outstanding voting
securities" of a Portfolio means the lesser of (1) 67% of the shares of that
Portfolio present at a meeting if the holders of more than 50% of the
outstanding shares of that Portfolio are present in person or by proxy, and
(2) more than 50% of the outstanding shares of that Portfolio. Any investment
restrictions which involve a maximum percentage of securities or assets shall
not be considered to be violated unless an excess over the percentage occurs
immediately after, and is caused by, an acquisition or encumbrance of
securities or assets of, or borrowings by or on behalf of, a Portfolio, as the
case may be.

ALL PORTFOLIOS (EXCEPT THE GROWTH & INCOME PORTFOLIO AND VALUE + GROWTH
PORTFOLIO)

The Trust may not, on behalf of a Portfolio:

(1) With respect to 75% of its total assets, purchase the securities of
any issuer if such purchase would cause more than 5% of the value of a
Portfolio's total assets to be invested in securities of any one issuer
(except securities issued or guaranteed by the U.S. Government or any agency
or instrumentality thereof), or purchase more than 10% of the outstanding
voting securities of any one issuer; provided that this restriction shall not
apply to the International Fixed Income Portfolio or the OTC Portfolio;

(2) invest more than 25% of the value of its net assets in the securities
(other than U.S. Government Securities), of issuers in a single industry,
except that this policy shall not limit investment by the Money Market
Portfolio in obligations of U.S. banks (excluding their foreign branches);

(3) with respect to all Portfolios except for the Money Market Portfolio,
borrow money except from banks as a temporary measure for extraordinary or
emergency purposes or by entering into reverse repurchase agreements (each
Portfolio of the Trust is required to maintain asset coverage (including
borrowings) of 300% for all borrowings), except that the Mortgage-Backed
Securities Portfolio and the International Fixed Income Portfolio may also
borrow to enhance income; with respect to the Money Market Portfolio, borrow
money except as a temporary measure from banks for extraordinary or emergency
purposes or engage in reverse repurchase agreements except for such purposes
or as a temporary measure to facilitate redemptions (i.e., not for investment
leverage, but only to enable it to satisfy redemption requests where
liquidation of portfolio securities is considered disadvantageous or
inconvenient), and in either event not in excess of an amount (taking
borrowings and reverse repurchase agreements together) equal to one third of
the value of its net assets;

(4) make loans to other persons, except loans of portfolio securities and
except to the extent that the purchase of debt obligations in accordance with
its investment objectives and policies or entry into repurchase agreements may
be deemed to be loans;

(5) purchase or sell any commodity contract, except that each Portfolio
(other than the Money Market Portfolio) may purchase and sell futures
contracts based on debt securities, indexes of securities, and foreign
currencies and purchase and write options on securities, futures contracts
which it may purchase, securities indexes, and foreign currencies and purchase
forward contracts. (Securities denominated in gold or other precious metals or
whose value is determined by the value of gold or other precious metals are
not considered to be commodity contracts.) The OTC, Research and Total Return
Portfolios reserve the freedom of action to hold and to sell real estate or
mineral leases, commodities or commodity contracts acquired as a result of the
ownership of securities. The OTC, Research and Total Return Portfolios will
not purchase securities for the purpose of acquiring real estate or mineral
leases, commodities or commodity contracts (except for options, futures
contracts, options on futures contracts and forward contracts).

(6) underwrite securities issued by other persons except to the extent
that, in connection with the disposition of its portfolio investments, it may
be deemed to be an underwriter under federal securities laws;

(7) purchase or sell real estate, although (with respect to Portfolios
other than the Money Market Portfolio) it may purchase and sell securities
which are secured by or represent interests in real estate, mortgage-related
securities, securities of companies principally engaged in the real estate
industry and participation interests in pools of real estate mortgage loans,
and it may liquidate real estate acquired as a result of default on a
mortgage; and

(8) issue any class of securities which is senior to a Portfolio's shares
of beneficial interest except as permitted under the Investment Company Act of
1940 or by order of the SEC.

VALUE + GROWTH PORTFOLIO

The Trust may not, on behalf of the Portfolio:

(1) purchase or sell commodities or commodity contracts, or interests in
oil, gas, or other mineral leases, or other mineral exploration or development
programs, although it may invest in companies that engage in such businesses
to the extent otherwise permitted by the Portfolio's investment policies and
restrictions and by applicable law, except as required in connection with
otherwise permissible options, futures and commodity activities as described
elsewhere in the Prospectus and this Statement;

(2) purchase or sell real estate, although it may invest in securities
secured by real estate or real estate interests, or issued by companies,
including real estate investment trusts, that invest in real estate or real
estate interests;

(3) make short sales or purchases on margin, although it may obtain
short-term credit necessary for the clearance of purchases and sales of its
portfolio securities and except as required in connection with permissible
options, futures, short selling and leverage activities as described elsewhere
in the Prospectus and this Statement (the short sale restriction is
nonfundamental);

(4) with respect to 75% of its total assets, invest in the securities of
any one issuer (other than the U.S. Government and its agencies and
instrumentalities), if immediately after and as a result of such investment
more than 5% of the total assets of the Portfolio would be invested in such
issuer (the remaining 25% of its total assets may be invested without
restriction except to the extent other investment restrictions may be
applicable);

(5) mortgage, hypothecate, or pledge any of its assets as security for
any of its obligations, except as required for otherwise permissible
borrowings (including reverse repurchase agreements), short sales, financial
options and other hedging activities;

(6) make loans of the Portfolio's assets, including loans of securities
(although it may, subject to the other restrictions or policies stated herein,
purchase debt securities or enter into repurchase agreements with banks or
other institutions to the extent a repurchase agreement is deemed to be a
loan);

(7) borrow money, except from banks for temporary or emergency purposes
or in connection with otherwise permissible leverage activities, and then only
in an amount not in excess of 5% of the Portfolio's total assets (in any case
as determined at the lesser of acquisition cost or current market value and
excluding collateralized reverse repurchase agreements);

(8) underwrite securities of any other company, although it may invest in
companies that engage in such businesses if it does so in accordance with
policies established by the Trust's Board of Trustees, and except to the
extent that the Portfolio may be considered an underwriter within the meaning
of the Securities Act of 1933, as amended, in the disposition of restricted
securities;

(9) invest more than 25% of the value of the Portfolio's total assets in
the securities of companies engaged in any one industry (except securities
issued by the U.S. Government, its agencies and instrumentalities);

(10) issue senior securities, as defined in the 1940 Act, except that
this restriction shall not be deemed to prohibit the Portfolio from making any
otherwise permissible borrowings, mortgages or pledges, or entering into
permissible reverse repurchase agreements, and options and futures
transactions;

(11) own, directly or indirectly, more than 25% of the voting securities
of any one issuer or affiliated person of the issuer; and

(12) purchase the securities of other investment companies, except as
permitted by the 1940 Act or as part of a merger, consolidation, acquisition
of assets or similar reorganization transaction.

GROWTH & INCOME PORTFOLIO

The Trust may not, on behalf of the Portfolio:

(1) issue any class of securities which is senior to the Portfolio's
shares of beneficial interest, except that the Portfolio may borrow money to
the extent contemplated by Restriction 3 below;

(2) purchase securities on margin (but a Portfolio may obtain such
short-term credits as may be necessary for the clearance of transactions).
(Margin payments or other arrangements in connection with transactions in
short sales, futures contracts, options, and other financial instruments are
not considered to constitute the purchase of securities on margin for this
purpose);

(3) borrow more than one-third of the value of its total assets less all
liabilities and indebtedness (other than such borrowings) not represented by
senior securities;

(4) act as underwriter of securities of other issuers except to the
extent that, in connection with the disposition of portfolio securities, it
may be deemed to be an underwriter under certain federal securities laws;

(5) as to 75% of the Portfolio's total assets, purchase any security
(other than obligations of the U.S. Government, its agencies or
instrumentalities) if as a result: (i) more than 5% of the Portfolio's total
assets (taken at current value) would then be invested in securities of a
single issuer, or (ii) more than 25% of the Portfolio's total assets (taken at
current value) would be invested in a single industry;

(6) invest in securities of any issuer if any officer or Trustee of the
Trust or any officer or director of the Sub-Adviser owns more than 1/2 of 1%
of the outstanding securities of such issuer, and such officers, Trustees and
directors who own more than 1/2 of 1% own in the aggregate more than 5% of the
outstanding securities of such issuer; and

(7) make loans, except by purchase of debt obligations or other financial
instruments in which the Portfolio may invest consistent with its investment
policies, by entering into repurchase agreements, or through the lending of
its portfolio securities.

NON-FUNDAMENTAL INVESTMENT RESTRICTIONS

The following investment restrictions are non-fundamental and may be changed
by the Trustees of the Trust without shareholder approval. Although
shareholder approval is not necessary, the Trust intends to notify its
shareholders before implementing any material change in any non-fundamental
investment restriction.

ALL PORTFOLIOS (EXCEPT THE GROWTH & INCOME PORTFOLIO AND VALUE + GROWTH
PORTFOLIO)

The Trust may not, on behalf of a Portfolio:

(1) invest more than 10% (except 15% with respect to the International
Fixed Income Portfolio, Mortgage-Backed Securities Portfolio, OTC Portfolio
and Total Return Portfolio) of the net assets of a Portfolio (taken at market
value) in illiquid securities, including repurchase agreements maturing in
more than seven days;

(2) purchase securities on margin, except (with respect to all Portfolios
other than the Money Market Portfolio) such short-term credits as may be
necessary for the clearance of purchases and sales of securities, and except
(with respect to all Portfolios other than the Money Market Portfolio) that it
may make margin payments in connection with options, futures contracts,
options on futures contracts and forward foreign currency contracts and in
connection with swap agreements;

(3) make short sales of securities unless such Portfolio (other than the
Money Market Portfolio) owns an equal amount of such securities or owns
securities which, without payment of any further consideration, are
convertible into or exchangeable for securities of the same issue as, and
equal in amount to, the securities sold short; and

(4) make investments for the purpose of gaining control of a company's
management.

VALUE + GROWTH PORTFOLIO

The Trust may not, on behalf of the Portfolio:

(1) except as required in connection with otherwise permissible options
and futures activities, invest more than 5% of the value of the Portfolio's
total assets in rights or warrants (other than those that have been acquired
in units or attached to other securities), or invest more than 2% of its total
assets in rights or warrants that are not listed on the New York or American
Stock Exchange;

(2) participate on a joint basis in any trading account in securities,
although the Sub-Adviser may aggregate orders for the sale or purchase of
securities with other accounts it manages to reduce brokerage costs or to
average prices;

(3) invest, in the aggregate, more than 10% of its net assets in illiquid
securities;

(4) purchase or write put, call, straddle or spread options except as
described in the Prospectus or Statement of Additional Information;

(5) purchase or retain in the Portfolio's portfolio any security if any
officer, trustee or shareholder of the issuer is at the same time an officer,
trustee or employee of the Trust or of its Sub-Adviser and such person owns
beneficially more than 1/2 of 1% of the securities and all such persons owning
more than 1/2 of 1% own in the aggregate more than 5% of the outstanding
securities of the issuer;

(6) invest in real estate limited partnerships or invest more than 10% of
the value of its total assets in real estate investment trusts;

(7) buy or sell physical commodities;

(8) invest or engage in arbitrage transactions;

(9) invest more than 40% of its total assets in the securities of
companies operating exclusively in one foreign country;

(10) purchase securities of other open-end investment companies;

(11) under normal market conditions, invest less than 65% of its total
assets in companies listed on a nationally recognized securities exchange or
traded on the National Association of Securities Dealers Automated Quotation
System.

(12) purchase the securities of any company for the purpose of exercising
management or control;

(13) purchase more than 10% of the outstanding voting securities of any
one issuer; and

(14) invest more than 5% of the value of its total assets in securities
of any issuer which has not had a record, together with its predecessors, of
at least three years of continuous operations.

GROWTH & INCOME PORTFOLIO

The Trust may not, on behalf of the Portfolio:

(1) invest in warrants (other than warrants acquired by the Portfolio as
a part of a unit or attached to securities at the time of purchase) if, as a
result, such investment (valued at the lower of cost or market value) would
exceed 5% of the value of the Portfolio's net assets, provided that not more
than 2% of the Portfolio's net assets may be invested in warrants not listed
on the New York or American Stock Exchanges;

(2) purchase or sell commodities or commodity contracts, except that the
Portfolio may purchase or sell financial futures contracts, options on
financial futures contracts, and futures contracts, forward contracts, and
options with respect to foreign currencies, and may enter into swap
transactions;

(3) purchase securities restricted as to resale if, as a result, (i) more
than 10% of the Portfolio's total assets would be invested in such securities,
or (ii) more than 5% of the Portfolio's total assets (excluding any securities
eligible for resale under Rule 144A under the Securities Act of 1933) would be
invested in such securities;

(4) invest in (a) securities which at the time of such investment are not
readily marketable, (b) securities restricted as to resale, and (c) repurchase
agreements maturing in more than seven days, if, as a result, more than 15% of
the Portfolio's net assets (taken at current value) would then be invested in
the aggregate in securities described in (a), (b), and (c) above;

(5) invest in securities of other registered investment companies, except
by purchases in the open market involving only customary brokerage commissions
and as a result of which not more than 5% of its total assets (taken at
current value) would be invested in such securities, or except as part of a
merger, consolidation, or other acquisition;

(6) invest in real estate limited partnerships;

(7) purchase any security if, as a result, the Portfolio would then have
more than 5% of its total assets (taken at current value) invested in
securities of companies (including predecessors) less than three years old;

(8) purchase or sell real estate or interests in real estate, including
real estate mortgage loans, although it may purchase and sell securities which
are secured by real estate and securities of companies, including limited
partnership interests, that invest or deal in real estate and it may purchase
interests in real estate investment trusts. (For purposes of this restriction,
investments by a Portfolio in mortgage-backed securities and other securities
representing interests in mortgage pools shall not constitute the purchase or
sale of real estate or interests in real estate or real estate mortgage
loans.);

(9) make investments for the purpose of exercising control or management;

(10) invest in interests in oil, gas or other mineral exploration or
development programs or leases, although it may invest in the common stocks of
companies that invest in or sponsor such programs;

(11) acquire more than 10% of the voting securities of any issuer;

(12) invest more than 15%, in the aggregate, of its total assets in the
securities of issuers which, together with any predecessors, have a record of
less than three years continuous operation and securities restricted as to
resale (including any securities eligible for resale under Rule 144A under the
Securities Act of 1933); or

(13) purchase or sell puts, calls, straddles, spreads, or any combination
thereof, if, as a result, the aggregate amount of premiums paid or received by
the Portfolio in respect of any such transactions then outstanding would
exceed 5% of its total assets.

MANAGEMENT OF THE TRUST

<TABLE>
<CAPTION>
<S> <C> <C>
Position Held Principal Occupation
Name, Address and Age (1) With the Trust During Past 5 Years
- -------------------------- -------------------- -----------------------------

Paul R. Schlaack* President, Principal President, Chief Executive
2000 Hub Tower Executive Officer Officer and Director of
699 Walnut Street and Trustee Adviser since 1984.
Des Moines, IA 50309
Age: 50

J. Michael Earley Trustee President and Chief
665 Locust Street Executive Officer, Bankers
Des Moines, IA 50309 Trust Company, Des Moines,
Age: 51 Iowa since July, 1992;
President and Chief
Executive Officer,
Mid-America Savings Bank,
Waterloo, Iowa from April,
1987 to June, 1992.

R. Barbara Gitenstein Trustee Provost, Drake University
Provost Office since July, 1992; Assistant
202 Old Main Provost, State University
Drake University of New York from August,
2507 University Avenue 1991 to July, 1992;
Des Moines, IA 50311-4505
Age: 49

Stanley B. Seidler Trustee President of Excel
P.O. Box 1297 Marketing L.C. since 1994,
3301 McKinley Avenue President, Iowa Periodicals,
Des Moines, IA 50321 Inc. covering the period
Age: 68 1990 to present, distributor
of books, periodicals and
videos

Paul E. Larson Treasurer and Executive Vice President
Age: 44 Principal Financial and Chief Financial Officer
Officer of Equitable of Iowa
Companies, Equitable
American Insurance Company
"EquitableAmerican"
(since January, 1993),
Equitable Life Insurance
Company of Iowa
("Equitable Life"),
Golden American Life
Insurance Company
("Golden American"), and
USG Annuity & Life
Company ("USG")

Myles R. Tashman Secretary Director, Executive Vice
Age: 55 President, Secretary and
General Counsel of Golden
American Life Insurance
Company, Directed Services,
Inc., and First Golden
American Life Insurance
Company of New York; formerly,
Senior Vice President and
General Counsel, United
Pacific Life Insurance Company
(1986-1993).

Eric J. Engstrom Principal Accounting Financial Analyst, EISI since
Age: 30 Officer October 1996; Senior
Accountant, Aldridge, Borden
& Co. from September 1995 to
September 1996; Assistant to
the CEO, Intravenous Nurses
Society from September 1994
to August 1995; and Ph.D.
student, University of
Chicago's Graduate School of
Business from October 1992 to
August 1994

Kimberly K. Krumviede Vice President Managing Director,
Age: 31 Treasurer/Secretary of
Adviser since
February, 1996.
Director - Administration,
Treasurer/Secretary of
Adviser from June, 1994
to January, 1996.
Principal - Research of
Adviser from April, 1994 to
June, 1994; Chief Financial
Officer, Joliet Concrete
Products, Inc., Joliet,
Illinois, from September,
1991 to March, 1994.

<FN>
____________________
* Interested Trustee of the Trust within the meaning of the 1940 Act.

(1) Unless otherwise indicated, the business address of each listed person is
604 Locust Street, Des Moines, Iowa 50309
</TABLE>

Each Trustee of the Trust who is not an interested person of the Trust or
Adviser or Sub-Adviser receives an annual fee of $6,000 and an additional fee
of $1,500 for each Trustees' meeting attended. With respect to the period
ended December 31, 1997, the Trust paid Trustees' Fees aggregating $42,750.
The following table shows 1997 compensation by Trustee.

COMPENSATION TABLE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
(1) (2) (3) (4) (5)
Pension or Total
Aggregate Retirement Estimated Compensation
Compensation Benefits Accrued Annual From Registrant
Name of Person, From As Part of Fund Benefits Upon and Fund Complex
Position Registrant Expenses Retirement Paid to Trustees

Paul R. Schlaack, N/A N/A N/A N/A
President and
Trustee

J. Michael Earley, 12,750 N/A N/A 21,750
Trustee

R. Barbara Gitenstein, 12,000 N/A N/A 21,000
Trustee

Stanley B. Seidler, 12,000 N/A N/A 21,000
Trustee

Elizabeth J. Newell 6,000 N/A N/A 12,000
Trustee
</TABLE>

SUBSTANTIAL SHAREHOLDERS

Shares of the Portfolios are issued and redeemed in connection with
investments in and payments under the Variable Contracts issued through
separate accounts of Equitable Life Insurance Company of Iowa and/or its
affiliated life insurance companies (collectively, the "Life Companies"). As
of December 31, 1997, the separate accounts of Equitable Life Insurance Company
of Iowa and Golden American Life Insurance Company, and Equitable Life
Insurance Company of Iowa were each known to the Board of Trustees and the
management of the Trust to own of record the following percentages of the
various Portfolios of the Trust.

<TABLE>
<CAPTION>
<S> <C> <C>
Separate Accounts Life Companies
Percentage Percentage
Portfolio Ownership Ownership
- -------------------------- ------------------ ---------------

Advantage 99.91% 0.09%

Growth & Income 99.99% 0.01%

International Fixed Income 99.86% 0.14%

Money Market 99.96% 0.04%

Mortgage-Backed Securities 99.90% 0.10%

OTC 99.98% 0.02%

Research 99.99% 0.01%

Total Return 99.99% 0.01%

Value + Growth 99.98% 0.01%
</TABLE>

The Declaration of Trust provides that the Trust will indemnify its Trustees
and officers against liabilities and expenses incurred in connection with
litigation in which they may be involved because of their offices with the
Trust, except if it is determined in the manner specified in the Declaration
of Trust that they have not acted in good faith in the reasonable belief that
their actions were in the best interests of the Trust or that such
indemnification would relieve any officer or Trustee of any liability to the
Trust or its shareholders by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of his or her duties. The Trust, at its
expense, may provide liability insurance for the benefit of its Trustees and
officers.

Under the Investment Advisory Agreement between the Trust and the Adviser (the
"Investment Advisory Agreement"), the Adviser, at its expense, provides the
Portfolios with investment advisory services and advises and assists the
officers of the Trust in taking such steps as are necessary or appropriate to
carry out the decisions of its Trustees regarding the conduct of business of
the Trust and each Portfolio. The fees to be paid under the Investment
Advisory Agreement are set forth in the Trust's prospectus.

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 that 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,
subject always to the provisions of the Trust's Declaration of Trust and
By-laws, and of the Investment Company Act of 1940, and subject further to
such policies and instructions as the Trustees may from time to time
establish.

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.

Under the Investment Advisory Agreement, the Trust is responsible for all its
other expenses including, but not limited to, the following expenses: legal,
auditing or accounting expenses, independent Trustees' fees and expenses,
insurance premiums, brokers' commissions, taxes and governmental fees, expenses
of issueor redemption of shares, expenses of registering or qualifying
shares forsale, reports and notices to shareholders, and fees and
disbursements ofcustodians, transfer agents, registrars, shareholde
r servicing agents and dividend disbursing agents, and certain expenses
with respect to membership 0fees of industry associations.

The Investment Advisory Agreement provides that the Adviser may retain
sub-advisers, at Adviser's own cost and expense, for the purpose of making
investment recommendations and research information available to the Trust.
State Street Bank and Trust Company provides certain accounting, transfer
agency, and other services to the Trust.

The Investment Advisory Agreement provides that neither the Adviser nor any
director, officer or employee of Adviser will be liable for any loss suffered
by the Trust in the absence of willful misfeasance, bad faith, gross
negligence or reckless disregard of obligations and duties.

The Investment Advisory Agreement may be terminated without penalty by vote of
the Trustees, as to any Portfolio by the shareholders of that Portfolio, or by
Adviser on 60 days written notice. The Agreement also terminates without
payment of any penalty in the event of its assignment. In addition, the
Investment Advisory Agreement may be amended only by a vote of the
shareholders of the affected Portfolio(s), and provides that it will continue
in effect from year to year only so long as such continuance is approved at
least annually with respect to each Portfolio by vote of either the Trustees
or the shareholders of the Portfolio, and, in either case, by a majority of
the Trustees who are not "interested persons" of the Adviser. In each of the
foregoing cases, the vote of the shareholders is the affirmative vote of a
"majority of the outstanding voting securities" as defined in the Investment
Company Act of 1940.

The Adviser has undertaken to reimburse each Portfolio for all operating
expenses, excluding management fees, that exceed .30% of the average daily net
assets of the Money Market and Advantage Portfolios, .40% of the average daily
net assets of the OTC, Total Return, Research, Growth & Income and Value +
Growth Portfolios, .50% of the average daily net assets of the Mortgage-Backed
Securities Portfolio and .75% of the average daily net assets of the
International Fixed Income Portfolio. This undertaking is subject to
termination at any time without notice to shareholders. Information concerning
the dollar amounts of advisory fees waived and expenses reimbursed for the
period ended December 31, 1997 is contained in the Prospectus.

For the years ended December 31, 1997, 1996 and 1995, respectively, the Adviser
was paid advisory fees as follows: $121,158, $48,489, $5,266 Money Market
Portfolio; $103,748, $79,625, $15,238 Mortgage-Backed Securities Portfolio;
$98,908, $84,700, $17,316 International Fixed Income Portfolio; $614,080,
$185,005, $17,068 OTC Portfolio; $1,211,826, $325,527, $25,665 Research
Portfolio; $871,199, $270,373, $24,687 Total Return Portfolio; $86,778, $47,012,
$7,371 Advantage Portfolio; $793,103, $127,300 Growth + Income Portfolio
(1996 only); $435,386, $80,234 Value + Growth Portfolio (1996 only). The
Adviser was not paid any advisory fees in 1994.

For the years ended December 31, 1995 and 1994, respectively, the Adviser
waived advisory fees as follows: $7,783, $255 Money Market Portfolio; $34,013,
$9,148 Mortgage-Backed Securities Portfolio; $42,182, $10,469 International
Fixed Income Portfolio; $26,045, $2,563 OTC Portfolio; $29,925, $2,508
Research Portfolio; $29,862, $2,084 Total Return Portfolio; $17,014, $3,740
Advantage Portfolio. No advisory fees were waived in 1997.

SUB-ADVISERS

Each of the Sub-Advisers described in the Prospectus serves as Sub-Adviser to
one or more of the Portfolios of the Trust pursuant to separate written
agreements. Certain of the services provided by, and the fees paid to, the
Sub-Advisers are described in the Prospectus under "Management of the Trust -
Sub-Advisers."

BROKERAGE AND RESEARCH SERVICES

Transactions on U.S. stock exchanges, commodities markets, futures markets and
other agency transactions involve the payment by the Trust of negotiated
brokerage commissions. Such commissions vary among different brokers. A
particular broker may charge different commissions according to such factors
as the difficulty and size of the transaction. Transactions in foreign
securities often involve the payment of fixed brokerage commissions, which may
be higher than those in the United States. There is generally no stated
commission in the case of securities traded in the over-the-counter markets,
but the price paid by the Trust usually includes an undisclosed dealer
commission or mark-up. In underwritten offerings, the price paid by the Trust
includes a disclosed, fixed commission or discount retained by the underwriter
or dealer. It is anticipated that most purchases and sales of securities by
funds investing primarily in certain fixed-income securities will be with the
issuer or with underwriters of or dealers in those securities, acting as
principal. Accordingly, those funds would not ordinarily pay significant
brokerage commissions with respect to securities transactions.

It is currently intended that the Adviser or Sub-Advisers will place all
orders for the purchase and sale of portfolio securities for the Trust and buy
and sell securities for the Trust through a substantial number of brokers and
dealers. In so doing, the Adviser or Sub-Advisers will use their best efforts
to obtain for the Trust the best price and execution available. In seeking the
best price and execution, the Adviser or Sub-Advisers, having in mind the
Trust's best interests, will consider all factors they deem relevant,
including, by way of illustration, price, the size of the transaction, the
nature of the market for the security, the amount of the commission, the
timing of the transaction taking into account market prices and trends, the
reputation, experience, and financial stability of the broker-dealer involved,
and the quality of service rendered by the broker-dealer in other
transactions.

It has for many years been a common practice in the investment advisory
business for advisers of investment companies and other institutional
investors to receive brokerage and research services (as defined in the
Securities Exchange Act of 1934 (the "1934 Act")) from broker-dealers which
execute portfolio transactions for the clients of such advisers and from third
parties with which such broker-dealers have arrangements. Consistent with this
practice, the Adviser or Sub-Advisers may receive brokerage and research
services and other similar services from many broker-dealers with which they
place the Trust's portfolio transactions and from third parties with which
such broker-dealers have arrangements. These services, which in some cases may
also be purchased for cash, include such matters as general economic and
security market reviews, industry and company reviews, evaluations of
securities, and recommendations as to the purchase and sale of securities.
Some of these services may be of value to the Adviser or Sub-Advisers and/or
their affiliates in advising various other clients (including the Trust),
although not all of these services are necessarily useful and of value in
managing the Trust. The management fees paid by the Trust are not reduced
because the Adviser or Sub-Advisers and/or their affiliates may receive such
services.

As permitted by Section 28(e) of the 1934 Act, an Adviser or Sub-Adviser may
cause a Portfolio to pay a broker-dealer which provides "brokerage and
research services" as defined in the 1934 Act to the Adviser or Sub-Adviser an
amount of disclosed commission for effecting a securities transaction for the
Portfolio in excess of the commission which another broker-dealer would have
charged for effecting that transaction provided that the Adviser or
Sub-Adviser determines in good faith that such commission was reasonable in
relation to the value of the brokerage and research services provided by such
broker-dealer viewed in terms of that particular transaction or in terms of
all of the accounts over which investment discretion is so exercised. A
Sub-Adviser's authority to cause a Portfolio to pay any such greater
commissions is also subject to such policies as the Adviser or the Trustees
may adopt from time to time.

A Portfolio Adviser or Sub-Adviser may place orders for the purchase and sale
of exchange-listed portfolio securities with a broker-dealer that is an
affiliate of the Adviser or Sub-Adviser where in, the judgment of the Adviser
or Sub-Adviser, such firm will be able to obtain a price and execution at
least as favorable as other qualified brokers.

Pursuant to the rules of the Securities and Exchange Commission, a broker-
dealer that is an affiliate of the Adviser or Sub-Adviser or, if it is also a
broker-dealer, the Adviser or Sub-Adviser, may receive and retain compensation
for effecting portfolio transactions for a Portfolio on a national securities
exchange of which the broker-dealer is a member if the transaction is
"executed" on the floor of the exchange by another broker which is not an
"associated person" of the affiliated broker-dealer or the Adviser or Sub-
Adviser and if there is in effect a written contract between the Adviser or
Sub-Adviser and the Trust expressly permitting the affiliated broker-dealer or
Sub-Adviser to receive and retain such compensation. The Investment Advisory
Agreement and Sub-Advisory Agreements provide that each Adviser or Sub-Adviser
may retain compensation on transactions effected for a Portfolio in accordance
with the terms of these rules.

Securities and Exchange Commission rules further require that commissions paid
to such an affiliated broker-dealer, Adviser, or Sub-Adviser by a Portfolio on
exchange transactions not exceed "usual and customary brokerage commissions."
The rules define "usual and customary" commissions to include amounts which are
"reasonable and fair compared to the commission, fee or other remuneration
received or to be received by other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time." The Board of Trustees
has adopted procedures for evaluating the reasonableness of commissions paid to
broker-dealers that are affiliated with the Adviser or Sub-Advisers or to Sub-
Advisers that are broker-dealers and will review these procedures periodically.

Before the fiscal year ended December 31, 1997, the following Portfolios paid
brokerage commissions in the identified amounts to C.S. First Boston and
Robertson, Stephens, respectively: OTC Portfolio, $564.00, $0.00; Research
Portfolio, $1,273.92, $0.00; Total Return Portfolio, $75.00, $0.00; Value
+ Growth, $6,700.00, $30,546.00; and Growth & Income, $22,185.00, $56,314.00.

INVESTMENT DECISIONS. Investment decisions for the Trust and for the
other investment advisory clients of the Adviser or Sub-Advisers are made with
a view to achieving their respective investment objectives and after
consideration of such factors as their current holdings, availability of cash
for investment, and the size of their investments generally. Frequently, a
particular security may be bought or sold for only one client or in different
amounts and at different times for more than one but less than all clients.
Likewise, a particular security may be bought for one or more clients when one
or more other clients are selling the security. In addition, purchases or
sales of the same security may be made for two or more clients of the Adviser
or Sub-Adviser on the same day. In such event, such transactions will be
allocated among the clients in a manner believed by the Adviser or Sub-Adviser
to be equitable to each. In some cases, this procedure could have an adverse
effect on the price or amount of the securities purchased or sold by the
Trust. Purchase and sale orders for the Trust may be combined with those of
other clients of the Adviser or Sub-Adviser in the interest of achieving the
most favorable net results for the Trust.

For the years ended December 31, 1997 and 1996, respectively, the Portfolios
paid brokerage commissions in the following aggregate amounts: OTC
Portfolio,$151,030, $67,231; Research Portfolio, $412,202, $128,699; Total
Return Portfolio, $90,072, $33,930; Growth + Income $532,477, $102,528; and
Value + Growth $190,271, $33,539.

DETERMINATION OF NET ASSET VALUE

The net asset value per share of each Portfolio is determined daily as of 4:00
p.m. New York time on each day the New York Stock Exchange is open for
trading. The New York Stock Exchange is normally closed on the following
national holidays: New Year's Day, President's Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving, and Christmas.

The value of a foreign security is determined in its national currency as of
the close of trading on the foreign exchange on which it is traded or as of
4:00 p.m. New York time, if that is earlier, and that value is then converted
into its U.S. dollar equivalent at the foreign exchange rate in effect at
noon, New York time, on the day the value of the foreign security is
determined.

The valuation of the Money Market Portfolio's portfolio securities is based
upon their amortized cost, which does not take into account unrealized
securities gains or losses. This method involves initially valuing an
instrument at its cost and thereafter assuming a constant amortization to
maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the instrument. By using amortized cost
valuation, the Trust seeks to maintain a constant net asset value of $1.00 per
share for the Money Market Portfolio, despite minor shifts in the market value
of its portfolio securities. While this method provides certainty in
valuation, it may result in periods during which value, as determined by
amortized cost, is higher or lower than the price the Money Market Portfolio
would receive if it sold the instrument. During periods of declining interest
rates, the quoted yield on shares of the Money Market Portfolio may tend to be
higher than a like computation made by a fund with identical investments
utilizing a method of valuation based on market prices and estimates of market
prices for all of its portfolio instruments. Thus, if the use of amortized
cost by the Portfolio resulted in a lower aggregate portfolio value on a
particular day, a prospective investor in the Money Market Portfolio would be
able to obtain a somewhat higher yield if he or she purchased shares of the
Money Market Portfolio on that day, than would result from investment in a
fund utilizing solely market values, and existing investors in the Money
Market Portfolio would receive less investment income. The converse would
apply on a day when the use of amortized cost by the Portfolio resulted in a
higher aggregate portfolio value. However, as a result of certain procedures
adopted by the Trust, the Trust believes any difference will normally be
minimal.

The net asset value of the shares of each of the Portfolios other than the
Money Market Portfolio is determined by dividing the total assets of the
Portfolio, less all liabilities, by the total number of shares outstanding.
Securities traded on a national securities exchange or quoted on the NASDAQ
National Market System are valued at their last-reported sale price on the
principal exchange or reported by NASDAQ or, if there is no reported sale, and
in the case of over-the-counter securities not included in the NASDAQ National
Market System, at a bid price estimated by a broker or dealer. Debt
securities, including zero-coupon securities, and certain foreign securities
will be valued by a pricing service. Other foreign securities will be valued
by the Trust's custodian. Securities for which current market quotations are
not readily available and all other assets are valued at fair value as
determined in good faith by the Trustees, although the actual calculations may
be made by persons acting pursuant to the direction of the Trustees.

If any securities held by a Portfolio are restricted as to resale, their fair
value is generally determined as the amount which the Trust could reasonably
expect to realize from an orderly disposition of such securities over a
reasonable period of time. The valuation procedures applied in any specific
instance are likely to vary from case to case. However, consideration is
generally given to the financial position of the issuer and other fundamental
analytical data relating to the investment and to the nature of the
restrictions on disposition of the securities (including any registration
expenses that might be borne by the Trust in connection with such
disposition). In addition, specific factors are also generally considered,
such as the cost of the investment, the market value of any unrestricted
securities of the same class (both at the time of purchase and at the time of
valuation), the size of the holding, the prices of any recent transactions or
offers with respect to such securities, and any available analysts' reports
regarding the issuer.

Generally, trading in certain securities (such as foreign securities) is
substantially completed each day at various times prior to the close of the
New York Stock Exchange. The values of these securities used in determining
the net asset value of the Trust's shares are computed as of such times. Also,
because of the amount of time required to collect and process trading
information as to large numbers of securities issues, the values of certain
securities (such as convertible bonds and U.S. Government Securities) are
determined based on market quotations collected earlier in the day at the
latest practicable time prior to the close of the Exchange. Occasionally,
events affecting the value of such securities may occur between such times and
the close of the Exchange which will not be reflected in the computation of
the Trust's net asset value. If events materially affecting the value of such
securities occur during such period, then these securities will be valued at
their fair value, in the manner described above.

The proceeds received by each Portfolio for each issue or sale of its shares,
and all income, earnings, profits, and proceeds thereof, subject only to the
rights of creditors, will be specifically allocated to such Portfolio, and
constitute the underlying assets of that Portfolio. The underlying assets of
each Portfolio will be segregated on the Trust's books of account, and will be
charged with the liabilities in respect of such Portfolio and with a share of
the general liabilities of the Trust. Expenses with respect to any two or more
Portfolios may be allocated in proportion to the net asset values of the
respective Portfolios except where allocations of direct expenses can
otherwise be fairly made.

TAXES

Each Portfolio of the Trust intends to continue to qualify each year and has
previously elected to be taxed as a regulated investment company under
Subchapter M of the United States Internal Revenue Code of 1986, as amended
(the "Code").

As a regulated investment company qualifying to have its tax liability
determined under Subchapter M, a Portfolio will not be subject to federal
income tax on any of its net investment income or net realized capital gains
that are distributed to the separate accounts of the Life Companies. As a
Massachusetts business trust, a Portfolio under present law will not be
subject to any excise or income taxes in Massachusetts.

In order to qualify as a "regulated investment company," a Portfolio must,
among other things, (a) derive at least 90% of its gross income from
dividends, interest, payments with respect to securities loans, gains from the
sale or other disposition of stock, securities, or foreign currencies, and
other income (including gains from options, futures, or forward contracts)
derived with respect to its business of investing in such stock, securities,
or currencies; (b) derive less than 30% of its gross income from the sale or
other disposition of certain assets (including stock and securities) held less
than three months; (c) diversify its holdings so that, at the close of each
quarter of its taxable year, (i) at least 50% of the value of its total assets
consists of cash, cash items, U.S. Government Securities, and other securities
limited generally with respect to any one issuer to not more than 5% of the
total assets of the Portfolio and not more than 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its
assets is invested in the securities of any issuer (other than U.S. Government
Securities). In order to receive the favorable tax treatment accorded
regulated investment companies and their shareholders, moreover, a Portfolio
must in general distribute at least 90% of its interest, dividends, net
short-term capital gain, and certain other income each year.

With respect to investment income and gains received by a Portfolio from
sources outside the United States, such income and gains may be subject to
foreign taxes which are withheld at the source. The effective rate of foreign
taxes in which a Portfolio will be subject depends on the specific countries
in which its assets will be invested and the extent of the assets invested in
each such country and therefore cannot be determined in advance.

A Portfolio's ability to use options, futures, and forward contracts and other
hedging techniques, and to engage in certain other transactions, may be
limited by tax considerations, in particular, the requirement that less than
30% of the Portfolio's gross income be derived from the sale or disposition of
assets held for less than three months. A Portfolio's transactions in
foreign-currency-denominated debt instruments and its hedging activities will
likely produce a difference between its book income and its taxable income.
This difference may cause a portion of the Portfolio's distributions of book
income to constitute returns of capital for tax purposes or require the
Portfolio to make distributions exceeding book income in order to permit the
Trust to continue to qualify, and be taxed under Subchapter M of the Code, as
a regulated investment company.

Under federal income tax law, a portion of the difference between the purchase
price of zero-coupon securities in which a Portfolio has invested and their
face value ("original issue discount") is considered to be income to the
Portfolio each year, even though the Portfolio will not receive cash interest
payments from these securities. This original issue discount (imputed income)
will comprise a part of the net investment income of the Portfolio which must
be distributed to shareholders in order to maintain the qualification of the
Portfolio as a regulated investment company and to avoid federal income tax at
the level of the Portfolio.

It is the policy of each of the Portfolios to meet the requirements of the
Code to qualify as a regulated investment company that is taxed pursuant to
Subchapter M of the Code. One of these requirements is that less than 30% of a
Portfolio's gross income must be derived from gains from sale or other
disposition of securities held for less than three months (with special rules
applying to so-called designated hedges). Accordingly, a Portfolio will be
restricted in selling securities held or considered under Code rules to have
been held less than three months, and in engaging in hedging or other
activities (including entering into options, futures, or short-sale
transactions) which may cause the Trust's holding period in certain of its
assets to be less than three months.

The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and related regulations currently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and regulations. The Code and regulations are subject to change by legislative
or administrative actions. This discussion does not describe in any respect
the tax treatment or offsets of any insurance or other product pursuant to
which investments in the Trust may be made.

DIVIDENDS AND DISTRIBUTIONS

MONEY MARKET PORTFOLIO. The net investment income of the Money Market
Portfolio is determined as of the close of trading on the New York Stock
Exchange (generally 4:00 p.m. New York time) on each day on which the Exchange
is open for business. All of the net investment income so determined normally
will be declared as a dividend daily to shareholders of record as of the close
of trading on the Exchange after the purchase and redemption of shares. A
dividend declared on the business day before a weekend or holiday will not
include an amount in respect of the Portfolio's income for the subsequent
non-business day or days. No daily dividend will include any amount of net
income in respect of a subsequent semi-annual accounting period. Dividends
commence on the next business day after the date of purchase. Dividends
declared during any month will be invested as of the close of business on the
last calendar day of that month (or the next business day after the last
calendar day of the month if the last calendar day of the month is a
non-business day) in additional shares of the Portfolio at the net asset value
per share, normally $1.00, determined as of the close of business on that day,
unless payment of the dividend in cash has been requested.

Net income of the Money Market Portfolio consists of all interest income
accrued on portfolio assets less all expenses of the Portfolio and amortized
market premium. Amortized market discount is included in interest income. The
Portfolio does not anticipate that it will normally realize any long-term
capital gains with respect to its portfolio securities.

Normally the Money Market Portfolio will have a positive net income at
the time of each determination thereof. Net income may be negative if an
unexpected liability must be accrued or a loss realized. If the net income of
the Portfolio determined at any time is a negative amount, the net asset value
per share will be reduced below $1.00 unless one or more of the following
steps, for which the Trustees have authority, are taken: (1) reduce the number
of shares in each shareholder's account, (2) offset each shareholder's pro
rata portion of negative net income against the shareholder's accrued dividend
account or against future dividends, or (3) combine these methods in order to
seek to maintain the net asset value per share at $1.00. The Trust may
endeavor to restore the Portfolio's net asset value per share to $1.00 by not
declaring dividends from net income on subsequent days until restoration, with
the result that the net asset value per share will increase to the extent of
positive net income which is not declared as a dividend.

Should the Money Market Portfolio incur or anticipate, with respect to
its portfolio, any unusual or unexpected significant expense or loss which
would affect disproportionately the Portfolio's income for a particular
period, the Trustees would at that time consider whether to adhere to the
dividend policy described above or to revise it in light of the then
prevailing circumstances in order to ameliorate to the extent possible the
disproportionate effect of such expense or loss on then existing shareholders.
Such expenses or losses may nevertheless result in a shareholder's receiving
no dividends for the period during which the shares are held and receiving
upon redemption a price per share lower than that which was paid.

OTHER PORTFOLIOS. Each of the Portfolios other than the Money Market
Portfolio will declare and distribute dividends from net investment income, if
any, and will distribute its net realized capital gains, if any, at least
annually. Both dividends and capital gain distributions will be made in shares
of such Portfolios unless an election is made on behalf of a separate account
to receive dividends and capital gain distributions in cash.

PERFORMANCE INFORMATION

MONEY MARKET PORTFOLIO: The Portfolio's yield is computed by determining the
percentage net change, excluding capital changes, in the value of an
investment in one share of the Portfolio over the base period, and multiplying
the net change by 365/7 (or approximately 52 weeks). The Portfolio's effective
yield represents a compounding of the yield by adding 1 to the number
representing the percentage change in value of the investment during the base
period, raising that sum to a power equal to 365/7, and subtracting 1 from the
result.

OTHER PORTFOLIOS:

(a) A Portfolio's yield is presented for a specified 30-day period (the
"base period"). Yield is based on the amount determined by (i) calculating the
aggregate of dividends and interest earned by the Portfolio during the base
period less expenses accrued for that period, and (ii) dividing that amount by
the product of (A) the average daily number of shares of the Portfolio
outstanding during the base period and entitled to receive dividends and (B)
the net asset value per share of the Portfolio on the last day of the base
period. The result is annualized on a compounding basis to determine the
Portfolio's yield. For this calculation, interest earned on debt obligations
held by a Portfolio is generally calculated using the yield to maturity (or
first expected call date) of such obligations based on their market values
(or, in the case of receivables-backed securities such as Ginnie Maes, based
on cost). Dividends on equity securities are accrued daily at their stated
dividend rates.

Total return of a Portfolio for periods longer than one year is determined by
calculating the actual dollar amount of investment return on a $1,000
investment in the Portfolio made at the beginning of each period, then
calculating the average annual compounded rate of return which would produce
the same investment return on the $1,000 investment over the same period.
Total return for a period of one year or less is equal to the actual
investment return on a $1,000 investment in the Portfolio during that period.
Total return calculations assume that all Portfolio distributions are
reinvested at net asset value on their respective reinvestment dates.

From time to time, Adviser may reduce its compensation or assume expenses in
respect of the operations of a Portfolio in order to reduce the Portfolio's
expenses. Any such waiver or assumption would increase a Portfolio's yield and
total return during the period of the waiver or assumption.

SHAREHOLDER COMMUNICATIONS

Owners of Variable Contracts issued by the Life Companies for which shares of
one or more Portfolios are the investment vehicle are entitled to receive from
the Life Companies unaudited semi-annual financial statements and audited
year-end financial statements certified by the Trust's independent public
accountants. Each report will show the investments owned by the Portfolio and
the market value thereof and will provide other information about the
Portfolio and its operations.

ORGANIZATION AND CAPITALIZATION

The Trust is an open-end investment company established under the laws of The
Commonwealth of Massachusetts by a Declaration of Trust dated May 11, 1994.
Shares entitle their holders to one vote per share, with fractional shares
voting proportionally; however, a separate vote will be taken by each
Portfolio on matters affecting an individual Portfolio. For example, a change
in a fundamental investment policy for the Advantage Portfolio would be voted
upon only by shareholders of the Advantage Portfolio. Additionally, approval
of the Investment Advisory Agreement is a matter to be determined separately
by each Portfolio. Approval by the shareholders of one Portfolio is effective
as to that Portfolio. Shares have noncumulative voting rights. Although the
Trust is not 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. Shares have no
preemptive or subscription rights, and are transferable. Shares are entitled
to dividends as declared by the Trustees, and if a Portfolio were liquidated,
the shares of that Portfolio would receive the net assets of that Portfolio.
The Trust may suspend the sale of shares at any time and may refuse any order
to purchase shares.

Additional Portfolios may be created from time to time with different
investment objectives or for use as funding vehicles for different variable
life insurance policies or variable annuity contracts. Any additional
Portfolios may be managed by investment advisers or sub-advisers other than
the current Adviser and Sub-Advisers. In addition, the Trustees have the
right, subject to any necessary regulatory approvals, to create more than one
class of shares in a Portfolio, with the classes being subject to different
charges and expenses and having such other different rights as the Trustees
may prescribe and to terminate any Portfolio of the Trust.

PORTFOLIO TURNOVER

The portfolio turnover rate of a Portfolio is defined by the Securities and
Exchange Commission as the ratio of the lesser of annual sales or purchases to
the monthly average value of the portfolio, excluding from both the numerator
and the denominator securities with maturities at the time of acquisition of
one year or less. Under that definition, the Money Market Portfolio would not
calculate portfolio turnover. Portfolio turnover generally involves some
expense to a Portfolio, including brokerage commissions or dealer mark-ups and
other transaction costs on the sale of securities and reinvestment in other
securities.

CUSTODIAN

Bankers Trust Company is the custodian of the Trust's assets. The custodian's
responsibilities include safeguarding and controlling the Trust's cash and
securities, handling the receipt and delivery of securities, and collecting
interest and dividends on the Trust's investments. The Trust may employ
foreign sub-custodians that are approved by the Board of Trustees to hold
foreign assets.

LEGAL COUNSEL

Sutherland, Asbill & Brennan, LLP 1275 Pennsylvania Avenue, NW, Washington,
D.C. 20004-2440 serves as counsel to the Trust.

INDEPENDENT AUDITORS

Ernst & Young LLP, 200 Claredon Street, Boston, Massachusetts, serves as
independent auditors of the Trust.

SHAREHOLDER LIABILITY

Under Massachusetts law, shareholders could, under certain circumstances, be
held personally liable for the obligations of the Trust. However, the
Declaration of Trust disclaims shareholder liability for acts or obligations
of the Trust and requires that notice of such disclaimer be given in each
agreement, obligation, or instrument entered into or executed by the Trust or
the Trustees. The Declaration of Trust provides for indemnification out of a
Portfolio's property for all loss and expense of any shareholder held
personally liable for the obligations of a Portfolio. Thus the risk of a
shareholder's incurring financial loss on account of shareholder liability is
limited to circumstances in which the Portfolio would be unable to meet its
obligations.

DESCRIPTION OF NRSRO RATINGS

DESCRIPTION OF MOODY'S CORPORATE RATINGS

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

Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than in Aaa
securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment some time in the future.

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

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

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

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

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

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

DESCRIPTION OF S&P CORPORATE RATINGS

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

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

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

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

BB-B-CCC-CC and C -- Bonds rated BB, B, CCC, CC and C are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the
obligation. BB indicates the least degree of speculation and C the highest
degree of speculation. While such bonds will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions. A C rating is typically applied to
debt subordinated to senior debt which is assigned an actual or implied CCC
rating. It may also be used to cover a situation where a bankruptcy petition
has been filed, but debt service payments are continued.

DESCRIPTION OF DUFF & PHELPS CORPORATE RATINGS

AAA - Highest credit quality. The risk factors are negligible being only
slightly more than for risk-free U.S. Treasury debt.

AA - risk is modest but may vary slightly from time to time because of
economic conditions.

A - Protection factors are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.

BBB - Investment grade. Considerable variability in risk during economic
cycles.

BB - Below investment grade but deemed likely to meet obligations when
due. Present or prospective financial protection factors fluctuate according
to industry conditions or company fortunes. Overall quality may move up or
down frequently within this category.

B - Below investment grade and possessing risk that obligations will not
be met when due. Financial protection factors will fluctuate widely according
to economic cycles, industry conditions and/or company fortunes. Potential
exists for frequent changes in quality rating within this category or into a
higher or lower quality rating grade.

SUBSTANTIAL RISK - Well below investment grade securities. May be in
default or have considerable uncertainty as to timely payment of interest,
preferred dividends and/or principal. Protection factors are narrow and risk
can be substantial with unfavorable economic/industry conditions, and/or with
favorable company developments.

DESCRIPTION OF FITCH CORPORATE RATINGS

AAA - Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.

AA - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds rated
in the "AAA" and "AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issues is generally
rated "[-]+."

A - Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and to repay principal is considered to
be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.

BBB - Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and to repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.

BB - Bonds considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.

B - Bonds considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the obligor's limited margin
of safety.

CCC - Bonds which may have certain identifiable characteristics which, if
not remedied, may lead to the default of either principal or interest
payments.

CC - Bonds which are minimally protected. Default in payment of interest
and/or principal seems probable over time.

C - Bonds which are in imminent default in payment of interest or
principal.

DESCRIPTION OF THOMSON BANKWATCH, INC. CORPORATE RATINGS

AAA - Bonds that are rated AAA indicate that the ability to repay
principal and interest on a timely basis is extremely high.

AA - Bonds that are rated AA indicate a very strong ability to repay
principal and interest on a timely basis with limited incremental risk
compared to issues rated in the highest category.

TBW may apply plus ("+") and minus ("-") modifiers in the AAA and AA
categories to indicate where within the respective category the issue is
placed.

DESCRIPTION OF IBCA LIMITED AND IBCA INC. CORPORATE RATINGS

AAA - Obligations which are rated AAA are considered to be of the lowest
expectation of investment risk. Capacity for timely repayment of principal and
interest is substantial such that adverse changes in business, economic, or
financial conditions are unlikely to increase investment risk significantly.

AA - Obligations which are rated AA are considered to be of a very low
expectation of investment risk. Capacity for timely repayment of principal and
interest is substantial. Adverse changes in business, economic, or financial
conditions may increase investment risk albeit not very significantly.

DESCRIPTION OF S&P COMMERCIAL PAPER RATINGS

Commercial paper rated A-1 by S&P indicates that the degree of safety
regarding timely payments is strong. Those issues determined to possess
extremely strong safety characteristics are denoted A-1+. Capacity for timely
payment on commercial paper rated A-2 is satisfactory, but the relative degree
of safety is not as high as for issues designated A-1. An A-3 designation
indicates an adequate capacity for timely payment. Issues with this
designation, however, are more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations. B issues are
regarded as having only speculative capacity for timely payment. C issues have
a doubtful capacity for payment. D issues are in payment default. The D rating
category is used when interest payments or principal payments are not made on
the due date, even if the applicable grace period has not expired, unless
Standard & Poor's believes that such payments will be made during such grace
period.

DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS

Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Issuers rated
Prime-2 (or supporting institutions) have a strong ability for repayment of
senior short-term debt obligations. This will normally be evidenced by many of
the characteristics of issuers rated Prime-1 but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected
by external conditions. Ample alternate liquidity is maintained. Issuers rated
Prime-3 (or supporting institutions) have an acceptable ability for repayment
of senior short-term obligations. The effect of industry characteristics and
market compositions may be more pronounced. Variability in earnings and
profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained. Issuers rated Not Prime do not fall with
any of the Prime rating categories.

DESCRIPTION OF DUFF'S COMMERCIAL PAPER RATINGS

The rating Duff-1 is the highest commercial paper rating assigned by Duff
& Phelps. Paper rated Duff-1 is regarded as having very high certainty of
timely payment with excellent liquidity factors which are supported by ample
asset protection. Risk factors are minor. Paper rated Duff-2 is regarded as
having good certainty of timely payment, good access to capital markets and
sound liquidity factors and company fundamentals. Risk factors are small.

DESCRIPTION OF FITCH'S COMMERCIAL PAPER RATINGS

The rating F-1+ (Exceptionally Strong Credit Quality) is the highest
commercial paper rating assigned by Fitch. Issues rated F-1+ are regarded as
having the strongest degree of assurance for timely payment. The rating F-1
(Very Strong Credit Quality) reflects an assurance of timely payment only
slightly less in degree than the strongest issues. An F-2 rating (Good Credit
Quality) indicates a satisfactory degree of assurance for timely payment, but
the margin of safety is not as great as for issues assigned F-1+ and F-1.
Issues rated F-3 (Fair Credit Quality) have characteristics suggesting that
the degree of assurance for timely payment is adequate; however, near-term
adverse changes could cause these securities to be rated below investment
grade.

DESCRIPTION OF IBCA LIMITED AND IBCA INC. COMMERCIAL PAPER RATINGS

A1 - Short-term obligations rated A1 are supported by the highest
capacity for timely repayment. Where issues possess a particularly strong
credit feature, a rating of A1+ is assigned.

A2 - Short-term obligations rated A2 are supported by a satisfactory
capacity for timely repayment, although such capacity may be susceptible to
adverse changes in business, economic or financial conditions.

DESCRIPTION OF THOMSON BANKWATCH, INC. COMMERCIAL PAPER RATINGS

TBW-1 - Issues rated TBW-1 indicate a very high degree of likelihood that
principal and interest will be paid on a timely basis.

TBW-2 - Issues rated TBW-2 indicate that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated TBW-1.

FINANCIAL STATEMENTS

The Trust's financial statements and notes thereto for the year ended December
31, 1997, and the report of Ernst & Young LLP, Independent Auditors, with
respect thereto, appear in the Trust's Annual Report for the year ended
December 31, 1997, which is incorporated by reference into this Statement of
Additional Information. The Trust delivers a copy of the Annual Report to
investors along with the Statement of Additional Information. In addition, the
Trust will furnish, without charge, additional copies of such Annual Report to
investors which may be obtained without charge by calling the Life Company at
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