SARATOGA ADVANTAGE TRUST, 497, 1997-04-21

SARATOGA ADVANTAGE TRUST
497, 1997-04-21

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[LOGO]

PROSPECTUS DATED APRIL 14, 1997

T H E S A R A T O G A A D V A N T A G E T R U S T

The Saratoga Advantage Trust (the "Trust") is an open-end, management investment
company providing a convenient means of investing in a series of separate
investment portfolios (the "Portfolios") professionally managed by Saratoga
Capital Management (the "Manager"). Each of the Portfolios is diversified and is
provided with discretionary advisory services by a registered investment advisor
(the "Advisor") identified, retained, supervised and compensated by the Manager.
The Trust is a series company that currently consists of the following
Portfolios to which this Prospectus relates:

Income Portfolios:

- U.S. GOVERNMENT MONEY MARKET PORTFOLIO

- INVESTMENT QUALITY BOND PORTFOLIO

- MUNICIPAL BOND PORTFOLIO

Equity Portfolios:
- LARGE CAPITALIZATION VALUE PORTFOLIO

- LARGE CAPITALIZATION GROWTH PORTFOLIO

- SMALL CAPITALIZATION PORTFOLIO

- INTERNATIONAL EQUITY PORTFOLIO

SHARES OF THE U.S. GOVERNMENT MONEY MARKET PORTFOLIO ARE NOT GUARANTEED OR
INSURED BY THE U.S. GOVERNMENT. THERE CAN BE NO ASSURANCE THAT THE U.S.
GOVERNMENT MONEY MARKET PORTFOLIO WILL BE ABLE TO MAINTAIN A CONSTANT NET ASSET
VALUE OF $1.00 PER SHARE.

Shares of the Portfolios are offered to participants in investment advisory
programs that provide asset allocation recommendations to investors based on an
evaluation of the investor's investment objectives and risk tolerance. The
advisors in certain of these investment advisory programs may use an asset
allocation methodology developed by the Manager, the Saratoga Strategic Horizon
Asset Reallocation ProgramSM (the "Saratoga SharpSM Program"), to assist them in
translating investor needs, preferences and attitudes identified from an
investment questionnaire into suggested portfolio allocations. Shares of the
Portfolios are also available to other investors and investment advisory
services. Investors purchasing shares through an investment advisory service
will be subject to the payment of a separate fee imposed by the investment
advisor for such services. See "Purchase of Shares--General." The operating
expenses of the Portfolios, when combined with any investment advisory fees
separately paid, may involve greater fees and expenses than other investment
companies whose shares are purchased without the benefit of the professional
consulting and asset allocation services rendered by the investment advisors.

This Prospectus sets forth concisely certain information about the Trust,
including expenses, that prospective investors will find helpful in making an
investment decision. Investors are encouraged to read this Prospectus carefully
and retain it for future reference.

Additional information about the Trust is contained in a Statement of Additional
Information dated April 14, 1997, which is available upon request and without
charge by calling or writing the Trust or Saratoga Capital Management at 33
Maiden Lane, New York, New York 10038-4578, 800-807-FUND (800-807-3863). The
Statement of Additional Information, which has been filed with the Securities
and Exchange Commission, is incorporated by reference into this Prospectus in
its entirety.

SHARES OF THE PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF OR GUARANTEED OR
ENDORSED BY ANY BANK AND THE SHARES OF THE PORTFOLIOS ARE NOT FEDERALLY INSURED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY
OTHER AGENCY AND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF THE
PRINCIPAL AMOUNT INVESTED.

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 THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS

PAGE
----
Summary................................................................. 2
Summary of Trust Expenses............................................... 5
Financial Highlights.................................................... 6
Objectives and Policies of the Portfolios............................... 8
Certain Securities and Investment Techniques............................ 12
Risk Factors............................................................ 19
Certain Investment Policies............................................. 21
Management of the Trust................................................. 22
Purchase of Shares...................................................... 25
Redemption of Shares.................................................... 27
Net Asset Value......................................................... 28
Exchange Privilege...................................................... 28
Dividends, Distributions and Taxes...................................... 29
Custodian and Transfer Agent............................................ 31
Performance of the Portfolios........................................... 31
Additional Information.................................................. 33

SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS.

THE TRUST. The Trust is a management investment company providing a convenient
means of investing in separate Portfolios professionally managed by the Manager.
The assets of each of the Portfolios are invested on a discretionary basis by a
separate Advisor. See "Management of the Trust." The Trust is a series company
currently consisting of the following 7 Portfolios:

Income Portfolios:

- -U.S. GOVERNMENT MONEY MARKET PORTFOLIO, whose Advisor is Sterling Capital
Management Company.

- -INVESTMENT QUALITY BOND PORTFOLIO, whose Advisor is Fox Asset Management, Inc.

- -MUNICIPAL BOND PORTFOLIO, whose Advisor is OpCap Advisors.

Equity Portfolios:

- -LARGE CAPITALIZATION VALUE PORTFOLIO, whose Advisor is OpCap Advisors.

- -LARGE CAPITALIZATION GROWTH PORTFOLIO, whose Advisor is Harris Bretall Sullivan
& Smith, Inc.

- -SMALL CAPITALIZATION PORTFOLIO, whose Advisor is Thorsell, Parker Partners,
Inc.

- -INTERNATIONAL EQUITY PORTFOLIO, whose Advisor is Ivory & Sime International,
Inc.

MANAGEMENT. Saratoga Capital Management is the Manager of the Portfolios. Each
of the Portfolios is provided with the discretionary advisory services of an
Advisor identified, retained, supervised and compensated by the Manager. Unified
Advisers, Inc. serves as the Trust's administrator and, in connection therewith,
provides administration services to each Portfolio. See "Management of the
Trust."

INVESTMENT ADVISORY SERVICES. Shares of the Portfolios are offered to
participants in certain investment advisory programs and to other investors and
investment advisory services. Generally, the investment advisors for the
investment advisory programs provide asset allocation recommendations with
respect to the Portfolios based on an evaluation of an investor's investment
objectives and risk tolerance. Certain investment advisors offering asset
allocation programs may enter into agreements with the Manager pursuant to which
the Manager will

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<PAGE>

make available its Saratoga SharpSM Program and provide various administrative
services to the investment advisor ("Consulting Programs"). The investment
advisory fee for these Consulting Programs will be determined by the investment
advisors and their clients. The fee is paid to the client's investment advisor
either directly or by redeeming a sufficient number of Portfolio shares. The
Manager is paid a fee by the client's investment advisor for services provided
to the investment advisor in connection with the investment advisory program.
See "Purchase of Shares--General."

PURCHASE AND REDEMPTION OF SHARES. Shares of the Portfolios are offered for
purchase and redemption at their respective net asset values next determined,
WITHOUT IMPOSITION OF ANY SALES CHARGE. See "Purchase of Shares" and "Redemption
of Shares."

RISK FACTORS AND SPECIAL CONSIDERATIONS. No assurance can be given that the
Portfolios will achieve their investment objectives. Investing in an investment
company that invests in securities of companies and governments of foreign
countries, particularly developing countries, involves risks that go beyond the
usual risks inherent in an investment company limiting its holdings to domestic
investments. Certain Portfolios may also be subject to certain risks in using
investment techniques and strategies such as entering into forward currency
contracts, repurchase agreements, trading futures contracts and options on
futures contracts. In addition, the Investment Quality Bond Portfolio and the
Municipal Bond Portfolio may invest in zero coupon securities, which, due to
changes in interest rates, may be more speculative and subject to greater
fluctuations in value than securities that pay interest currently. See
"Objectives and Policies of the Portfolios," "Certain Securities and Investment
Techniques" and "Risk Factors."

Investors should be aware that the Manager receives a fee from the investment
advisor for each participant in a Consulting Program for services rendered to
the investment advisor in connection with the investment advisory program. This
fee does not vary based on the Portfolios recommended for the participant's
investments. The Manager also serves as the Trust's Manager with responsibility
for identifying, retaining, supervising and compensating each Portfolio's
Advisor and receives a fee from each Portfolio. The portion of each Portfolio's
management fee that is retained by the Manager does not vary based on the
Portfolio involved. The Manager's decisions as to the retention of particular
Advisors and specific amount of the Manager's compensation to be paid to the
Advisor are subject to review and approval by a majority of the Board of
Trustees and separately by a majority of the Trustees who are not affiliated
with the Manager or any of its affiliates. These decisions are also subject to
approval of shareholders of the Portfolio involved. See "Management of the
Trust--Investment Manager" and "Purchase of Shares--General--Investment Advisory
Programs."

The Portfolios are intended primarily as vehicles for the implementation of long
term asset allocation strategies rendered through investment advisory programs
that are based on an evaluation of an investor's investment objectives and risk
tolerance. Because these asset allocation strategies are designed to spread
investment risk across the various segments of the securities markets through
investment in a number of Portfolios, each individual Portfolio generally
intends to be substantially fully invested in accordance with its investment
objectives and policies during most market conditions. Although the Advisor of a
Portfolio may, upon the concurrence of the Manager, take a temporary defensive
position during adverse market conditions, it can be expected that a defensive
posture will be adopted less frequently than would be by other mutual funds.
This policy may impede an Advisor's ability to protect a Portfolio's capital
during declines in the particular segment of the market to which the Portfolio's
assets are committed. Consequently, no single Portfolio should be considered a
complete investment program and an investment among the Portfolios should be
regarded as a long term commitment that should be held through several market
cycles. In addition, although the investment advisors for the Consulting
Programs may recommend adjustments in the allocation of assets among the
Portfolios based on, among other things, anticipated market trends, there can be
no assurance that these recommendations can be developed, transmitted and acted
upon in a manner sufficiently timely to avoid market shifts, which can be sudden
and substantial. Participants in

~ 3 ~
<PAGE>
Consulting Programs should note that responsibility for investment
recommendations rests solely with the investment advisor for the program or the
client itself and not with the Trust or the Manager. Investors intending to
purchase Portfolio shares through investment advisory programs should evaluate
carefully whether the service is ongoing and continuous, as well as their
investment advisors' ability to anticipate and respond to market trends. See
"Objectives and Policies of the Portfolios," and "Certain Securities and
Investment Techniques--Temporary Investments."

DIVIDENDS AND DISTRIBUTIONS. Each Portfolio intends to distribute annually to
its shareholders substantially all of its net investment income and its net
realized long and short term capital gains. Dividends from the net investment
income of the U.S. Government Money Market Portfolio, the Investment Quality
Bond Portfolio, and the Municipal Bond Portfolio are declared daily and paid
monthly. Dividends from the net investment income of the remaining Portfolios
are declared and paid annually. Distributions of any net realized long term and
short term capital gains earned by a Portfolio will be made annually. See
"Dividends, Distributions and Taxes."

TAXATION. Each of the Portfolios intends to qualify as a regulated investment
company for U.S. federal income tax purposes. As such, the Trust anticipates
that no Portfolio will be subject to U.S. federal income tax on income and
gains, if any, that are distributed to shareholders. It is expected that certain
capital gains and certain dividends and interest earned by the International
Equity Portfolio will be subject to foreign withholding taxes. These taxes may
be deductible or creditable in whole or in part by shareholders of the Portfolio
for U.S. federal income tax purposes. See "Dividends, Distributions and Taxes."

CUSTODIAN AND TRANSFER AGENT. State Street Bank and Trust Company ("State
Street") acts as the custodian of the Trust's U.S. and non-U.S. assets and may
employ sub-custodians outside the United States approved by the Trustees of the
Trust in accordance with regulations of the Securities and Exchange Commission
(the "SEC"). State Street also serves as the transfer agent for the Portfolios'
shares. See "Custodian and Transfer Agent."

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<PAGE>
SUMMARY OF TRUST EXPENSES

ANNUAL PORTFOLIO OPERATING EXPENSES. THE FOLLOWING TABLE LISTS THE COSTS AND
EXPENSES THAT AN INVESTOR WILL INCUR AS A SHAREHOLDER OF EACH OF THE PORTFOLIOS
BASED ON THE PORTFOLIO'S PROJECTED ANNUAL OPERATING EXPENSES. THERE ARE NO
SHAREHOLDER TRANSACTION EXPENSES, SALES LOADS OR DISTRIBUTION FEES.
<TABLE>
<CAPTION>
U.S.
GOVERNMENT INVESTMENT LARGE
MONEY QUALITY MUNICIPAL CAPITALIZATION
MARKET BOND BOND VALUE
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
---------------- --------------- ----------------- -----------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES........ NONE NONE NONE NONE
ANNUAL PORTFOLIO OPERATING EXPENSES
(as a percentage of average net
assets)
Management Fees....................... .475% .55% .55% .65%
Distribution (Rule 12b-1 Expenses).... NONE NONE NONE NONE
Other Expenses........................ .65% .65% .65% .65%
------- ------ ------ ------
Total Operating Expenses.............. 1.125% 1.20% 1.20% 1.30%

LARGE
CAPITALIZATION SMALL INTERNATIONAL
GROWTH CAPITALIZATION EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO
------------------- ----------------- ---------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES........ NONE NONE NONE
ANNUAL PORTFOLIO OPERATING EXPENSES
(as a percentage of average net
assets)
Management Fees....................... .65% .65% .75%
Distribution (Rule 12b-1 Expenses).... NONE NONE NONE
Other Expenses........................ .65% .65% .65%
------ ------ ------
Total Operating Expenses.............. 1.30% 1.30% 1.40%
</TABLE>

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

MANAGEMENT FEES AND OTHER EXPENSES: Each Portfolio pays the Manager a fee for
its services that is computed daily and paid monthly at an annual rate ranging
from .475% to .75% of the value of the average daily net assets of the
Portfolio. The fees of each Advisor are paid by the Manager. The nature of the
services provided to, and the aggregate management fees paid by, each Portfolio
are described under "Management of the Trust." The expenses set forth in the
above table reflect voluntary expense limitations currently in effect. For the
year ended August 31, 1996, the Manager waived all or a portion of its
management fee and assumed certain operating expenses of each Portfolio. In
addition, the Portfolios benefitted from expense offset arrangements with their
custodian bank. Without such voluntary waivers, expense assumptions and expense
offsets, total operating expenses of each of the Portfolios would have been as
follows: U.S. Government Money Market Portfolio, 1.79%; Investment Quality Bond
Portfolio, 2.12%; Municipal Bond Portfolio, 5.32%; Large Capitalization Value
Portfolio, 2.19%; Large Capitalization Growth Portfolio, 1.67%; Small
Capitalization Portfolio, 1.84%; and International Equity Portfolio, 3.91%.
"Other Expenses" include fees for shareholder services, administration,
custodial fees, legal and accounting fees, printing costs, registration fees,
the costs of regulatory compliance, a Portfolio's allocated portion of the costs
associated with maintaining the Trust's legal existence and the costs involved
in the Trust's communications with shareholders. The table does not reflect any
fees paid by investors pursuant to Consulting Programs.

Example. The following example demonstrates the projected dollar amount of total
cumulative expenses that would be incurred over various periods with respect to
a hypothetical investment in the Portfolios. These amounts are based upon (i)
payment by the Portfolios of operating expenses at the levels set forth in the
table above and (ii) the specific assumptions stated below:

A shareholder would pay the following expenses on a $1,000 investment assuming
(i) a 5% annual return and (ii) redemption at the end of each time period:
<TABLE>
<S> <C> <C> <C> <C>
1 year................................ $ 11.47 $ 12.23 $ 12.23 $ 13.24
3 years............................... 35.75 38.09 38.09 41.21
5 years............................... 61.95 65.97 65.97 71.29
10 years.............................. 136.88 145.46 145.46 156.78

<CAPTION>
1 year................................ $ 13.24 $ 13.24 $ 14.25
3 years............................... 41.21 41.21 44.32
5 years............................... 71.29 71.29 76.59
10 years.............................. 156.78 156.78 167.98
</TABLE>

The purpose of this example is to assist an investor in understanding various
costs and expenses that an investor in a Portfolio will bear. THIS EXAMPLE
SHOULD NOT BE CONSIDERED TO BE A REPRESENTATION OF PAST OR FUTURE EXPENSES;
ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. Moreover, although the
table assumes a 5% annual return, a Portfolio's actual performance will vary and
may result in an actual return greater or less than 5%.

~ 5 ~
<PAGE>
FINANCIAL HIGHLIGHTS

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

The financial highlights listed below have been audited by KPMG Peat Marwick
LLP, independent auditors, whose unqualified report thereon appears in the SAI.
All of the following information should be read in conjunction with the
financial statements and related notes thereto appearing in the SAI. Further
information regarding the performance of each Portfolio is available in the
Trust's Annual Report. Annual Reports may be obtained without charge by calling
the Trust at (800) 807-FUND.
<TABLE>
<CAPTION>
DIVIDENDS
INCOME FROM INVESTMENT OPERATIONS ---------------------------
DIVIDENDS TO
---------------------------------------- DIVIDENDS TO SHAREHOLDERS
NET ASSET NET NET REALIZED SHAREHOLDERS FROM NET
VALUE, INVESTMENT AND UNREALIZED TOTAL FROM FROM NET REALIZED
BEGINNING INCOME GAIN (LOSS) ON INVESTMENT INVESTMENT GAINS ON
OF PERIOD (LOSS) INVESTMENTS OPERATIONS INCOME INVESTMENTS
<S> <C> <C> <C> <C> <C> <C>
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
YEAR ENDED AUGUST 31, 1996 $1.000 $0.044 $0.000 0.044 ($0.044) --
SEPTEMBER 2, 1994(3) TO
AUGUST 31, 1995 1.000(4) 0.052 0.000 0.052 (0.052) --

<CAPTION>
RATIOS
---------------------------------------------------
RATIO OF NET
RATIO OF NET INVESTMENT
NET ASSET NET ASSETS OPERATING INCOME
VALUE, END OF EXPENSES TO (LOSS) TO PORTFOLIO AVERAGE
END OF TOTAL PERIOD AVERAGE NET AVERAGE NET TURNOVER COMMISSION
PERIOD RETURN* (000'S) ASSETS ASSETS RATE RATE
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. GOVERNMENT MONEY MARKET
YEAR ENDED AUGUST 31, 1996 $1.000 4.47% $22,906 1.13%(1,2,6) 4.30%(1,2) -- --
SEPTEMBER 2, 1994(3) TO
AUGUST 31, 1995 1.000 5.36% 5,072 0.40%(1,5) 5.38%(1,5) -- --
</TABLE>

<CAPTION>
INVESTMENT QUALITY BOND PORT
<S> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED AUGUST 31, 1996 ($0.01) $ 9.91 3.23% $16,864 1.31%(1,2,6) 4.84%(1,2) 55% --

SEPTEMBER 2, 1994(3) TO
AUGUST 31, 1995 -- 10.08 7.12% 4,503 0.45%(1,5) 5.77%(1,5) 18% --

</TABLE>

<CAPTION>
MUNICIPAL BOND PORTFOLIO
<S> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED AUGUST 31, 1996 -- $10.00 4.88% $ 4,708 1.23%(1,2,6) 4.03%(1,2) 12% --

SEPTEMBER 2, 1994(3) TO
AUGUST 31, 1995 -- 9.93 4.65% 1,477 0.37%(1,5) 4.79%(1,5) 27% --

</TABLE>

(1) DURING THE PERIODS PRESENTED ABOVE, SARATOGA CAPITAL MANAGEMENT WAIVED ALL
OF ITS FEES AND ASSUMED A PORTION OF THE OPERATING EXPENSES. ADDITIONALLY,
FOR THE YEAR ENDED AUGUST 31, 1996, THE PORTFOLIO BENEFITED FROM AN EXPENSE
OFFSET ARRANGEMENT WITH ITS CUSTODIAN BANK. IF SUCH WAIVERS, ASSUMPTIONS AND
EXPENSE OFFSETS HAD NOT BEEN IN EFFECT FOR THE RESPECTIVE PERIODS, THE
RATIOS OF NET OPERATING EXPENSES TO AVERAGE DAILY NET ASSETS AND THE RATIOS
OF NET INVESTMENT INCOME (LOSS) TO AVERAGE DAILY NET ASSETS WOULD HAVE BEEN
5.32% AND (0.12%), RESPECTIVELY, FOR THE YEAR ENDED AUGUST 31, 1996 AND
20.15% AND (14.99%), ANNUALIZED, RESPECTIVELY, FOR THE PERIOD SEPTEMBER 2,
1994 (COMMENCEMENT OF OPERATIONS) TO AUGUST 31, 1995.
<TABLE>
<CAPTION>
LARGE CAPITALIZATION VALUE PORTFOLIO
<S> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED AUGUST 31, 1996 $12.30 $0.07 $2.33 $2.40 ($0.11) ($0.14) $14.45 19.73%
SEPTEMBER 2, 1994(3) TO
AUGUST 31, 1995 10.00(4) 0.15 2.20 2.35 (0.05) -- 12.30 23.60%

<CAPTION>
LARGE CAPITALIZATION VALUE PORTFOLIO
<S> <C> <C> <C> <C> <C>
YEAR ENDED AUGUST 31, 1996 $18,274 1.28%(1,2,6) 0.97%(1,2) 26% $0.06
SEPTEMBER 2, 1994(3) TO
AUGUST 31, 1995 5,515 0.40%(1,5) 2.29%(1,5) 33% --
</TABLE>

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<PAGE>
FINANCIAL HIGHLIGHTS

(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) (CONTINUED)
<TABLE>
<CAPTION>
DIVIDENDS
INCOME FROM INVESTMENT OPERATIONS ---------------------------
DIVIDENDS TO
---------------------------------------- DIVIDENDS TO SHAREHOLDERS
NET ASSET NET NET REALIZED SHAREHOLDERS FROM NET
VALUE, INVESTMENT AND UNREALIZED TOTAL FROM FROM NET REALIZED
BEGINNING INCOME GAIN (LOSS) ON INVESTMENT INVESTMENT GAINS ON
OF PERIOD (LOSS) INVESTMENTS OPERATIONS INCOME INVESTMENTS
<S> <C> <C> <C> <C> <C> <C>
LARGE CAPITALIZATION GROWTH PORTFOLIO
YEAR ENDED AUGUST 31, 1996 $12.86 ($0.02) $ 0.35 $ 0.33 ($0.01) ($0.02)
SEPTEMBER 2, 1994(3) TO
AUGUST 31, 1995 10.00(4) 0.02 2.85 2.87 (0.01) --

<CAPTION>
RATIOS
---------------------------------------------------
RATIO OF NET
RATIO OF NET INVESTMENT
NET ASSET NET ASSETS OPERATING INCOME
VALUE, END OF EXPENSES TO (LOSS) TO PORTFOLIO AVERAGE
END OF TOTAL PERIOD AVERAGE NET AVERAGE NET TURNOVER COMMISSION
PERIOD RETURN* (000'S) ASSETS ASSETS RATE RATE
<S> <C> <C> <C> <C> <C> <C> <C>
LARGE CAPITALIZATION GROWTH
YEAR ENDED AUGUST 31, 1996 $13.16 2.56% $33,962 1.34%(1,2,6) (0.13%)(1,2) 50% $0.07
SEPTEMBER 2, 1994(3) TO
AUGUST 31, 1995 12.86 28.77% 11,107 0.51%(1,5) 0.32%(1,5) 23% --
</TABLE>

(1) DURING THE PERIODS PRESENTED ABOVE, SARATOGA CAPITAL MANAGEMENT WAIVED A
PORTION OR ALL OF ITS FEES AND ASSUMED A PORTION OF THE OPERATING EXPENSES.
ADDITIONALLY, FOR THE YEAR ENDED AUGUST 31, 1996, THE PORTFOLIO BENEFITED
FROM AN EXPENSE OFFSET ARRANGEMENT WITH ITS CUSTODIAN BANK. IF SUCH WAIVERS,
ASSUMPTIONS AND EXPENSE OFFSETS HAD NOT BEEN IN EFFECT FOR THE RESPECTIVE
PERIODS, THE RATIOS OF NET OPERATING EXPENSES TO AVERAGE DAILY NET ASSETS
AND THE RATIOS OF NET INVESTMENT INCOME (LOSS) TO AVERAGE DAILY NET ASSETS
WOULD HAVE BEEN 1.67% AND (0.60%), RESPECTIVELY, FOR THE YEAR ENDED AUGUST
31, 1996 AND 5.00% AND (4.17%), ANNUALIZED, RESPECTIVELY, FOR THE PERIOD
SEPTEMBER 2, 1994 (COMMENCEMENT OF OPERATIONS) TO AUGUST 31, 1995.
<TABLE>
<CAPTION>
SMALL CAPITALIZATION PORTFOLIO
<S> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED AUGUST 31, 1996 $ 12.62 ($ 0.09) $ 1.44 $ 1.35 ($0.00) ($0.39) $13.58
SEPTEMBER 2, 1994(3) TO
AUGUST 31, 1995 10.00(4) 0.02 2.61 2.63 (0.01) -- 12.62

<CAPTION>
SMALL CAPITALIZATION PORTFOLIO
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED AUGUST 31, 1996 11.03 % $ 22,071 1.25%(1,2,6) (0.83%)(1,2) 95% $ 0.06
SEPTEMBER 2, 1994(3) TO
AUGUST 31, 1995 26.38 % 15,103 0.42%(1,5) 0.07%(1,5) 111% --
</TABLE>

(1) DURING THE PERIODS PRESENTED ABOVE, SARATOGA CAPITAL MANAGEMENT WAIVED A
PORTION OR ALL OF ITS FEES AND ASSUMED A PORTION OF THE OPERATING EXPENSES.
ADDITIONALLY, FOR THE YEAR ENDED AUGUST 31, 1996, THE PORTFOLIO BENEFITED
FROM AN EXPENSE OFFSET ARRANGEMENT WITH ITS CUSTODIAN BANK. IF SUCH WAIVERS,
ASSUMPTIONS AND EXPENSE OFFSETS HAD NOT BEEN IN EFFECT FOR THE RESPECTIVE
PERIODS, THE RATIOS OF NET OPERATING EXPENSES TO AVERAGE DAILY NET ASSETS
AND THE RATIOS OF NET INVESTMENT INCOME (LOSS) TO AVERAGE DAILY NET ASSETS
WOULD HAVE BEEN 1.84% AND (1.42%), RESPECTIVELY, FOR THE YEAR ENDED AUGUST
31, 1996 AND 3.57% AND (3.08%), ANNUALIZED, RESPECTIVELY, FOR THE PERIOD
SEPTEMBER 2, 1994 (COMMENCEMENT OF OPERATIONS) TO AUGUST 31, 1995.
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY PORTFOLIO
<S> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED AUGUST 31, 1996 $ 9.33 $ 0.00 $ 0.34 $ 0.34 ($0.03) ($0.05) $ 9.59
SEPTEMBER 2, 1994(3) TO
AUGUST 31, 1995 10.00(4) 0.05 (0.71) (0.66) (0.01) -- 9.33

<CAPTION>
INTERNATIONAL EQUITY PORTFOLIO
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED AUGUST 31, 1996 3.68 % $ 6,857 1.65%(1,2,6) 0.23%(1,2) 58% $ 0.09
SEPTEMBER 2, 1994(3) TO
AUGUST 31, 1995 (6.61 %) 2,907 0.38%(1,5) 1.03%(1,5) 36% --
</TABLE>

(1) DURING THE PERIODS PRESENTED ABOVE, SARATOGA CAPITAL MANAGEMENT WAIVED ALL
OF ITS FEES AND ASSUMED A PORTION OF THE OPERATING EXPENSES. ADDITIONALLY,
FOR THE YEAR ENDED AUGUST 31, 1996, THE PORTFOLIO BENEFITED FROM AN EXPENSE
OFFSET ARRANGEMENT WITH ITS CUSTODIAN BANK. IF SUCH WAIVERS, ASSUMPTIONS AND
EXPENSE OFFSETS HAD NOT BEEN IN EFFECT FOR THE RESPECTIVE PERIODS, THE
RATIOS OF NET OPERATING EXPENSES TO AVERAGE DAILY NET ASSETS AND THE RATIOS
OF NET INVESTMENT INCOME (LOSS) TO AVERAGE DAILY NET ASSETS WOULD HAVE BEEN
3.91% AND (2.33)%, RESPECTIVELY, FOR THE YEAR ENDED AUGUST 31, 1996 AND
8.96% AND (7.55%), ANNUALIZED, RESPECTIVELY, FOR THE PERIOD SEPTEMBER 2,
1994 (COMMENCEMENT OF OPERATIONS) TO AUGUST 31, 1995.
- ----------------------------------
(2) AVERAGE DAILY NET ASSETS FOR THE YEAR ENDED AUGUST 31, 1996 WERE
$14,679,617; $10,861,629; $3,067,626; $11,644,595; $22,974,545; $18,217,666
AND $5,019,160 FOR U.S. GOVERNMENT MONEY MARKET, INVESTMENT QUALITY BOND,
MUNICIPAL BOND, LARGE CAPITALIZATION VALUE, LARGE CAPITALIZATION GROWTH,
SMALL CAPITALIZATION AND INTERNATIONAL EQUITY, RESPECTIVELY.
(3) COMMENCEMENT OF OPERATIONS.
(4) INITIAL OFFERING PRICE.
(5) ANNUALIZED.
(6) DOES NOT REFLECT EXPENSE OFFSETS.
* ASSUMES REINVESTMENT OF ALL DIVIDENDS AND DISTRIBUTIONS. AGGREGATE (NOT
ANNUALIZED) TOTAL RETURN IS SHOWN FOR ANY PERIOD SHORTER THAN ONE YEAR.

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<PAGE>
OBJECTIVES AND POLICIES OF THE PORTFOLIOS

Set forth below is a description of the investment objectives and policies of
each Portfolio. There can be no assurance that any Portfolio will achieve its
investment objectives. Further information about the investment policies of each
Portfolio, including a list of those restrictions on its investment activities
that cannot be changed without shareholder approval, appears in the Statement of
Additional Information.

U.S. GOVERNMENT MONEY MARKET PORTFOLIO is advised by Sterling Capital Management
Company. The Portfolio's investment objective is to provide maximum current
income to the extent consistent with the maintenance of liquidity and the
preservation of capital by investing exclusively in short term securities issued
or guaranteed by the U.S. Government, its agencies or instrumentalities ("U.S.
Government Securities") and repurchase agreements with respect to those
securities. The Portfolio may purchase securities on a when-issued or
delayed-delivery basis. See "Certain Securities and Investment Techniques." The
Portfolio will invest only in securities that are purchased with and payable in
U.S. dollars and that have remaining maturities of 397 days or less at the time
of purchase. The Portfolio maintains a dollar-weighted average portfolio
maturity of 90 days or less. All securities purchased by the Portfolio,
including repurchase agreements, will present minimal credit risks in the
opinion of the Advisor acting pursuant to criteria adopted by the Trust's Board
of Trustees. The Portfolio follows these policies in order to maintain a
constant net asset value of $1.00 per share, although there can be no assurance
it can do so on a continuing basis. The Portfolio is not insured or guaranteed
by the U.S. Government. The yield attained by the Portfolio may not be as high
as that of other funds that invest in lower quality or longer term securities.

All investment decisions for the Portfolio are made by Sterling Capital
Management Company's investment committee which is primarily responsible for
management of the Portfolio.

INVESTMENT QUALITY BOND PORTFOLIO is advised by Fox Asset Management, Inc.
("Fox"). The Portfolio seeks, as its investment objectives, current income and
reasonable stability of principal. The Portfolio seeks to achieve its objectives
through investment in investment quality fixed income securities and the active
management of such securities. The average maturity of the securities held by
the Portfolio may be shortened, but not below three years, in order to preserve
capital if the Advisor anticipates a rise in interest rates. Conversely, the
average maturity may be lengthened, but not beyond ten years, to maximize
returns if interest rates are expected to decline.

Under normal conditions, the Portfolio will invest at least 65% of its assets in
debt instruments including U.S. Government Securities, corporate bonds,
debentures, Eurodollar bonds, Yankee bonds and foreign currency denominated
bonds. In addition, the Portfolio may invest in non-convertible fixed income
preferred stock and mortgage pass-through securities. The Portfolio limits its
investments to investment grade securities, which are securities rated within
the four highest categories established by Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Corporation ("S&P"), and unrated securities
determined by the Advisor to be of comparable quality. The Portfolio is not
obligated to dispose of securities that fall below such ratings due to changes
made by the rating agencies subsequent to the purchase of the securities but
will dispose of any such securities in order to limit its holdings of securities
rated below Baa by Moody's or BBB by S&P to no more than 5% of its net assets.
See the Appendix to the Statement of Additional Information for a description of
Moody's and S&P ratings and "Risk Factors--Medium and Lower Rated and Unrated
Securities" for a description of certain risks associated with securities in the
fourth highest rating category. Although the Portfolio is authorized to hedge
against unfavorable changes in interest rates by entering into interest rate
futures contracts and purchasing and writing put and call options thereon, its
Advisor has no

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<PAGE>
present intention of using such techniques. The Portfolio also may engage in
repurchase agreements, purchase temporary investments, purchase securities on a
when-issued basis and lend its portfolio securities. See "Certain Securities and
Investment Techniques."

The Portfolio is managed by Paul Stach, Russell Tompkins and Thayer Potter. Mr.
Stach is a Managing Director and Director of Fixed Income Research at Fox where
he has worked since 1993. He joined the firm from Kidder, Peabody & Co. where he
was a Managing Director in Investment Banking. Mr. Tompkins is a Managing
Director and also coordinates all compliance matters for the firm. He joined the
firm in 1988. Mr. Potter is a Vice President and Portfolio Manager of Fox. He
has been with the firm since 1993, and was previously with Acorn Asset
Management, serving as Vice President and portfolio manager.

MUNICIPAL BOND PORTFOLIO is advised by OpCap Advisors. The Portfolio seeks, as
its investment objective, a high level of interest income that is excluded from
federal income taxation to the extent consistent with prudent investment
management and the preservation of capital. The Portfolio seeks to achieve its
objectives through investment in a diversified portfolio of general obligation,
revenue and private activity bonds, including lease obligations, and notes that
are issued by or on behalf of states, territories and possessions of the United
States and the District of Columbia and their political subdivisions, agencies
and instrumentalities, or multi-state agencies or authorities, the interest on
which, in the opinion of counsel to the issuer of the instrument, is excluded
from gross income for federal income tax purposes ("Municipal Obligations"). See
"Municipal Obligations" on page 16.

Portfolio composition generally covers a full range of maturities with broad
geographic and issuer diversification. The Portfolio may also invest in variable
rate Municipal Obligations, most of which permit the holder thereof to receive
the principal amount on demand upon seven days' notice. The Portfolio will
invest primarily in municipal bonds rated at the time of purchase within the
four highest ratings assigned by Moody's, S&P or by Fitch Municipal Division
("Fitch") or, if unrated, which are of comparable quality in the opinion of
OpCap Advisors. See the Appendix to the SAI for a description of such ratings
and "Risk Factors--Medium and Lower Rated and Unrated Securities" for a
description of certain risks associated with securities in the fourth highest
rating category. The Portfolio is not obligated to dispose of securities that
fall below such ratings due to changes made by the rating agencies subsequent to
purchase of the securities but will dispose of any such securities in order to
limit its holdings of securities rated below Baa by Moody's or BBB by S&P or
Fitch to no more than 5% of its net assets.

It is a fundamental policy of the Portfolio that under normal circumstances at
least 80% of its assets will be invested in Municipal Obligations. Also, at
least 65% of its assets will be invested in bonds. The Portfolio will not invest
more than 25% of its total assets in Municipal Obligations whose issuers are
located in the same state. The Portfolio will also not invest more than 25% of
its assets in private activity bonds of similar projects. It is possible that
the Portfolio from time to time will invest more than 25% of its assets in a
particular segment of the municipal securities market, such as hospital revenue
bonds, housing agency bonds, industrial development bonds or airport bonds, or
in securities the interest on which is paid from revenues of a similar type of
project. In such circumstances, economic, business, political or other changes
affecting one bond (such as proposed legislation affecting the financing of a
project; shortages or price increases of needed materials; or declining markets
or needs for the projects) might also affect other bonds in the same segment,
thereby potentially increasing market risk.

The Portfolio may invest without limit in private activity bonds, although it
does not currently expect to invest more than 20% of its total assets in private
activity bonds. Dividends attributable to interest income on certain types of
private activity bonds issued after August 7, 1986 to finance nongovernmental
activities are a specific tax preference item for purposes of the federal
individual and corporate alternative minimum tax.

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<PAGE>
When the Portfolio is maintaining a temporary defensive position, it may invest
in short term investments, some of which may not be tax exempt. Securities
eligible for short term investment by the Portfolio are tax exempt notes of
municipal issuers having, at the time of purchase, a rating within the two
highest grades of Moody's or S&P or, if not rated, having an issue of
outstanding Municipal Obligations rated within the three highest grades by
Moody's or S&P, and taxable short term instruments having quality
characteristics comparable to those for Municipal Obligations. The Portfolio may
invest in temporary investments for defensive reasons in anticipation of a
market decline. At no time will more than 20% of the Portfolio's total assets be
invested in temporary investments unless the Portfolio has adopted a defensive
investment policy. The Portfolio will purchase tax exempt temporary investments
pending the investment of the proceeds from the sale of the securities held by
the Portfolio or from the purchase of the Portfolio's shares by investors or in
order to have highly liquid securities available to meet anticipated
redemptions. To the extent that the Portfolio holds temporary investments, it
may not achieve its investment objective. The Portfolio may purchase securities
on a when-issued basis, lend its portfolio securities and purchase stock index
futures contracts and write options thereon. See "Certain Securities and
Investment Techniques."

Oppenheimer Financial Corp., a holding company, is a general partner of OpCap
Advisors. Oppenheimer Financial Corp. also holds a one-third interest in
Oppenheimer Capital (the parent of OpCap Advisors) and Oppenheimer Capital L.P.,
a Delaware limited partnership whose units are traded on the New York Stock
Exchange, and of which Oppenheimer Financial Corp. is the sole general partner,
owns the remaining two-thirds interest. On February 13, 1997, PIMCO Advisers,
L.P., a registered investment adviser with $110 billion in assets under
management through various subsidiaries, signed an Agreement and Plan of Merger
with Oppenheimer Group, Inc. ("OGI") and its subsidiary Oppenheimer Financial
Corp pursuant to which PIMCO Advisers, L.P. and its affiliate, Thomson Advisory
Group, Inc. ("TAG"), will acquire the one-third managing general partner
interest in Oppenheimer Capital, the general partnership interest in OpCap
Advisors, and the 1.0% general partner interest in Oppenheimer Capital L.P. (the
"Transaction") and OGI will be merged with and into TAG.

The Portfolio is managed by Matthew Greenwald, Vice President of Oppenheimer
Capital, the parent of OpCap Advisors. Mr. Greenwald has been a fixed income
portfolio manager and financial analyst for Oppenheimer Capital since 1989. From
1984-1989 he was a fixed income portfolio manager with PaineWebber's Mitchell
Hutchins Asset Management.

LARGE CAPITALIZATION VALUE PORTFOLIO is advised by OpCap Advisors. The Portfolio
seeks, as its investment objective, total return consisting of capital
appreciation and dividend income by investing primarily in a diversified
portfolio of highly liquid equity securities that, in the Advisor's opinion,
have above average price appreciation potential at the time of purchase. For
purposes of the Portfolio's investment policies, equity securities consist of
common and preferred stock and securities such as bonds, rights and warrants
that are convertible into common stock. In general, these securities are
characterized as having above average dividend yields and below average price
earnings ratios relative to the stock market in general, as measured by the
Standard & Poor's 500 Composite Stock Price Index (the "S&P 500"). Other
factors, such as earnings, the ability of the issuer to generate cash flow in
excess of business needs and to sustain above average profitability, as well as
industry outlook and market share, also are considered. Under normal conditions,
at least 80% of the Portfolio's assets will be invested in common stocks. No
less than 65% of the Portfolio's assets will be invested in common stocks of
issuers with total market capitalization of $1 billion or greater at the time of
purchase. The Portfolio may purchase temporary investments and purchase stock
index futures contracts and purchase and write options thereon. The Portfolio
also may lend its portfolio securities. See "Certain Securities and Investment
Techniques."

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<PAGE>
The Portfolio is managed by Eileen Rominger, Managing Director of Oppenheimer
Capital, the parent of OpCap Advisors. Ms. Rominger has been an analyst and
portfolio manager at Oppenheimer Capital since 1981.

LARGE CAPITALIZATION GROWTH PORTFOLIO is advised by Harris Bretall Sullivan &
Smith, Inc. ("Harris Bretall"). The Portfolio seeks capital appreciation by
investing primarily in a diversified portfolio of common stocks that, in the
Advisor's opinion, are characterized by a growth of earnings at a rate faster
than that of the S&P 500. Dividend income is an incidental consideration in the
selection of investments. In selecting securities for the Portfolio, the Advisor
evaluates factors believed to be favorable to long-term capital appreciation
including specific financial characteristics of the issuer such as historical
earnings growth, sales growth, profitability and return on equity. The Advisor
also analyzes the issuer's position within its industry as well as the quality
and experience of the issuer's management. Under normal conditions, at least 80%
of the Portfolio's assets will be invested in common stocks and at least 65% of
the Portfolio's assets will be invested in common stocks of issuers with total
market capitalization of $1 billion or greater at the time of purchase. Although
the Portfolio is authorized to purchase temporary investments and purchase stock
index futures contracts and purchase and write options thereon, its Advisor has
no present intention of using such techniques during the coming year. The
Portfolio also may lend its portfolio securities. See "Certain Securities and
Investment Techniques."

Stock selections for the Portfolio will be made by the Strategy and Investment
Committees of Harris Bretall. The Portfolio is managed by Jack Sullivan and
Gordon Ceresino. Mr. Sullivan is a partner of Harris Bretall and has been
associated with the firm since 1981. Mr. Ceresino is a Vice President of Harris
Bretall and has been associated with the firm since 1991. Prior thereto, he was
Senior Vice President of Capitol Associates and was responsible for sales and
marketing.

SMALL CAPITALIZATION PORTFOLIO is advised by Thorsell, Parker Partners, Inc.
(Prior to April 14, 1997, the Small Capitalization Portfolio was advised by
Axe-Houghton Associates, Inc.). The Portfolio seeks, as its investment
objective, maximum capital appreciation. Under normal conditions at least 80% of
the Portfolio's assets will be invested in common stocks, at least 65% of the
Portfolio's assets will be invested in common stock of issuers with total market
capitalization of less than $1 billion and at least one third of the Portfolio's
assets will be invested in common stocks of companies with total market
capitalization of $550 million or less at the time of purchase. Dividend income
is not a consideration in the selection of investments. In selecting investments
for the Portfolio, the Advisor seeks small capitalization growth companies that
it believes are undervalued in the marketplace. These companies typically are
under-followed by investment firms and undervalued relative to their growth
prospects. The Portfolio may also invest in companies that offer the possibility
of accelerating earnings growth due to internal changes such as new product
introductions, synergistic acquisitions or distribution channels or external
changes affecting the marketplace for the company's products and services.
External factors can be demographics, regulatory, legislative, technological,
social or economic. Although the Portfolio is authorized to purchase temporary
investments and purchase stock index futures contracts and purchase and write
options thereon, its Advisor has no present intention of using such techniques
during the coming year. The Portfolio also may lend its portfolio securities.
See "Certain Securities and Investment Techniques."

The Portfolio is managed by Richard Thorsell. Mr. Thorsell has been Managing
Partner of Thorsell since 1991.

INTERNATIONAL EQUITY PORTFOLIO is advised by Ivory & Sime International, Inc.
The investment objective of the Portfolio is long-term capital appreciation. The
Portfolio ordinarily invests at least 80% of its assets in equity securities of
companies domiciled outside the United States. For purposes of the Portfolio's
investment policies, equity securities consist of common and preferred

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<PAGE>
stock and securities such as bonds, rights and warrants that are convertible
into common stock. The Portfolio has no present intention of investing in bonds
other than bonds convertible into common stock.

Under normal market conditions, at least 65% of the Portfolio's assets will be
invested in securities of issuers domiciled in at least three foreign countries.
The Portfolio may invest 25% or more of its total assets in securities of
issuers domiciled in one country. The Portfolio presently intends to invest more
than 25% of its total assets in Japan. Accordingly, the investment performance
of the Portfolio will be subject to social, political and economic events
occurring in Japan to a greater extent than those occurring in other foreign
countries. Investments may be made in companies in developed as well as
developing countries. It is the present intention of the Portfolio not to invest
more than 20% of its total assets in securities of issuers located in developing
countries. Investing in the equity markets of developing countries involves
exposure to economies that are generally less diverse and mature, and to
political systems that can be expected to have less stability, than those of
developed countries. The Advisor attempts to limit exposure to investments in
developing countries where both liquidity and sovereign risks are high. Although
there is no established definition, a developing country is generally considered
to be a country that is in the initial stages of its industrialization cycle
with per capita gross national product of less than $5,000. Historical
experience indicates that the markets of developing countries have been more
volatile than the markets of developed countries, although securities traded in
the former markets have provided higher rates of return to investors. For a
discussion of the risks associated with investing in foreign securities, see
"Risk Factors--Foreign Securities."

It is expected that the Portfolio will invest primarily in securities of foreign
issuers in the form of American Depositary Receipts ("ADRs") or Global
Depositary Receipts ("GDRs"), which are U.S. dollar-denominated receipts, which
represent and may be converted into the underlying foreign security, typically
issued by domestic banks or trust companies that represent the deposit with
those entities of securities of a foreign issuer. Issuers of the stock of ADRs
or GDRs sponsored by banks or trust companies are not obligated to disclose
material information in the United States and therefore, there may not be a
correlation between such information and the market value of such ADRs or GDRs.
ADRs or GDRs are publicly traded on exchanges or over-the-counter in the United
States. The Portfolio may purchase temporary investments, lend its portfolio
securities and purchase stock index futures contracts and purchase and write
options thereon. See "Certain Securities and Investment Techniques."

John Stubbs, Chief Investment Officer ("CIO") and Chairman of the Investment
Committee at Ivory & Sime plc has been overseeing the management of the
Portfolio since January 31, 1997. Mr. Stubbs has been CIO of Ivory & Sime plc
since April 1995. Previously, he was head of UK equities with Hermes Pensions
Management Ltd. During his 29 year investment career Mr. Stubbs has managed
money in most of the world's major markets. Individual stock selections are made
by the following regional specialists: Dr. Michael Woodward, Thomas Maxwell,
Julie Dent, James Anderson and Jonathan Harrison. Each of the regional
specialists has been responsible for individual stock selections for the
Portfolio since its inception, with the exception of Mr. Maxwell, who began on
January 31, 1997. Prior to assuming the position of regional specialist for the
Portfolio, each Portfolio regional specialist acted in the same capacity at
Ivory & Sime plc.

Except as indicated, the Portfolios' limitations on investments and investment
policies are non-fundamental and can be changed without a vote of shareholders.

CERTAIN SECURITIES AND INVESTMENT TECHNIQUES

TEMPORARY INVESTMENTS. For temporary defensive purposes during periods when the
Advisor of a Portfolio, other than the U.S. Government Money Market Portfolio,
believes, with the concurrence of the Manager, that pursuing the Portfolio's
basic investment strategy may be

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inconsistent with the best interests of its shareholders, the Portfolio may
invest up to 100% of its assets in the following money market instruments: U.S.
Government Securities (including those purchases in the form of custodial
receipts), repurchase agreements, certificates of deposit and bankers'
acceptances issued by banks or savings and loan associations having assets of at
least $500 million as of the end of their most recent fiscal year and high
quality commercial paper. In addition, for the same purposes the Advisor of the
International Equity Portfolio may invest in obligations issued or guaranteed by
foreign governments or by any of their political subdivisions, authorities,
agencies or instrumentalities that are rated at least AA by S&P or Aa by Moody's
or, if unrated, are determined by the Advisor to be of equivalent quality. See
"Foreign Securities" below. Each Portfolio also may hold a portion of its assets
in money market instruments or cash in amounts designed to pay expenses, to meet
anticipated redemptions or pending investments in accordance with its objectives
and policies. Any temporary investments may be purchased on a when-issued basis.
A Portfolio's investment in any other short term debt instruments would be
subject to the Portfolio's investment objectives and policies, and to approval
by the Trust's Board of Trustees.

The Portfolios are intended primarily as vehicles for the implementation of a
long term investment program utilizing asset allocation strategies rendered
through investment advisory programs that are based on an evaluation of an
investor's investment objectives and risk tolerance. Because these asset
allocation strategies are designed to spread investment risk across the various
segments of the securities markets through investment in a number of Portfolios,
each individual Portfolio generally intends to be substantially fully invested
in accordance with its investment objectives and policies during most market
conditions. Although the Advisor of a Portfolio may, upon the concurrence of the
Manager, take a temporary defensive position during adverse market conditions,
it can be expected that a defensive posture will be adopted less frequently than
would be by other mutual funds. This policy may impede an Advisor's ability to
protect a Portfolio's capital during declines in the particular segment of the
market to which the Portfolio's assets are committed. Consequently, no single
Portfolio should be considered a complete investment program. An investment
among the Portfolios should be regarded as a long term commitment that should be
held through several market cycles. In addition, although the investment
advisors for the Consulting Programs may recommend adjustments in the allocation
of assets among the Portfolios based on, among other things, anticipated market
trends, there can be no assurance that these recommendations can be developed,
transmitted and acted upon in a manner sufficiently timely to avoid market
shifts, which can be sudden and substantial. Participants in Consulting Programs
should note that responsibility for investment recommendations rests solely with
the investment advisor for the program or the client itself and not with the
Trust or the Manager. Investors intending to purchase Portfolio shares through
investment advisory programs should evaluate carefully whether the service is
ongoing and continuous, as well as their investment advisors' ability to
anticipate and respond to market trends.

REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS. Each of the Portfolios
may engage in repurchase agreement and (except for the U.S. Government Money
Market Portfolio) reverse repurchase agreement transactions. Under the terms of
a typical repurchase agreement, a Portfolio would acquire an underlying debt
obligation for a relatively short period (usually not more than one week)
subject to an obligation of the seller to repurchase, and the Portfolio to
resell, the obligation at an agreed-upon price and time, thereby determining the
yield during the Portfolio's holding period. This arrangement results in a fixed
rate of return that is not subject to market fluctuations during the Portfolio's
holding period. A Portfolio may enter into repurchase agreements with respect to
U.S. Government Securities with member banks of the Federal Reserve System and
certain non-bank dealers approved by the Board of Trustees. The International
Equity Portfolio will not engage in repurchase agreements with foreign brokers
or dealers. Under each repurchase agreement, the selling institution is required
to maintain the value of the securities subject to the repurchase agreement at
not less than their repurchase

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<PAGE>
price. The Portfolio's Advisor, acting under the supervision of the Board of
Trustees, reviews on an ongoing basis the value of the collateral and the
creditworthiness of those non-bank dealers with whom the Portfolio enters into
repurchase agreements. A Portfolio will not invest in a repurchase agreement
maturing in more than seven days if the investment, together with illiquid
securities held by the Portfolio, exceeds 15% (10% for the U.S. Government Money
Market Portfolio) of the Portfolio's total assets. See "Certain Investment
Policies." In entering into a repurchase agreement, a Portfolio bears a risk of
loss in the event that the other party to the transaction defaults on its
obligations and the Portfolio is delayed or prevented from exercising its right
to dispose of the underlying securities, including the risk of a possible
decline in the value of the underlying securities during the period in which the
Portfolio seeks to assert its rights to them, the risk of incurring expenses
associated with asserting those rights and the risk of losing all or a part of
the income from the agreement. Under a reverse repurchase agreement, a Portfolio
sells securities and agrees to repurchase them at a mutually agreed date and
price. At the time the Portfolio enters into a reverse repurchase agreement, it
will establish and maintain a segregated account with an approved custodian
containing liquid high grade securities having a value not less than the
repurchase price (including accrued interest). Reverse repurchase agreements
involve the risk that the market value of the securities retained in lieu of
sale by the Portfolio may decline more than or appreciate less than the
securities the Portfolio has sold but is obligated to repurchase. In the event
the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, such buyer or its trustee or receiver may
receive an extension of time to determine whether to enforce the Portfolio's
obligation to repurchase the securities and the Portfolio's use of the proceeds
of the reverse repurchase agreements may effectively be restricted pending such
decisions. Reverse repurchase agreements create leverage, a speculative factor,
and will be considered borrowings for purposes of a Portfolio's limitation on
borrowing.

U.S. GOVERNMENT SECURITIES. Each Portfolio may invest in U.S. Government
Securities, which are obligations issued or guaranteed by the U.S. Government,
its agencies, authorities or instrumentalities. Some U.S. Government Securities,
such as U.S. Treasury bills, Treasury notes and Treasury bonds, which differ
only in their interest rates, maturities and time of issuance, are supported by
the full faith and credit of the United States. Others are supported by: (i) the
right of the issuer to borrow from the U.S. Treasury, such as securities of the
Federal Home Loan Bank; (ii) the discretionary authority of the U.S. Government
to purchase the agency's obligations, such as securities of the FNMA; or (iii)
only the credit of the issuer, such as securities of the Student Loan Marketing
Association. No assurance can be given that the U.S. Government will provide
financial support in the future to U.S. Government agencies, authorities or
instrumentalities that are not supported by the full faith and credit of the
United States.

Securities guaranteed as to principal and interest by the U.S. Government, its
agencies, authorities or instrumentalities include: (i) securities for which the
payment of principal and interest is backed by an irrevocable letter of credit
issued by the U.S. Government or any of its agencies, authorities or
instrumentalities; and (ii) participation in loans made to foreign governments
or other entities that are so guaranteed. The secondary market for certain of
these participations is limited and, therefore, may be regarded as illiquid.

U.S. Government Securities may include zero coupon securities that may be
purchased when yields are attractive and/or to enhance portfolio liquidity. Zero
coupon U.S. Government Securities are debt obligations that are issued or
purchased at a significant discount from face value. The discount approximates
the total amount of interest the security will accrue and compound over the
period until maturity or the particular interest payment date at a rate of
interest reflecting the market rate of the security at the time of issuance.
Zero coupon U.S. Government Securities do not require the periodic payment of
interest. These 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 cash. These investments may
experience

~ 14 ~
<PAGE>
greater volatility in market value than U.S. Government Securities that make
regular payments of interest. A Portfolio accrues income on these investments
for tax and accounting purposes, 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, in which case the Portfolio will forego the purchase
of additional income producing assets with these funds. Zero coupon U.S.
Government Securities include STRIPS and CUBES, which are issued by the U.S.
Treasury as component parts of U.S. Treasury bonds and represent scheduled
interest and principal payments on the bonds.

CUSTODIAL RECEIPTS. Each Portfolio other than the U.S. Government Money Market
Portfolio may acquire custodial receipts or certificates, such as CATS, TIGRs
and FICO Strips, underwritten by securities dealers or banks that evidence
ownership of future interest payments, principal payments or both on certain
notes or bonds issued by the U.S. Government, its agencies, authorities or
instrumentalities. The underwriters of these certificates or receipts purchase a
U.S. Government Security and deposit the security in an irrevocable trust or
custodial account with a custodian bank, which then issues receipts or
certificates that evidence ownership of the periodic unmatured coupon payments
and the final principal payment on the U.S. Government Security. Custodial
receipts evidencing specific coupon or principal payments have the same general
attributes as zero coupon U.S. Government Securities, described above. Although
typically under the terms of a custodial receipt a Portfolio is authorized to
assert its rights directly against the issuer of the underlying obligation, the
Portfolio may be required to assert through the custodian bank such rights as
may exist against the underlying issuer. Thus, in the event the underlying
issuer fails to pay principal and/or interest when due, a Portfolio may be
subject to delays, expenses and risks that are greater than those that would
have been involved if the Portfolio had purchased a direct obligation of the
issuer. In addition, in the event that the trust or custodial account in which
the underlying security has been deposited is determined to be an association
taxable as a corporation, instead of a non-taxable entity, the yield on the
underlying security would be reduced in respect of any taxes paid.

LENDING PORTFOLIO SECURITIES. To generate income for the purpose of helping to
meet its operating expenses, each Portfolio other than the U.S. Government Money
Market Portfolio may lend securities to brokers, dealers and other financial
organizations. These loans, if and when made, may not exceed 33 1/3% of a
Portfolio's assets taken at value. A Portfolio's loans of securities will be
collateralized by cash, letters of credit or U.S. Government Securities. The
cash or instruments collateralizing a Portfolio's loans of securities will be
maintained at all times in a segregated account with the Portfolio's custodian,
or with a designated sub-custodian, in an amount at least equal to the current
market value of the loaned securities. In lending securities to brokers, dealers
and other financial organizations, a Portfolio is subject to risks, which, like
those associated with other extensions of credit, include delays in recovery and
possible loss of rights in the collateral should the borrower fail financially.
State Street arranges for each Portfolio's securities loans and manages
collateral received in connection with these loans. See "Management of the
Trust--Administration."

WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. To secure prices deemed
advantageous at a particular time, each Portfolio may purchase securities on a
when-issued or delayed-delivery basis, in which case delivery of the securities
occurs beyond the normal settlement period; payment of or delivery of the
securities would be made prior to the reciprocal delivery or payment by the
other party to the transaction. A Portfolio will enter into when-issued or
delayed-delivery transactions for the purpose of acquiring securities and not
for the purpose of leverage. When-issued securities purchased by the Portfolio
may include securities purchased on a "when, as and if issued" basis under which
the issuance of the securities depends on the occurrence of a subsequent event,
such as approval of a merger, corporate reorganization or debt restructuring.

~ 15 ~
<PAGE>
The Portfolio will establish with its custodian, or with a designated
sub-custodian, a segregated account consisting of cash, U.S. Government
Securities or other liquid high grade debt obligations in an amount equal to the
amount of its when-issued or delayed-delivery purchase commitments.

Securities purchased on a when-issued or delayed-delivery basis may expose a
Portfolio to risk because the securities may experience fluctuations in value
prior to their actual delivery. The Portfolio does not accrue income with
respect to a when-issued or delayed-delivery security prior to its stated
delivery date. Purchasing securities on a when-issued or delayed-delivery basis
can involve the additional risk that the yield available in the market when the
delivery takes place may be higher than that obtained in the transaction itself.

FIXED INCOME SECURITIES. The market value of fixed income obligations of the
Portfolios will be affected by general changes in interest rates which will
result in increases or decreases in the value of the obligations held by the
Portfolios. The market value of the obligations held by a Portfolio can be
expected to vary inversely to changes in prevailing interest rates. Investors
also should recognize that, in periods of declining interest rates, a
Portfolio's yield will tend to be somewhat higher than prevailing market rates
and, in periods of rising interest rates, a Portfolio's yield will tend to be
somewhat lower. Also, when interest rates are falling, the inflow of net new
money to a Portfolio from the continuous sale of its shares will tend to be
invested in instruments producing lower yields than the balance of its
portfolio, thereby reducing the Portfolio's current yield. In periods of rising
interest rates, the opposite can be expected to occur. In addition, securities
in which a Portfolio may invest may not yield as high a level of current income
as might be achieved by investing in securities with less liquidity, less
creditworthiness or longer maturities.

Ratings made available by S&P and Moody's are relative and subjective and are
not absolute standards of quality. Although these ratings are initial criteria
for the selection of portfolio investments, a Portfolio also will make its own
evaluation of these securities. Among the factors that will be considered are
the long term ability of the issuers to pay principal and interest and general
economic trends.

MUNICIPAL OBLIGATIONS. The term "Municipal Obligations" generally is understood
to include debt obligations issued to obtain funds for various public purposes,
the interest on which is, in the opinion of bond counsel to the issuer, excluded
from gross income for federal income tax purposes. In addition, if the proceeds
from private activity bonds are used for the construction, equipment, repair or
improvement of privately operated industrial or commercial facilities, the
interest paid on such bonds may be excluded from gross income for federal income
tax purposes, although current federal tax laws place substantial limitations on
the size of these issues.

The two principal classifications of Municipal Obligations are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its faith, credit, and taxing power for the payment of
principal and interest. Revenue bonds are payable from the revenues derived from
a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise or the specific revenue source, but not from the
general taxing power. Sizable investments in these obligations could involve an
increased risk to the Portfolio should any of the related facilities experience
financial difficulties. Private activity bonds are in most cases revenue bonds
and do not generally carry the pledge of the credit of the issuing municipality.
Included within the revenue bonds category are participations in lease
obligations or installment purchase contracts (hereinafter collectively called
"lease obligations") of municipalities. States and local agencies or authorities
issue lease obligations to acquire equipment and facilities.

Lease obligations may have risks not normally associated with general obligation
or other revenue bonds. Lease obligations and conditional sale contracts (which
may provide for title to the leased asset to pass eventually to the issuer),
have developed as a means for government issuers to acquire property and
equipment without the necessity of complying with the constitutional and
statutory requirements generally applicable for the issuance of debt. Certain

~ 16 ~
<PAGE>
lease obligations contain "non-appropriation" clauses that provide that the
governmental issuer has no obligation to make future payments under the lease or
contract unless money is appropriated for such purposes by the appropriate
legislative body on an annual or other periodic basis. Consequently, continued
lease payments on those lease obligations containing "non-appropriation" clauses
are dependent on future legislative actions. If such legislative actions do not
occur, the holders of the lease obligation may experience difficulty in
exercising their rights, including disposition of the property.

In addition, lease obligations may not have the depth of marketability
associated with other municipal obligations, and as a result, certain of such
lease obligations may be considered illiquid securities. To determine whether or
not the Municipal Bond Portfolio will consider such securities to be illiquid
(the Portfolio may not invest more than 15% of its net assets in illiquid
securities), the following guidelines have been established to determine the
liquidity of a lease obligation. The factors to be considered in making the
determination include: (1) the frequency of trades and quoted prices for the
obligation; (2) the number of dealers willing to purchase or sell the security
and the number of other potential purchasers; (3) the willingness of dealers to
undertake to make a market in the security; and (4) the nature of the
marketplace trades, including the time needed to dispose of the security, the
method of soliciting offers, and the mechanics of the transfer. There are, of
course, variations in the security of Municipal Obligations, both within a
particular classification and between classifications.

MORTGAGE RELATED SECURITIES. The Investment Quality Bond Portfolio may invest in
mortgage related securities including modified pass-through certificates. There
are several risks associated with mortgage related securities generally. One is
that the monthly cash inflow from the underlying loans may not be sufficient to
meet the monthly payment requirements of the mortgage related security.

Prepayment of principal by mortgagors or mortgage foreclosures will shorten the
term of the underlying mortgage pool for a mortgage related security. Early
returns of principal will affect the average life of the mortgage related
securities remaining in the Portfolio. The occurrence of mortgage prepayments is
affected by factors including the level of interest rates, general economic
conditions, the location and age of the mortgage and other social and
demographic conditions. In periods of rising interest rates, the rate of
prepayment tends to decrease, thereby lengthening the average life of a pool of
mortgage related securities. Conversely, in periods of falling interest rates
the rate of prepayment tends to increase, thereby shortening the average life of
a pool. Reinvestment of prepayments may occur at higher or lower interest rates
than the original investment, thus affecting the yield of the Portfolio. Because
prepayments of principal generally occur when interest rates are declining, it
is likely that the Portfolio will have to reinvest the proceeds of prepayments
at lower interest rates than those at which the assets were previously invested.
If this occurs, the Portfolio's yield will correspondingly decline. Thus,
mortgage related securities may have less potential for capital appreciation in
periods of falling interest rates than other fixed income securities of
comparable maturity, although these securities may have a comparable risk of
decline in market value in periods of rising interest rates. To the extent that
the Portfolio purchases mortgage related securities at a premium, unscheduled
prepayments, which are made at par, will result in a loss equal to any
unamortized premium.

The Investment Quality Bond Portfolio may invest in a type of mortgage-backed
security known as modified pass-through certificates. Each certificate evidences
an interest in a specific pool of mortgages that have been grouped together for
sale and provides investors with payments of interest and principal. The issuer
of modified pass-through certificates guarantees the payment of the principal
and interest whether or not the issuer has collected such amounts on the
underlying mortgage.

The average life of these securities varies with the maturities of the
underlying mortgage instruments (generally up to 30 years) and with the extent
of prepayments or the mortgages

~ 17 ~
<PAGE>
themselves. Any such prepayments are passed through to the certificate holder,
reducing the stream of future payments. Prepayments tend to rise in periods of
falling interest rates, decreasing the average life of the certificate and
generating cash which must be invested in a lower interest rate environment.
This could also limit the appreciation potential of the certificates when
compared to similar debt obligations which may not be paid down at will, and
could cause losses on certificates purchased at a premium or gains on
certificates purchased at a discount. Government National Mortgage Association
("Ginnie Mae") certificates represent pools of mortgages insured by the Federal
Housing Administration or the Farmers Home Administration or guaranteed by the
Veteran's Administration. The guarantee of payments under these certificates is
backed by the full faith and credit of the United States. Federal National
Mortgage Association ("Fannie Mae") is a government-sponsored corporation owned
entirely by private stockholders. The guarantee of payments under these
instruments is that of Fannie Mae only. They are not backed by the full faith
and credit of the United States but the U.S. Treasury may extend credit to
Fannie Mae through discretionary purchases of its securities. The U.S.
Government has no obligation to assume the liabilities of Fannie Mae. Federal
Home Loan Mortgage Corp. ("Freddie Mac") is a corporate instrumentality of the
United States government whose stock is owned by the Federal Home Loan Banks.
Certificates issued by Freddie Mac represent interest in mortgages from its
portfolio. Freddie Mac guarantees payments under its certificates but this
guarantee is not backed by the full faith and credit of the United States and
Freddie Mac does not have authority to borrow from the U.S. Treasury.

The coupon rate of these instruments is lower than the interest rate on the
underlying mortgages by the amount of fees paid to the issuing agencies, usually
approximately 1/2 of 1%. Mortgage-backed securities, due to the scheduled
periodic repayment of principal, and the possibility of accelerated repayment of
underlying mortgage obligations, fluctuate in value in a different manner than
other, non-redeemable debt securities.

CMOs are obligations fully collateralized by a portfolio of mortgages or
mortgage related securities. Although the Portfolio is authorized to invest in
CMOs, it has no present intention of doing so.

FUTURES CONTRACTS AND RELATED OPTIONS. Each Portfolio other than the U.S.
Government Money Market Portfolio may enter into futures contracts and purchase
and write (sell) options on these contracts, including but not limited to
interest rate, securities index and foreign currency futures contracts and put
and call options on these futures contracts. These contracts will be entered
into only upon the concurrence of the Manager that such contracts are necessary
or appropriate in the management of the Portfolio's assets. These contracts will
be entered into on exchanges designated by the Commodity Futures Trading
Commission ("CFTC") or, consistent with CFTC regulations, on foreign exchanges.
These transactions may be entered into for bona fide hedging and other
permissible risk management purposes including protecting against anticipated
changes in the value of securities a Portfolio intends to purchase.

So long as Commodities Futures Trading Commission rules so require, a Portfolio
will not enter into any financial futures or options contract unless such
transactions are for bona-fide hedging purposes or for other purposes only if
the aggregate initial margins and premiums required to establish such
non-hedging positions would not exceed 5% of the liquidation value of the
Portfolio's total assets. All futures and options on futures positions will be
covered by owning the underlying security or segregation of assets. With respect
to long positions in a futures contract or option (e.g., futures contracts to
purchase the underlying instrument and call options purchased or put options
written on these futures contracts or instruments), the underlying value of the
futures contract at all times will not exceed the sum of cash, short term U.S.
debt obligations or other high quality obligations set aside in a segregated
account with the Trust's Custodian for this purpose.

~ 18 ~
<PAGE>
A Portfolio may lose the expected benefit of these futures or options
transactions and may incur losses if the prices of the underlying commodities
move in an unanticipated manner. In addition, changes in the value of the
Portfolio's futures and options positions may not prove to be perfectly or even
highly correlated with changes in the value of its portfolio securities.
Successful use of futures and related options is subject to an Advisor's ability
to predict correctly movements in the direction of the securities markets
generally, which ability may require different skills and techniques than
predicting changes in the prices of individual securities. Moreover, futures and
options contracts may only be closed out by entering into offsetting
transactions on the exchange where the position was entered into (or a linked
exchange), and as a result of daily price fluctuation limits there can be no
assurance that an offsetting transaction could be entered into at an
advantageous price at any particular time. Consequently, a Portfolio may realize
a loss on a futures contract or option that is not offset by an increase in the
value of its portfolio securities that are being hedged or a Portfolio may not
be able to close a futures or options position without incurring a loss in the
event of adverse price movements.

GOVERNMENT STRIPPED MORTGAGE RELATED SECURITIES. Although the Investment Quality
Bond Portfolio may invest in certain government stripped mortgage related
securities issued and guaranteed by GNMA, FNMA or FHLMC, it has no present
intention of doing so.

RISK FACTORS

MEDIUM AND LOWER RATED AND UNRATED SECURITIES. Securities rated in the fourth
highest category by S&P or Moody's, although considered investment grade, have
speculative characteristics, and changes in economic or other conditions are
more likely to impair the ability of issuers of these securities to make
interest and principal payments than is the case with respect to issuers of
higher grade bonds.

Subsequent to its purchase by a Portfolio, an issue of securities may cease to
be rated or its rating may be reduced below the minimum required for purchase by
the Portfolio. Neither event will require sale of these securities by the
Portfolio, but the Advisor will dispose of any such securities in order to limit
the holdings by a Portfolio of securities rated below Baa by Moody's or BBB by S
& P to no more than 5% of its net assets. It is the intention of the Portfolios
to invest no more than 5% of their respective net assets in debt securities
rated below Baa by Moody's or BBB by S & P (commonly known as "high yield" or
"junk bonds").

NON-PUBLICLY TRADED SECURITIES. Each Portfolio may invest in non-publicly traded
securities, which may be less liquid than publicly traded securities. Although
these securities may be resold in privately negotiated transactions, the prices
realized from these sales could be less than those originally paid by the
Portfolios. In addition, companies whose securities are not publicly traded are
not subject to the disclosure and other investor protection requirements that
may be applicable if their securities were publicly traded.

SMALL CAPITALIZATION COMPANIES. Smaller capitalization companies may experience
higher growth rates and higher failure rates than do larger capitalization
companies. Companies in which the Small Capitalization Portfolio is likely to
invest may have limited product lines, markets or financial resources and may
lack management depth. The trading volume of securities of smaller
capitalization companies is normally less than that of larger capitalization
companies and, therefore, may disproportionately affect their market price,
tending to make them rise more in response to buying demand and fall more in
response to selling pressure than is the case with larger capitalization
companies.

FOREIGN SECURITIES. All the Portfolios except for the U.S. Government Money
Market Portfolio and the Municipal Bond Portfolio may invest in foreign
securities. The Investment Quality Bond Portfolio and the Large Capitalization
Value Portfolio do not intend to invest more than 20% of their respective total
assets in foreign securities. The Large Capitalization Growth Portfolio and

~ 19 ~
<PAGE>
the Small Capitalization Portfolio do not intend to purchase foreign securities
in an amount more than 5% of each Portfolio's total assets. The International
Equity Portfolio expects to invest at least 80% of its assets in foreign
securities. Investing in securities issued by foreign companies and governments
involves considerations and potential risks not typically associated with
investing in obligations issued by the U.S. Government and domestic
corporations. Less information may be available about foreign companies than
about domestic companies and foreign companies generally are not subject to
uniform accounting, auditing and financial reporting standards or to other
regulatory practices and requirements comparable to those applicable to domestic
companies. The values of foreign investments are affected by changes in currency
rates or exchange control regulations, restrictions or prohibitions on the
repatriation of foreign currencies, application of foreign tax laws, including
withholding taxes, changes in governmental administration or economic or
monetary policy (in the United States or abroad) or changed circumstances in
dealings between nations. Costs are also incurred in connection with conversions
between various currencies. In addition, foreign brokerage commissions and
custody fees are generally higher than those charged in the United States, and
foreign securities markets may be less liquid, more volatile and less subject to
governmental supervision than in the United States. Investments in foreign
countries could be affected by other factors not present in the United States,
including expropriation, confiscatory taxation, lack of uniform accounting and
auditing standards and potential difficulties in enforcing contractual
obligations and could be subject to extended clearance settlement periods.

CURRENCY EXCHANGE RATES. A Portfolio's share value may change significantly when
the currencies, other than the U.S. dollar, in which the Portfolio's investments
are denominated strengthen or weaken against the U.S. dollar. Currency exchange
rates generally are determined by the forces of supply and demand in the foreign
exchange markets of investments in different countries as seen from an
international perspective. Currency exchange rates can also be affected
unpredictably by intervention by U.S. or foreign governments or central banks or
by currency controls or political developments in the United States or abroad.

FORWARD CURRENCY CONTRACTS. Each Portfolio that may invest in foreign
currency-denominated securities may hold currencies to meet settlement
requirements for foreign securities and may engage in currency exchange
transactions in order to protect against uncertainty in the level of future
exchange rates between a particular foreign currency and the U.S. dollar or
between foreign currencies in which the Portfolio's securities are or may be
denominated. Forward currency 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 French francs at a future date. The date (which may be any
agreed-upon fixed number of days in the future), the amount of currency to be
exchanged and the price at which the exchange will take place will be negotiated
with a currency trader and fixed for the term of the contract at the time that
the Portfolio enters into the contract. To assure that a Portfolio's forward
currency contracts are not used to achieve investment leverage, the Portfolio
will segregate cash or high grade securities with its custodian in an amount at
all times equal to or exceeding the Portfolio's commitment with respect to these
contracts.

In hedging specific portfolio positions, a Portfolio may enter into a forward
contract with respect to either the currency in which the positions are
denominated or another currency deemed appropriate by the Portfolio's Advisor.
The amount the Portfolio may invest in forward currency contracts is limited to
the amount of the Portfolio's aggregate investments in foreign currencies. Risks
associated with entering into forward currency contracts include the possibility
that the market for forward currency contracts may be limited with respect to
certain currencies and, upon a contract's maturity, the inability of a Portfolio
to negotiate with the dealer to enter into an offsetting transaction. Forward
currency contracts may be closed out only by the parties entering into an
offsetting contract. In addition, the correlation between movements in the
prices of those contracts and movements in the price of the currency hedged or
used for cover will not

~ 20 ~
<PAGE>
be perfect. There is no assurance that an active forward currency contract
market will always exist. These factors will restrict a Portfolio's ability to
hedge against the risk of devaluation of currencies in which a Portfolio holds a
substantial quantity of securities and are unrelated to the qualitative rating
that may be assigned to any particular security. See the Statement of Additional
Information for further information concerning forward currency contracts. See
also "Certain Securities and Investment Techniques--Futures Contracts and
Related Options" on page 18 and "Certain Investment Policies--Portfolio
Turnover" on page 21.

CERTAIN INVESTMENT POLICIES

The Trust on behalf of each Portfolio has adopted certain investment
restrictions that are enumerated in detail in the Statement of Additional
Information. Among other restrictions, each Portfolio may not, with respect to
75% of its total assets taken at market value, invest more than 5% of its total
assets in the securities of any one issuer, except U.S. Government Securities,
or acquire more than 10% of any class of the outstanding voting securities of
any one issuer. In addition, except as described above with respect to the
Municipal Bond Portfolio, each Portfolio may not invest 25% or more of its total
assets in securities of issuers in any one industry. The Trust on behalf of a
Portfolio may borrow money as a temporary measure from banks in an aggregate
amount not exceeding one-third of the value of the Portfolio's total assets to
meet redemptions and for other temporary or emergency purposes not involving
leveraging. A Portfolio may not purchase securities while borrowings exceed 5%
of the value of the Portfolio's assets. A Portfolio will not invest more than
15% (10% with respect to the U.S. Government Money Market Portfolio) of the
value of its net assets in securities that are illiquid, including certain
government stripped mortgage related securities, repurchase agreements maturing
in more than seven days and that cannot be liquidated prior to maturity and
securities that are illiquid by virtue of the absence of a readily available
market. Securities that have legal or contractual restrictions on resale but
have a readily available market are deemed not illiquid for this purpose. The
Portfolios each may purchase securities which are not registered under the
Securities Act of 1933 ("1933 Act") but which can be sold to "qualified
institutional buyers" in accordance with Rule 144A under the 1933 Act. Any such
security will not be considered illiquid so long as it is determined by the
Board of Trustees or the Portfolio's Adviser, acting under guidelines approved
and monitored by the Board, which has the ultimate responsibility for any
determination regarding liquidity, that an adequate trading market exists for
that security. This investment practice could have the effect of increasing the
level of illiquidity in each of the Portfolios during any period that qualified
institutional buyers become uninterested in purchasing these restricted
securities. The ability to sell to qualified institutional buyers under Rule
144A is a recent development and it is not possible to predict how this market
will develop. The Board will carefully monitor any investments by each of the
Portfolios in these securities. To comply with state securities laws, each
Portfolio has agreed to limit its investments in restricted securities
(excluding 144A securities) to 10% of their respective total assets, to limit
its investments in the securities of unseasoned issuers, which have been in
operation for less than three years (including their predecessors), to no more
than 5% of their respective assets (10% with respect to the Small Capitalization
Portfolio) and to limit their aggregate investment in restricted securities
(including 144A securities) and unseasoned issuers to no more than 15% of their
respective total assets.

The investment restrictions listed above as well as the Portfolios' investment
objectives are fundamental policies and accordingly may not be changed with
respect to any Portfolio without the approval of a majority of the outstanding
shares of that Portfolio, as defined in the Investment Company Act of 1940 (the
"1940 Act"). Unless otherwise specifically stated, however, the investment
policies and practices of each Portfolio are not fundamental and may be changed
by the Board of Trustees.

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<PAGE>
PORTFOLIO TURNOVER

Active trading will increase a Portfolio's rate of turnover, certain transaction
expenses and the incidence of short term capital gains taxable as ordinary
income. An annual turnover rate of 100% would occur when all the securities held
by the Portfolio are replaced one time during a period of one year. The Advisor
of the International Equity Portfolio anticipates that the annual turnover in
that Portfolio will not be in excess of 100%. The Advisor of the Small
Capitalization Portfolio anticipates that the annual turnover in that Portfolio
will not be in excess of 150%. The Advisors of each of the other Portfolios
anticipate that the annual turnover in those Portfolios will not exceed 80%. The
U.S. Government Money Market Portfolio's turnover is expected to be zero for
regulatory reporting purposes.

MANAGEMENT OF THE TRUST

BOARD OF TRUSTEES

Overall responsibility for management and supervision of the Trust and the
Portfolios rests with the Trust's Board of Trustees. The Trustees approve all
significant agreements between the Trust and the persons and companies that
furnish services to the Trust and the Portfolios, including agreements with the
Trust's distributor, custodian, transfer agent, the Manager, Advisors and
administrator. One of the Trustees and all of the Trust's executive officers are
affiliated with the Manager. The Statement of Additional Information contains
background information regarding each Trustee and executive officer of the
Trust.

INVESTMENT MANAGER

Saratoga Capital Management, a registered investment advisor, located at 33
Maiden Lane, New York, NY 10038-4578, serves as the Trust's Manager.

Saratoga Capital Management is a Delaware general partnership which is owned by
certain executives of Saratoga Capital Management and by Mr. Ronald J. Goguen,
whose address is Major Drilling Group International Inc., 111 St. George Street,
Suite 200, Moncton, New Brunswick, Canada E1C177 and Mr. John Schiavi, whose
address is Schiavi Enterprises, 995 Main Street, Oxford, Maine 04270.

The Trust has entered into an investment management agreement (the "Management
Agreement") with the Manager which, in turn, has entered into an advisory
agreement ("Advisory Agreement") with each Advisor selected for the Portfolios.
It is the Manager's responsibility to select, subject to the review and approval
of the Board of Trustees, the Advisors who have distinguished themselves by able
performance in their respective areas of expertise in asset management and to
review their continued performance.

Subject to the supervision and direction of the Trust's Board of Trustees, the
Manager provides to the Trust investment management evaluation services
principally by performing initial due diligence on prospective Advisors for each
Portfolio and thereafter monitoring Advisor performance. In evaluating
prospective Advisors, the Manager considers, among other factors, each Advisor's
level of expertise, relative performance and consistency of performance to
investment discipline or philosophy; personnel and financial strength; and
quality of service and client communications. The Manager has responsibility for
communicating performance expectations and evaluations to the Advisors and
ultimately recommending to the Board of Trustees of the Trust whether the
Advisors' contracts should be renewed, modified or terminated. The Manager
provides reports to the Board of Trustees regarding the results of its
evaluation and monitoring functions. The Manager is also responsible for
conducting all operations of the Trust except those operations contracted to the
Advisors, custodian, distributor, transfer agent and administrator. Each
Portfolio pays the Manager a fee for its services that is computed daily and
paid monthly at the annual rate specified below of the value of the average net
assets of the

~ 22 ~
<PAGE>
Portfolios. The Manager pays a portion of its fee to each Advisor for the
advisory services provided to the Portfolio that is computed daily and paid
monthly at the annual rate specified below of the value of the Portfolio's
average daily net assets:

<TABLE>
<CAPTION>
PORTION
OF THE
MANAGER'S
MANAGER'S FEE PAID
PORTFOLIO FEE TO THE ADVISOR
- -------------------------------------------------- --------- --------------
<S> <C> <C>
U.S. Government Money Market Portfolio............ .475% .125%
Investment Quality Bond Portfolio................. .55% .20%
Municipal Bond Portfolio.......................... .55% .20%
Large Capitalization Value Portfolio.............. .65% .30%
Large Capitalization Growth Portfolio............. .65% .30%
Small Capitalization Portfolio.................... .65% .30%
International Equity Portfolio.................... .75% .40%
</TABLE>

ADVISORS

The Advisors have agreed to the foregoing fees, which are generally lower than
the fees they charge to institutional accounts for which they serve as
investment advisor and perform all administrative functions associated with
serving in that capacity in recognition of the reduced administrative
responsibilities they have undertaken with respect to the Portfolios. Subject to
the supervision and direction of the Manager and, ultimately, the Board of
Trustees, each Advisor's responsibilities are to manage the securities held by
the Portfolio it serves in accordance with the Portfolio's stated investment
objective and policies, make investment decisions for the Portfolio and place
orders to purchase and sell securities on behalf of the Portfolio.

The following sets forth certain information about each of the Advisors:

OpCap Advisors ("OpCap"), a registered investment advisor, located at One World
Financial Center, New York, NY 10281, serves as Advisor to the Municipal Bond
Portfolio and Large Capitalization Value Portfolio. OpCap is a majority owned
subsidiary of Oppenheimer Capital, a registered investment advisor, founded in
1968. Oppenheimer Financial Corp., a holding company, holds a 33% interest in
Oppenheimer Capital, and Oppenheimer Capital, L.P., a Delaware limited
partnership whose units are traded on the New York Stock Exchange and of which
Oppenheimer Financial Corp. is the sole general partner, owns the remaining 67%
interest. As of December 31, 1996, Oppenheimer Capital and its subsidiary OpCap
had assets under management of approximately $48.2 billion. As previously
discussed on page [9], Oppenheimer Group, Inc. and its subsidiary, Oppenheimer
Financial Corp. have signed an Agreement and Plan of Merger to sell their
interest in Oppenheimer Capital and Oppenheimer Capital, L.P.

Fox Asset Management, Inc. ("Fox"), a registered investment advisor, serves as
Advisor to the Investment Quality Bond Portfolio. Fox was formed in 1985. Fox is
owned by its current employees, with a controlling interest held by J. Peter
Skirkanich, President, Managing Director and Chairman of Fox's Investment
Committee. Fox is located at 44 Sycamore Avenue, Little Silver, NJ 07739. As of
December 31, 1996, assets under management by Fox were approximately $3.2
billion.

Harris Bretall Sullivan & Smith, Inc. ("Harris Bretall"), a registered
investment advisor, serves as Advisor to the Large Capitalization Growth
Portfolio. The firm was founded in 1971 and is owned by W. Graeme Bretall,
President and Director, John J. Sullivan, Director and Treasurer and Henry
Smith, Director. Located at One Post Street, San Francisco, CA 94104, the firm
managed assets of approximately $2.8 billion as of December 31, 1996.

Thorsell, Parker Partners, Inc. ("Thorsell"), a registered investment advisor
serves as Advisor to the Small Capitalization Portfolio. The firm is located at
265 Post Road West, Westport,

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Connecticut 06880. Thorsell is owned by its current employees with a controlling
interest (approximately 70%) held by Richard L. Thorsell. As of December 31,
1996, the firm had approximately $316 million of assets under management.

Sterling Capital Management Company ("Sterling"), a registered investment
advisor, is the Advisor to the U.S. Government Money Market Portfolio. Sterling
is a North Carolina corporation formed in 1970 and located at One First Union
Center, 301 S. College Street, Suite 3200, Charlotte, NC 28202. Sterling is a
wholly-owned subsidiary of United Asset Management Corporation and provides
investment management services to corporations, pension and profit-sharing
plans, trusts, estates and other institutions and individuals. As of November
29, 1996, Sterling had approximately $1.7 billion in assets under management.
Since 1982, Sterling has been involved with the distribution of the North
Carolina Capital Management Trust, a money market mutual fund offered
exclusively to public units in the state, the first such fund to be registered
with the Securities and Exchange Commission. As of December 31, 1996, the asset
value of this fund was approximately $1.7 billion.

Ivory & Sime International, Inc. ("ISI"), a registered investment advisor, is
the Advisor to the International Equity Portfolio and, in connection therewith,
has entered into a sub-investment advisory agreement with Ivory & Sime plc of
Edinburgh, Scotland. Pursuant to such sub-investment advisory agreement, Ivory &
Sime plc performs investment advisory and portfolio transaction services for
such Portfolio. While Ivory & Sime plc is responsible for the day-to-day
management of the Portfolio's assets, ISI reviews investment performance,
policies and guidelines, facilitates communication between Ivory & Sime plc and
the Manager and maintains certain books and records. As compensation for its
services as investment advisor, the Manager pays ISI a monthly fee at the annual
rate of .40% of the average daily net assets of the International Equity
Portfolio. As compensation for its services, Ivory & Sime plc receives from ISI
78% of the net monthly fees paid by the Manager to ISI pursuant to the
Investment Advisory Agreement between the Manager and ISI.

ISI was organized in 1978. Twenty-five percent of its voting stock is owned by
Jamison, Eaton & Wood, Inc. and 75% is owned by Ivory & Sime plc. ISI offers
clients in the United States the services of Ivory & Sime plc in global
securities markets. Ivory & Sime plc, founded in 1895, is one of the leading
independent investment managers in the United Kingdom. As of December 31, 1996,
the firm and its affiliates managed approximately $6.4 billion of global equity
investments. ISI is located at 39 Main Street, Chatham, NJ 07928, and Ivory &
Sime plc is located at 1 Charlotte Square, Edinburgh, Scotland EH24DZ. Ivory &
Sime plc is a public limited company listed on the London Stock Exchange. As of
December 31, 1996, approximately 29.3% of Ivory & Sime's outstanding shares were
held by Caledonia Investments.

ADMINISTRATION

State Street Bank and Trust Company ("State Street"), located at One Heritage
Drive, North Quincy, Massachusetts 02171, calculates the net asset value of the
Portfolios' shares and creates and maintains the Trust's financial records
required by Section 31 of the 1940 Act.

Unified Advisers, Inc. provides administrative services and manages the
administrative affairs of the Trust pursuant to an Administration Agreement with
the Trust. Such services include the preparation of proxy statements and reports
filed with federal and state securities commissions (except to the extent that
the participation of independent accountants and attorneys is, in the opinion of
Unified Advisers, Inc., necessary or desirable), preparation of materials for
regular and special meetings of the Board of Trustees of the Trust, responding
to shareholders' inquiries relating to the Trust and supervising the
determination of the net asset value of the Trust's Portfolios. For these
services, each Portfolio pays Unified Advisers, Inc. an annual rate of .12% of
the Portfolio's average daily net assets per year with an annual cap of
$234,000.

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EXPENSES OF THE PORTFOLIOS

Each Portfolio bears its own expenses, which generally include all costs not
specifically borne by the Manager, the Advisors, State Street and Unified
Advisers, Inc. as Administrator to the Trust. Included among a Portfolio's
expenses are: costs incurred in connection with the Portfolio's organization;
investment management and administration fees; fees for necessary professional
and brokerage services; fees for any pricing service; costs of the determination
of net asset value; the costs of regulatory compliance; and costs associated
with maintaining the Trust's legal existence and shareholder relations. The
Trust's agreement with the Manager provides that the Manager will reduce its
fees to a Portfolio to the extent required by applicable state laws for certain
expenses that are described in the Statement of Additional Information.

PORTFOLIO TRANSACTIONS

To the extent consistent with the applicable provisions of the 1940 Act and the
rules and exemptions adopted by the SEC under the 1940 Act, the Board of
Trustees of the Trust has determined that brokerage transactions for a Portfolio
may be executed through affiliated broker-dealers if, in the judgment of the
Advisor, the use of an affiliated broker-dealer is likely to result in price and
execution at least as favorable as those of other qualified broker-dealers. When
selecting broker-dealers, the Advisors may consider their record of sales of
shares of the Portfolios.

PURCHASE OF SHARES
GENERAL

Purchases of shares of a Portfolio by a participant in a Consulting Program must
be made through an entity having a sales agreement with Unified Management
Corporation (the "Distributor") ("Consulting Brokers"), the Trust's general
distributor, or directly through the Distributor.

Shares of the Portfolio are available to participants in Consulting Programs and
to other investors and investment advisory services. The Trust is designed to
allow Consulting Programs and other investment advisory programs to relieve
investors of the burden of devising an asset allocation strategy to meet their
individual needs as well as selecting individual investments within each asset
category among the myriad choices available.

INVESTMENT ADVISORY PROGRAMS. Generally, the Consulting Programs provide
advisory services in connection with investments among the Portfolios by
identifying the investor's risk tolerance and investment objectives through
evaluation of an investor questionnaire; identifying and recommending an
appropriate allocation of assets among the Portfolios that conforms to such risk
tolerance and objectives in a recommendation; and providing on a periodic basis,
a report to the investor containing an analysis and evaluation of the investor's
account and recommending any appropriate changes in the allocation of assets
among the Portfolios. The investment advisors for the Consulting Programs are
also responsible for reviewing the asset allocation recommendations and
performance reports with the investor, providing any interpretations, monitoring
identified changes in the investor's financial characteristics and the
implementation of investment decisions.

The investment advisors in the Consulting Programs may use the Manager's
Saratoga SharpSM Program in assisting their clients in translating investor
needs, preferences and attitudes into suggested portfolio allocations. In
addition, the Manager may provide some or all of the following administrative
services to the investment advisers for the Consulting Programs: the
preparation, printing and processing of investment questionnaires and investment
literature and other client communications.

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The fee for the Consulting Programs is subject to negotiation between the client
and his or her investment advisor and is paid directly by each advisory client
to his or her investment advisor either by redemption of Portfolio shares or by
separate payment.

Investors should be aware that the Manager receives a fee from the investment
advisor to each participant in a Consulting Program for services rendered to the
investment advisor in connection with the investment advisory program. This fee
does not vary based on the Portfolios recommended for the participant's
investments. Also, the Manager serves as the Trust's Manager with responsibility
for identifying, retaining, supervising and compensating each Portfolio's
Advisor under the supervision of the Trust's Board of Trustees and receives a
fee from each Portfolio.

OTHER ADVISORY PROGRAMS

Shares of the Portfolios are also available for purchase by certain registered
investment advisors (other than the investment advisors for the Consulting
Programs) as a means of implementing asset allocation recommendations based on
an investor's investment objectives and risk tolerance. In order to qualify to
purchase shares on behalf of its clients, the investment advisor must be
approved by the Manager. Investors purchasing shares through these investment
advisory programs will bear different fees for different levels of services as
agreed upon with the investment advisors offering the programs. Registered
investment advisors interested in utilizing the Portfolios for the purposes
described above should call 800-807-FUND (800-807-3863).

CONTINUOUS OFFERING

For participants in Consulting Programs, shares of the Portfolios may be
purchased from Consulting Brokers only after the completion and processing of
such documentation as may be required by the Consulting Broker for the Program.
The offering price is the net asset value per share next determined after
receipt of an order by the Distributor. Shareholders will not receive share
certificates because the Trust does not issue share certificates.

The Trust offers an Automatic Investment Plan under which purchase orders may be
placed periodically for Portfolio shares in an amount not less than $100. The
purchase price is paid automatically from cash held in the shareholder's
designated account. For further information regarding the Automatic Investment
Plan, shareholders should contact their Consulting Broker or the Trust at
800-807-FUND (800-807-3863).

The minimum initial investment in the Trust is $10,000 and the minimum
investment in any individual Portfolio (other than the U.S. Government Money
Market Portfolio) is $250; there is no minimum investment for the U.S.
Government Money Market Portfolio. For employees of the Manager and its
affiliates and their relatives, the minimum initial investment is $1,000 with no
individual Portfolio minimum. There is no minimum initial investment for
employee benefit plans and individual retirement accounts. The minimum
subsequent investment in the Trust is $100 and there is no minimum subsequent
investment for any Portfolio. The Trust reserves the right at any time to vary
the initial and subsequent investment minimums.

The sale of shares will be suspended during any period when the determination of
net asset value is suspended and may be suspended by the Board of Trustees of
the Trust whenever the Board judges it to be in the best interest of the Trust
to do so. The Distributor in its sole discretion, may accept or reject any
purchase order.

The Distributor will from time to time provide compensation to dealers in
connection with sales of shares of the Trust including promotional gifts
(including gift certificates, dinners and other items), financial assistance to
dealers in connection with conferences, sales or training programs for their
employees, seminars for the public and advertising campaigns.

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<PAGE>
REDEMPTION OF SHARES

REDEMPTION IN GENERAL

Shares of a Portfolio may be redeemed at no charge on any day that the Portfolio
calculates its net asset value as described below under "Net Asset Value."
Redemption requests received in proper form prior to the close of regular
trading on the NYSE will be effected at the net asset value per share determined
on that day. Redemption requests received after the close of regular trading on
the NYSE will be effected at the net asset value next determined. A Portfolio is
required to transmit redemption proceeds for credit to the shareholder's account
at no charge within seven days after receipt of a redemption request. A
shareholder who pays for Portfolio shares by personal check will be credited
with the proceeds of a redemption of those shares when the purchase check has
been collected, which may take up to 15 days. Shareholders who anticipate the
need for more immediate access to their investment should purchase shares by
Federal funds or bank wire or by a certified or cashier's check.

Redemption requests may be given to the shareholder's Consulting Broker who is
responsible for transmitting them to the Trust's Transfer Agent or directly to
the Transfer Agent, if the shareholder purchased shares directly from the
Distributor. In order to be effective, a redemption request of a shareholder
other than an individual may require the submission of documents commonly
required to assure the safety of a particular account.

The agreement relating to participation in a Consulting Program between a client
and the investment advisor will provide that, absent separate payment by the
participant, fees charged pursuant to that agreement may be paid through
automatic redemptions of a portion of the participant's Trust account.

The Trust may suspend redemption procedures and postpone redemption payment
during any period when the NYSE is closed other than for customary weekend or
holiday closing or when the SEC has determined an emergency exists or has
otherwise permitted such suspension or postponement.

If the Board of Trustees determines that it would be detrimental to the best
interests of a Portfolio's shareholders to make a redemption payment wholly in
cash, the Portfolio may pay, in accordance with rules adopted by the SEC, any
portion of a redemption in excess of the lesser of $250,000 or 1% of the
Portfolio's net assets by a distributions in kind of readily marketable
portfolio securities in lieu of cash. Redemptions failing to meet this threshold
must be made in cash. Shareholders receiving distributions in kind of portfolio
securities may incur brokerage commissions when subsequently disposing of those
securities.

INVOLUNTARY REDEMPTIONS

Due to the relatively high cost of maintaining small accounts, the Trust may
redeem an account having a current value of $7,500 or less as a result of
redemptions, but not as a result of a fluctuation in a Portfolio's net asset
value or redemptions to pay fees for Consulting Programs, after the shareholder
has been given at least 30 days in which to increase the account balance to

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<PAGE>
more than that amount. Investors should be aware that involuntary redemptions
may result in the liquidation of Portfolio holdings at a time when the value of
those holdings is lower than the investor's cost of the investment or may result
in the realization of taxable capital gains.

NET ASSET VALUE

Each Portfolio's net asset value per share is calculated by State Street on each
day, Monday through Friday, except on days on which the NYSE is closed. The NYSE
is currently scheduled to be closed on New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas,
and on the preceding Friday when one of those holidays falls on a Saturday or on
the subsequent Monday when one of those holidays falls on a Sunday.

Net asset value per share is determined as of the close of trading on the NYSE
and is computed by dividing the value of a Portfolio's net assets by the total
number of its shares outstanding. Generally, a Portfolio's investments are
valued at market value or, in the absence of a market value, at fair value as
determined by or under the direction of the Board of Trustees.

Securities that are primarily traded on foreign exchanges are generally valued
for purposes of calculating a Portfolio's net asset value at the preceding
closing values of the securities on their respective exchanges, except that,
when an occurrence subsequent to the time a value was so established is likely
to have changed that value, the fair market value of those securities will be
determined by consideration of other factors by or under the direction of the
Board of Trustees. A security that is primarily traded on a domestic or foreign
stock exchange is valued at the last sale price on that exchange or, if no sales
occurred during the day, at the current quoted bid price. All portfolio
securities held by the U.S. Government Money Market Portfolio and short term
dollar-denominated investments of the other Portfolios that mature in 60 days or
less are valued on the basis of amortized cost (which involves valuing an
investment at its cost and, thereafter, assuming a constant amortization to
maturity of any discount or premium, regardless of the effect of fluctuating
interest rates on the market value of the investment) when the Board of Trustees
has determined that amortized cost represents fair value. An option that is
written by the Fund is generally valued at the last sale price or, in the
absence of the last sale price, the last offer price. An option that is
purchased by the Portfolio is generally valued at the last sale price or, in the
absence of the last sale price, the last bid price. The value of a futures
contact is equal to the unrealized gain or loss on the contract that is
determined by marking the contract to the current settlement price for a like
contract on the valuation date of the futures contract. A settlement price may
not be used if the market makes a limit move with respect to a particular
futures contract if the securities underlying the futures contract experience
significant price fluctuations after the determination of the settlement price.
When a settlement price cannot be used, futures contracts will be valued at
their fair market value as determined by or under the direction of the Board of
Trustees.

All assets and liabilities initially expressed in foreign currency values will
be converted into U.S. dollar values at the mean between the bid and offered
quotations of the currencies against U.S. dollars as last quoted by any
recognized dealer. If the bid and offered quotations are not available, the rate
of exchange will be determined in good faith by or under the direction of by the
Board of Trustees. In carrying out the Board's valuation policies, State Street
may consult with an independent pricing service retained by the Trust. Further
information regarding the Portfolio's valuation policies is contained in the
Statement of Additional Information.

EXCHANGE PRIVILEGE

Shares of a Portfolio may be exchanged without payment of any exchange fee
(except as set forth below) for shares of another Portfolio at their respective
net asset values.

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An exchange of shares is treated for federal income tax purposes as a redemption
(sale) of shares given in exchange by the shareholder, and an exchanging
shareholder may, therefore, realize a taxable gain or loss in connection with
the exchange. Shareholders exchanging shares of a Portfolio for shares of
another Portfolio should review the disclosure provided herein relating to the
exchanged-for shares carefully prior to making an exchange. The exchange
privilege is available to shareholders residing in any state in which Portfolio
shares being acquired may be legally sold.

The Manager reserves the right to reject any exchange request and the exchange
privilege may be modified or terminated upon notice to shareholders in
accordance with applicable rules adopted by the Securities and Exchange
Commission.

The Distributor and the Trust's transfer agent will employ reasonable procedures
for telephone redemptions and exchanges to confirm that the instructions
received from shareholders or their account representatives are genuine, and if
they do not, the Distributor or the transfer agent may be liable for any losses
due to unauthorized or fraudulent instructions. Shareholders will be required to
provide their name, address, social security number and other identifying
information. Account representatives must identify themselves and their firm and
the Distributor will confirm that such firm has a valid selling agreement with
the Distributor and that the representative is authorized to act on behalf of
the firm.

Because excessive trading (including short-term "market timing" trading can
limit a Portfolio's performance, each Portfolio may refuse any exchange orders
(1) if they appear to be market-timing transactions involving significant
portions of a Portfolio's assets or (2) from any shareholder account if the
shareholder or his or her broker-dealer has been advised that previous use of
the exchange privilege is considered excessive. Accounts under common ownership
or control, including those with the same taxpayer ID number and those
administered so as to redeem or purchase shares based upon certain predetermined
market indicators, will be considered one account for this purpose.

DIVIDENDS, DISTRIBUTIONS AND TAXES

DIVIDENDS AND DISTRIBUTIONS

Net investment income (i.e., income other than long and short term capital
gains) and net realized long and short term capital gains will be determined
separately for each Portfolio. Dividends derived from net investment income and
distributions of net realized long and short term capital gains paid by a
Portfolio to a shareholder will be automatically reinvested (at current net
asset value) in additional shares of that Portfolio (which will be deposited in
the shareholder's account) unless the shareholder instructs the Trust, in
writing, to pay all dividends and distributions in cash. Dividends attributable
to the net investment income of the U.S. Government Money Market Portfolio, the
Municipal Bond Portfolio and the Investment Quality Bond Portfolio will be
declared daily and paid monthly. Shareholders of those Portfolios receive
dividends from the day following the purchase up to and including the date of
redemption. Dividends attributable to the net investment income of the remaining
Portfolios are declared and paid annually. Distributions of any net realized
long term and short term capital gains earned by a Portfolio will be made
annually.

TAXES

As each Portfolio will be treated as a separate entity for federal income tax
purposes, the amounts of net investment income and net realized capital gains
subject to tax will be determined separately for each Portfolio (rather than on
a Trust-wide basis).

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Each Portfolio intends to qualify each year as a regulated investment company
for federal income tax purposes. The requirements for qualification (i) may
cause a Portfolio, among other things, to restrict the extent of its short term
trading or its transactions in warrants, currencies, options, futures or forward
contracts and (ii) will cause each of the Portfolios to maintain a diversified
asset portfolio.

A regulated investment company will not be subject to federal income tax on its
net investment income and its capital gains that it distributes to shareholders,
so long as it meets certain overall distribution requirements and other
conditions under the Code. Each Portfolio intends to satisfy these overall
distribution requirements and any other required conditions. Dividends declared
by a Portfolio in October, November or December of any calendar year and payable
to shareholders of record on a specified date in such a month shall be deemed to
have been received by each shareholder on December 31 of such calendar year and
to have been paid by the Portfolio not later than such December 31 provided that
such dividend is actually paid by the Portfolio during January of the following
year.

Dividends derived from a Portfolio's taxable net investment income and
distributions of a Portfolio's net realized short term capital gains (including
short term gains from investments in tax exempt obligations) will be taxable to
shareholders as ordinary income for federal income tax purposes, regardless of
how long shareholders have held their Portfolio shares and whether the dividends
or distributions are received in cash or reinvested in additional shares.
Distributions of net realized long term capital gains will be taxable to
shareholders as long term capital gains for federal income tax purposes,
regardless of how long a shareholder has held his Portfolio shares and whether
the distributions are received in cash or reinvested in additional shares.
Dividends and distributions paid by the U.S. Government Money Market Portfolio,
the Investment Quality Bond Portfolio and the Municipal Bond Portfolio and
distributions of capital gains paid by all the Portfolios will not qualify for
the dividend received deduction for corporations. As a general rule, dividends
paid by a Portfolio, to the extent derived from dividends attributable to
certain types of stock issued by U.S. corporations, will qualify for the
dividend received deduction for corporations which hold shares in a Portfolio
for more than 45 days. Some states, if certain asset and diversification
requirements are satisfied, permit shareholders to treat their portions of a
Portfolio's dividends that are attributable to interest on U.S. Treasury
securities and certain U.S. Government Securities as income that is exempt from
state and local income taxes. Dividends attributable to repurchase agreement
earnings are, as a general rule, subject to state and local taxation.

Dividends paid by the Municipal Bond Portfolio that are derived from interest
earned on qualifying tax-exempt obligations are expected to be "exempt-interest"
dividends that shareholders may exclude from their gross incomes for federal
income tax purposes if the Portfolio satisfies certain asset percentage
requirements. To the extent that the Portfolio invests in bonds, the interest on
which is a specific tax preference item for federal income tax purposes
("AMT-Subject Bonds"), any exempt-interest dividends derived from interest on
AMT-Subject Bonds will be a specific tax preference item for purposes of the
federal individual and corporate alternative minimum taxes. Dividends
distributed by the Municipal Bond Portfolio may not be exempt from state or
local taxation. Shareholders will receive notification annually stating the
portion of the Municipal Bond Portfolio's tax-exempt income attributable to
issuers in each state. You should contact your tax advisor if you have any
questions, particularly with regard to state and local taxes.

Net investment income or capital gains earned by the Portfolios investing in
foreign securities may be subject to foreign income taxes withheld at the
source. The United States has entered into tax treaties with many foreign
countries that entitle the Portfolios to a reduced rate of tax or exemption from
tax on this related income and gains. It is impossible to determine the
effective rate of foreign tax in advance since the amount of these Portfolios'
assets to be invested within various countries is not known. The Portfolios
intend to operate so as to qualify for treaty-

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<PAGE>
reduced rates of tax where applicable. Furthermore, if a Portfolio qualifies as
a regulated investment company, if certain distribution requirements are
satisfied, and if more than 50% of the value of the Portfolio's assets at the
close of the taxable year consists of stock or securities of foreign
corporations, the Portfolio may elect, for U.S. federal income tax purposes, to
treat foreign income taxes paid by the Portfolio that can be treated as income
taxes under U.S. income tax principles as paid by its shareholders. The Trust
anticipates that the International Equity Portfolio will qualify for and make
this election in most, but not necessarily all, of its taxable years. If a
Portfolio were to make an election, an amount equal to the foreign income taxes
paid by the Portfolio would be included in the income of its shareholders and
the shareholders would be entitled to credit their portions of this amount
against their U.S. tax liabilities, if any, or to deduct such portions from
their U.S. taxable income, if any. Shortly after any year for which it makes an
election, a Portfolio will report to its shareholders, in writing, the amount
per share of foreign tax that must be included in each shareholder's gross
income and the amount which will be available for deduction or credit. No
deduction for foreign taxes may be claimed by a shareholder who does not itemize
deductions. Certain limitations will be imposed on the extent to which the
credit (but not the deduction) for foreign taxes may be claimed.

As noted above, shareholders who are participants in Consulting Programs or
other investment advisory services will pay an investment advisory fee out of
their own assets. For most shareholders who are individuals, this fee will be
treated as a "miscellaneous itemized deduction" for federal income tax purposes.
Under current federal income tax law, an individual's miscellaneous itemized
deductions for any taxable year shall be allowed as a deduction only to the
extent that the aggregate of these deductions exceeds 2% of adjusted gross
income.

As discussed above, an exchange of shares in a Portfolio for shares in another
Portfolio, including exchanges by participants in a Consulting Program, is
treated for federal income tax purposes as a redemption (sale) of shares and
taxable gain or loss may be realized.

Statements as to the tax status of each shareholder's dividends and
distributions are mailed annually. Shareholders will also receive, if
appropriate, various written notices after the close of the Portfolios' taxable
year with respect to certain foreign taxes paid by the Portfolios and certain
dividends and distributions that were, or were deemed to be, received by
shareholders from the Portfolios during the Portfolios' prior taxable year.
Shareholders should consult with their own tax advisors with specific reference
to their own tax situations.

CUSTODIAN AND TRANSFER AGENT

State Street Bank and Trust Company is located at One Heritage Drive, North
Quincy, Massachusetts 02171 and serves as the Custodian of the Trust's
investments and the Trust's transfer agent. The Shareholder Services Group is
the subtransfer agent for certain retirement plan accounts. Cash balances of the
Portfolios with the Custodian in excess of $100,000 are unprotected by Federal
deposit insurance. Such uninsured balances may at times be substantial.

PERFORMANCE OF THE PORTFOLIOS

YIELD

The Trust may, from time to time, include the yield and effective yield of the
U.S. Government Money Market Portfolio in advertisements or reports to
shareholders or prospective investors. Current yield for the U.S. Government
Money Market Portfolio will be based on income received by a hypothetical
investment over a given seven-day period (less expenses accrued during the
period), and then "annualized" (i.e., assuming that the seven-day yield would be
received for 52 weeks, stated in terms of an annual percentage return on the
investment). "Effective yield" for the U.S. Government Money Market Portfolio
will be calculated in a manner similar to that used to calculate yield, but will
reflect the compounding effect of earnings on reinvested dividends.

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For the Investment Quality Bond Portfolio and the Municipal Bond Portfolio, from
time to time, the Trust may advertise the thirty-day "yield" and, with respect
to the Municipal Bond Portfolio, an "equivalent taxable yield." The yield of a
Portfolio refers to the income generated by an investment in the Portfolio over
the thirty-day period identified in the advertisement and is computed by
dividing the net investment income per share earned by the Portfolio during the
period by the net asset value per share on the last day of the period. This
income is "annualized" by assuming that the amount of income is generated each
month over a one-year period and is compounded semi-annually. The annualized
income is then shown as a percentage of the net asset value.

EQUIVALENT TAXABLE YIELD

The equivalent taxable yield of the Municipal Bond Portfolio demonstrates the
yield on a taxable investment necessary to produce an after-tax yield equal to
the Portfolio's tax-exempt yield. It is calculated by increasing the yield shown
for the Portfolio, calculated as described above, to the extent necessary to
reflect the payment of specified tax rates. Thus, the equivalent taxable yield
always will exceed the Portfolio's yield.

TOTAL RETURN

From time to time, the Trust may advertise a Portfolio's (other than the U.S.
Government Money Market Portfolio's) "average annual total return" over various
periods of time. This total return figure shows the average percentage change in
value of an investment in the Portfolio from the beginning date of the measuring
period to the ending date of the measuring period. The figure reflects changes
in the price of the Portfolio's shares and assumes that any income, dividends
and/or capital gains distributions made by the Portfolio during the period are
reinvested in shares of the Portfolio. Figures will be given for recent one-,
five-and ten-year periods (if applicable) and may be given for other periods as
well (such as from commencement of the Portfolio's operations or on a
year-by-year basis). When considering "average" total return figures for periods
longer than one year, investors should note that Portfolio's annual total return
for any one year in the period might have been greater or less than the average
for the entire period. A Portfolio also may use "aggregate" total return figures
for various periods, representing the cumulative change in value of an
investment in the Portfolio for the specific period (again reflecting changes in
the Portfolio's share price and assuming reinvestment of dividends and
distributions). Aggregate total returns may be shown by means of schedules,
charts or graphs, and may indicate subtotals of the various components of total
return (that is, the change in value of initial investment, income dividends and
capital gains distributions).

It is important to note that yield and total return figures are based on
historical earnings and are not intended to indicate future performance. The
Statement of Additional Information describes the method used to determine a
Portfolio's yield and total return. Shareholders may make inquiries regarding a
Portfolio, including current yield quotations or total return figures, to any
Consulting Broker or the Trust at 800-807-FUND (800-807-3863).

In reports or other communications to shareholders or in advertising material, a
Portfolio may compare its performance with that of other mutual funds as listed
in the rankings prepared by Lipper Analytical Services, Inc., Morningstar or
similar independent services that monitor the performance of mutual funds or
with other appropriate indices of investment securities, such as the Lehman
Brothers Government/Corporate Bond Index, the S&P 500, the S&P/Barra Growth
Index and S&P/Barra Value Index, the EAFE Index and the Russell 2000 Index. The
performance information also may include evaluations of the Portfolios published
by nationally recognized ranking services and by financial publications that are
nationally recognized, such as BUSINESS WEEK, FORBES, FORTUNE, INSTITUTIONAL
INVESTOR, MORNINGSTAR, BARRON'S, INVESTOR'S BUSINESS DAILY, THE WALL STREET
JOURNAL, USA TODAY, THE NEW YORK TIMES and MONEY.

~ 32 ~
<PAGE>
ADDITIONAL INFORMATION

The Trust was organized as an unincorporated business trust under the laws of
Delaware on April 8, 1994 and is a trust fund commonly known as a "business
trust."

The shareholders of the Portfolios are each entitled to a full vote for each
full share of beneficial interest (par value $.001 per share) held and
fractional votes for fractional shares. Shares of each Portfolio are entitled to
vote as a class to the extent required by the provisions of the 1940 Act or as
otherwise permitted by the Trustees. When issued, shares of each Portfolio are
fully paid and have no preemptive, conversion or other subscription rights. The
shares do not have cumulative voting rights.

It is the intention of the Trust not to hold Annual Meetings of Shareholders.
The Trustees may call Special Meetings of Shareholders for action by shareholder
vote as may be required by the 1940 Act or the Master Trust Agreement.
Shareholders have certain rights, including the right to call a meeting upon a
vote of the Trust's outstanding shares for the purpose of voting on the removal
of one or more Trustees. The Trust may from time to time add additional
Portfolios to the Trust or with approval of the shareholders of an existing
Portfolio, if necessary, terminate one or more of the Portfolios.

SHAREHOLDER INQUIRIES

All inquiries regarding the Trust should be directed to Saratoga Capital
Management at 800-807-FUND (800-807-3863).

MAJOR SHAREHOLDERS

To the knowledge of the Trust, the only person who as of December 31, 1996 had
beneficial ownership of more than 25% of the voting securities of any of the
Portfolios is the American Medical Association Pension Trust which held 42.23%
of the outstanding shares of the Small Capitalization Portfolio and may be
deemed to control the Small Capitalization Portfolio until such time as it owns
less than 25% of the outstanding shares of the Small Capitalization Portfolio.

~ 33 ~
<PAGE>
PROSPECTUS

[LOGO]

TRUST MANAGER:
SARATOGA CAPITAL MANAGEMENT
33 MAIDEN LANE
NEW YORK, NY 10038
(800) 807- FUND
(3863)

TRANSFER AND SHAREHOLDER
SERVICING AGENT:
STATE STREET BANK AND TRUST COMPANY
P.O. BOX 8514
BOSTON, MA 02266

GENERAL DISTRIBUTOR:
UNIFIED MANAGEMENT CORPORATION
429 NORTH PENNSYLVANIA STREET
INDIANAPOLIS, INDIANA 46204
(317) 634-3300

- - U.S. GOVERNMENT MONEY MARKET PORTFOLIO

- - INVESTMENT QUALITY BOND PORTFOLIO

- - MUNICIPAL BOND PORTFOLIO

- - LARGE CAPITALIZATION VALUE PORTFOLIO

- - LARGE CAPITALIZATION GROWTH PORTFOLIO

- - SMALL CAPITALIZATION PORTFOLIO

- - INTERNATIONAL EQUITY PORTFOLIO

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, THE STATEMENT OF
ADDITIONAL INFORMATION OR THE TRUST'S OFFICIAL SALES LITERATURE IN CONNECTION
WITH THE OFFERING OF SHARES, AND IF GIVEN OR MADE, SUCH OTHER INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE TRUST.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY STATE IN WHICH, OR TO ANY
PERSON TO WHOM, SUCH OFFER MAY NOT LAWFULLY BE MADE.
<PAGE>

THE SARATOGA ADVANTAGE TRUST

Statement of Additional Information

INCOME PORTFOLIOS:

U. S. Government Money Market Portfolio

Investment Quality Bond Portfolio

Municipal Bond Portfolio

EQUITY PORTFOLIOS:

Large Capitalization Value Portfolio

Large Capitalization Growth Portfolio

Small Capitalization Portfolio

International Equity Portfolio

33 Maiden Lane
New York, New York 10038
800-807-FUND (800-807-3863).

This Statement of Additional Information (the "Additional Statement") is not a
Prospectus. Investors should understand that this Additional Statement should
be read in conjunction with the Trust's Prospectus dated April 14, 1997 (the
"Prospectus"), which may be obtained by written request to Saratoga Capital
Management at the address or phone listed above.

The date of this Additional Statement is April 14, 1997

<PAGE>

TABLE OF CONTENTS
Page

INVESTMENT OF THE TRUST'S ASSETS . . . . . . . . . . . . . . . . . .3

INVESTMENT RESTRICTIONS. . . . . . . . . . . . . . . . . . . . . . 14

PRINCIPAL HOLDERS OF SECURITIES AND
CONTROL PERSONS OF THE PORTFOLIOS. . . . . . . . . . . . . . . . . 15

TRUSTEES AND OFFICERS. . . . . . . . . . . . . . . . . . . . . . . 15

MANAGEMENT AND OTHER SERVICES. . . . . . . . . . . . . . . . . . . 17

INVESTMENT ADVISORY SERVICES . . . . . . . . . . . . . . . . . . . 19

DETERMINATION OF NET ASSET VALUE . . . . . . . . . . . . . . . . . 23

PORTFOLIO YIELD AND TOTAL RETURN INFORMATION . . . . . . . . . . . 26

TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . 35

APPENDIX A - RATINGS . . . . . . . . . . . . . . . . . . . . . . .A-1

FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . .B-1

2
<PAGE>

INVESTMENT OF THE TRUST'S ASSETS

The investment objective and policies of each Portfolio are described in
the Prospectus. A further description of each Portfolio's investments and
investment methods appears below.

COLLATERALIZED MORTGAGE OBLIGATIONS. In addition to securities issued by
Ginnie Mae, Fannie Mae and Freddie Mac, another type of mortgage-backed security
is the "collateralized mortgage obligation," which is secured by groups of
individual mortgages but is similar to a conventional bond where the investor
looks only to the issuer for payment of principal and interest. Although the
obligations are recourse obligations to the issuer, the issuer typically has no
significant assets, other than assets pledged as collateral for the obligations,
and the market value of the collateral, which is sensitive to interest rate
movements, may affect the market value of the obligations. A public market for
a particular collateralized mortgage obligation may or may not develop and thus,
there can be no guarantee of liquidity of an investment in such obligations.

INFORMATION ON TIME DEPOSITS AND VARIABLE RATE NOTES. The Portfolios may
invest in fixed time deposits, whether or not subject to withdrawal penalties;
however, investment in such deposits which are subject to withdrawal penalties,
other than overnight deposits, are subject to the 15% limit on illiquid
investments set forth in the Prospectus for each Portfolio.

The commercial paper obligations which the Portfolios may buy are unsecured
and may include variable rate notes. The nature and terms of a variable rate
note (i.e., a "Master Note") permit a Portfolio to invest fluctuating amounts at
varying rates of interest pursuant to a direct arrangement between a Portfolio
as lender, and the issuer, as borrower. It permits daily changes in the amounts
borrowed. The Portfolio has the right at any time to increase, up to the full
amount stated in the note agreement, or to decrease the amount outstanding under
the note. The issuer may prepay at any time and without penalty any part of or
the full amount of the note. The note may or may not be backed by one or more
bank letters of credit. Because these notes are direct lending arrangements
between the Portfolio and the issuer, it is not generally contemplated that they
will be traded; moreover, there is currently no secondary market for them.
Except as specifically provided in the Prospectus there is no limitation on the
type of issuer from whom these notes will be purchased; however, in connection
with such purchase and on an ongoing basis, a Portfolio's Advisor will consider
the earning power, cash flow and other liquidity ratios of the issuer, and its
ability to pay principal and interest on demand, including a situation in which
all holders of such notes made demand simultaneously. A Portfolio will not
invest more than 5% of its total assets in variable rate notes. Variable rate
notes are subject to the Portfolio's investment restriction on illiquid
securities unless such notes can be put back to the issuer on demand within
seven days.

CONVERTIBLE SECURITIES. As specified in the Prospectus, certain of the
Portfolios may invest in fixed-income securities which are convertible into
common stock. Convertible securities rank senior to common stocks in a
corporation's capital structure and, therefore, entail less risk than the
corporation's common stock. The value of a convertible security is a function
of its "investment value" (its value as if it did not have a conversion
privilege), and its "conversion value" (the security's worth if it were to be

<PAGE>

exchanged for the underlying security, at market value, pursuant to its
conversion privilege).

To the extent that a convertible security's investment value is greater
than its conversion value, its price will be primarily a reflection of such
investment value and its price will be likely to increase when interest rates
fall and decrease when interest rates rise, as with a fixed-income security (the
credit standing of the issuer and other factors may also have an effect on the
convertible security's value). If the conversion value exceeds the investment
value, the price of the convertible security will rise above its investment
value and, in addition, the convertible security will sell at some premium over
its conversion value. (This premium represents the price investors are willing
to pay for the privilege of purchasing a fixed-income security with a
possibility of capital appreciation due to the conversion privilege.) At such
times the price of the convertible security will tend to fluctuate directly with
the price of the underlying equity security. Convertible securities may be
purchased by the Portfolios at varying price levels above their investment
values and/or their conversion values in keeping with the Portfolios'
objectives.

INSURED BANK OBLIGATIONS. The Federal Deposit Insurance Corporation
("FDIC") insures the deposits of federally insured banks and savings and loan
associations (collectively referred to as "banks") up to $100,000. A Portfolio
may, within the limits set forth in the Prospectus, purchase bank obligations
which are fully insured as to principal by the FDIC. Currently, to remain fully
insured as to principal, these investments must be limited to $100,000 per bank;
if the principal amount and accrued interest together exceed $100,000, the
excess principal and accrued interest will not be insured. Insured bank
obligations may have limited marketability. Unless the Board of Trustees
determines that a readily available market exists for such obligations, a
Portfolio will treat such obligations as subject to the 15% limit for illiquid
investments set forth in the Prospectus unless such obligations are payable at
principal amount plus accrued interest on demand or within seven days after
demand.

WHEN-ISSUED SECURITIES. All Portfolios may take advantage of offerings
of eligible portfolio securities on a "when-issued" basis, i.e., delivery of
and payment for such securities take place sometime after the transaction
date on terms established on such date. Normally, settlement on U.S.
Government securities takes place within ten days. A Portfolio only will
make when-issued commitments on eligible securities with the intention of
actually acquiring the securities. If a Portfolio chooses to dispose of the
right to acquire a when-issued security (prior to its acquisition), it could,
as with the disposition of any other Portfolio obligation, incur a gain or
loss due to market fluctuation. No when-issued commitments will be made if,
as a result, more than 15% of the net assets of a Portfolio would be so
committed.

HEDGING. Certain Portfolios may use certain Hedging Instruments as
described, and subject to the restrictions stated, in the Prospectus. To engage
in short hedging, a Portfolio would: (i) sell financial futures; (ii) purchase
puts on such futures or on individual securities held by it ("Portfolio
securities") or securities indexes; or (iii) write calls on Portfolio securities
or on financial futures or securities indexes. To engage in long hedging, a
Portfolio would: (i) purchase financial futures, or (ii) purchase calls or write
puts on such futures or on Portfolio securities or securities indexes.
Additional information about the Hedging Instruments a Portfolio may use is
provided below.

<PAGE>

FINANCIAL FUTURES. No price is paid or received upon the purchase of a
financial future. Upon entering into a futures transaction, a Portfolio will
be required to deposit an initial margin payment equal to a specified
percentage of the contract value. Initial margin payments will be deposited
with a Portfolio's custodian bank in an account registered in the futures
commission merchant's name; however the futures commission merchant can gain
access to that account only under specified conditions. As the future is
marked to market to reflect changes in its market value, subsequent payments,
called variation margin, will be made to or from the futures commission
merchant on a daily basis. Prior to expiration of the future, if the
Portfolio elects to close out its position by taking an opposite position, a
final determination of variation margin is made, additional cash is required
to be paid by or released to the Portfolio, and any loss or gain is realized
for tax purposes. Although financial futures by their terms call for the
actual delivery or acquisition of the specified debt security, in most cases
the obligation is fulfilled by closing out the position. All futures
transactions are effected through a clearing house associated with the
exchange on which the contracts are traded. At present, no Portfolio intends
to enter into financial futures and options on such futures if after any such
purchase, the sum of initial margin deposits on futures and premiums paid on
futures options would exceed 5% of a Portfolio's total assets. This
limitation is not a fundamental policy.

ADDITIONAL INFORMATION ON PUTS AND CALLS. When a Portfolio writes a call,
it receives a premium and agrees to sell the callable securities to a purchaser
of a corresponding call during the call period (usually not more than 9 months)
at a fixed exercise price (which may differ from the market price of the
underlying securities) regardless of market price changes during the call
period. If the call is exercised, the Portfolio forgoes any possible profit
from an increase in market price over the exercise price. A Portfolio may, in
the case of listed options, purchase calls in "closing purchase transactions" to
terminate a call obligation. A profit or loss will be realized, depending upon
whether the net of the amount of option transaction costs and the premium
received on the call written is more or less than the price of the call
subsequently purchased. A profit may be realized if the call lapses
unexercised, because the Portfolio retains the underlying security and the
premium received. Sixty percent of any such profits are considered long-term
gains and forty percent are considered short-term gains for tax purposes. If,
due to a lack of a market, a Portfolio could not effect a closing purchase
transaction, it would have to hold the callable securities until the call lapsed
or was exercised. A Portfolio's Custodian, or a securities depository acting
for the Custodian, will act as the Portfolio's escrow agent, through the
facilities of the Options Clearing Corporation ("OCC") in connection with listed
calls, as to the securities on which the Portfolio has written calls, or as to
other acceptable escrow securities, so that no margin will be required for such
transactions. OCC will release the securities on the expiration of the calls or
upon the Portfolio's entering into a closing purchase transaction.

When a Portfolio purchases a call (other than in a closing purchase
transaction), it pays a premium and has the right to buy the underlying
investment from a seller of a corresponding call on the same investment during
the call period (or on a certain date for OTC options) at a fixed exercise
price. A Portfolio benefits only if the call is sold at a profit or if, during
the call period, the market price of the underlying investment is above the call
price plus the transaction costs and the premium paid for the call

<PAGE>

and the call is exercised. If a call is not exercised or sold (whether or
not at a profit), it will become worthless at its expiration date and the
Portfolio will lose its premium payment and the right to purchase the
underlying investment.

With OTC options, such variables as expiration date, exercise price and
premium will be agreed upon between the Portfolio and the transacting dealer,
without the intermediation of a third party such as the OCC. If a transacting
dealer fails to make delivery on the U.S. Government securities underlying an
option it has written, in accordance with the terms of that option as written, a
Portfolio could lose the premium paid for the option as well as any anticipated
benefit of the transaction. The Portfolios will engage in OTC option
transactions only with primary U.S. Government securities dealers recognized by
the Federal Reserve Bank of New York. In the event that any OTC option
transaction is not subject to a forward price at which the Portfolio has the
absolute right to repurchase the OTC option which it has sold, the value of the
OTC option purchased and of the Portfolio assets used to "cover" the OTC option
will be considered "illiquid securities" and will be subject to the 15% limit on
illiquid securities. The "formula" on which the forward price will be based may
vary among contracts with different primary dealers, but it will 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., current market value
of the underlying securities minus the option's strike price.

A put option gives the purchaser the right to sell, and the writer the
obligation to buy, the underlying investment at the exercise price during the
option period (or on a certain date for OTC options). The investment
characteristics of writing a put covered by segregated liquid assets equal to
the exercise price of the put are similar to those of writing a covered call.
The premium paid on a put written by a Portfolio represents a profit, as long as
the price of the underlying investment remains above the exercise price.
However, a Portfolio has also assumed the obligation during the option period to
buy the underlying investment from the buyer of the put at the exercise price,
even though the value of the investment may fall below the exercise price. If
the put expires unexercised, the Portfolio (as writer) realizes a gain in the
amount of the premium. If the put is exercised, the Portfolio must fulfill its
obligation to purchase the underlying investment at the exercise price, which
will usually exceed the market value of the investment at that time. In that
case, the Portfolio may incur a loss upon disposition, equal to the sum of the
sale price of the underlying investment and the premium received minus the sum
of the exercise price and any transaction costs incurred.

When writing put options, to secure its obligation to pay for the
underlying security, a Portfolio will maintain in a segregated account at its
Custodian liquid assets with a value equal to at least the exercise price of the
option. As a result, the Portfolio forgoes the opportunity of trading the
segregated assets or writing calls against those assets. As long as the
Portfolio's obligation as a put writer continues, the Portfolio may be assigned
an exercise notice by the broker-dealer through whom such option was sold,
requiring the Portfolio to purchase the underlying security at the exercise
price. A Portfolio has no control over when it may be required to purchase the
underlying security, since it may be assigned an exercise notice at any time
prior to the termination of its obligation as the writer of the put. This
obligation terminates upon the earlier of the expiration of the put, or the
consummation by the Portfolio of a closing purchase transaction by purchasing a
put of the same series as that previously sold. Once a

<PAGE>

Portfolio has been assigned an exercise notice, it is thereafter not allowed
to effect a closing purchase transaction.

A Portfolio may effect a closing purchase transaction to realize a profit
on an outstanding put option it has written or to prevent an underlying
security from being put to it. Furthermore, effecting such a closing purchase
transaction will permit the Portfolio to write another put option to the extent
that the exercise price thereof is secured by the deposited assets, or to
utilize the proceeds from the sale of such assets for other investments by
the Portfolio. The Portfolio will realize a profit or loss from a closing
purchase transaction if the cost of the transaction is less or more than the
premium received from writing the option.

When a Portfolio purchases a put, it pays a premium and has the right to
sell the underlying investment at a fixed exercise price to a seller of a
corresponding put on the same investment during the put period if it is a listed
option (or on a certain date if it is an OTC option). Buying a put on
securities or futures held by it permits a Portfolio to attempt to protect
itself during the put period against a decline in the value of the underlying
investment below the exercise price. In the event of a decline in the market,
the Portfolio could exercise, or sell the put option at a profit that would
offset some or all of its loss on the Portfolio securities. If the market price
of the underlying investment is above the exercise price and as a result, the
put is not exercised, the put will become worthless at its expiration date and
the purchasing Portfolio will lose the premium paid and the right to sell the
underlying securities; the put may, however, be sold prior to expiration
(whether or not at a profit). Purchasing a put on futures or securities not
held by it permits a Portfolio to protect its Portfolio securities against a
decline in the market to the extent that the prices of the future or securities
underlying the put move in a similar pattern to the prices of the securities in
the Portfolio's portfolio.

An option position may be closed out only on a market which provides
secondary trading for options of the same series, and there is no assurance that
a liquid secondary market will exist for any particular option. A Portfolio's
option activities may affect its turnover rate and brokerage commissions. The
exercise of calls written by a Portfolio may cause the Portfolio to sell from
its Portfolio securities to cover the call, thus increasing its turnover rate in
a manner beyond the Portfolio's control. The exercise of puts on securities or
futures will increase portfolio turnover. Although such exercise is within the
Portfolio's control, holding a put might cause a Portfolio to sell the
underlying investment for reasons which would not exist in the absence of the
put. A Portfolio will pay a brokerage commission every time it purchases or
sells a put or a call or purchases or sells a related investment in connection
with the exercise of a put or a call.

REGULATORY ASPECTS OF HEDGING INSTRUMENTS. Transactions in options by a
Portfolio are subject to limitations established (and changed from time to time)
by each of the exchanges governing the maximum number of options which may be
written or held by a single investor or group of investors acting in concert,
regardless of whether the options were written or purchased on the same or
different exchanges or are held in one or more accounts or through one or more
different exchanges or through one or more brokers. Thus, the number of options
which a Portfolio may write or hold may be affected by options written or held
by other investment companies and discretionary accounts of the Portfolio's

<PAGE>

Advisor, including other investment companies having the same or an
affiliated investment adviser. An exchange may order the liquidation of
positions found to be in violation of those limits and may impose certain
other sanctions.

Due to requirements under the Act when a Portfolio sells a future, it will
maintain in a segregated account or accounts with its custodian bank, cash or
readily marketable short-term (maturing in one year or less) debt instruments in
an amount equal to the market value of such future, less the margin deposit
applicable to it.

The Trust and each Portfolio must operate within certain restrictions as to
its positions in futures and options thereon under a rule ("CFTC Rule") adopted
by the Commodity Futures Trading Commission ("CFTC") under the Commodity
Exchange Act (the "CEA"), which excludes the Trust and each Portfolio from
registration with the CFTC as a "commodity pool operator" (as defined under the
CEA). Under those restrictions, a Portfolio may not enter into any financial
futures or options contract unless such transactions are for bona fide hedging
purposes, or for other purposes only if the aggregate initial margins and
premiums required to establish such non-hedging positions would not exceed 5% of
the liquidation value of its assets. Each Portfolio may use futures and options
thereon for bona fide hedging or for other purposes within the meaning and
intent of the applicable provisions of the CEA.

TAX ASPECTS OF HEDGING INSTRUMENTS. Each Portfolio in the Trust intends to
qualify as a "regulated investment company" under the Internal Revenue Code.
One of the tests for such qualification is that at least 90% of its gross income
must be derived from dividends, interest and gains from the sale or other
disposition of securities. Another test is that less than 30% of its gross
income must be derived from gains realized on the sale of securities held for
less than three months. In connection with the 90% test, recent amendments to
the Internal Revenue Code specify that income from options, futures and other
gains derived from investments in securities is qualifying income under the 90%
test. Due to the 30% limitation, each Portfolio will limit the extent to which
it engages in the following activities, but will not be precluded from them: (i)
selling investments, including futures, held for less than three months, whether
or not they were purchased on the exercise of a call held by the Portfolio; (ii)
writing or purchasing calls on investments held less than three months; (iii)
purchasing calls or puts which expire in less than three months; (iv) effecting
closing transactions with respect to calls or puts purchased less than three
months previously; and (v) exercising puts or calls held by a Portfolio for less
than three months.

Regulated futures contracts, options on broad-based stock indices,
options on stock index futures, certain other futures contracts and options
thereon (collectively, "Section 1256 contracts") held by a Portfolio at the
end of each taxable year may be required to be "marked to market" for federal
income tax purposes (that is, treated as having been sold at that time at
market value). Any unrealized gain or loss taxed pursuant to this rule will
be added to realized gains or losses recognized on Section 1256 contracts
sold by a Portfolio during the year, and the resulting gain or loss will be
deemed to consist of 60% long-term capital gain or loss and 40% short-term
capital gain or loss. A Portfolio may elect to exclude certain transactions
from the mark-to-market rule although doing so may have the effect of
increasing the relative proportion of short-term capital gain (taxable as
ordinary income) and/or increasing the amount of dividends that must be
distributed annually to meet income distribution requirements, currently at
98%.

<PAGE>

It should also be noted that under certain circumstances, the
acquisition of positions in hedging instruments may result in the elimination
or suspension of the holding period for tax purposes of other assets held by
a Portfolio with the result that the relative proportion of short-term
capital gains (taxable as ordinary income) could increase and the amount of
dividends qualifying for the dividends received deduction could decrease.

POSSIBLE RISK FACTORS IN HEDGING. In addition to the risks with respect to
futures and options discussed in the Prospectus and above, there is a risk in
selling futures that the prices of futures will correlate imperfectly with the
behavior of the cash (i.e., market value) prices of a Portfolio's securities.
The ordinary spreads between prices in the cash and futures markets are subject
to distortions due to differences in the natures of those markets. First, all
participants in the futures market are subject to margin deposit and maintenance
requirements. Rather than meeting additional margin deposit requirements,
investors may close out futures contracts through offsetting transactions which
could distort the normal relationship between the cash and futures markets.
Second, the liquidity of the futures market depends on participants entering
into offsetting transactions rather than making or taking delivery. To the
extent participants decide to make or take delivery, liquidity in the futures
market could be reduced, thus producing distortion. Third, from the point of
view of speculators, the deposit requirements in the futures market are less
onerous than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may cause temporary price
distortions.

When a Portfolio uses appropriate Hedging Instruments to establish a
position in the market as a temporary substitute for the purchase of individual
securities (long hedging) by buying futures and/or calls on such futures or on a
particular security, it is possible that the market may decline. If the
Portfolio then concludes not to invest in such securities at that time because
of concerns as to possible further market decline or for other reasons, it will
realize a loss on the Hedging Instruments that is not offset by a reduction in
the price of the securities purchased.

TYPE OF SECURITIES IN WHICH THE INTERNATIONAL EQUITY PORTFOLIO MAY INVEST.
As discussed in the Prospectus, the International Equity Portfolio seeks to
achieve its investment objectives through investment primarily in equity
securities. It is expected that the Portfolio will invest principally in
American Depositary Receipts ("ADRs"), Global Depositary Receipts ("GDRs") and
European Depositary Receipts ("EDRs") although it also may invest directly in
equity securities. Generally, ADRs and GDRs in registered form are U.S. dollar
denominated securities designed for use in the U.S. securities markets, which
represent and may be converted into the underlying foreign security. EDRs are
typically issued in bearer form and are designed for use in the European
securities markets. Issuers of the stock of ADRs not sponsored by such
underlying issuers are not obligated to disclose material information in the
United States and, therefore, there may not be a correlation between such
information and the market value of such ADRs. The Portfolio also may purchase
shares of investment companies or trusts which invest principally in securities
in which the Portfolio is authorized to invest. The return on the Portfolio's
investments in investment companies will be reduced by the operating expenses,
including investment advisory and administrative fees, of such companies. The
Portfolio's investment in an investment company may require the payment of a
premium above the net asset value of the investment company's shares, and the
market price of the investment company thereafter may decline without any change
in the

9
<PAGE>

value of the investment company's assets. The Portfolio will not invest in
any investment company or trust unless it is believed that the potential
benefits of such investment are sufficient to warrant the payment of any such
premium. Under the Act, the Portfolio may not invest more than 10% of its
assets in investment companies or more than 5% of its total assets in the
securities of any one investment company, nor may it own more than 3% of the
outstanding voting securities of any such company. To the extent the
Portfolio invests in securities in bearer form it may be more difficult to
recover securities in the event such securities are lost or stolen.

If the Portfolio invests in an entity which is classified as a "passive
foreign investment company" ("PFIC") for U.S. tax purposes, the application
of certain technical tax provisions applying to such companies could result
in the imposition of federal income tax with respect to such investments at
the Portfolio level which could not be eliminated by distributions to
shareholders. The U.S. Treasury has issued proposed regulations which
establish a mark-to-market regime that allows a regulated investment company
("RIC") to avoid most, if not all, of the difficulties posed by the PFIC
rules. In any event, it is not anticipated that any taxes on the Portfolio
with respect to investments in PFIC's would be significant.

PRIVATE PLACEMENTS. The Portfolios may invest in securities which are
subject to restriction on resale because they have not been registered under the
Securities Act of 1933, or which are otherwise not readily marketable. These
securities are generally referred to as private placements or restricted
securities. Limitations on the resale of such securities may have an adverse
effect on their marketability, and may prevent the Portfolios from disposing of
them promptly at reasonable prices. A Portfolio may have to bear the expense of
registering such securities for resale and risk the substantive delays in
effecting such registration. However, as described in the Prospectus, the
Portfolios may avail themselves of recently adopted regulatory changes to the
Securities Act of 1933 ("Rule 144A") which permit the Portfolios to purchase
securities which have been privately placed and resell such securities to
certain qualified institutional buyers without restriction. Since it is not
possible to predict with assurance exactly how this market for restricted
securities sold and offered under Rule 144A will develop, the Board of Trustees
will carefully monitor the Portfolios' investments in these securities, focusing
on such important factors, among others, as valuation, liquidity and
availability of information. This investment practice could have the effect of
increasing the level of illiquidity in the Portfolios to the extent that
qualified institutional buyers become, for a time, uninterested in purchasing
these restricted securities.

Securities of foreign issuers often have not been registered in the U.S.
Accordingly, if a Portfolio wishes to sell unregistered foreign securities in
the U.S. it will avail itself of Rule 144A.

FOREIGN CURRENCY TRANSACTIONS. When a Portfolio agrees to purchase or sell
a security in a foreign market it will generally be obligated to pay or entitled
to receive a specified amount of foreign currency and will then generally
convert dollars to that currency in the case of a purchase or that currency to
dollars in the case of a sale. The Portfolios will conduct their foreign
currency exchange transactions either on a spot basis (i.e., cash) at the spot
rate prevailing in the foreign currency exchange market, or through entering
into forward foreign currency contracts ("forward contracts") to purchase or
sell foreign currencies. A Portfolio may enter into forward contracts in order
to lock in the U.S. dollar amount it must pay or expects to receive for a
security it has agreed to buy or sell. A Portfolio may also enter into

<PAGE>

forward currency contracts with respect to the Portfolio's portfolio
positions when it believes that a particular currency may change unfavorably
compared to the U.S. dollar. A forward 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 agreed upon by the parties, at a
price set at the time of the contract. These 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 Portfolio's custodian bank will place cash, U.S. Government securities or
debt securities in a separate account of the Portfolio in an amount equal to the
value of the Portfolio's total assets committed to the consummation of any such
contract in such account and if the value of the securities placed in the
separate account declines, additional cash or securities will be placed in the
account on a daily basis so that the value of the account will equal the amount
of the Portfolio's commitments with respect to such forward contracts. If,
rather than cash, portfolio securities are used to secure such a forward
contract, on the settlement of the forward contract for delivery by the
Portfolio of a foreign currency, the Portfolio may either sell the portfolio
security and make delivery of the foreign currency, or it may retain the
security and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract obligating it to purchase, on
the same settlement date, the same amount of foreign currency.

The Portfolios may effect currency hedging transactions in foreign currency
futures contracts, exchange-listed and over-the-counter call and put options on
foreign currency futures contracts and on foreign currencies. The use of
forward futures or options contracts will not eliminate fluctuations in the
underlying prices of the securities which the Portfolios own or intend to
purchase or sell. They simply establish a rate of exchange for a future point
in time. Additionally, while these techniques tend to minimize the risk of loss
due to a decline in the value of the hedged currency, their use tends to limit
any potential gain which might result from the increase in value of such
currency. In addition, such transactions involve costs and may result in
losses.

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

Under Internal Revenue Code Section 988, special rules are provided for
certain transactions in a currency other than the taxpayer's functional currency
(i.e., unless certain special rules apply, currencies other than the U.S.
dollar). In general, foreign currency gains or losses from forward contracts,
futures contracts that are not "regulated futures contracts", and from unlisted
options will be treated as ordinary income or loss under Code Section 988.
Also, certain foreign exchange gains or losses derived with respect to
fixed-income securities are also subject to Section 988 treatment. In general,
therefore, Code

<PAGE>
Section 988 gains or losses will increase or decrease the amount of the
Portfolio's investment company taxable income available to be distributed to
shareholders as ordinary income, rather than increasing or decreasing the
amount of the Portfolio's net capital gain. Additionally, if Code Section
988 losses exceed other investment company taxable income during a taxable year,
a Portfolio would not be able to make any ordinary income distributions.

FOREIGN CUSTODY. Rules adopted under the Act permit each Portfolio to
maintain its securities and cash in the custody of certain eligible banks and
securities depositories. The Portfolios' portfolios of securities of issuers
located outside of the U.S. will be held by their sub-custodians who will be
approved by the Trustees in accordance with such Rules. Such determination will
be made pursuant to such Rules following a consideration of a number of factors,
including, but not limited to, the reliability and financial stability of the
institution; the ability of the institution to perform custodial services for
the Trust; the reputation of the institution in its national market; the
political and economic stability of the country in which the institution is
located; and the risks of potential nationalization or expropriation of the
Portfolio's assets. However, no assurances can be given that the Trustees'
appraisal of the risks in connection with foreign custodial arrangements will
always be correct or that expropriation, nationalization, freezes (including
currency blockage), or confiscations of assets that would affect assets of the
Portfolios will not occur, and shareholders bear the risk of losses arising from
those or other similar events.

ADDITIONAL RISKS. Securities in which the Portfolios may invest are
subject to the provisions of bankruptcy, insolvency and other laws affecting the
rights and remedies of creditors and shareholders, such as the federal
Bankruptcy Code, and laws, if any, which may be enacted by Congress or the state
legislatures extending the time for payment of principal or interest, or both or
imposing other constraints upon enforcement of such obligations.

RATINGS OF CORPORATE AND MUNICIPAL DEBT OBLIGATIONS. Moody's Investors
Service, Inc. ("Moody's"), Standard & Poor's Corporation ("S&P") and Fitch
Municipal Division ("Fitch") are private services that provide ratings of the
credit quality of debt obligations, including issues of corporate and municipal
securities. A description of the range of ratings assigned to corporate and
municipal securities by Moody's, S&P and Fitch is included in Appendix A to this
Statement of Additional Information. The Investment Quality Bond Portfolio and
the Municipal Bond Portfolio may use these ratings in determining whether to
purchase, sell or hold a security. These ratings represent Moody's, S&P's and
Fitch's opinions as to the quality of the securities that they undertake to
rate. It should be emphasized, however, that ratings are general and are not
absolute standards of quality. Consequently, securities with the same maturity,
interest rate and rating may have different market prices. Subsequent to its
purchase by the Investment Quality Bond Portfolio or the Municipal Bond
Portfolio, an issue of securities may cease to be rated or its rating may be
reduced below the minimum rating required for purchase by the Portfolio. The
advisers to the Municipal Bond Portfolio and the Investment Quality Bond
Portfolio will consider such an event in determining whether the Portfolio
should continue to hold the obligation but will dispose of such securities in
order to limit the holdings of debt securities rated below investment grade to
less than 5% of the assets of the respective Portfolio.

<PAGE>

Opinions relating to the validity of municipal securities and to the
exemption of interest thereon from federal income tax (and also, when
available, from the federal alternative minimum tax) are rendered by bond
counsel to the issuing authorities at the time of issuance. Neither the
Municipal Bond Portfolio nor the Portfolio's Advisor will review the
proceedings relating to the issuance of municipal securities or the basis
for such opinions. An issuer's obligations under its municipal securities
are subject to the provisions of bankruptcy, insolvency and other
laws affecting the rights and remedies of creditors (such as the federal
bankruptcy laws) and federal, state and local laws that may be enacted to extend
the time for payment of principal or interest, or both, or to impose other
constraints upon enforcement of such obligations. There also is the possibility
that, as a result of litigation or other conditions, the power or ability of
issuers to meet their obligations for the payment of principal of and interest
on their municipal securities may be materially adversely affected.

MUNICIPAL NOTES. For liquidity purposes, pending investment in municipal
bonds, or on a temporary or defensive basis due to market conditions, the
Municipal Bond Portfolio may invest in tax-exempt short-term debt obligations
(maturing in one year or less). These obligations, known as "municipal notes,"
include tax, revenue and bond anticipation notes, construction loan notes and
tax-exempt commercial paper which are issued to obtain funds for various public
purposes; the interest from these Notes is also exempt from federal income
taxes. The Municipal Bond Portfolio will limit its investments in municipal
notes to those which are rated, at the time of purchase, within the two highest
grades assigned by Moody's or the two highest grades assigned by S&P or Fitch,
or if unrated, which are of comparable quality in the opinion of the Advisor.

MUNICIPAL BONDS. Municipal bonds include debt obligations of a state, a
territory, or a possession of the United States, or any political subdivision
thereof (e.g., counties, cities, towns, villages, districts, authorities) or the
District of Columbia issued to obtain funds for various purposes, including the
construction of a wide range of public facilities such as airports, bridges,
highways, housing, hospitals, mass transportation, schools, streets and water
and sewer works. Other public purposes for which municipal bonds may be issued
include the refunding of outstanding obligations, obtaining funds for general
operating expenses and the obtaining of funds to loan to public or private
institutions for the construction of facilities such as education, hospital and
housing facilities. In addition, certain types of private activity bonds may be
issued by or on behalf of public authorities to obtain funds to provide
privately-operated housing facilities, sports facilities, convention or trade
show facilities, airport, mass transit, port or parking facilities, air or water
pollution control facilities and certain local facilities for water supply, gas,
electricity or sewage or solid waste disposal. Such obligations are included
within the term municipal bonds if the interest paid thereon is at the time of
issuance, in the opinion of the issuer's bond counsel, exempt from federal
income tax. The current federal tax laws, however, substantially limit the
amount of such obligations that can be issued in each state.

The two principal classifications of municipal bonds are "general
obligation" and limited obligation or "revenue" bonds. General obligation bonds
are secured by the issuer's pledge of its faith, credit and taxing power for the
payment of principal and interest, whereas revenue bonds are payable only from
the revenues derived from a particular facility or class of facilities or, in
some cases, from the proceeds of a special excise tax or other specific revenue
source. Private activity bonds that are municipal bonds are in

<PAGE>

most cases revenue bonds and do not generally constitute the pledge of the
credit of the issuer of such bonds. The credit quality of private activity
revenue bonds is usually directly related to the credit standing of the
industrial user involved. There are, in addition, a variety of hybrid and
special types of municipal obligations as well as numerous differences in the
collateral security of municipal bonds, both within and between the two
principal classifications described above.

INVESTMENT RESTRICTIONS

The Trust's significant investment restrictions applicable to each
Portfolio are described in the Prospectus. The following are also fundamental
policies and, together with the restrictions and other fundamental policies
described in the Prospectus, cannot be changed without the vote of a majority of
the outstanding voting securities of that Portfolio, as defined in the Act.
Such a majority is defined as the lesser of (a) 67% or more of the shares of the
Portfolio present at a meeting of shareholders of the Trust, if the holders of
more than 50% of the outstanding shares of the Portfolio are present or
represented by proxy or (b) more than 50% of the outstanding shares of the
Portfolio. For purposes of the following restrictions and those contained in
the Prospectus: (i) all percentage limitations apply immediately after a
purchase or initial investment; and (ii) any subsequent change in any applicable
percentage resulting from market fluctuations or other changes in the amount of
total assets does not require elimination of any security from a Portfolio.

Under these additional restrictions, each Portfolio cannot: (a) Invest
in physical commodities or physical commodity contracts or speculate in
financial commodity contracts, but all Portfolios are authorized to purchase
and sell financial futures contracts and options on such futures contracts
exclusively for hedging and other non-speculative purposes to the extent
specified in the Prospectus; (b) Invest in real estate or real estate limited
partnerships (direct participation programs); however, each Portfolio may
purchase securities of issuers which engage in real estate operations and
securities which are secured by real estate or interests therein; (c)
Purchase securities on margin (except for such short-term loans as are
necessary for the clearance of purchases of Portfolio securities) or make
short sales of securities except "against the box" (collateral arrangements
in connection with transactions in futures and options are not deemed to be
margin transactions); (d) Underwrite securities of other companies except in
so far as the Portfolio may be deemed to be an underwriter under the
Securities Act of 1933 in disposing of a security; (e) Invest more than 10%
of its assets in securities of other investment companies or more than 5% of
its assets in the securities of one investment company or more than 3% of the
outstanding voting securities of such company, except in connection with a
merger, consolidation, reorganization or acquisition of assets; (f) Invest in
interests in oil, gas or other mineral exploration or development programs or
leases; (g) Purchase warrants if as a result the Portfolio would then have
either more than 5% of its total assets (determined at the time of
investment) invested in warrants or more than 2% of its total assets invested
in warrants not listed on the New York or American Stock Exchange; (h) Invest
in securities of any issuer if any officer or trustee of the Trust or any
officer or director of any of the Advisers 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; (i) Pledge its assets or assign or
otherwise encumber its assets in excess of 33 1/3% of its net assets (taken
at market value at the time of pledging) and then only to secure borrowings

<PAGE>

effected within the limitations set forth in the Prospectus; (j) Invest for
the purpose of exercising control or management of another company; (k) Issue
senior securities as defined in the Act except insofar as the Portfolio may
be deemed to have issued a senior security by reason of: (a) entering into
any repurchase agreement; (b) borrowing money in accordance with restrictions
described above; or (c) lending Portfolio securities; and (l) make loans to
any person or individual except that Portfolio securities may be loaned by
all Portfolios within the limitations set forth in the Prospectus.

In addition each Portfolio may not with respect to 75% of its assets,
invest more than 5% of the value of its total assets in the securities of any
one issuer.

PRINCIPAL HOLDERS OF
SECURITIES AND CONTROL PERSONS OF THE PORTFOLIOS

To the knowledge of the Trust, the only person who as of
December 31, 1996, had beneficial ownership of five percent or more of the
shares of any Portfolio is the American Medical Association Pension Trust,
515 North State Street, Chicago, Illinois 60610-4320 which held 42.23% of
the Small Capitalization Portfolio.

TRUSTEES AND OFFICERS

The trustees and officers of the Trust, and their principal occupations
during the past five years, are set forth below. Trustees who are
"interested persons," as defined in the Act, are denoted by an asterisk. As
of December 31, 1996, the trustees and officers of the Trust as a group owned
less than 1% of the outstanding shares of the Large Capitalization Value
Portfolio, Large Capitalization Growth Portfolio, Small Capitalization
Portfolio, International Equity Portfolio, Investment Quality Bond and
Municipal Bond Portfolios and 2.8% of the outstanding shares of the U.S.
Government Money Market Portfolio.

BRUCE E. VENTIMIGLIA, PRESIDENT AND CHAIRMAN OF THE BOARD OF TRUSTEES*
33 Maiden Lane
New York, NY 10038

Chairman, President and Chief Executive Officer of Saratoga Capital Management;
Senior Vice President of Oppenheimer Capital and OpCap Advisors since 1992;
prior thereto, Senior Vice President of Prudential Securities, Inc.

PATRICK H. MCCOLLOUGH, TRUSTEE
One Michigan Avenue Building
120 North Washington Square
Lansing, Michigan 48933

<PAGE>

Partner with the law firm of Cawthorne, McCollough & Cavanagh since 1987;
Michigan State Senator from 1971 to 1978 and 1982 to 1986.

UDO W. KOOPMANN, TRUSTEE
175 East Broadway
Roslyn, NY 11576

Chief Financial and Administrative Executive of the North American subsidiary
of Klockner and Company AG, a multi-national company; member of
National Committee of Steel Service Centre Institute.

FLOYD E. SEAL, TRUSTEE
1650 Cox Road
Roswell, GA 30075

Chief Executive Officer and 50% owner of TARAHILL, INC., d.b.a. Pet Goods
Manufacturing & Imports, Alpharetta, GA; Partner of S&W Management, Gwinnet, GA.

SCOTT KANE, VICE PRESIDENT

Managing Director and Chief Financial Officer of Saratoga Capital Management;
prior thereto, he was Vice President of Prudential Securities, Inc.

STEPHEN VENTIMIGLIA, VICE PRESIDENT

Vice Chairman and Chief Investment Officer of Saratoga Capital Management; prior
thereto, he was First Vice President and Senior Portfolio Manager of Prudential
Securities, Inc.

REMUNERATION OF OFFICERS AND TRUSTEES. All officers of the Trust are
officers of Saratoga Capital Management and receive no salary or fee from the
Trust. Until a Portfolio has net assets of $25 million, no trustees fees will
be paid by that Portfolio. When a Portfolio has net assets of at least $25
million but not more than $50 million, the Trustees, other than Mr.
Ventimiglia, will be paid an annual fee of $1,750 plus $250 for each
trustees' meeting attended and $100 for each committee meeting attended.
When a Portfolio has net assets in excess of $50 million, the Trustees, other
than Mr. Ventimiglia, will be paid an annual fee of $3,500 plus $500 for each
trustees' meeting attended and $100 for each committee meeting attended.
During the 1996 fiscal year, certain trustees, who no longer serve as such,
were paid compensation as listed in the table below. These trustees also
received compensation from other funds in the fund complex of OpCap Advisors.
The following table sets forth the aggregate compensation paid by the Trust
to each of the Trustees for the year ended August 31, 1996 and the aggregate
compensation paid to each of the Trustees by all of the funds in the Fund
Complex of OpCap Advisors during each such fund's 1996 fiscal year.

<PAGE>

<TABLE>
<CAPTION>
Name of Trustee of the Aggregate Pension or Retirement Estimated Annual Total Compensation
Trust Compensation from Benefits Accrued as Benefits upon from the Trust and the
the Trust Part of Trust Expenses Retirement Fund Complex of OpCap
Advisors
<S> <C> <C> <C> <C>
Lacy Herrmann 788 0 0 $74,650
Joseph La Motta 0 0 0 0
George Loft 788 0 0 81,350
Patrick McCollough 788 0 0 0
Bruce Ventimiglia 0 0 0 0
</TABLE>

Mr. Herrmann served as director with respect to 12 investment
companies in OpCap's Fund Complex and Mr. Loft served as director with
respect to 13 investment companies in OpCap's Fund Complex. For the purpose
of this paragraph, a portfolio of an investment company organized in series
form is considered to be an investment company.

MANAGEMENT AND OTHER SERVICES

The manager of the Trust is Saratoga Capital Management ("Saratoga" or
the "Manager"), 33 Maiden Lane, New York, New York 10038. See
"Management of the Trust" in the Prospectus.

Pursuant to the Management Agreement with the Trust (the "Management
Agreement"), Saratoga, subject to the supervision of the Trustees and in
conformity with the stated policies of the Trust, manages both the operations of
the Trust and reviews the performance of the Advisors, and makes recommendations
to the Trustees with respect to the retention and renewal of contracts.

The following table sets forth the annual management fee rates payable by
each Portfolio to Saratoga pursuant to the Management Agreement, expressed as
a percentage of the Portfolio's average daily net assets:

Total Amount
Management Retained by
Portfolio Fee Manager
- --------- --- -------
Large Capitalization Growth Portfolio 0.65% 0.35%

Large Capitalization Value Portfolio 0.65% 0.35%

Small Capitalization Portfolio 0.65% 0.35%

International Equity Portfolio 0.75% 0.35%

Investment Quality Bond Portfolio 0.55% 0.35%

Municipal Bond Portfolio 0.55% 0.35%

U.S. Government Money Market Portfolio 0.475% 0.35%

The fee is computed daily and payable monthly. Currently, the Manager is
voluntarily limiting expenses

<PAGE>

of the Portfolios as follows: 1.125% with respect to U.S. Government Money
Market Portfolio, 1.20% with respect to Investment Quality Bond Portfolio,
1.20% with respect to Municipal Bond Portfolio, 1.30% with respect to Large
Capitalization Value Portfolio, 1.30% with respect to Large Capitalization
Growth Portfolio, 1.30% with respect to Small Capitalization Portfolio and
1.40% with respect to International Equity Portfolio. During the period
September 2, 1994 (commencement of operations) to August 31,1995, the
Manager voluntarily waived its management fees and assumed $109,897,
$110,359, $104,700, $126,245, $130,628, $164,025 and $114,661 in other operating
expenses for the U.S. Government Money Market, Investment Quality Bond,
Municipal Bond, Large Capitalization Value, Large Capitalization Growth, Small
Capitalization and International Equity Portfolios, respectively. For the year
ended August 31, 1996, the Manager voluntarily waived all or a portion of its
management fees and assumed $26,822, $28,600, $108,803, $30,550 and $75,530 in
other operating expenses for U.S. Government Money Market, Investment Quality
Bond, Municipal Bond, Large Capitalization Value and International Equity,
respectively.

Expenses not expressly assumed by Saratoga under the Management
Agreement or by Unified Advisers, Inc. under the Administration Agreement are
paid by the Trust. The fees payable to each Advisor pursuant to the
Investment Advisory Agreements between each Advisor and Saratoga with respect
to the Portfolios are paid for by Saratoga. Under the terms of the
Management Agreement, the Trust is responsible for the payment of the
following expenses: (a) the fees payable to the Manager, (b) the fees and
expenses of Trustees who are not affiliated persons of the Manager or the
Trust's Advisors, (c) the fees and certain expenses of the Custodian and
Transfer and Dividend Disbursing Agent, including the cost of maintaining
certain required records of the Trust and of pricing the Trust's shares, (d)
the charges and expenses of legal counsel and independent accountants for the
Trust, (e) brokerage commissions and any issue or transfer taxes chargeable
to the Trust in connection with its securities transactions, (f) all taxes
and corporate fees payable by the Trust to governmental agencies, (g) the
fees of any trade association of which the Trust may be a member, (h) the
cost of share certificates representing shares of the Trust, (i) the cost of
fidelity and liability insurance, (j) the fees and expenses involved in
registering and maintaining registration of the Trust and of its shares with
the SEC, qualifying its shares under state securities laws, including the
preparation and printing of the Trust's registration statements and
prospectuses for such purposes, (k) all expenses of shareholders and Trustees
meetings (including travel expenses of trustees and officers of the Trust who
are directors, officers or employees of the Manager or Advisors) and of
preparing, printing and mailing reports, proxy statements and prospectuses to
shareholders in the amount necessary for distribution to the shareholders and
(j) litigation and indemnification expenses and other extraordinary expenses
not incurred in the ordinary course of the Trust's business.

The Management Agreement provides that Saratoga will not be liable for
any error of judgment or for any loss suffered by the Trust in connection
with the matters to which the Management Agreement relates, except a loss
resulting from willful misfeasance, bad faith, gross negligence or reckless
disregard of duty. The Management Agreement will continue in effect for a
period of more than two years from the date of execution only so long as such
continuance is specifically approved at least annually in conformity with the
Act. The Management Agreement was approved by the Trustees of the Trust
including all of the Trustees who are not parties to the contract or
interested persons of any such party as defined in the Act

<PAGE>

on February 3, 1997 and by the Shareholders of the Trust on April
11, 1997.

ADMINISTRATION AGREEMENT. Unified Advisers, Inc. acts as the Trust's
Administrator pursuant to an Administration Agreement which was approved by
the Trust's trustees on February 3, 1997. The Administration Agreement will
remain in effect for one year from the date of its effectiveness, April 14,
1997, and may be continued annually thereafter if approved in accordance with
the requirements of the Act. Prior to the Administration Agreement currently
in effect, OpCap Advisors served as the Trust's Adminstrator. For the period
September 2, 1994 (commencement of operations) to August 31, 1995 each
Portfolio accrued $42,000 in administrative fees. For the year ended August
31, 1996, each portfolio accrued $42,000 in administrative fees.

INVESTMENT ADVISORY SERVICES

As noted in the Prospectus, subject to the supervision and direction of the
Manager and, ultimately, the Trustees, each Advisor manages the securities held
by the Portfolio it serves in accordance with the Portfolio's stated investment
objectives and policies, makes investment decisions for the Portfolio and places
orders to purchase and sell securities on behalf of the Portfolio.

The Advisory Agreements were approved by the Trustees including
a majority of the Trustees who are not parties to such contract or interested
persons of any such parties, on February 3, 1997 and were approved by the
Shareholders of the Trust on April 11, 1997.

Each Advisory Agreement provides that it will terminate in the event of
its assignment (as defined in the Act). Each Advisory Agreement may be
terminated by the Trust, Saratoga, or by vote of a majority of the
outstanding voting securities of the Trust, upon written notice to the
Advisor, or by the Advisor upon at least 100 days' written notice. Each
Advisory Agreement provides that it will continue in effect for a period of
more than two years from its execution (April 14, 1997) only so long as such
continuance is specifically approved at least annually in accordance with the
requirements of the Act.

ADVISORS. The Advisors have agreed to the following fees, which are
generally lower than the fees they charge to institutional accounts for which
they serve as investment adviser.

PORTION
PAID BY
TOTAL MANAGER
MANAGEMENT TO THE
PORTFOLIO FEE ADVISOR
- --------- --- -------
Large Capitalization Growth Portfolio 0.65% 0.30%

Large Capitalization Value Portfolio 0.65% 0.30%

Small Capitalization Portfolio 0.65% 0.30%

International Equity Portfolio 0.75% 0.40%

<PAGE>

Investment Quality Bond Portfolio 0.55% 0.20%

Municipal Bond Portfolio 0.55% 0.20%

U.S. Government Money Market Portfolio 0.475% 0.125%

For the period September 2, 1994 (commencement of operations) to June 30,
1995, the Advisors waived their fees. For the period July 1, 1995 to August 31,
1995, the Manager paid advisory fees to the Advisors but the Manager waived its
fees from the Portfolios. For the year ended August 31, 1996, the Manager
waived all of its management fees for each Portfolio except Large Capitalization
Growth and Small Capitalization for which the Manager waived $75,686 of $149,335
in fees and $106,549 of $118,415, respectively. For the year ended August 31,
1996, the Manager paid advisory fees to the Advisors as follows: $18,350,
$21,723, $6,135, $34,934, $68,924, $54,653 and $20,077 for U.S. Government Money
Market, Investment Quality Bond, Municipal Bond, Large Capitalization Value,
Large Capitalization Growth, Small Capitalization and International Equity,
respectively. For the period September 2, 1994 (commencement of operations)
to August 31, 1995 and for the year ended August 31, 1996, Axe-Houghton served
as Advisor to the Small Capitalization Portfolio.

Subject to the supervision and direction of the Manager and, ultimately,
the Trustees, each Adviser's responsibilities are limited to managing the
securities held by the Portfolio it serves in accordance with the Portfolio's
stated investment objective and policies, making investment decisions for the
Portfolio and placing orders to purchase and sell securities on behalf of the
Portfolio.

PORTFOLIO TRANSACTIONS. Each Advisor is responsible for decisions to
buy and sell securities, futures contracts and options thereon, the selection
of brokers, dealers and futures commission merchants to effect the
transactions and the negotiation of brokerage commissions, if any. As most,
if not all, purchases made by the Income Portfolios are principal
transactions at net prices, those Portfolios pay no brokerage commissions;
however, prices of debt obligations reflect mark-ups and mark-downs which
constitute compensation to the executing dealer. Each Portfolio will pay
brokerage commissions on transactions in listed options and equity
securities. Prices of portfolio securities purchased from underwriters of
new issues include a commission or concession paid by the issuer to the
underwriter, and prices of debt securities purchased from dealers include a
spread between the bid and asked prices. Each Advisor seeks to obtain prompt
execution of orders at the most favorable net price. Transactions may be
directed to dealers during the course of an underwriting in return for their
brokerage and research services, which are intangible and on which no dollar
value can be placed. There is no formula for such allocation. The research
information may or may not be useful to one or more of the Portfolios and/or
other accounts of the Advisors; information received in connection with
directed orders of other accounts managed by the Advisors or its affiliates
may or may not be useful to one or more of the Portfolios. Such information
may be in written or oral form and includes information on particular
companies and industries as well as market, economic or institutional
activity areas. It serves to broaden the scope and supplement the research
activities of the Advisors, to make available additional views for
consideration and comparison, and to enable the Advisors to obtain market
information for the valuation of securities held in a Portfolio's assets.

<PAGE>

Sales of shares of each Portfolio, subject to applicable rules covering the
Distributor's activities in this area, will also be considered as a factor in
the direction of portfolio transactions to dealers, but only in conformity with
the price, execution and other considerations and practices discussed above. A
Portfolio will not purchase any securities from or sell any securities to a
broker that is affiliated with any of the Advisors (an "affiliated broker") that
is acting as principal for its own account. Each of the Advisors currently
serves as investment manager to a number of clients, including other investment
companies, and may in the future act as investment manager or advisor to others.
It is the practice of each Advisor to cause purchase or sale transactions to be
allocated among the Portfolios and others whose assets it manages in such manner
as it deems equitable. In making such allocations among the Portfolios and
other client accounts, the main factors considered are the respective investment
objectives, the relative size of Portfolio holdings of the same or comparable
securities, the availability of cash for investment, the size of investment
commitments generally held and the opinions of the persons responsible for
managing the Portfolios of each Portfolio and other client accounts. When
orders to purchase or sell the same security on identical terms are placed by
more than one of the Portfolios and/or other advisory accounts managed by an
Advisor or its affiliates, the transactions are generally executed as received,
although a Portfolio or advisory account that does not direct trades to a
specific broker ("free trades") usually will have its order executed first.
Purchases are combined where possible for the purpose of negotiating brokerage
commissions, which in some cases might have a detrimental effect on the price or
volume of the security in a particular transaction as far as the Portfolio is
concerned. Orders placed by accounts that direct trades to a specific broker
will generally be executed after the free trades. All orders placed on behalf
of the Portfolio are considered free trades. However, having an order placed
first in the market does not necessarily guarantee the most favorable price.

Subject to the above considerations, an affiliated broker may act as a
securities broker or futures commission merchant for the Trust. In order for an
affiliate of an Advisor or Saratoga to effect any Portfolio transactions for the
Trust, the commissions, fees or other remuneration received by an affiliated
broker must be reasonable and fair compared to the commissions, fees or other
remuneration paid to other brokers in connection with comparable transactions
involving similar securities being purchased or sold during a comparable period
of time. This standard would allow an affiliated broker to receive no more than
the remuneration which would be expected to be received by an unaffiliated
broker in a commensurate arm's-length transaction. Furthermore, the Trustees,
including a majority of the Trustees who are not "interested" persons, have
adopted procedures which are reasonably designed to provide that any
commissions, fees or other remuneration paid to an affiliated broker are
consistent with the foregoing standard.

The following tables present information as to the allocation of
brokerage commissions by the Portfolios of the Trust during the period
September 2, 1994 (commencement of operations) to August 31, 1995 and for the
year ended August 31, 1996 to Hoenig & Co, Inc. ("Hoenig"), which is an
affiliated person of Axe-Houghton Associates, Inc., and Oppenheimer & Co.,
Inc. ("Opco"), which is an affiliated person of OpCap Advisors.

<PAGE>

<TABLE>
<CAPTION>
Total Amount of Transactions where Brokerage
Brokerage Commissions Paid to Hoenig Commissions Paid to Hoenig
Total
Name of Brokerage Dollar % Dollar Amounts %
Portfolio Period Commissions Amounts
Paid
<S> <C> <C> <C> <C> <C> <C>
Small
Capitalization 9/2/94- $14,454 $5,860 40.5% $3,086,778 41.4%
Portfolio 8/31/95

Year 17,848 40 0.2% 31,240 0.39%
Ended
8/31/96

Investment 9/2/94 -
Quality Bond 8/31/95 567 188 33.2% 402,109 53.5%
Portfolio

Year 965 500 51.8% 1,486,691 54.07%
Ended
8/31/96

</TABLE>

* Most transactions for the Investment Quality Bond Portfolio are on a
principal basis; however transactions with Hoenig & Co, Inc. are on an
agency basis since principal transactions between the Portfolio and an
affiliated broker are restricted by the Investment Company Act of 1940.

<TABLE>
<CAPTION>
Total
Amount of Transactions where Brokerage
Brokerage Commissions Paid to Opco Commissions Paid to
Opco

Total
Name of Brokerage
Portfolio Period Commissions Dollar % Dollar Amount %
Paid Amount
<S> <C> <C> <C> <C> <C> <C>
Large
Capitalization 9/2/94 - $8,087 $5,953 73.6% $3,923,454 77.3%
Value Portfolio 8/31/95

Year Ended 15,975 6,138 38.4% 5,356,688 42.5%
8/31/96

Small 9/2/94- 14,454 578 4.0% 169,191 2.3%
Capitalization 8/31/85
Portfolio

Year Ended 17,848 180 1.0% 104,884 1.3%
8/31/96
</TABLE>

22
<PAGE>

DETERMINATION OF NET ASSET VALUE

The net asset value per share of each Portfolio is determined each day the
New York Stock Exchange (the "Exchange") is open, as of the close of the regular
trading session of the Exchange that day (currently 4:00 p.m. Eastern Time), by
dividing the value of a Portfolio's net assets by the number of its shares
outstanding.

The Exchange's most recent annual announcement (which is subject to change)
states that it will close on New Year's Day, President's Day, Good Friday,
Memorial Day, July 4, Labor Day, Thanksgiving and Christmas Day. It may also
close on other days.

Securities listed on a national securities exchange or designated national
market system securities are valued at the last reported sale price on that day,
or, if there has been no sale on such day or on the previous day on which the
Exchange was open (if a week has not elapsed between such days), then the value
of such security is taken to be the reported bid price at the time as of which
the value is being ascertained. Securities actively traded in the
over-the-counter market but not designated as national market system securities
are valued at the last quoted bid price. Any securities or other assets for
which current market quotations are not readily available are valued at their
fair value as determined in good faith under procedures established by and under
the general supervision and responsibility of the Trust's Board of Trustees.
The value of a foreign security is determined in its national currency and that
value is then converted into its US dollar equivalent at the foreign exchange
rate in effect on the date of valuation.

The Trust's Board of Trustees has approved the use of nationally recognized
bond pricing services for the valuation of each Portfolio's debt securities.
The services selected create and maintain price matrices of U.S. Government and
other securities from which individual holdings are valued shortly after the
close of business each trading day. Debt securities not covered by the pricing
services are valued upon bid prices obtained from dealers who maintain an active
market therein or, if no readily available market quotations are available from
dealers, such securities (including restricted securities and OTC options) are
valued at fair value under the Board's procedures. Short-term (having a
maturity of 60 days or less) debt securities are valued at amortized cost.

Puts and calls are valued at the last sales price therefor, or, if there
are no transactions, at the last reported sales price that is within the spread
between the closing bid and asked prices on the valuation date. Futures are
valued based on their daily settlement value. When a Portfolio writes a call,
an amount equal to the premium received is included in the Portfolio's Statement
of Assets and Liabilities as an asset, and an equivalent deferred credit is
included in the liability section. The deferred credit is adjusted
("marked-to-market") to reflect the current market value of the call. If a call
written by a Portfolio is exercised, the proceeds on the sale of the underlying
securities are increased by the premium received. If a call or put written by a
Portfolio expires on its stipulated expiration date or if a Portfolio enters
into a closing transaction, it will realize a gain or loss depending on whether
thepremium was more or less than the transaction costs, without regard to
unrealized appreciation or depreciation on the underlying

<PAGE>

securities. If a put held by a Portfolio is exercised by it, the amount the
Portfolio receives on its sale of the underlying investment is reduced by the
amount of the premium paid by the Portfolio.

The U.S. Government Money Market Portfolio utilizes the amortized cost
method in valuing its portfolio securities for purposes of determining the net
asset value of the shares of the Portfolio. The Portfolio utilizes the
amortized cost method in valuing its portfolio securities even though the
portfolio securities may increase or decrease in market value, generally, in
connection with changes in interest rates. The amortized cost method of
valuation involves valuing a security at its cost adjusted by 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. 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
Portfolio would receive if it sold the instrument. During such periods, the
yield to investors in the Portfolio may differ somewhat from that obtained in a
similar company which uses mark to market values from all its portfolio
securities. For example, if the use of amortized cost resulted in a lower
(higher) aggregate portfolio value on a particular day, a prospective investor
in the Portfolio would be able to obtain a somewhat higher (lower) yield than
would result from investment in such a similar company and existing investors
would receive less (more) investment income. The purpose of this method of
calculation is to facilitate the maintenance of a constant net asset value per
share of $1.00.

The Portfolio's use of the amortized cost method to value its portfolio
securities and the maintenance of the per share net asset value of $1.00 is
permitted pursuant to Rule 2a-7 of the Act (the "Rule"), and is conditioned on
its compliance with various conditions including: (a) the Trustees are
obligated, as a particular responsibility within the overall duty of care owed
to the Portfolio's shareholders, to establish procedures reasonably designed,
taking into account current market conditions and the Portfolio's investment
objectives, to stabilize the net asset value per share as computed for the
purpose of distribution and redemption at $1.00 per share; (b) the procedures
include (i) calculation, at such intervals as the Trustees determine are
appropriate and as are reasonable in light of current market conditions, of the
deviation, if any, between net asset value per share using amortized cost to
value portfolio securities and net asset value per share based upon available
market quotations with respect to such portfolio securities; (ii) periodic
review by the Trustees of the amount of deviation as well as methods used to
calculate it; and (iii) maintenance of written records of the procedures, the
Trustees' considerations made pursuant to them and any actions taken upon such
considerations; (c) the Trustees should consider what steps should be taken, if
any, in the event of a difference of more than 2 of 1% between the two methods
of valuation; and (d) the Trustees should take such action as they deem
appropriate (such as shortening the average portfolio maturity, realizing gains
or losses or as provided by the Agreement and Declaration of Trust, reducing the
number of the outstanding shares of the Portfolio to eliminate or reduce to the
extent reasonably practicable material dilution or other unfair results to
investors or existing shareholders). Any reduction of outstanding shares will
be effected by having each shareholder proportionately contribute to the
Portfolio's capital the necessary shares that represent the amount of excess
upon such determination. Each shareholder will be deemed to have agreed to such
contribution in these circumstances by investment in the Portfolio.

The Rule further requires that the Portfolio limit its investments to U.S.
dollar-denominated

<PAGE>

instruments which the Trustees determine present minimal credit risks and
which are Eligible Securities (as defined below). The Rule also requires the
Portfolio to maintain a dollar-weighted average portfolio maturity (not more
than 90 days) appropriate to its objective of maintaining a stable net asset
value of $1.00 per share and precludes the purchase of any instrument with
remaining maturity of more than thirteen months. Should the disposition of a
portfolio security result in a dollar-weighted average portfolio maturity of
more than 90 days, the Portfolio would be required to invest its available
cash in such a manner as to reduce such maturity to 90 days or less as soon
as reasonably practicable.

Generally, for purposes of the procedures adopted under the Rule, the
maturity of a portfolio instrument is deemed to be the period remaining
(calculated from the trade date or such other date on which the Portfolio's
interest in the instrument is subject to market action) until the date noted
on the face of the instrument as the date on which the principal amount must
be paid, or in the case of an instrument called for redemption, the date on
which the redemption payment must be made.

A variable rate obligation that is subject to a demand feature is deemed to
have a maturity equal to the longer of the period remaining until the next
readjustment of the interest rate or the period remaining until the principal
amount can be recovered through demand. A floating rate instrument that is
subject to a demand feature is deemed to have a maturity equal to the period
remaining until the principal amount can be recovered through demand.

An Eligible Security is defined in the Rule to mean a security which: (a)
has a remaining maturity of thirteen months or less; (b) (i) is rated in the two
highest short-term rating categories by any two nationally recognized
statistical rating organizations ("NRSROs") that have issued a short-term rating
with respect to the security or class of debt obligations of the issuer, or (ii)
if only one NRSRO has issued a short-term rating with respect to the security,
then by that NRSRO; (c) was a long-term security at the time of issuance whose
issuer has outstanding a short-term debt obligation which is comparable in
priority and security and has a rating as specified in clause (b) above; or (d)
if no rating is assigned by any NRSRO as provided in clauses (b) and (c) above,
the unrated security is determined by the Board to be of comparable quality to
any such rated security.

As permitted by the Rule, the Trustees have delegated to the Portfolio's
Advisor, subject to the Trustees' oversight pursuant to guidelines and
procedures adopted by the Trustees, the authority to determine which securities
present minimal credit risks and which unrated securities are comparable in
quality to rated securities.

If the Trustees determine that it is no longer in the best interests of the
Portfolio and its shareholders to maintain a stable price of $1.00 per share, or
if the Trustees believe that maintaining such price no longer reflects a
market-based net asset value per share, the Trustees have the right to change
from an amortized cost basis of valuation to valuation based on market
quotations. The Trust will notify shareholders of any such change.

The Portfolio will manage its portfolio in an effort to maintain a
constant $1.00 per share price, but it cannot assure that the value of its
shares will never deviate from this price. Since dividends from net

<PAGE>

investment income are declared and reinvested on a daily basis, the net asset
value per share, under ordinary circumstances, is likely to remain constant.
Otherwise, realized and unrealized gains and losses will not be distributed
on a daily basis but will be reflected in the Portfolio's net asset value.
The amounts of such gains and losses will be considered by the Trustees in
determining the action to be taken to maintain the Trust's $1.00 per share
net asset value. Such action may include distribution at any time of part or
all of the then accumulated undistributed net realized capital gains, or
reduction or elimination of daily dividends by an amount equal to part or all
of the then accumulated net realized capital losses. However, if realized
losses should exceed the sum of net investment income plus realized gains on
any day, the net asset value per share on that day might decline below $1.00
per share. In such circumstances, the Trust may reduce or eliminate the
payment of daily dividends for a period of time in an effort to restore the
Trust's $1.00 per share net asset value. A decline in prices of securities
could result in significant unrealized depreciation on a mark to market
basis. Under these circumstances the Portfolio may reduce or eliminate the
payment of dividends and utilize a net asset value per share as determined by
using available market quotations or reduce the number of its shares
outstanding.

PORTFOLIO YIELD AND TOTAL RETURN INFORMATION

PERFORMANCE INFORMATION

U.S. GOVERNMENT MONEY MARKET PORTFOLIO

CURRENT YIELD AND EFFECTIVE YIELD. The Trust may from time to time
advertise the current yield and effective annual yield of the U.S. Government
Money Market Portfolio calculated over a 7-day period. The yield quoted will be
the simple annualized yield for an identified seven calendar day period. The
yield calculation will be based on a hypothetical account having a balance of
exactly one share at the beginning of the seven-day period. The base period
return will be the change in the value of the hypothetical account during the
seven-day period, including dividends declared on any shares purchased with
dividends on the share but excluding any capital changes. The yield will vary
as interest rates and other conditions affecting money market instruments
change. Yield also depends on the quality, length of maturity and type of
instruments in the Portfolio, and its operating expenses. The Portfolio may
also prepare an effective annual yield computed by compounding the unannualized
seven-day period return as follows: by adding 1 to the unannualized 7-day
period return, raising the sum to a power equal to 365 divided by 7, and
subtracting 1 from the result.

Effective Yield = [(base period return +1)365/7]-1]

Other Portfolios

YIELDS. Yield information may be useful to investors in reviewing a
Portfolio's performance. However, a number of factors should be considered
before using yield information as a basis for comparison with other
investments. An investment in any of the Portfolios of the Trust is not
insured; yield is not guaranteed and normally will fluctuate on a daily
basis. The yield for any given past period is not an indication or
representation of future yields or rates of return. Yield is affected by
Portfolio quality,

<PAGE>

Portfolio maturity, type of instruments held and operating expenses. When
comparing a Portfolio's yield with that of other investments, investors
should understand that certain other investment alternatives such as
money-market instruments or bank accounts provide fixed yields and also that
bank accounts may be insured.

The Trust may from time to time advertise the yield of a Portfolio as
calculated over a 30-day period. This yield will be computed by dividing the
Trust's net investment income per share earned during this 30-day period by the
maximum offering price per share on the last day of this period. The average
number of shares used in determining the net investment income per share will be
the average daily number of shares outstanding during the 30-day period that
were eligible to receive dividends. In accordance with regulations of the
Securities and Exchange Commission, income will be computed by totaling the
interest earned on all debt obligations during the 30-day period and subtracting
from that amount the total of all expenses incurred during the period, which
include management and distribution fees. The 30-day yield is then annualized
on a bond-equivalent basis assuming semi-annual reinvestment and compounding of
net investment income, as described in the Prospectus. Yield is calculated
according to the following formula:

--------------------------------
x 6
YIELD = 2(---- + 1) - 1
cd
--------------------------------

Where:

x= daily net investment income, based upon the subtraction of daily accrued
expenses from daily accrued income of the Portfolio. Income is accrued
daily for each day of the indicated period based upon yield-to-maturity of
each obligation held in the Portfolio as of the day before the beginning of
any thirty-day period or as of contractual settlement date for securities
acquired during the period. Mortgage and other receivables-backed
securities calculate income using coupon rate and outstanding principal
amount.

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

d= the maximum offering price per share on the last day of the period.

Yield does not reflect capital gains or losses, non-recurring or irregular
income. Gain or loss attributable to actual monthly paydowns on mortgage or
other receivables-backed obligations purchased at a discount or premium is
reflected as an increase or decrease in interest income during the period.

TAX EQUIVALENT YIELD is computed by dividing that portion of the current
yield (computed as described above) which is tax exempt by 1 minus a stated tax
rate and adding the quotient to that portion, if any, of the yield of the
Portfolio that is not tax exempt.

<PAGE>

- ---------------------------
E
TAX EQUIVALENT YIELD = ----- + t
1-P
- --------------------------- Where: E = tax exempt yield
P = stated income tax rate
t = taxable yield

The Municipal Bond Portfolio may advertise tax-equivalent yields at varying
assumed tax rates.

AVERAGE ANNUAL TOTAL RETURN

The Trust may from time to time advertise the average annual total return
of a Portfolio. Average annual total return is computed by finding the average
annual compounded rates of return over the 1, 5 and 10 year periods that would
equate the initial amount invested to the ending redeemable value according to
the following formula:

P (1+t)n = ERV

Where: P = a hypothetical initial investment of $1,000
t = average annual total return
n = number of years
ERV = ending redeemable value of P at the end of each period

Total return information may be useful to investors in reviewing a
Portfolio's performance. However, certain factors should be considered before
using this information as a basis for comparison with alternate investments. No
adjustment is made for taxes payable on distributions. The total return for any
given past period is not an indication or representation by the Portfolio of
future rates of return on its shares.

Total returns quoted in advertising reflect all aspects of a Portfolio's
return including the effect of reinvesting dividends and capital gain
distributions, and any change in a Portfolio's net asset value per share over
the period. Average annual returns are calculated by determining the growth or
decline in value of a hypothetical investment in a Portfolio over a stated
period, and then calculating the annually compounded percentage rate that would
have produced the same result if the rate of growth or decline in value had been
constant over the period. For example, a cumulative return of 100% over ten
years would produce an average annual return of 7.18%, which is the steady
annual return that would equal 100% growth on a compounded basis in ten years.

AGGREGATE TOTAL RETURN

The Trust may from time to time advertise the aggregate total return of a
Portfolio. A Portfolio's

<PAGE>

aggregate total return figures represent the cumulative change in the value
of an investment in the Portfolio for the specified period and are computed
by the following formula:

ERV - P
-------
P

Where: P = a hypothetical initial payment of $1000.

ERV = Ending Redeemable Value of a hypothetical $1,000 investment made at
the beginning of the 1, 5, or 10 year period at the end of the 1, 5 or 10
year period (or fractional portion thereof).

Unaveraged or cumulative total returns reflect the simple change in value
of an investment over a stated period. Average annual and cumulative total
returns may be quoted as a percentage or as a dollar amount and may be
calculated for a single investment, a series of investments and/or a series of
redemptions over any time period. Total returns and other performance
information may be quoted numerically or in a table, graph or similar
illustration.

The average annual total return on an investment made in shares of the
Portfolios for the year ended August 31, 1996 and for the period of inception
through year ended August 31, 1996 are as follows:

<TABLE>
<CAPTION>
Average Annual Total Average Annual
Name of Portfolio Return for the year ended Total Return for
August 31, 1996* period of inception
through
Year ended
August 31, 1996*

<S> <C> <C>
Large Capitalization Value Portfolio 19.73% 21.65%

Large Capitalization Growth Portfolio 2.56% 14.92%

Small Capitalization Portfolio 11.03% 18.45%

International Equity Portfolio 3.68% (1.60)%

Investment Quality Bond Portfolio 3.23% 5.16%

Municipal Bond Portfolio 4.88% 4.77%
</TABLE>

* During the years ended August 31, 1995 and August 31, 1996, the Manager
waived the management fee, assumed certain expenses of and, during the year
ended August 31, 1996, benefitted from expense offset arrangements with
respect to the Portfolios. Without such waivers, expense assumptions and
expense offsets, the returns would have been lower.

29
<PAGE>

<TABLE>
<CAPTION>
YIELD FOR 30-DAY PERIOD

Portfolio Ended August 31, 1995* Ended August 31, 1996*
- --------- ----------------------- ------------------------
<S> <C> <C>
Investment Quality Bond Portfolio 4.90% 5.40%

Municipal Bond Portfolio 4.08% 4.25%
</TABLE>

* Reflects the waiver of management fees, assumption of certain operating
expenses and, for the period ended August 31, 1996, the benefit of expense
offset arrangements by the Manager. Without such waivers, assumptions and
expense offsets, the yields would have been 2.07% for the Investment Quality
Bond Portfolio and 1.96% for the Municipal Bond Portfolio for period ended
August 31, 1995 and 5.31% and 2.73%, respectively, for the period ended
August 31, 1996.

<TABLE>
<CAPTION>
TAX EQUIVALENT YIELD FOR 30 DAY PERIOD

30 Day
Period At Federal Income At Federal Income At Federal Income At Federal Income
Portfolio Ended Tax Rate of 28% Tax Rate of 31% Tax Rate of 36% Tax Rate of 39.6%
- --------- ------ ---------------- ------------------ ------------------ -----------------
<S> <C> <C> <C> <C> <C>
Municipal
Bond Portfolio
8/31/95* 5.67% 5.91% 6.38% 6.75%

8/31/96* 5.90% 6.16% 6.64% 7.04%

</TABLE>

* During the 30 day periods ended August 31, 1995 and August 31, 1996, the
Manager waived the management fee, assumed certain expenses and, for period
ended August 31, 1996, benefitted from expense offset arrangements for the
Municipal Bond Portfolio. Without such waivers, expense assumptions and expense
offsets, the yields for the Municipal Bond Portfolio would have been 2.72% at
the 28% Federal income tax rate, 2.84% at the 31% Federal income tax rate, 3.06%
at the 36% Federal income tax rate and 3.25% at the 39.6% Federal income tax
rate for the period ended August 31, 1995 and 3.79%, 3.96%, 4.27% and 4.52%,
respectively, for the period ended August 31, 1996.

<TABLE>
<CAPTION>
YIELD FOR SEVEN DAY PERIOD*

Portfolio Period Ended Current Effective
- --------- ------------ ------- ---------
<S> <C> <C> <C>
U.S. Government Money
Market Portfolio August 31, 1995 4.59% 4.70%
August 31, 1996 4.25% 4.34%
</TABLE>

* During the seven day periods ended August 31, 1995 and August 31, 1996
the Manager waived

<PAGE>

the entire management fee, assumed certain expenses, and, for the
seven-day period ended August 31, 1996, benefitted from an expense offset
arrangement with respect to the U.S. Government Money Market Portfolio.
Without such waiver, expenses assumptions and expense offsets, the current
yield and effective yield would have been 2.78% and 2.82%, respectively, for
the seven day period ended August 31, 1995 and 3.99% and 4.07%, respectively,
for the seven day period ended August 31, 1996.

From time to time the Portfolios may refer in advertisements to rankings
and performance statistics published by (1) recognized mutual fund
performance rating services including but not limited to Lipper Analytical
Services, Inc. and Morningstar, Inc., (2) recognized indexes including but
not limited to the Standard & Poors Composite Stock Price Index, Russell 2000
Index, Dow Jones Industrial Average, Consumer Price Index, EAFE Index, Lehman
Brothers Government/Corporate Bond Index, the S & P Barra/ Growth Index, the
S&P/Barra Value Index, Lehman Municipal Bond Index and (3) Money Magazine and
other financial publications including but not limited to magazines,
newspapers and newsletters. Performance statistics may include yields, total
returns, measures of volatility, standard deviation or other methods of
portraying performance based on the method used by the publishers of the
information. In addition, comparisons may be made between yields on
certificates of deposit and U.S. government securities and corporate bonds,
and between value stocks and growth stocks, and may refer to current or
historic financial or economic trends or conditions.

The performance of the Portfolios may be compared to the performance of
other mutual funds in general, or to the performance of particular types of
mutual funds. These comparisons may be expressed as mutual fund rankings
prepared by Lipper Analytical Services, Inc. ("Lipper"), an independent service
located in Summit, New Jersey that monitors the performance of mutual funds.
Lipper generally ranks funds on the basis of total return, assuming reinvestment
of distributions, but does not take sales charges or redemption fees into
consideration, and is prepared without regard to tax consequences. In addition
to the mutual fund rankings, performance may be compared to mutual fund
performance indices prepared by Lipper.

From time to time, a Portfolio's performance also may be compared to other
mutual funds tracked by financial or business publications and periodicals. For
example, the Portfolio may quote Morningstar, Inc., in its advertising
materials. Morningstar, Inc. is a mutual fund rating service that rates mutual
funds on the basis of risk-adjusted performance.

Saratoga Capital Management or Unified Management Corporation (the
"Distributor")(which replaced OCC Distributors as the Trust's distributor
effective April 14, 1997) may provide information designed to help individuals
understand their investment goals and explore various financial strategies
such as general principles of investing, such as asset allocation,
diversification, risk tolerance; goal setting; and a questionnaire designed
to help create a personal financial profile.

Ibbotson Associates of Chicago, Illinois ("Ibbotson") provides historical
returns of the capital markets in the United States, including common stocks,
small capitalization stocks, long-term corporate bonds, intermediate-term
government bonds, long-term government bonds, Treasury bills, the U.S. rate of
inflation (based on CPI), and combinations of various capital markets. The
performance of these capital markets is based on the returns of different
indices.

<PAGE>

Saratoga Capital Management or the Distributor may use the performance of
these capital markets in order to demonstrate general risk-versus-reward
investment scenarios. Performance comparisons may also include the value of a
hypothetical investment in any of these capital markets. The risks associated
with the security types in any capital market may or may not correspond directly
to those of the Portfolios. The Portfolios may also compare performance to that
of other compilations or indices that may be developed and made available in the
future.

In advertising materials, the Distributor may reference or discuss its
products and services, which may include: retirement investing; brokerage
products and services; the effects of dollar-cost averaging and saving for
college; and the risks of market timing. In addition, the Distributor may
quote financial or business publications and periodicals, including model
portfolios or allocations, as they relate to fund management, investment
philosophy, and investment techniques.

The Portfolios may present their fund number, Quotron number, CUSIP number,
and discuss or quote their current portfolio manager.

Volatility. The Portfolios may quote various measures of volatility and
benchmark correlation in advertising. In addition, the Portfolios may compare
these measures to those of other funds. Measures of volatility seek to compare
a fund's historical share price fluctuations or total returns to those of a
benchmark. Measures of benchmark correlation indicate how valid a comparative
benchmark may be. All measures of volatility and correlation are calculated
using averages of historical data.

Momentum Indicators indicate the Portfolios price movements over specific
periods of time. Each point on the momentum indicator represents the
Portfolio's percentage change in price movements over that period.

The Portfolios may advertise examples of the effects of periodic investment
plans, including the principle of dollar cost averaging. In such a program, an
investor invests a fixed dollar amount in a fund at periodic intervals, thereby
purchasing fewer shares when prices are high and more shares when prices are
low. While such a strategy does not assure a profit or guard against a loss in
a declining market, the investor's average cost per share can be lower than if
fixed numbers of shares are purchased at the same intervals. In evaluating such
a plan, investors should consider their ability to continue purchasing shares
during periods of low price levels.

The Portfolios may be available for purchase through retirement plans or
other programs offering deferral of or exemption from income taxes, which may
produce superior after-tax returns over time. For example, a $1,000 investment
earning a taxable return of 10% annually would have an after-tax value of $1,949
after ten years, assuming tax was deducted from the return each year at a 28%
rate. An equivalent tax-deferred investment would have an after-tax value of
$2,100 after ten years, assuming tax was deducted at a 31% rate from the
tax-deferred earnings at the end of the ten-year period.

<PAGE>
TAXES

THE MUNICIPAL BOND PORTFOLIO

Because the Municipal Bond Portfolio will distribute exempt-interest
dividends, interest on indebtedness incurred by a shareholder to purchase or
carry shares of the Municipal Bond Portfolio is not deductible for Federal
income tax purposes. If a shareholder of the Municipal Bond Portfolio
receives exempt-interest dividends with respect to any share and if such
share is held by the shareholder for six months or less, then any loss on the
sale or exchange of such share may, to the extent of such exempt-interest
dividends, be disallowed. In addition, the Code may require a shareholder, if
he or she receives exempt-interest dividends, to treat as taxable income a
portion of certain otherwise non-taxable social security and railroad
retirement benefit payments. Furthermore, that portion of any exempt-interest
dividend paid by the Municipal Bond Portfolio which represents income derived
from private activity bonds held by the Portfolio may not retain its
tax-exempt status in the hands of a shareholder who is a "substantial user"
of a facility financed by such bonds, or a "related person" thereof.
Moreover, as noted in the Prospectus, some of the Municipal Bond Portfolio's
dividends may be a specific preference item or a component of an adjustment
item, for purposes of the Federal individual and corporate alternative
minimum taxes. In addition, the receipt of dividends and distributions from
the Municipal Bond Portfolio also may affect a foreign corporate
shareholder's Federal "branch profits" tax liability and a Subchapter S
corporate shareholder's Federal "excess net passive income" tax liability.
Shareholders should consult their own tax advisors as to whether they are (a)
substantial users with respect to a facility or related to such users within
the meaning of the Code or (b) subject to a Federal alternative minimum tax,
the Federal environmental tax, the Federal branch profits tax or the Federal
excess net passive income tax.

Each shareholder of the Municipal Bond Portfolio will receive after the
close of the calendar year an annual statement as to the Federal income tax
status of his or her dividends and distributions from the Portfolio for the
prior calendar year. These statements also will designate the amount of
exempt-interest dividends that is a specified preference item for purposes of
the Federal individual and corporate alternative minimum taxes. Each
shareholder of the Municipal Bond Portfolio will also receive a report of the
percentage and source on a state-by-state basis of interest income on
municipal obligations received by the Portfolio during the preceding year.
Shareholders should consult their tax advisors as to any other state and
local taxes that may apply to these dividends and distributions. In the
event that the Municipal Bond Portfolio derives taxable net investment
income, it intends to designate as taxable dividends the same percentage of
each day's dividend as its actual taxable net investment income bears to its
total taxable net investment income earned on that day. Therefore, the
percentage of each day's dividend designated as taxable, if any, may vary
from day to day.

For the period September 2, 1994 (commencement of
operations) to August 31, 1995, the International Equity Portfolio had
capital loss carryforwards of $821, which will be available, to the extent
provided by regulations, to offset future net capital gains realized through
the fiscal year ending 2003 and reduce amounts distributable to shareholders.
At August 31, 1996, Municipal Bond and Large Capitalization Growth had net
capital loss carryforwards of $4,276 and $93,316, respectively, which will be
available to offset future net capital gains through the year 2004. Capital
and currency losses incurred after October 31, within the portfolio's taxable
year are deemed to arise on the first business day of the

<PAGE>

portfolio's next taxable year. U.S. Government Money Market, Investment
Quality, Municipal Bond and Large Capitalization Growth incurred and elected
to defer $32; $6,147; $7,549 and $859,468, respectively, in net capital
losses, during the year ended August 31, 1996. Additionally, during the year
ended August 31, 1996, International Equity incurred and elected to defer
$12,996 in currency losses.

ALL PORTFOLIOS

As described above and in the Prospectus, the Portfolios may invest in
futures contracts and options. Each Portfolio anticipates that these investment
activities will not prevent the Trust from qualifying as a regulated investment
company. As a general rule, these investment activities will increase or
decrease the amount of long-term and short-term capital gains or losses realized
by a Portfolio and, accordingly, will affect the amount of capital gains
distributed to the Portfolio's shareholders.
Any net long-term capital gains realized by a Portfolio will be distributed
annually as described in the Prospectus. Such distributions ("capital gain
dividends") will be taxable to shareholders as long-term capital gains,
regardless of how long a shareholder has held shares of the Portfolio and will
be designated as capital gain dividends in a written notice mailed by the
Portfolio to shareholders after the close of the Portfolio's taxable year. If a
shareholder receives a capital gain dividend with respect to any share and if
the share has been held by the shareholder for six months or less, then any loss
(to the extent not disallowed pursuant to the other six-month rule described
above relating to exempt-interest dividends) on the sale or exchange of such
share will be treated as a long-term capital loss to the extent of the capital
gain dividend. Short-term capital gains will be distributed annually as
ordinary income as required by the Internal Revenue Code.

If a shareholder fails to furnish a correct taxpayer identification number,
fails to fully report dividend or interest income or fails to certify that he or
she has provided a correct taxpayer identification number and that he or she is
not subject to backup withholding, then the shareholder may be subject to a 31%
"backup withholding tax," with respect to (a) taxable dividends and
distributions, and (b) the proceeds of any redemptions of shares of a Portfolio.
An individual's taxpayer identification number is his or her social security
number. The backup withholding tax is not an additional tax and will be
credited against a taxpayer's regular Federal income tax liability.

From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on municipal securities. Similar proposals may be introduced in the
future. If such a proposal were enacted, the availability of municipal
securities for investment by the Municipal Bond Portfolio could be affected. In
that event the Board of Trustees of the Trust would reevaluate the investment
objections and policies of the Municipal Bond Portfolio.

The foregoing is only a summary of certain tax considerations generally
affecting the Portfolios, and is not intended as a substitute for careful tax
planning. Individuals are often exempt from state and local personal income
taxes on distributions of tax-exempt interest income derived from obligations of
issuers located in the state in which they reside when these distributions are
received directly from these

<PAGE>

issuers, but are usually subject to such taxes on income derived from
obligations of issuers located in other jurisdictions. The discussion does
not purport to deal with all of the Federal, state and local tax consequences
applicable to an investment in the Municipal Bond Portfolio, or to all
categories of investors, some of which may be subject to special rules.
Shareholders are urged to consult their tax advisors with specific reference
to their own tax situations.

ADDITIONAL INFORMATION

DESCRIPTION OF THE TRUST. The Trust was formed under the laws of
Delaware on April 8, 1994. It is not contemplated that regular annual
meetings of shareholders will be held. Shareholders of each Portfolio have
the right, upon the declaration in writing or vote by two-thirds of the
outstanding shares of the Portfolio, to remove a Trustee. The Trustees will
call a meeting of shareholders to vote on the removal of a Trustee upon the
written request of the record holders (for at least six months) of 10% of its
outstanding shares. In addition, 10 shareholders holding the lesser of
$25,000 or 1% of a Portfolio's outstanding shares may advise the Trustees in
writing that they wish to communicate with other shareholders of that
Portfolio for the purpose of requesting a meeting to remove a Trustee. The
Trustees will then either give the applicants access to the Portfolio's
shareholder list or mail the applicants' communication to all other
shareholders at the applicants' expense.

When issued, shares of each class are fully paid and have no preemptive,
conversion or other subscription rights. Each class of shares represents
identical interests in the applicable Portfolio's investment Portfolio. As
such, they have the same rights, privileges and preferences, except with respect
to: (a) the designation of each class, (b) the effect of the respective sales
charges, if any, for each class, (c) the distribution fees borne by each class,
(d) the expenses allocable exclusively to each class, (e) voting rights on
matters exclusively affecting a single class and (f) the exchange privilege of
each class. Upon liquidation of the Trust or any Portfolio, shareholders of
each class of shares of a Portfolio are entitled to share pro rata in the net
assets of that class available for distribution to shareholders after all debts
and expenses have been paid. The shares do not have cumulative voting rights.

The assets received by the Trust on the sale of shares of each Portfolio
and all income, earnings, profits and proceeds thereof, subject only to the
rights of creditors, are allocated to each Portfolio, and constitute the assets
of such Portfolio. The assets of each Portfolio are required to be segregated
on the Trust's books of account. Expenses not otherwise identified with a
particular Portfolio will be allocated fairly among two or more Portfolios by
the Board of Trustees. The Trust's Board of Trustees has agreed to monitor the
Portfolio transactions and management of each of the Portfolios and to consider
and resolve any conflict that may arise.

The Agreement and Declaration of Trust contains an express disclaimer of
shareholder liability for each Portfolio's obligations, and provides that each
Portfolio shall indemnify any shareholder who is held personally liable for the
obligations of that Portfolio. It also provides that each Portfolio shall
assume, upon request, the defense of any claim made against any shareholder for
any act or obligation of that Portfolio and shall satisfy any judgment thereon.

<PAGE>

POSSIBLE ADDITIONAL PORTFOLIO SERIES. If additional Portfolios are created
by the Board of Trustees, shares of each such Portfolio will be entitled to vote
as a group only to the extent permitted by the 1940 Act (see below) or as
permitted by the Board of Trustees.

Under Rule 18f-2 of the 1940 Act, any matter required to be submitted to
a vote of shareholders of any investment company which has two or more series
outstanding is not deemed to have been effectively acted upon unless approved
by the holders of a "majority" (as defined in that Rule) of the voting
securities of each series affected by the matter. Such separate voting
requirements do not apply to the election of trustees or the ratification of
the selection of accountants. Approval of an investment management or
distribution plan and a change in fundamental policies would be regarded as
matters requiring separate voting by each Portfolio. The Rule contains
provisions for cases in which an advisory contract is approved by one or
more, but not all, series. A change in investment policy may go into effect
as to one or more series whose holders so approve the change even though the
required vote is not obtained as to the holders of other affected series.

INDEPENDENT AUDITORS. KPMG Peat Marwick LLP, 345 Park Avenue, New York,
New York 10154, are the independent auditors of the Trust and of each Portfolio;
their services include auditing the annual financial statements and financial
highlights of each Portfolio as well as other related services.

CUSTODIAN, TRANSFER AGENT AND SHAREHOLDER SERVICING AGENT. State Street
Bank and Trust Company acts as transfer agent, shareholder servicing agent and
custodian of the assets of the Trust.

DISTRIBUTION OPTIONS. Shareholders may change their distribution options
by giving the Transfer Agent three days prior notice in writing.

TAX INFORMATION. The Federal tax treatment of the Portfolios' dividends
and distributions is explained in the Prospectus under the heading "Tax Status."
A Portfolio will be subject to a nondeductible 4% excise tax to the extent that
it fails to distribute by the end of any calendar year substantially all its
ordinary income for that year and capital gains for the one year period ending
on October 31 of that year.

OTHER. Oppenheimer Capital, an affiliate of Saratoga Capital Management,
is the parent of OpCap Advisors and a leading institutional investment
manager with over $48.2 billion in assets under management, and has been an
investment advisor to the American Medical Association's pension fund since
the 1960's.

RETIREMENT PLANS. The Distributor may print advertisements and brochures
concerning retirement plans, lump sum distributions and 401-k plans. These
materials may include descriptions of tax rules, strategies for reducing risk
and descriptions of 401-k programs. From time to time hypothetical investment
programs illustrating various tax-deferred investment strategies will be used in
brochures, sales literature, and omitting prospectuses. The following examples
illustrate the general approaches that will be followed. These hypotheticals
will be modified with different investment amounts, reflecting the amounts that
can be invested in different types of retirement programs, different assumed tax
rates, and assumed rates of return. They should not be viewed as indicative of
past or future performance of any of the Distributor's products.

<PAGE>

EXAMPLES

<TABLE>
<CAPTION>
- ---------------------------------------------------
- ---------------------------------------------------
Benefits of Long Term Tax-Free Compounding -
Single Sum
- ---------------------------------------------------
Amount of Contribution:$100,000
- ---------------------------------------------------
Rates of Return
-----------------------------------------
Years
8.00% 10.00% 12.00%
-----------------------------------------
Value at end
- ---------------------------------------------------
<S> <C> <C> <C>
5 $ 146,933 $ 161,051 $ 176,234
10 $ 215,892 $ 259,374 $ 310,585
15 $ 317,217 $ 417,725 $ 547,357
20 $ 466,096 $ 672,750 $ 964,629
25 $ 684,848 $1,083,471 $1,700,006
30 $1,006,266 $1,744,940 $2,995,992
- ---------------------------------------------------
- ---------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
- ---------------------------------------------------
- ---------------------------------------------------
Benefits of Long Term Tax-Free Compounding -
Periodic Investment
- ---------------------------------------------------
Amount Invested Annually: $2,000
- ---------------------------------------------------
Rates of Return
---------------------------------------
Years
8.00% 10.00% 12.00%
---------------------------------------
Value at End
- ---------------------------------------------------
<S> <C> <C> <C>
5 $ 12,672 $ 13,431 $ 14,230
10 $ 31,291 $ 35,062 $ 39,309
15 $ 58,649 $ 69,899 $ 83,507
20 $ 98,846 $126,005 $161,397
25 $157,909 $216,364 $298,668
30 $244,692 $361,887 $540,585
- ---------------------------------------------------
- ---------------------------------------------------
</TABLE>

-----------------------------------------------------------
Tax Deferred Rates of Return
Years -----------------------------------------------------------
8.00% 10.00% 12.00%
-----------------------------------------------------------
Value at end
- -----------------------------------------------------------------------
<S> <C> <C> <C>
5 $ 12,672 $ 13,431 $ 14,230
10 $ 31,291 $ 35,062 $ 39,309
15 $ 58,649 $ 69,899 $ 83,507
20 $ 98,846 $126,005 $161,397
25 $157,909 $216,364 $298,668
30 $244,692 $361,887 $540,585
- -----------------------------------------------------------------------
Annual Contribution (After Tax): $1,440
-----------------------------------------------------------
Fully Taxed Rates of Return
Years -----------------------------------------------------------
5.76% 7.20% 8.64%
-----------------------------------------------------------
Value at End
- -----------------------------------------------------------------------
5 $ 8,544 $ 8,913 $ 9,296
10 $ 19,849 $ 21,531 $ 23,364
15 $ 34,807 $ 39,394 $ 44,654
20 $ 54,598 $ 64,683 $ 76,874
25 $ 80,785 $100,485 $125,635
30 $115,435 $151,171 $199,429
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
Comparison of Tax Deferred Investing
-- Deducting Taxes at End
(Assumed Tax Rate at End: 28%)
- -----------------------------------------------------------------------
Amount of Annual Contribution: $2,000
- -----------------------------------------------------------------------
Tax Deferred Rates of Return
-----------------------------------------------------------
8.00% 10.00% 12.00%
Years -----------------------------------------------------------
Value at End
- -----------------------------------------------------------------------
<S> <C> <C> <C>
5 $ 11,924 $ 12,470 $ 13,046
10 $ 28,130 $ 30,485 $ 33,903
15 $ 50,627 $ 58,728 $ 68,525
20 $ 82,369 $101,924 $127,406
25 $127,694 $169,782 $229,041
30 $192,978 $277,359 $406,021
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
</TABLE>

37
<PAGE>

APPENDIX A -- RATINGS

DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS:

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

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

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

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

Ba. Bonds which are rated Ba are judged to have speculative elements;
their future payments cannot be considered as well assured. Often the
protection of interest and principal 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.

Moody's applies the numerical modifiers 1, 2, and 3 to each generic rating
classification from Aa through B. The modifier 1 indicates that the security
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.

DESCRIPTION OF MOODY'S MUNICIPAL BOND RATINGS

Aaa. Bonds which are rated Aaa are judged to be of the best quality and
carry the smallest degree

A-1

<PAGE>

of investment risk. 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. They are rated lower than the Aaa 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 made the long-term risks appear somewhat larger than in Aaa
securities.

A. Bonds which are rated A are judged to be upper medium grade
obligations. Security for principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment sometime in
the future.

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

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

B. Bonds which are rated B generally lack the characteristics of a
desirable investment. Assurance of interest and principal payments or of other
terms of the contract over long periods may be small.

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

DESCRIPTION OF S&P CORPORATE BOND RATINGS:

AAA. Bonds rated AAA have the highest rating assigned by S&P 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

A-2

<PAGE>

principal for bonds in this category than for bonds in higher rated
categories.

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

DESCRIPTION OF S&P'S MUNICIPAL BOND RATINGS

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

AA. Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree. The
AA rating may be modified by the addition of a plus or minus sign to show
relative standing within the AA rating category.

A. Debt rated A is regarded as safe. This rating differs from the two
higher ratings because, with respect to general obligation bonds, there is some
weakness which, under certain adverse circumstances, might impair the ability of
the issuer to meet debt obligations at some future date. With respect to
revenue bonds, debt service coverage is good but not exceptional and stability
of pledged revenues could show some variations because of increased competition
or economic influences in revenues.

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

BB. Debt rated BB has less near-term vulnerability to default than
other speculative grade debt, however, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payment.

B. Debt rated B has a greater vulnerability to default but presently
has the capacity to meet interest and principal payments. Adverse business,
financial or economic conditions would likely impair capacity or willingness to
pay interest and repay principal.

CCC. Debt rated CCC has a current identifiable vulnerability to default
and is dependent upon favorable business, financial and economic conditions to
meet timely payments of principal. In the event of adverse business, financial
or economic conditions, it is not likely to have the capacity to pay interest
and repay principal.

A-3

<PAGE>

DESCRIPTION OF FITCH'S MUNICIPAL BOND RATINGS.

Debt rated "AAA", the highest rating by Fitch, is considered to be 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.

Debt rated "AA" is regarded as very high credit quality. The obligor's
ability to pay interest and repay principal is very strong.

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

Debt rated "BBB" is of satisfactory credit quality. The obligor's ability
to pay interest and repay principal is adequate, however a change in economic
conditions may adversely affect timely payment.

Debt rated "BB" is considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes, however, business and financial alternatives can be identified which
could assist the obligor in satisfying its debt service requirements.

Debt rated "B" is 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 and the need for reasonable business and economic activity throughout
the life of the issue.

Debt rated "CCC" has certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.

Plus (+) and minus (-) signs are used with a rating symbol (except AAA) to
indicate the relative position within the category.

DESCRIPTION OF MOODY'S RATINGS OF STATE AND MUNICIPAL NOTES AND OTHER SHORT-TERM
LOANS

Moody's ratings for state and municipal notes and other short-term loans
are designated "Moody's Investment Grade" ("MIG"). Such ratings recognize the
differences between short-term credit risk and long-term risk. A short-term
rating designated VMIG may also be assigned on an issue having a demand feature.
Factors affecting the liquidity of the borrower and short-term cyclical elements
are critical in short-term borrowing. Symbols used will be as follows:

MIG-1/VMIG-1. This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.

MIG-2/VMIG-2. This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.

A-4

<PAGE>

DESCRIPTION OF S&P'S RATINGS OF STATE AND MUNICIPAL NOTES AND OTHER SHORT-TERM
LOANS

Standard & Poor's tax exempt note ratings are generally given to such notes
that mature in three years or less. The two higher rating categories are as
follows:

SP-1. Very strong or strong capacity to pay principal and interest. These
issues determined to possess overwhelming safety characteristics will be
given a plus (+) designation.

SP-2. Satisfactory capacity to pay principal and interest.

DESCRIPTION OF COMMERCIAL PAPER RATINGS

Commercial paper rated Prime-1 by Moody's are judged by Moody's to be of
the best quality. Their short-term debt obligations carry the smallest degree
of investment risk. Margins of support for current indebtedness are large or
stable with cash flow and asset protection well assured. Current liquidity
provides ample coverage of near-term liabilities and unused alternative
financing arrangements are generally available. While protective elements may
change over the intermediate or longer term, such changes are most unlikely to
impair the fundamentally strong position of short-term obligations.

Issuers (or related supporting institutions) rated Prime-2 have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.

Commercial paper rated A by S&P have the following characteristics.
Liquidity ratios are better than industry average. Long-term debt rating is A
or better. The issuer has access to at least two additional channels of
borrowing. Basic earnings and cash flow are in an upward trend. Typically, the
issuer is a strong company in a well-established industry and has superior
management. Issuers rated A are further refined by use of numbers 1, 2, and 3
to denote relative strength within this highest classification. Those issuers
rated A-1 that are determined by S&P to possess overwhelming safety
characteristics are denoted with a plus (+) sign designation.

Fitch's commercial paper ratings represent Fitch's assessment of the
issuer's ability to meet its obligations in a timely manner. The assessment
places emphasis on the existence of liquidity. Ratings range from F-1+ which
represents exceptionally strong credit quality to F-4 which represents weak
credit quality.

Duff & Phelps' short-term ratings apply to all obligations with maturities
of under one year, including commercial paper, the uninsured portion of
certificates of deposit, unsecured bank loans, master notes, bankers
acceptances, irrevocable letters of credit and current maturities of long-term
debt. Emphasis is placed on liquidity. Ratings range from Duff 1+ for the
highest quality to Duff 5 for the lowest, issuers in default. Issues rated Duff
1+ are regarded as having the highest certainty of timely payment. Issues rated
Duff 1 are regarded as having very high certainty of timely payment.

A-5
<PAGE>

August 31, 1996
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS
- --------------------------------------------------------------------------------

U.S. GOVERNMENT MONEY MARKET PORTFOLIO

<TABLE>
<CAPTION>
Principal
Amount Value
------------------ ------------
<S> <C> <C>
Federal Farm Credit Bank - 4.9%
$ 95,000 5.16%, 9/20/96 ............................ $ 94,741
190,000 5.17%, 9/20/96 ............................ 189,482
10,000 5.22%, 9/25/96 ............................ 9,965
500,000 5.23%, 2/06/97 ............................ 488,523
200,000 5.36%, 9/03/96 (1) ........................ 200,000
135,000 5.50%, 5/01/97 ............................ 134,832
------------

Total Federal Farm Credit Bank
(cost--$1,117,543) ........................ $ 1,117,543
------------

Federal Home Loan Bank - 10.6%
$ 275,000 5.16%, 9/17/96 ............................ $ 274,370
650,000 5.28%, 1/07/97 ............................ 637,797
525,000 5.36%, 5/16/97 ............................ 504,911
500,000 5.41%, 3/14/97 ............................ 500,000
500,000 5.925%, 6/13/97 ........................... 499,717
------------

Total Federal Home Loan Bank
(cost--$2,416,795) ........................ $ 2,416,795
------------

Federal Home Loan Mortgage Corporation - 57.6%
$ 1,700,000 5.20%, 9/16/96 ............................ $ 1,696,317
2,035,000 5.20%, 9/20/96 ............................ 2,029,415
95,000 5.21%, 9/12/96 ............................ 94,849
2,045,000 5.21%, 9/20/96 ............................ 2,039,377
210,000 5.22%, 9/20/96 ............................ 209,421
2,030,000 5.25%, 9/09/96 ............................ 2,027,632
70,000 5.27%, 9/13/96 ............................ 69,879
115,000 5.27%, 9/16/96 ............................ 114,747
2,500,000 5.30%, 9/12/96 ............................ 2,495,951
2,430,000 5.30%, 9/23/96 ............................ 2,422,130
------------
Total Federal Home Loan Mortgage Corporation
(cost--$13,199,718) ....................... $ 13,199,718
<PAGE>

------------
Federal National Mortgage Association - 19.0%
$ 75,000 5.20%, 9/03/96 ............................ $ 74,978
2,890,000 5.22%, 9/12/96 ............................ 2,885,391
1,385,000 5.31%, 9/27/96 ............................ 1,379,689
------------
Total Federal National Mortgage Association
(cost--$4,340,058) ........................ $ 4,340,058
------------
U.S. Treasury Bill - 4.2%
$ 1,000,000 5.19%, 4/03/97
(cost--$969,148) .......................... $ 969,148
------------
U.S. Treasury Note - 3.2%
$ 745,000 4.75%, 2/15/97
(cost--$743,731) .......................... $ 743,731
------------
Total Investments
(cost--$22,786,993) ........................................ 99.5% $ 22,786,993

Other Assets in Excess of
Other Liabilities .......................................... 0.5 119,307
------- ------------

Total Net Assets .............................................. 100.0% $ 22,906,300
======= ============
</TABLE>
- ----------
(1) Represents a floating interest rate note subject to change on
quarterly coupon dates, based on the current 90 day U.S. Treasury
Bill rate plus 20 basis points. Rate shown reflects the rate in
effect at 8/31/96.

B-1
<PAGE>

August 31, 1996
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (continued)
- --------------------------------------------------------------------------------

INVESTMENT QUALITY BOND PORTFOLIO

<TABLE>
<CAPTION>
Principal
Amount Value
------------------ ------------
<S> <C> <C>
U.S. TREASURY NOTES - 58.7%
$ 2,800,000 5.625%, 11/30/00 .......................... $ 2,691,052
4,900,000 6.125%, 9/30/00 ........................... 4,802,000

2,400,000 6.75%, 5/31/99 ............................ 2,414,616
------------

Total U.S. Treasury Notes
(cost--$10,036,599) ....................... $ 9,907,668
------------

CORPORATE NOTES & BONDS - 38.3%
Automotive - 3.8%
$ 225,000 Ford Motor Credit Corp.
7.75%, 10/01/99 ........................... $ 229,903
400,000 General Motors Acceptance Corp.
7.75%, 1/15/99 ............................ 407,356
------------
637,259
------------
Banking - 3.4%
600,000 Nationsbank Corp.
5.375%, 4/15/00 ........................... 565,908
------------

Chemicals - 3.4%
550,000 du Pont (E.I.) de Nemours & Co.
8.50%, 2/15/03 ............................ 574,590
------------

Computers - 2.3%
400,000 International Business Machines Corp.
6.375%, 6/15/00 ........................... 392,524
------------

Drugs & Medical Products - 2.1%
350,000 American Home Products Corp.
7.70%, 2/15/00 ............................ 357,669
------------

Entertainment - 2.9%
500,000 The Walt Disney Co.
6.375%, 3/30/01 ........................... 486,720
------------

Miscellaneous Financial Services - 10.5%
350,000 Associates Corp. of North America
6.25%, 9/15/00 ............................ 340,078
Bear Stearns & Co.
250,000 5.75%, 2/15/01 ............................ 235,700
350,000 7.625%, 9/15/99 ........................... 355,939
550,000 Dean Witter Discover & Co.
6.75%, 8/15/00 ............................ 543,867
50,000 Lehman Brothers, Inc.
9.875%, 10/15/00 .......................... 53,971
250,000 Morgan Stanley Group
5.75%, 2/15/01 ............................ 236,388
------------

1,765,943
------------
Oil/Gas - 1.6%
260,000 Amoco Canada Petroleum Co. Ltd.
7.25%, 12/01/02 ........................... 259,979
------------

Resource Recovery - 4.4%
750,000 WMX Technologies, Inc.
7.125%, 6/15/01 ........................... 749,220
------------
</TABLE>

B-2
<PAGE>

INVESTMENT QUALITY BOND PORTFOLIO (cont'd)

<TABLE>
<CAPTION>
Principal
Amount Value
------------------ ------------
<S> <C> <C>
Utility - 3.9%
$700,000 Southern California Edison Co.
5.875%, 1/15/01 ........................... $ 665,938
------------

Total Corporate Notes & Bonds
(cost--$6,593,467) ........................ $ 6,455,750
------------

Total Investments
(cost--$16,630,066) ........................................ 97.0% $ 16,363,418

Other Assets in Excess of
Other Liabilities .......................................... 3.0 500,631
------- ------------

Total Net Assets .............................................. 100.0% $ 16,864,049
======= ============
</TABLE>

B-3
<PAGE>

MUNICIPAL BOND PORTFOLIO

Principal
Amount Value
- ------------------ ------------------
<S> <C> <C>
MUNICIPAL NOTES & BONDS - 94.2%
CALIFORNIA - 10.0%
Education - 5.3%
$ 50,000 California State Public Works Board Lease Revenue
California State University Projects
6.00%, 9/01/15 ............................................. $ 49,442
200,000 Lafayette, California Elementary School District
5.90%, 5/15/18 ............................................. 199,980
-----------------
249,422
-----------------
Power/Utility - 3.1%
150,000 Southern California Public Power Authority
Power Project Revenue (Series A)
5.50%, 7/01/12 (AMBAC insured) ............................. 147,192
-----------------
Water/Sewer - 1.6%
75,000 San Francisco, California City & County Public Utilities
Community Water Revenue (Series A)
6.00%, 11/01/15 ............................................ 74,152
-----------------
470,766
-----------------
COLORADO - 3.2%
Health/Hospital
150,000 Denver, Colorado City & County Revenue
Childrens Hospital Association Project
6.00%, 10/01/15 ............................................ 149,991
-----------------
CONNECTICUT - 0.4%
Housing
20,000 Connecticut State Housing Finance Authority
Housing Mortgage Financing Program (Series B)
6.50%, 5/15/18 ............................................. 20,563
-----------------
FLORIDA - 4.9%
Education - 0.7%
35,000 Dade County, Florida School Board
Certificates of Participation (Series A)
5.75%, 5/01/12 (MBIA insured) .............................. 34,783

-----------------
General Obligation - 2.2%
Florida State Board of Education Capital Outlay
75,000 5.25%, 6/01/23 (Series D) .................................. 67,730
35,000 6.00%, 6/01/19 (Series A) .................................. 35,209
-----------------
102,939
-----------------
Power/Utility - 0.5%
25,000 Jacksonville, Florida Electric Authority Revenue
St. John's River Power
5.50%, 10/01/14 ............................................ 24,138
-----------------
Sales Tax - 1.1%
50,000 St. Petersburg, Florida Professional Sports Facilities
Sales Tax Revenue
5.60%, 10/01/15 (MBIA insured) ............................. 48,908
-----------------
Turnpike/Toll - 0.4%
20,000 Orlando & Orange County Expressway Authority
Florida Expressway Revenue (Series A)
5.00%, 7/01/17 (FGIC insured) .............................. 18,078
-----------------
228,846
-----------------
</TABLE>

B-4
<PAGE>

Principal
Amount Value
- ------------------ -----------------
<S> <C> <C>
GEORGIA - 9.3%
Education - 4.7%
$215,000 Jackson County, Georgia School District
6.00%, 7/01/14 (MBIA insured) .............................. $218,492
-----------------
General Obligation - 4.6%
200,000 Georgia State General Obligation Bonds (Series B)
6.25%, 4/01/07 ............................................. 218,112
-----------------

436,604
-----------------
IOWA - 1.2%
Water/Sewer
50,000 West Des Moines, Iowa Water Revenue
6.80%, 12/01/13 (AMBAC insured) ............................ 54,492
-----------------
KENTUCKY - 2.1%
Turnpike/Toll
100,000 Kentucky State Turnpike Authority
Economic Development Road Revenue
5.625%, 7/01/15 (AMBAC insured) ............................ 98,114
-----------------
LOUISIANA - 3.3%
General Obligation
150,000 New Orleans, Louisiana General Obligation Bonds
6.125%, 10/01/16 ........................................... 153,215
-----------------
MARYLAND - 6.5%
Resource Recovery
300,000 Maryland State Energy Financing Administration
Solid Waste Disposal Revenue Wheelabrator Water Projects
6.30%, 12/01/10 ............................................ 305,610
-----------------
MASSACHUSETTS - 2.1%
General Obligation - 1.1%
50,000 Lowell, Massachusetts General Obligation Bonds
6.05%, 4/01/11 ............................................. 51,270
-----------------
Transportation - 1.0%
50,000 Massachusetts Bay Transportation Authority
General Transportation System (Series B)
5.90%, 3/01/24 ............................................. 49,198
-----------------
100,468
-----------------
MICHIGAN - 2.5%
Pollution Control
125,000 Michigan State Environmental Protection Program
5.40%, 11/01/19 ............................................ 117,000
-----------------
MISSOURI - 1.0%
Housing
45,000 Missouri State Housing Development Community
Single Family Mortgage Revenue
6.90%, 7/01/18 ............................................. 47,072
-----------------
NEBRASKA - 0.8%
Power/Utility
40,000 Omaha Public Power Distribution (Series C)
5.50%, 2/01/14 ............................................. 39,338
-----------------
</TABLE>

B-5
<PAGE>

Principal
Amount Value
- ------------------ -----------------
<S> <C> <C>
NEVADA - 5.9%
General Obligation - 2.7%
$ 50,000 Clark County, Nevada General Obligation Bonds (Series B)
6.00%, 6/01/16 (AMBAC insured) ............................. $ 53,006
75,000 Nevada State General Obligation Bonds
Municipal Bond Bank (Series A)
5.50%, 11/01/20 ............................................ 72,371
-----------------
125,377
-----------------
Housing - 3.2%
150,000 Nevada Housing Division
Single Family Program (Series A1)
6.15%, 4/01/17 ............................................. 150,237
-----------------
275,614
-----------------
NEW HAMPSHIRE - 0.6%
Turnpike/Toll
30,000 New Hampshire State Turnpike Systems
6.00%, 4/01/13 ............................................. 30,016
-----------------
NEW YORK - 17.9%
Education - 4.9%
New York State Dormitory Authority Revenue
75,000 Albany Memorial Hospital
5.50%, 7/01/10 ............................................. 71,978
125,000 Consolidated City University System
5.75%, 7/01/09 ............................................. 128,187
30,000 Sarah Lawrence College
6.00%, 7/01/15 ............................................. 30,355
-----------------
230,520
-----------------
General Obligation - 5.1%
20,000 New York City General Obligation Bonds (Series B)

7.00%, 10/01/19 ............................................ 20,447
200,000 New York State General Obligation Bonds (Series A)
6.50%, 7/15/06 ............................................. 220,030
-----------------
240,477
-----------------
Housing - 2.0%
New York State Mortgage Agency Revenue
20,000 6.875%, 4/01/17 (Series A) ................................. 20,419
75,000 Homeowner Mortgage (Series 54)
6.10%, 10/01/15 ............................................ 73,997
-----------------
94,416
-----------------
Pollution Control - 0.8%
40,000 New York State Environmental Facilities Corp.
Pollution Control Revenue
5.875%, 6/15/14 ............................................ 40,040
-----------------
Sales Tax - 1.6%
75,000 New York State Local Government Assistance Corp. (Series A)
6.00%, 4/01/16 ............................................. 74,568
-----------------
Transportation - 2.2%
100,000 Metropolitan Transit Authority
5.50%, 7/01/08 (FGIC insured) .............................. 101,470
-----------------
Water/Sewer - 1.3%
65,000 New York City Municipal Water Finance Authority
Water and Sewer Systems Revenue (Series F)
5.50%, 6/15/15 (MBIA insured) .............................. 62,207
-----------------
843,698
-----------------
</TABLE>

B-6
<PAGE>

MUNICIPAL BOND PORTFOLIO (cont'd)

Principal
Amount Value
- ------------------ -----------------
<S> <C> <C>

OHIO - 1.2%
Health/Hospital
$ 50,000 Lorain County, Ohio Hospital Revenue
7.75%, 11/01/13 (AMBAC insured) ............................ $ 58,738
-----------------
PENNSYLVANIA - 5.7%
Education - 3.1%
150,000 Pennsylvania State Higher Educational Facilities Authority
Health Services Revenue University of Pennsylvania (Series B)
5.75%, 1/01/17 ............................................. 147,690
-----------------
Tax Allocation - 1.6%
75,000 Philadelphia, Pennsylvania Municipal Authority Revenue
5.625%, 11/15/14 (FGIC insured) ............................ 72,913
-----------------
Water/Sewer - 1.0%
50,000 Pittsburgh, Pennsylvania Water & Sewer Authority
Water & Sewer Systems Revenue (Series B)
5.60%, 9/01/15 ............................................. 48,189
-----------------
268,792
-----------------
PUERTO RICO - 1.4%
Power/Utility
65,000 Puerto Rico Electric Power Authority
Power Revenue (Series X)
6.00%, 7/01/15 ............................................. 64,487
-----------------
TENNESSEE - 2.1%
Airline/Airport
100,000 Metro Nashville Airport Special Facilities (1)
3.70%, 10/01/12 ............................................ 100,000
-----------------
TEXAS - 10.6%
Airline/Airport - 2.1%
100,000 Lone Star Texas Airport Improvement Authority (1)
3.70%, 12/01/14 ............................................ 100,000
-----------------
Education - 0.3%
15,000 University of Texas Revenue Bonds (Series B)
6.75%, 8/15/13 ............................................. 16,327
-----------------
General Obligation - 7.1%
75,000 Houston, Texas General Obligation Bonds (Series C)
5.25%, 4/01/14 ............................................. 70,486
25,000 San Antonio, Texas General Obligation Bonds
6.625%, 8/01/14 ............................................ 26,391
35,000 Texas State General Obligation Bonds (Series D)
6.00%, 8/01/12 ............................................. 35,832
200,000 Texas State Tax & Revenue Anticipation Notes
4.75%, 8/29/97 ............................................. 201,670
-----------------
334,379
-----------------

Power/Utility - 1.1%
50,000 Brazos River Authority Texas Revenue
Houston Light & Power Company
5.80%, 8/01/15 (MBIA insured) .............................. 49,432
-----------------
500,138
-----------------
</TABLE>

B-7
<PAGE>

MUNICIPAL BOND PORTFOLIO (cont'd)

Principal
Amount Value
- ------------------ -----------------
<S> <C> <C>
WASHINGTON - 1.0%
Power/Utility
$ 35,000 Seattle, Washington Municipal Light & Power Revenue
5.75%, 8/01/11 (Series A) .................................. $ 35,042
10,000 Washington State Public Power Supply Systems
Nuclear Project Revenue (Series B)
7.25%, 7/01/12 (FGIC insured) .............................. 10,934
-----------------
45,976
-----------------
WYOMING - 0.5%
Housing
25,000 Wyoming Community Development
Authority Housing Revenue (Series 1)
6.65%, 12/01/06 ............................................ 25,895
-----------------
Total Investments
(cost--$4,432,785).................................................... 94.2% $4,435,433

Other Assets in Excess of
Other Liabilities..................................................... 5.8 272,315
----------- -----------------
Total Net Assets......................................................... 100.0% $4,707,748
=========== =================
</TABLE>

- ----------
(1) Represents a variable rate demand note whose interest rate is subject to
change daily and payable on demand. Rate shown reflects the rate in effect
on 8/31/96.

B-8
<PAGE>

LARGE CAPITALIZATION VALUE PORTFOLIO

Principal
Amount Value
- ----------------- -----------------
<S> <C> <C>
SHORT-TERM CORPORATE NOTES - 15.8%
Computers - 3.9%
$713,000 International Business Machines Corp.
5.29%, 9/17/96 ............................................. $ 711,324
-----------------
Miscellaneous Financial Services - 8.6%
240,000 American Express Corp.
5.27%, 9/19/96 ............................................. 239,367
750,000 Beneficial Corp.
5.30%, 9/17/96 ............................................. 748,233
577,000 Ford Motor Credit Corp.
5.27%, 9/18/96 ............................................. 575,564
-----------------
1,563,164
-----------------
Oil/Gas - 3.3%
Chevron Oil Finance Co.
425,000 5.19%, 9/06/96 ............................................. 424,694
188,000 5.20%, 9/06/96 ............................................. 187,864
-----------------
612,558
-----------------
Total Short-Term Corporate Notes
(cost--$2,887,046).......................................... $2,887,046
-----------------
Shares
- ------------------
COMMON STOCKS - 82.9%
Aerospace - 6.0%
6,500 Lockheed Martin Corp. ........................................ $ 546,812
11,000 McDonnell Douglas Corp. ...................................... 551,375

-----------------
1,098,187
-----------------
Airlines - 2.7%
6,000 AMR Corp.*..................................................... 492,000
-----------------
Automotive - 3.5%
12,700 Varity Corp.*.................................................. 638,175
-----------------
Banking - 6.8%
6,300 Citicorp ...................................................... 524,475
2,866 Wells Fargo & Co. ............................................ 712,917
-----------------
1,237,392
-----------------
Chemicals - 3.1%
3,700 du Pont (E.I.) de Nemours & Co. .............................. 303,863
1,980 Hercules, Inc. ............................................... 98,505
5,250 Monsanto Co. ................................................. 168,656
-----------------
571,024
-----------------
Conglomerates - 3.5%
2,900 General Electric Co. ......................................... 241,063
8,000 Tenneco, Inc. ................................................ 398,000
-----------------
639,063
-----------------
Drugs & Medical Products - 3.3%
14,680 Becton, Dickinson & Co. ...................................... 600,045
-----------------
Electronics - 4.2%
8,000 Adaptec, Inc.*................................................. 399,000
8,080 Arrow Electronics, Inc.*....................................... 368,650
-----------------
767,650
-----------------
Healthcare Services - 4.7%
7,800 Columbia/HCA Healthcare Corp. ................................ 439,725
19,800 Tenet Healthcare Corp.*........................................ 415,800
-----------------
855,525
-----------------
</TABLE>

B-9
<PAGE>

LARGE CAPITALIZATION VALUE PORTFOLIO (cont'd)

Shares Value
- ------------------ -----------------
<S> <C> <C>
Insurance - 19.3%
18,700 Ace Ltd. ..................................................... $ 871,887
14,950 AFLAC, Inc. .................................................. 513,906
4,150 American International Group, Inc. ........................... 394,250
18,000 Everest Re Holdings, Inc. ................................... 438,750
15,620 EXEL Ltd. .................................................... 523,270
1,200 General Re Corp. ............................................. 173,850
4,180 Progressive Corp., Ohio ....................................... 227,287
13,000 RenaissanceRe Holdings Ltd. .................................. 386,750
-----------------
3,529,950
-----------------
Machinery/Engineering - 2.9%
7,800 Caterpillar, Inc. ............................................ 537,225
-----------------
Metals/Mining - 1.0%
6,000 Freeport McMoRan, Copper & Gold, Inc. (Class B) ............... 176,250
-----------------
Miscellaneous Financial Services - 5.8%
22,200 Countrywide Credit Industries, Inc. .......................... 535,575
5,850 Federal Home Loan Mortgage Corp. ............................. 516,994
-----------------
1,052,569
-----------------
Oil/Gas - 2.1%
8,500 Triton Energy Ltd. * .......................................... 389,938
-----------------
Printing/Publishing - 2.6%
14,500 R.R. Donnelley & Sons Co. .................................... 473,063
-----------------
Railroad - 2.5%
2,100 Norfolk Southern Corp. ....................................... 175,088
4,000 Union Pacific Corp. .......................................... 291,500
-----------------
466,588
-----------------
Retail - 3.6%
14,650 May Department Stores Co. .................................... 666,575
-----------------
Telecommunications - 3.5%
8,000 Sprint Corp. ................................................. 325,000
21,000 Tele-Communications, Inc.*..................................... 312,375
-----------------
637,375
-----------------

Textiles - 1.1%
13,000 Shaw Industries, Inc. ........................................ 195,000
-----------------
Toys/Games/Hobby - 0.7%
5,000 Mattel, Inc. ................................................. 131,875
-----------------
Total Common Stocks
(cost--$13,230,586) ........................................ $15,155,469
-----------------
Total Investments
(cost--$16,117,632) ................................................. 98.7% $18,042,515
Other Assets in Excess of
Other Liabilities ................................................... 1.3 231,944
----------- -----------------
Total Net Assets ....................................................... 100.0% $18,274,459
=========== =================
</TABLE>

- ----------
* Non-income producing security.

B-10
<PAGE>

LARGE CAPITALIZATION GROWTH PORTFOLIO

<TABLE>
<CAPTION>
Principal
Amount Value
------------------ ------------
<S> <C> <C>
SHORT TERM CORPORATE NOTES - 6.5%
Conglomerate - 3.0%
$1,000,000 General Electric Capital Corp.
5.16%, 9/05/96 ............................ $ 1,000,000
------------
Miscellaneous Financial Services - 3.5%
500,000 Federal National Mortgage Association
5.26%, 9/12/96 ............................ 499,196
700,000 Prudential Funding Corp.
5.22%, 9/03/96 ............................ 700,000
------------
1,199,196
------------
Total Short-Term Corporate Notes
(cost--$2,199,196) ........................ $ 2,199,196

------------
Shares
------------------
COMMON STOCKS - 92.6%
Advertising - 2.2%
16,500 Interpublic Group of Companies, Inc. ......... $ 746,625
------------
Banking - 6.4%
9,050 BankAmerica Corp. ............................ 701,375
19,700 Norwest Corp. ................................ 741,212
3,000 Wells Fargo & Co. ............................ 746,250
------------
2,188,837
------------
Building & Construction - 2.3%
12,000 Fluor Corp. .................................. 768,000
------------
Chemicals - 4.4%
9,500 du Pont (E.I) de Nemours & Co. ............... 780,188
12,500 Great Lakes Chemical Corp. ................... 718,750
------------
1,498,938
------------
Computers - 2.3%
17,500 Hewlett - Packard Co. ........................ 765,625
------------

Computer Services - 6.7%
20,280 Automatic Data Processing, Inc. .............. 844,155
14,000 Cisco Systems, Inc.* ......................... 738,500
9,000 First Data Corp. ............................. 702,000
------------
2,284,655
------------
Computer Software - 4.0%
5,500 Microsoft Corp.* ............................. 673,750
19,000 Oracle Systems Corp.* ........................ 669,750
------------
1,343,500
------------
Conglomerate - 2.2%
9,000 General Electric Co. ......................... 748,125
------------
Cosmetics/Toiletries - 2.3%
12,000 Gillette Co. ................................. 765,000
------------
Drugs & Medical Products - 10.7%
15,300 Abbott Laboratories .......................... 690,413
12,500 American Home Products Corp. ................. 740,625
12,670 Amgen, Inc.* ................................. 738,028
14,500 Johnson & Johnson ............................ 714,125
11,500 Merck & Co., Inc. ............................ 754,688
------------
3,637,879

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

B-11
<PAGE>

LARGE CAPITALIZATION GROWTH PORTFOLIO (cont'd)
<TABLE>
<CAPTION>

Shares Value
------------------ ------------
<S> <C> <C>
Electronics - 3.7%
20,000 Applied Materials, Inc.* .................. $ 485,000
9,620 Intel Corp. ............................... 767,796
------------
1,252,796
------------
Entertainment - 2.1%
12,500 The Walt Disney Co. ....................... 712,500
------------
Healthcare Services - 2.2%
19,000 United Healthcare Corp. ................... 733,875
------------
Household Products - 2.3%
9,500 Colgate-Palmolive Co. ..................... 771,875
------------
Insurance - 2.2%
8,000 American International Group, Inc. ........ 760,000
------------
Manufacturing - 4.3%
11,000 Illinois Tool Works, Inc. ................. 760,375
16,800 Tyco International Ltd. ................... 709,800
------------
1,470,175
------------
Metals/Mining - 2.3%
16,500 Nucor Corp. ............................... 771,375
------------
Miscellaneous Financial Services - 4.3%
14,500 Dean Witter Discover and Co. .............. 725,000
29,500 Schwab (Charles) Corp. .................... 737,500
------------
1,462,500
------------
Oil/Gas - 2.2%
9,000 Schlumberger, Ltd. ........................ 759,375
------------

Railroads - 2.2%
10,500 Union Pacific Corp. ....................... 765,187
------------
Retail - 6.5%
22,600 Circuit City Stores, Inc. ................. 711,900
14,000 Home Depot, Inc. .......................... 743,750
28,600 Wal-Mart Stores, Inc. ..................... 757,900
------------
2,213,550
------------
Telecommunications - 8.4%
23,000 General Instrument Corp.* ................. 629,625
21,000 Lucent Technologies, Inc. ................. 774,375
13,700 Motorola, Inc. ............................ 731,237
11,500 Tellabs, Inc.* ............................ 728,813
------------
2,864,050
------------
Tobacco/Beverages/Food Products - 4.2%
13,500 General Mills, Inc. ....................... 742,500
24,000 PepsiCo, Inc. ............................. 690,000
------------
1,432,500
------------
Toys/Games/Hobby - 2.2%
28,000 Mattel, Inc. .............................. 738,500
------------
Total Common Stocks
(cost--$29,012,984) ....................... $ 31,455,442
------------
Total Investments
(cost--$31,212,180) ........................................ 99.1% $ 33,654,638

Other Assets in Excess of
Other Liabilities .......................................... 0.9 307,558
------- ------------
Total Net Assets .............................................. 100.0% $ 33,962,196
======= ============
</TABLE>

- ----------
* Non-income producing security.

B-12
<PAGE>

Principal
Amount Value
- ------------------ -----------------
<S> <C> <C>
SHORT-TERM CORPORATE NOTE - 3.1%
Telecommunications
$680,000 A T & T Corp.
5.35%, 9/03/96
(cost -- $679,798) ......................................... $ 679,798
-----------------
Shares
- ------------------
COMMON STOCKS - 96.2%
Airlines - 2.7%
24,500 Comair Holdings, Inc. ........................................ $ 588,000
-----------------
Building & Construction - 3.3%
18,000 Cavalier Homes, Inc. ......................................... 346,500
30,000 Southern Energy Homes, Inc. * ................................. 390,000
-----------------
736,500
-----------------
Commercial Services - 10.6%
10,500 COREStaff, Inc. * ............................................ 441,000
13,300 Data Processing Resources Corp. * ............................ 246,050
14,500 F.Y.I., Inc.* ................................................ 282,750
16,500 RemedyTemp, Inc. * ........................................... 309,375
15,000 RTW, Inc. * ................................................... 423,750
13,400 TeleSpectrum Worldwide, Inc. * ............................... 236,175
21,000 Youth Services, Inc. * ....................................... 406,875
-----------------
2,345,975
-----------------
Computer Services - 1.4%
14,000 Transition Systems, Inc. * ................................... 316,750
-----------------
Computer Software - 7.2%
12,000 CBT Group Plc. Sponsored ADR * ............................... 537,000
11,000 Electronics for Imaging, Inc. * .............................. 695,750
8,000 Remedy Corp. * ................................................ 364,000
-----------------
1,596,750
-----------------
Correctional Facilities - 1.5%
14,000 Wackenhut Corrections Corp. * ................................ 341,250
-----------------
Drugs & Medical Products - 5.4%
7,050 Gelman Sciences, Inc. * ....................................... 204,450
26,500 Meridian Diagnostics, Inc. .................................. 374,313
26,000 Respironics, Inc. * ........................................... 611,000
-----------------
1,189,763
-----------------
Electronics - 8.0%

29,500 Methode Electronics, Inc. - Class A ........................... 560,500
15,500 Perceptron, Inc. * ............................................ 503,750
21,500 SDL, Inc. * ................................................... 413,875
19,500 Special Devices, Inc. * ....................................... 297,375
-----------------
1,775,500
-----------------
Entertainment - 1.9%
11,500 Regal Cinemas, Inc. * ........................................ 428,375
-----------------
Food Services - 2.6%
17,000 Lone Star Steakhouse & Saloon * .............................. 563,125
-----------------
Healthcare Services - 6.3%
12,050 Alternative Living Services, Inc. * .......................... 182,256
22,000 Omnicare, Inc. ............................................... 539,000
11,100 Orthodontic Centers of America, Inc. * ....................... 419,025
9,500 Sunrise Assisted Living, Inc. * .............................. 251,750
-----------------
1,392,031
-----------------
Insurance - 2.4%
13,500 United Dental Care, Inc. * .................................... 523,125
-----------------
</TABLE>

B-13
<PAGE>

Shares Value
- ------------------ -----------------
<S> <C> <C>
Leasing - 1.2%
12,000 Alrenco, Inc. * .............................................. $ 270,000
-----------------
Lodging - 5.0%
34,000 La Quinta Inns, Inc. ......................................... 650,250
19,500 Suburban Lodges of America, Inc. * ........................... 458,250
-----------------
1,108,500
-----------------
Manufacturing - 3.6%
15,500 Advanced Lighting Technologies, Inc. * ....................... 271,250

18,600 Chicago Miniature Lamp, Inc. * ............................... 520,800
-----------------
792,050
-----------------
Miscellaneous Financial Services - 1.4%
27,000 Jayhawk Acceptance Corp. * .................................... 300,375
-----------------
Oil/Gas - 1.9%
11,000 Carbo Ceramics, Inc. ......................................... 206,250
14,500 Drilex International, Inc. * ................................. 203,000
-----------------
409,250
-----------------
Printing & Publishing - 2.9%
9,500 Scholastic Corp. * ............................................ 643,625
-----------------
Retail - 8.5%
9,300 Barnett, Inc. * .............................................. 225,525
9,800 CompUSA, Inc. * ............................................... 393,225
14,000 Dollar Tree Stores, Inc. * .................................... 448,000
14,500 Gadzooks, Inc. * .............................................. 551,000
11,000 Marks Brothers Jewelers, Inc. * .............................. 264,000
-----------------
1,881,750
-----------------
Telecommunications - 11.3%
3,900 Century Telephone Enterprises ................................. 132,112
14,500 Davox Corp. * ................................................ 493,000
23,600 Harmonic Lightwaves, Inc. * ................................... 472,000
2,600 Periphonics Corp. * .......................................... 104,650
13,000 PictureTel Corp. * ............................................ 427,375
13,500 Teltrend, Inc. * .............................................. 632,813
19,150 TresCom International, Inc. * ................................. 225,012
-----------------
2,486,962
-----------------
Toys/Games/Hobby - 1.7%
14,200 Galoob (Lewis) Toys, Inc. * ................................... 372,750
-----------------
Transportation - 2.7%
17,000 Rural/Metro Corp. * ........................................... 586,500
-----------------
Other - 2.7%
17,500 Stewart Enterprises, Inc. .................................... 595,000
-----------------
Total Common Stocks
(cost--$17,250,419) ........................................ $21,243,906
-----------------
Total Investments
(cost--$17,930,217) .................................................. 99.3% $21,923,704

Other Assets in Excess of
Other Liabilities .................................................... 0.7 147,672
----------- -----------------

Total Net Assets ........................................................ 100.0% $22,071,376
=========== =================
</TABLE>

- ----------
* Non-income producing security.

B-14
<PAGE>

INTERNATIONAL EQUITY PORTFOLIO
<TABLE>
<CAPTION>

Shares Value
------------------ ------------
<S> <C> <C>
COMMON STOCKS - 90.1%
ARGENTINA - 2.5%
Conglomerate - 1.3%
7,700 Perez Companc S.A. Sponsored ADR ............. $ 87,434
------------
Telecommunications - 1.2%
3,500 Telefonica de Argentina S.A.
Sponsored ADR ............................. 83,562
------------
170,996
------------
BRAZIL - 1.1%
Utilities
2,500 Cemig S.A. Sponsored ADR ..................... 75,258
------------
CHILE - 1.8%
Utilities
5,500 Chilgener S.A. Sponsored ADR ................. 127,875
------------
FRANCE - 8.3%
Automotive - 1.7%
4,000 Peugeot Citroen S.A. Sponsored ADR ........... 114,712
------------
Chemicals - 2.3%
6,136 Rhone-Poulenc S.A. Sponsored ADR ............. 161,837
------------
Electronics - 2.4%
4,000 SGS-Thomson Microelectronics N.V. * .......... 163,500
------------
Oil/Gas - 1.9%

3,500 Elf Aquitane S.A. Sponsored ADR .............. 127,750
------------
567,799
------------
GERMANY - 4.6%
Banking - 1.4%
2,000 Deutsche Bank AG Sponsored ADR ............... 98,917
------------
Chemicals - 1.6%
3,000 Hoechst AG ADR ............................... 106,500
------------
Machinery/Engineering - 1.6%
300 Mannesmann AG Sponsored ADR .................. 108,404
------------
313,821
------------
HONG KONG - 2.3%
Real Estate
5,100 Hong Kong Land Holdings, Ltd.
Sponsored ADR ............................. 57,885
10,000 Sun Hung Kai Properties Ltd.
Sponsored ADR ............................. 97,636
------------
155,521
------------
INDIA - 2.9%
Textiles - 1.0%
750 Century Textiles and Industries Ltd.
Sponsored GDR ............................. 69,750
------------
Utilities - 1.9%
6,650 BSES Ltd. GDR ................................ 128,013
------------
197,763
------------
ITALY - 3.4%
Drugs & Medical Products - 1.5%
5,700 De Rigo SpA Sponsored ADR * .................. 99,038
------------
Oil/Gas - 1.9%
3,000 ENI SpA Sponsored ADR ........................ 132,750
------------
231,788
------------
JAPAN - 34.8%
Automotive - 2.0%
2,800 Toyota Motor Corp. ADR ....................... 134,750
------------
</TABLE>

B-15
<PAGE>

INTERNATIONAL EQUITY PORTFOLIO (cont'd)
<TABLE>
<CAPTION>

Shares Value
------------------ ------------
<S> <C> <C>
JAPAN (cont'd)
Banking - 6.6%
7,000 Bank of Tokyo-Mitsubishi ADR .............. $ 144,375
900 Mitsubishi Trust & Banking Corp.
Sponsored ADR .......................... 135,083
930 Sumitomo Bank Ltd. Japan ADR .............. 170,414
------------
449,872
------------
Building & Construction - 1.7%
1,800 Taisei Corp. ADR .......................... 114,199
------------
Chemicals - 1.9%
2,000 Asahi Chemical Industry Co. Ltd. ADR ...... 134,438
------------
Conglomerate - 1.9%
6,000 Mitsubishi Corp. Sponsored ADR ............ 133,700
------------
Drugs & Medical Products - 1.9%
7,470 Eisai Co. Ltd. Sponsored ADR .............. 129,315
------------
Electronics - 8.0%
1,300 Hitachi Ltd. Sponsored ADR ................ 119,275
900 Kyocera Corp. Sponsored ADR ............... 122,400
850 Sharp Corp. ADR ........................... 134,622
2,700 Sony Corp. Sponsored ADR .................. 170,775
------------
547,072
------------
Manufacturing - 1.5%
650 Bridgestone Corp. ADR ..................... 106,538
------------
Metals/Mining - 2.3%
4,650 Kawasaki Steel Corp. Sponsored ADR ........ 156,284
------------
Miscellaneous Financial Services - 1.5%
600 Nomura Securities Co. Ltd. ADR ............ 104,420
------------
Photography - 1.7%
1,300 Canon, Inc. Sponsored ADR ................. 120,412
------------

Real Estate - 1.8%
1,000 Mitsubishi Estate Co. Ltd. ADR ............ 122,468
------------
Retail - 2.0%
640 Ito-Yokado Co. Ltd. Sponsored ADR ......... 134,720
------------
2,388,188
------------
MALAYSIA - 1.4%
Entertainment
13,000 Genting Berhad ADR ........................ 95,917
------------
NETHERLANDS - 2.1%
Printing/Publishing
8,200 VNU - Ver Ned Bezit Sponsored ADR ......... 142,555
------------
PHILIPPINES - 2.2%
Telecommunications
2,500 Philippine Long Distance Telephone Co.
Sponsored ADR .......................... 149,687
------------
SOUTH KOREA - 1.4%
Telecommunications
6,000 Korea Mobile Telecommunications ADR * ..... 96,000
------------
SWEDEN - 4.0%
Machinery/Engineering - 1.8%
5,500 Sandvik AB Sponsored ADR .................. 125,542
------------
</TABLE>

B-16
<PAGE>

INTERNATIONAL EQUITY PORTFOLIO (cont'd)
<TABLE>
<CAPTION>

Shares Value
------------------ ------------
<S> <C> <C>
SWEDEN (cont'd)
Telecommunications - 2.2%
6,500 Telefonaktiebolaget LM Ericsson
Sponsored ADR ............................. $ 149,906
------------
275,448

------------
SWITZERLAND - 2.3%
Drugs & Medical Products
2,500 Ciba-Geigy AG Sponsored ADR .................. 158,125
------------
THAILAND - 1.1%
Telecommunications
6,000 Advanced Info Services PCL Sponsored ADR ..... 78,719
------------
UNITED KINGDOM - 12.3%
Airports - 1.1%
10,000 BAA Plc. Sponsored ADR ....................... 75,179
------------
Banking - 2.5%
1,200 Barclays Plc. Sponsored ADR .................. 69,000
600 HSBC Holdings Plc. Sponsored ADR ............. 103,585
------------
172,585
------------
Building & Construction - 1.1%
11,000 Redland Plc. Sponsored ADR ................... 78,375
------------
Conglomerate - 0.4%
1,820 Rank Group Plc. Sponsored ADR ................ 26,390
------------
Drugs & Medical Products - 2.4%
3,000 Glaxo Wellcome Plc. Sponsored ADR ............ 85,500
5,000 Medeva Plc. Sponsored ADR .................... 76,875
------------
162,375
------------
Manufacturing - 0.8%
3,200 Tomkins Plc. Sponsored ADR ................... 52,000
------------
Media/Broadcasting - 1.1%
2,000 Carlton Communications Plc. Sponsored ADR .... 76,687
------------
Oil/Gas - 1.3%
1,000 Shell Transport & Trading Co. ADR ............ 87,500
------------
Tobacco/Beverages/Food Products - 1.6%
2,700 Bass Plc. Sponsored ADR ...................... 71,212
3,000 BAT Industries Plc. Sponsored ADR ............ 39,750
------------
110,962
------------
842,053
------------
UNITED STATES - 1.6%
Other
8,000 Foreign Fund, Inc.
(WEBS - Malaysian Index Series) ........... 112,000
------------
Total Common Stocks

(cost--$6,210,114) ........................ $ 6,179,513
------------
Contracts
------------------
PURCHASED PUT OPTION ON FOREIGN
CURRENCY - 0.7%
98 Philadelphia Stock Exchange Japanese Yen Put
expiring Dec. '96 @ $91.00
(cost--$61,585) ........................... $ 44,713
------------
Total Investments
(cost--$6,271,699) ......................................... 90.8% $ 6,224,226

Other Assets in Excess of
Other Liabilities .......................................... 9.2 632,712
------- ------------
Total Net Assets .............................................. 100.0% $ 6,856,938
======= ============
</TABLE>

- ----------
* Non-income producing security.

See accompanying notes to financial statements.

B-17
<PAGE>

August 31, 1996
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
----------- ----------- ---------- -----------
U.S. Large
Government Investment Municipal Capitalization
Money Market Quality Bond Bond Value
Portfolio Portfolio Portfolio Portfolio
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Assets
Investments, at value (cost--$22,786,993;
$16,630,066; $4,432,785; $16,117,632;
$31,212,180; $17,930,217 and
$6,271,699, respectively) .............. $22,786,993 $16,363,418 $4,435,433 $18,042,515
Cash ..................................... 2,264 104,685 152,738 82,489
Receivable for shares of beneficial
interest sold .......................... 103,659 96,525 31,243 145,350
Deferred organization expenses ........... 38,246 38,246 38,246 38,246
Interest receivable ...................... 26,119 300,269 68,927 --
Receivable from manager .................. -- -- 3,900 --
Dividends receivable ..................... -- -- -- 21,955

Receivable for investments sold .......... -- -- -- --
Prepaid expenses and other assets ........ 660 607 403 663
----------- ----------- ---------- -----------
Total Assets .......................... 22,957,941 16,903,750 4,730,890 18,331,218
----------- ----------- ---------- -----------

Liabilities
Payable to manager ....................... 10,678 8,835 -- 9,064
Administration fee payable ............... 3,557 3,557 3,557 3,557
Payable for shares of beneficial
interest redeemed ...................... 2,509 65 -- 14,120
Dividends payable ........................ -- -- 1,244 --
Payable for investments purchased ........ -- -- -- --
Other payables and accrued expenses ...... 34,897 27,244 18,341 30,018
----------- ----------- ---------- -----------
Total Liabilities ................... 51,641 39,701 23,142 56,759
----------- ----------- ---------- -----------

Net Assets
Shares of beneficial interest at par value 22,906 1,702 471 1,265
Paid-in-surplus .......................... 22,883,426 17,114,514 4,716,454 15,948,727
Accumulated undistributed net investment
income (loss) .......................... -- -- -- 81,988
Accumulated net realized gain (loss)
on investments ......................... (32) (6,296) (11,825) 317,596
Accumulated net realized gain on foreign
currency transactions .................. -- 20,777 -- --
Net unrealized appreciation (depreciation)
on investments ......................... -- (266,648) 2,648 1,924,883
----------- ----------- ---------- -----------
Total Net Assets .................... $22,906,300 $16,864,049 $4,707,748 $18,274,459
=========== =========== ========== ===========

Shares of beneficial interest outstanding 22,906,332 1,701,884 470,817 1,264,513
----------- ----------- ---------- -----------
Net asset value and offering
price per share ....................... $ 1.00 $ 9.91 $ 10.00 $ 14.45
=========== =========== ========== ===========

----------- ----------- ----------
Large
Capitalization Small International
Growth Capitalization Equity
Portfolio Portfolio Portfolio
----------- ----------- ----------
<S> <C> <C> <C>
Assets
Investments, at value (cost--$22,786,993;
$16,630,066; $4,432,785; $16,117,632;
$31,212,180; $17,930,217 and
$6,271,699, respectively) .............. $33,654,638 $21,923,704 $6,224,226
Cash ..................................... 456,866 2,686 587,964

Receivable for shares of beneficial
interest sold .......................... 192,852 44,509 22,819
Deferred organization expenses ........... 38,246 38,246 38,246
Interest receivable ...................... 3,057 -- --
Receivable from manager .................. -- -- --
Dividends receivable ..................... 32,365 925 10,646
Receivable for investments sold .......... -- 237,471 --
Prepaid expenses and other assets ........ 826 768 2,835
----------- ----------- ----------
Total Assets .......................... 34,378,850 22,248,309 6,886,736
----------- ----------- ----------

Liabilities
Payable to manager ....................... 18,667 11,856 178
Administration fee payable ............... 3,557 3,557 3,557
Payable for shares of beneficial
interest redeemed ...................... 7,675 9,637 1,949
Dividends payable ........................ -- -- --
Payable for investments purchased ........ 343,584 119,283 --
Other payables and accrued expenses ...... 43,171 32,600 24,114
----------- ----------- ----------
Total Liabilities ................... 416,654 176,933 29,798
----------- ----------- ----------

Net Assets
Shares of beneficial interest at par value 2,581 1,626 715
Paid-in-surplus .......................... 32,506,732 17,785,924 6,840,435
Accumulated undistributed net investment
income (loss) .......................... (31,012) (151,486) 11,612
Accumulated net realized gain (loss)
on investments ......................... (958,563) 441,825 (13,965)
Accumulated net realized gain on foreign
currency transactions .................. -- -- 65,614
Net unrealized appreciation (depreciation)
on investments ......................... 2,442,458 3,993,487 (47,473)
----------- ----------- ----------
Total Net Assets .................... $33,962,196 $22,071,376 $6,856,938
=========== =========== ==========

Shares of beneficial interest outstanding 2,581,231 1,625,699 714,966
----------- ----------- ----------
Net asset value and offering
price per share ....................... $ 13.16 $ 13.58 $ 9.59
=========== =========== ==========
</TABLE>

See accompanying notes to financial statements.

B-18
<PAGE>

Year Ended August 31, 1996

- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
------------ ------------ --------- -------------------
U.S. Large
Government Investment Municipal Capitalization
Money Market Quality Bond Bond Value
Portfolio Portfolio Portfolio Portfolio
------------ ------------ --------- -------------------
<S> <C> <C> <C> <C>
Investment Income
Dividends .................................... -- -- -- $144,879 (1)
Interest ..................................... $797,041 $654,570 $159,494 114,247
-------- -------- -------- -------
Total investment income .................... 797,041 654,570 159,494 259,126
-------- -------- -------- -------

Operating Expenses
Management fees (note 2a) .................... 69,728 59,739 16,872 75,690
Administration fees (note 2c) ................ 42,000 42,000 42,000 42,000
Transfer and dividend disbursing agent fees .. 54,496 37,322 10,810 43,883
Custodian fees (note 2a) ..................... 45,875 44,832 53,928 47,613
Registration fees ............................ 20,085 18,435 14,598 17,249
Amortization of deferred organization
expenses (note 1c) ......................... 12,784 12,784 12,784 12,784
Auditing fees ................................ 7,300 7,300 8,200 7,300
Reports and notices to shareholders .......... 6,169 4,758 1,681 5,021
Legal fees ................................... 1,653 1,295 710 1,368
Trustees' fees ............................... -- -- -- --
Miscellaneous ................................ 1,970 1,921 1,700 1,975
-------- -------- -------- -------
Total operating expenses ................... 262,060 230,386 163,283 254,883
Less: Management fees waived and/or
expenses assumed (note 2a) ....... (96,550) (88,339) (125,675) (106,240)
Expense offset
arrangement (note 2a) ............ (364) (13,512) (1,774) (2,125)
-------- -------- -------- -------
Net operating expenses ................... 165,146 128,535 35,834 146,518
-------- -------- -------- -------

Net investment income (loss) ........... 631,895 526,035 123,660 112,608
-------- -------- -------- -------

Realized and Unrealized
Gain(Loss) on Investments-Net
Net realized gain (loss) on securities ....... (32) 1,585 (7,549) 317,589
Net realized gain on foreign currency
transactions ............................... -- 20,777 -- --
-------- -------- -------- -------
Net realized gain (loss) on investments .. (32) 22,362 (7,549) 317,589.

Net change in unrealized appreciation

(depreciation) on investments .............. -- (313,450) (20,197) 1,390,237
-------- -------- -------- -------

Net realized gain (loss) and change in
unrealized appreciation (depreciation)
on investments .......................... (32) (291,088) (27,746) 1,707,826
-------- -------- -------- -------

Net increase in net assets resulting from
operations ................................. $631,863 $234,947 $95,914 $1,820,434
======== ======== ======= ==========

<CAPTION>
---------------- -------------------- -----------------
Large
Capitalization Small International
Growth Capitalization Equity
Portfolio Portfolio Portfolio
---------------- -------------------- -----------------
<S> <C> <C> <C>
Investment Income
Dividends .................................... $205,211 $24,143 $79,529 (1)
Interest ..................................... 39,115 51,448 --
--------- --------- -------
Total investment income .................... 244,326 75,591 79,529
--------- --------- -------

Operating Expenses
Management fees (note 2a) .................... 149,335 118,415 37,644
Administration fees (note 2c) ................ 42,000 42,000 42,000
Transfer and dividend disbursing agent fees .. 74,410 61,514 23,162
Custodian fees (note 2a) ..................... 54,219 64,488 49,436
Registration fees ............................ 22,607 15,317 15,417
Amortization of deferred organization
expenses (note 1c) ......................... 12,784 12,784 12,784
Auditing fees ................................ 7,300 7,300 11,100
Reports and notices to shareholders .......... 9,362 7,744 2,465
Legal fees ................................... 2,175 1,632 830
Trustees' fees ............................... 4,425 -- --
Miscellaneous ................................ 4,728 3,096 1,383
--------- --------- -------
Total operating expenses ................... 383,345 334,290 196,221
Less: Management fees waived and/or
expenses assumed (note 2a) ....... (75,686) (106,549) (113,174)
Expense offset
arrangement (note 2a) ............ (32,338) (685) (15,136)
--------- --------- -------
Net operating expenses ................... 275,321 227,056 67,911
--------- --------- -------

Net investment income (loss) ........... (30,995) (151,465) 11,618
--------- --------- -------

Realized and Unrealized

Gain(Loss) on Investments-Net
Net realized gain (loss) on securities ....... (958,517) 442,165 52,023
Net realized gain on foreign currency
transactions ............................... -- -- 65,614
--------- --------- -------
Net realized gain (loss) on investments .. (958,517) 442,165 117,637

Net change in unrealized appreciation
(depreciation) on investments .............. 1,243,929 1,684,758 (50,666)
--------- --------- -------

Net realized gain (loss) and change in
unrealized appreciation (depreciation)
on investments .......................... 285,412 2,126,923 66,971
--------- --------- -------

Net increase in net assets resulting from
operations ................................. $254,417 $1,975,458 $78,589
========= ========= =======
</TABLE>

(1) Net of foreign withholding taxes of $143 and $13,462 for Large
Capitalization Value and International Equity, respectively.

See accompanying notes to financial statements.

B-19
<PAGE>

- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
-------------------------------- --------------------------------
U.S. Government Money Market Investment Quality Bond
Portfolio Portfolio
-------------------------------- --------------------------------

September 2, 1994(1) September 2, 1994(1)
Year Ended to Year Ended to
August 31, 1996 August 31, 1995 August 31, 1996 August 31, 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Operations
Net investment income (loss) ................. $ 631,895 $ 101,762 $ 526,035 $ 91,743
Net realized gain (loss) on investments ...... (32) 1 22,362 (949)
Net change in unrealized appreciation
(depreciation) on investments ............. -- -- (313,450) 46,802
------------ ------------ ------------ ------------

Net increase (decrease) in net assets
resulting from operations ................ 631,863 101,763 234,947 137,596
------------ ------------ ------------ ------------

Dividends and Distributions to
Shareholders
Net investment income ........................ (631,896) (101,762) (526,035) (91,743)
Net realized gain ............................ -- -- (6,932) --
------------ ------------ ------------ ------------
Total dividends and distributions
to shareholders .......................... (631,896) (101,762) (532,967) (91,743)
------------ ------------ ------------ ------------

Share Transactions of
Beneficial Interest
Net proceeds from sales ...................... 24,971,593 5,475,388 14,478,935 4,973,274
Reinvestment of dividends and distributions .. 618,794 100,393 526,071 89,810
Cost of shares redeemed ...................... (7,756,080) (603,756) (2,345,771) (606,103)
------------ ------------ ------------ ------------
Net increase in net assets from share
transactions of beneficial interest ...... 17,834,307 4,972,025 12,659,235 4,456,981
------------ ------------ ------------ ------------

Total increase in net assets ........... 17,834,274 4,972,026 12,361,215 4,502,834

Net Assets
Beginning of period .......................... 5,072,026 100,000 4,502,834 0
------------ ------------ ------------ ------------
End of period (including undistributed net
investment income of $0, $0; $0, $0; $0, $0;
$81,988, $46,159; ($31,012), $8,991;
($151,486), $1,294; $11,612 and $13,971,
respectively) .............................. $ 22,906,300 $ 5,072,026 $ 16,864,049 $ 4,502,834
============ ============ ============ ============

Shares of Beneficial Interest
Issued and Redeemed
Issued ....................................... 24,971,593 5,475,388 1,435,999 499,131
Issued from reinvestment of dividends ........
and distributions .......................... 618,794 100,393 52,358 9,006
Redeemed ..................................... (7,756,080) (603,756) (233,347) (61,263)
------------ ------------ ------------ ------------
Net increase ............................... 17,834,307 4,972,025 1,255,010 446,874
============ ============ ============ ============

<CAPTION>
--------------------------------
Municipal Bond
Portfolio
--------------------------------
September 2, 1994(1)
Year Ended to
August 31, 1996 August 31, 1995

------------ ------------
<S> <C> <C>
Operations
Net investment income (loss) ................. $ 123,660 $ 26,104
Net realized gain (loss) on investments ...... (7,549) (4,276)
Net change in unrealized appreciation
(depreciation) on investments ............. (20,197) 22,845
------------ ------------
Net increase (decrease) in net assets
resulting from operations ................ 95,914 44,673
------------ ------------

Dividends and Distributions to
Shareholders
Net investment income ........................ (123,660) (26,104)
Net realized gain ............................ -- --
------------ ------------
Total dividends and distributions
to shareholders .......................... (123,660) (26,104)
------------ ------------

Share Transactions of
Beneficial Interest
Net proceeds from sales ...................... 3,903,159 1,680,554
Reinvestment of dividends and distributions .. 121,243 25,671
Cost of shares redeemed ...................... (766,332) (247,370)
------------ ------------
Net increase in net assets from share
transactions of beneficial interest ...... 3,258,070 1,458,855
------------ ------------

Total increase in net assets ........... 3,230,324 1,477,424

Net Assets
Beginning of period .......................... 1,477,424 0
------------ ------------
End of period (including undistributed net
investment income of $0, $0; $0, $0; $0, $0;
$81,988, $46,159; ($31,012), $8,991;
($151,486), $1,294; $11,612 and $13,971,
respectively) .............................. $ 4,707,748 $ 1,477,424
============ ============

Shares of Beneficial Interest
Issued and Redeemed
Issued ....................................... 386,019 172,119
Issued from reinvestment of dividends ........
and distributions .......................... 12,042 2,624
Redeemed ..................................... (76,024) (25,963)
------------ ------------
Net increase ............................... 322,037 148,780
============ ============
</TABLE>

B-20
<PAGE>

<TABLE>
<CAPTION>
------------------------------- --------------------------------
Large Capitalization Value Large Capitalization Growth
Portfolio Portfolio
------------------------------- --------------------------------

September 2, 1994(1) September 2, 1994(1)
Year Ended to Year Ended to
August 31, 1996 August 31, 1995 August 31, 1996 August 31, 1995
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Operations
Net investment income (loss) ................. $ 112,608 $ 52,804 ($ 30,995) $ 10,814
Net realized gain (loss) on investments ...... 317,589 85,960 (958,517) 30,050
Net change in unrealized appreciation
(depreciation) on investments ............. 1,390,237 534,646 1,243,929 1,198,529
------------ ----------- ------------ ------------
Net increase (decrease) in net assets
resulting from operations ................ 1,820,434 673,410 254,417 1,239,393
------------ ----------- ------------ ------------

Dividends and Distributions to
Shareholders
Net investment income ........................ (76,779) (6,645) (9,008) (1,823)
Net realized gain ............................ (85,953) -- (30,096) --
------------ ----------- ------------ ------------
Total dividends and distributions
to shareholders .......................... (162,732) (6,645) (39,104) (1,823)
------------ ----------- ------------ ------------

Share Transactions of
Beneficial Interest
Net proceeds from sales ...................... 13,591,164 6,169,560 27,913,201 11,032,593
Reinvestment of dividends and distributions .. 161,529 6,623 38,924 1,816
Cost of shares redeemed ...................... (2,650,626) (1,328,258) (5,312,493) (1,164,728)
------------ ----------- ------------ ------------
Net increase in net assets from share
transactions of beneficial interest ...... 11,102,067 4,847,925 22,639,632 9,869,681
------------ ----------- ------------ ------------

Total increase in net assets ........... 12,759,769 5,514,690 22,854,945 11,107,251

Net Assets

Beginning of period .......................... 5,514,690 0 11,107,251 0
------------ ----------- ------------ ------------
End of period (including undistributed net
investment income of $0, $0; $0, $0; $0, $0;
$81,988, $46,159; ($31,012), $8,991;

($151,486), $1,294; $11,612 and $13,971,
respectively) .............................. $ 18,274,459 $ 5,514,690 $ 33,962,196 $ 11,107,251
============ =========== ============ ============

Shares of Beneficial Interest
Issued and Redeemed
Issued ....................................... 996,818 568,685 2,115,299 968,006
Issued from reinvestment of dividends
and distributions .......................... 12,415 669 2,926 182
Redeemed ..................................... (193,154) (120,920) (400,706) (104,476)
------------ ----------- ------------ ------------
Net increase ............................... 816,079 448,434 1,717,519 863,712
============ =========== ============ ============

-------------------------------- ------------------------------
Small Capitalization International Equity
Portfolio Portfolio
-------------------------------- ------------------------------
September 2, 1994(1) September 2, 1994(1)
Year Ended to Year Ended to
August 31, 1996 August 31, 1995 August 31, 1996 August 31, 1995
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Operations
Net investment income (loss) ................. ($ 151,465) $ 4,428 $ 11,618 $ 15,086
Net realized gain (loss) on investments ...... 442,165 492,075 117,637 (44,732)
Net change in unrealized appreciation
(depreciation) on investments ............. 1,684,758 2,308,729 (50,666) 3,193
------------ ------------ ----------- -----------
Net increase (decrease) in net assets
resulting from operations ................ 1,975,458 2,805,232 78,589 (26,453)
------------ ------------ ----------- -----------

Dividends and Distributions to
Shareholders
Net investment income ........................ (1,315) (3,134) (13,977) (1,115)
Net realized gain ............................ (492,415) -- (21,256) --
------------ ------------ ----------- -----------
Total dividends and distributions
to shareholders .......................... (493,730) (3,134) (35,233) (1,115)
------------ ------------ ----------- -----------

Share Transactions of
Beneficial Interest
Net proceeds from sales ...................... 8,411,846 13,426,783 5,504,760 3,393,938
Reinvestment of dividends and distributions .. 493,046 2,991 34,444 1,113
Cost of shares redeemed ...................... (3,418,635) (1,128,481) (1,632,377) (460,728)
------------ ------------ ----------- -----------
Net increase in net assets from share
transactions of beneficial interest ...... 5,486,257 12,301,293 3,906,827 2,934,323

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

Total increase in net assets ........... 6,967,985 15,103,391 3,950,183 2,906,755

Net Assets

Beginning of period .......................... 15,103,391 0 2,906,755 0
------------ ------------ ----------- -----------
End of period (including undistributed net
investment income of $0, $0; $0, $0; $0, $0;
$81,988, $46,159; ($31,012), $8,991;
($151,486), $1,294; $11,612 and $13,971,
respectively) .............................. $ 22,071,376 $ 15,103,391 $ 6,856,938 $ 2,906,755
============ ============ =========== ===========

Shares of Beneficial Interest
Issued and Redeemed
Issued ....................................... 654,637 1,300,430 567,890 361,971
Issued from reinvestment of dividends
and distributions .......................... 39,783 308 3,577 118
Redeemed ..................................... (265,931) (103,528) (168,151) (50,439)
------------ ------------ ----------- -----------
Net increase ............................... 428,489 1,197,210 403,316 311,650
============ ============ =========== ===========
</TABLE>

B-21

<PAGE>

August 31, 1996

- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

The Saratoga Advantage Trust (the "Trust") was organized on April 8, 1994
as a Delaware Business Trust and is registered under the Investment Company Act
of 1940, as amended, as a diversified, open-end management investment company.
The Trust commenced investment operations on September 2, 1994. The Trust
consists of seven portfolios: the U.S. Government Money Market Portfolio; the
Investment Quality Bond Portfolio; the Municipal Bond Portfolio; the Large
Capitalization Value Portfolio; the Large Capitalization Growth Portfolio; the
Small Capitalization Portfolio and the International Equity Portfolio. Saratoga
Capital Management (the "Manager") serves as the Trusts' manager. Each of the
Portfolios are provided with discretionary advisory services of an Adviser
identified, retained, supervised and compensated by the Manager. The following
serve as Advisers (the "Advisers") to their respective portfolio(s): OpCap
Advisors (formerly Quest for Value Advisors): Municipal Bond and Large
Capitalization Value; Fox Asset Management Inc.: Investment Quality Bond; Harris
Bretall Sullivan and Smith, Inc.: Large Capitalization Growth; Axe-Houghton
Associates, Inc.: Small Capitalization; Sterling Capital Management Co.: U.S.
Government Money Market and Ivory & Sime International, Inc.: International
Equity. OpCap Advisors (the "Administrator") provides the Trust with
administrative services. OCC Distributors (formerly Quest for Value
Distributors) serves as the Trust's distributor. The Manager, Administrator and
Distributor are all affiliates of Oppenheimer Capital. On August 19, 1994, U.S.
Government Money Market issued 100,000 shares to the Manager for $100,000 to
provide initial capital for the Trust. The preparation of the financial
statements in accordance with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts
and disclosures in the financial statements. The following is a summary of
significant accounting policies consistently followed by each Portfolio:

(a) Valuation of Investments

Investment securities listed on a national securities exchange and
securities traded in the over-the-counter National Market System are valued at
the last reported sale price on the valuation date; if there are no such
reported sales, the securities are valued at the last quoted bid price. Other
securities traded over-the-counter and not part of the National Market System
are valued at the last quoted bid price. Investment debt securities (other than
short - term obligations) are valued each day by an independent pricing service
approved by the Board of Trustees using methods which include current market
quotations from a major market maker in the securities and trader-reviewed
"matrix" prices. Short-term debt securities having a remaining maturity of sixty
days or less are valued at amortized cost or amortized value, which approximates
market value. Any securities or other assets for which market quotations are not
readily available are valued at their fair value as determined in good faith
under procedures established by the Board of Trustees. The ability of issuers of
debt securities held by the portfolios to meet their obligations may be affected

by economic or political developments in a specific state, industry or region.
U.S. Government Money Market values all of its securities on the basis of
amortized cost which approximates market value. Investments in countries in
which International Equity may invest may involve certain considerations and
risks not typically associated with domestic investments as a result of, among
others, the possibility of future political and economic developments and the
level of governmental supervision and regulation of foreign securities markets.

(b) Federal Income Tax

It is each Portfolio's policy to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantally all of its taxable and tax-exempt income to
shareholders; accordingly, no Federal income tax provision is required.

In connection with the Trust's organization, each Portfolio incurred
approximately $66,000 in costs. These costs have been deferred and are being
amortized to expense on a straight-line basis over sixty months from
commencement of operations.

(d) Security Transactions and Other Income

Security transactions are accounted for on the trade date. In determining
the gain or loss from the sale of securities, the cost of securities sold is
determined on the basis of identified cost. Dividend income is recorded on the
ex-dividend date and interest income is accrued as earned. Discounts or premiums
on debt securities purchased are accreted or amortized to interest income over
the lives of the respective securities.

(e) Dividends and Distributions

The following table summarizes each Portfolio's dividend and capital gain
declaration policy:

Income Short-Term Long-Term
Dividends Capital Gains Capital Gains
------------------------------------------
U.S. Government Money Market daily * annually annually
Investment Quality Bond daily * annually annually
Municipal Bond daily * annually annually
Large Capitalization Value annually annually annually
Large Capitalization Growth annually annually annually
Small Capitalization annually annually annually
International Equity annually annually annually
* paid monthly

Each Portfolio records dividends and distributions to its shareholders on
the ex-dividend date. The amount of dividends and distributions from net
investment income and net realized gains are determined in accordance with
federal income tax regulations, which may differ from generally accepted
accounting principles. These "book-tax" differences are either permanent or
temporary in nature. To the extent these differences are permanent in nature,

such amounts are reclassified within the net asset accounts based on their
federal tax-basis treatment; temporary differences do not require
reclassification. Dividends and distributions which exceed net investment income
and net realized gains for financial reporting purposes but not for tax purposes
are reported as dividends in excess of net investment income or distributions in
excess of net realized gains, respectively. To the extent distributions exceed
current and accumulated earnings and profits for federal income tax purposes,
they are reported as distributions of paid-in-surplus or tax return of capital.
For the year ended August 31, 1996 there were no permanent book-tax differences
relating to shareholder distributions, therefore, net investment income, net
realized gain(loss) and net assets were not affected.

B-22
<PAGE>

August 31, 1996

- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------

(f) Purchased Put Option Accounting Policy

When a Portfolio purchases a put option, it pays a premium and an amount
equal to the premium is recorded as an investment. The option is subsequently
marked-to-market to reflect its current market value. The Portfolio, as
purchaser of an option, has control over whether the option is exercised. If an
option expires, the Portfolio realizes a loss in the amount of the premium paid.
If an option is exercised, the premium paid is an adjustment to the proceeds
from the sale in determining whether the Portfolio has realized a gain or loss.
If a Portfolio enters into a closing sale transaction, the difference between
the premium paid and the amount received from the sale is the realized gain or
loss.

The Portfolio, as a purchaser of an option, bears the risk of the potential
inability of the counter parties to meet the terms of their contracts.

(g) Allocation of Expenses

Expenses specifically identifiable to a particular Portfolio are borne by
that Portfolio. Other expenses are allocated to each Portfolio based on its net
assets in relation to the total net assets of all the applicable Portfolios or
another reasonable basis.

2. MANAGEMENT FEE, ADMINISTRATION FEE AND OTHER TRANSACTIONS WITH AFFILIATES

(a) The management fees are payable monthly to the Manager and are computed
daily at the following annual rates of each Portfolio's average daily net
assets: .475% for U.S. Government Money Market; .55% for Investment Quality Bond
and Municipal Bond; .65% for Large Capitalization Value, Large Capitalization
Growth and Small Capitalization and .75% for International Equity.

For the year ended August 31, 1996, the Manager voluntarily waived all of
its management fees and assumed $26,822; $28,600; $108,803; $30,550 and $75,530
in other operating expenses for U.S. Government Money Market, Investment Quality
Bond, Municipal Bond, Large Capitalization Value and International Equity,
respectively. The Manager also voluntarily waived $75,686 and $106,549 in
management fees for Large Capitalization Growth and Small Capitalization,
respectively, for the year ended August 31, 1996.

The Portfolios also benefit from a expense offset arrangement with their
custodian bank where uninvested cash balances earn credits that reduce monthly
fees. Had these cash balances been invested in income producing assets, they
would have generated income for their respective Portfolios.

(b) The Manager pays a portion of its management fees to the Advisers at
the following annual rates of each Portfolios' average daily net assets: .125%
for U.S. Government Money Market; .20% for Investment Quality Bond and Municipal
Bond; .30% for Large Capitalization Value, Large Capitalization Growth and Small
Capitalization and .40% for International Equity. For the year ended August 31,
1996, the Manager paid the Advisers $18,350; $21,723; $6,135; $34,934; $68,924;
$54,653 and $20,077 for U.S. Government Money Market, Investment Quality,
Municipal Bond, Large Capitalization Value, Large Capitalization Growth, Small
Capitalization and International Equity, respectively.

(c) The administration fee is accrued daily and payable monthly to the
Administrator at an annual rate of $42,000 for each Portfolio, provided that
each Portfolio's net assets do not exceed $80 million. In the event that a
Portfolio's net assets exceed $80 million, an additional fee of .05% of net
assets in excess of $80 million shall be payable by the Portfolio. For the year
ended August 31, 1996 each Portfolio accrued $42,000 in administrative fees.

(d) Total brokerage commissions paid by Investment Quality Bond, Large
Capitalization Value, Large Capitalization Growth, Small Capitalization and
International Equity were $965; $15,975; $50,200; $17,848 and $27,884,
respectively. Oppenheimer & Co., Inc., an affiliate of the Manager, received
$6,138 and $180 from Large Capitalization Value and Small Capitalization,
respectively; Hoeing & Co., Inc., an affiliate of Axe-Houghton Associates, Inc.,
received $500 and $40 from Investment Quality and Small Capitalization,
respectively, for the year ended August 31, 1996.

3. PURCHASES AND SALES OF SECURITIES

For the year ended August 31, 1996 purchases and sales of investment
securities, other than short-term securities were as follows:

Purchases Sales
------------------------------
Investment Quality Bond $18,163,985 $ 5,768,974
Municipal Bond 3,209,469 289,416
Large Capitalization Value 11,669,819 2,484,727
Large Capitalization Growth 31,783,341 10,699,865
Small Capitalization 21,304,759 16,564,650
International Equity 6,280,235 2,616,934

For the year ended August 31, 1996, U.S. Government Money Market had
purchases and sales/maturities of short-term securities of $170,835,597 and
$153,955,476, respectively.

4. UNREALIZED APPRECIATION (DEPRECIATION) AND COST OF INVESTMENTS FOR
FEDERAL INCOME TAX PURPOSES

At August 31, 1996, the composition of unrealized appreciation
(depreciation) of investment securities and the cost of investments for Federal
income tax purposes were as follows:

<TABLE>
<CAPTION>
Appreciation (Depreciation) Net Tax Cost
----------------------------------------------------------
<S> <C> <C> <C> <C>
Investment Quality Bond $ 2,285 ($ 268,933) ($ 266,648) $16,630,066
Municipal Bond 37,583 (34,935) 2,648 4,432,785
Large Capitalization Value 2,085,761 (160,878) 1,924,883 16,117,632
Large Capitalization Growth 3,339,162 (902,437) 2,436,725 31,217,913
Small Capitalization 4,455,003 (461,516) 3,993,487 17,930,217
International Equity 382,648 (430,121) (47,473) 6,271,699
</TABLE>

B-23
<PAGE>

August 31, 1996

5. AUTHORIZED SHARES OF BENEFICIAL INTEREST AND PAR VALUE PER SHARE

Each Portfolio has unlimited shares of beneficial interest authorized with
$.001 par value per share.

6. FINANCIAL INSTRUMENTS AND ASSOCIATED RISKS

When a Portfolio purchases a put option, it is generally to hedge against
adverse movements in the value of Portfolio holdings. The risk of buying an
option is that the Portfolio will pay a premium whether or not the option is
exercised. The Portfolio also has the additional risk of not being able to enter
into a closing transaction if an illiquid secondary market exists.

7. CAPITAL LOSS CARRYFOWARDS

At August 31, 1996, Municipal Bond and Large Capitalization Growth had net
capital loss carryfowards of $4,276 and $93,316, respectively, which will be
available to offset future net capital gains through the year 2004. Capital and
currency losses incurred after October 31, within the portfolio's taxable year
are deemed to arise on the first business day of the portfolio's next taxable
year. U.S. Government Money Market, Investment Quality, Municipal Bond and Large
Capitalization Growth incurred and elected to defer $32; $6,147; $7,549 and
$859,468, respectively, in net capital losses, during the year ended August 31,
1996. Additionally, during the year ended August 31, 1996, International Equity
incurred and elected to defer $12,996 in currency losses.

B-24
<PAGE>

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (For a share outstanding throughout each period)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
INCOME FROM DIVIDENDS AND
INVESTMENT OPERATIONS DISTRIBUTIONS
----------------------------------------- -----------------------------------
Distributions
Net Realized to
and Dividends to Shareholders
Net Asset Unrealized Total Shareholders from Net
Value, Net Gain(Loss) from from Net Realized Gains
Beginning Investment on Investment Investment on
of Period Income(Loss) Investments Operations Income Investments
<S> <C> <C> <C> <C> <C> <C>
U.S. Government Money Market Portfolio

Year Ended August 31, 1996 $1.000 $0.044 $0.000 0.044 ($0.044) --
September 2, 1994 (3)
to August 31, 1995 1.000(4) 0.052 0.000 0.052 (0.052) --

<CAPTION>
RATIOS
-------------------------------------------------------------
Net Net Ratio of Net Ratio of Net
Asset Assets Operating Investment
Value, End of Expenses Income(Loss) Portfolio Average
End of Total Period to Average to Average Turnover Commission
Period Return* (000's) Net Assets Net Assets Rate Rate
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Government Money Market Portfolio

Year Ended August 31, 1996 $1.000 4.47% $22,906 1.13% (1,2,6) 4.30% (1,2) -- --
September 2, 1994 (3)
to August 31, 1995 1.000 5.36% 5,072 0.40% (1,5) 5.38% (1,5) -- --

(1) During the periods presented above, Saratoga Capital Management waived all of its fees and assumed a portion of the operating
expenses. Additionally, for the year ended August 31, 1996, the Portfolio benefited from an expense offset arrangement with its
custodian bank. If such waivers, assumptions and expense offsets had not been in effect for the respective periods, the ratios
of net operating expenses to average daily net assets and the ratios of net investment income (loss) to average daily net
assets would have been 1.79% and 3.64%, respectively, for the year ended August 31, 1996 and 6.69% and (0.91%), annualized,
respectively, for the period September 2, 1994 (commencement of operations) to August 31, 1995.

<CAPTION>
INCOME FROM DIVIDENDS AND
INVESTMENT OPERATIONS DISTRIBUTIONS
----------------------------------------- -----------------------------------
Distributions
Net Realized to
and Dividends to Shareholders
Net Asset Unrealized Total Shareholders from Net
Value, Net Gain(Loss) from from Net Realized Gains
Beginning Investment on Investment Investment on
of Period Income(Loss) Investments Operations Income Investments
<S> <C> <C> <C> <C> <C> <C>
Investment Quality Bond Portfolio

Year Ended August 31, 1996 $10.08 $0.48 ($0.16) $0.32 ($0.48) ($0.01)
September 2, 1994 (3)
to August 31, 1995 10.00(4) 0.60 0.08 0.68 (0.60) --

Year Ended August 31, 1996 $9.91 3.23% $16,864 1.31%(1,2,6) 4.84%(1,2) 55% --
September 2, 1994 (3)
to August 31, 1995 10.08 7.12% 4,503 0.45%(1,5) 5.77%(1,5) 18% --

(1) During the periods presented above, Saratoga Capital Management waived all of its fees and assumed a portion of the operating
expenses. Additionally, for the year ended August 31, 1996, the Portfolio benefited from an expense offset arrangement with its
custodian bank. If such waivers, assumptions and expense offsets had not been in effect for the respective periods, the ratios
of net operating expenses to average daily net assets and the ratios of net investment income (loss) to average daily net
assets would have been 2.12% and 3.90%, respectively, for the year ended August 31, 1996 and 7.93% and (1.71%), annualized,
respectively, for the period September 2, 1994 (commencement of operations) to August 31, 1995.

Year Ended August 31,
1996 $9.93 $0.41 $0.07 $0.48 ($0.41) --
September 2, 1994 (3)
to August 31, 1995 10.00(4) 0.51 (0.07) 0.44 (0.51) --

Year Ended August 31,
1996 $10.00 4.88% $4,708 1.23%(1,2,6) 4.03%(1,2) 12% --
September 2, 1994 (3)
to August 31, 1995 9.93 4.65% 1,477 0.37%(1,5) 4.79%(1,5) 27% --

(1) During the periods presented above, Saratoga Capital Management waived all of its fees and assumed a portion of the operating
expenses. Additionally, for the year ended August 31, 1996, the Portfolio benefited from an expense offset arrangement with its
custodian bank. If such waivers, assumptions and expense offsets had not been in effect for the respective periods, the ratios
of net operating expenses to average daily net assets and the ratios of net investment income (loss) to average daily net
assets would have been 5.32% and (0.12%), respectively, for the year ended August 31, 1996 and 20.15% and (14.99%), annualized,
respectively, for the period September 2, 1994 (commencement of operations) to August 31, 1995.

Year Ended August 31, 1996 $12.30 $0.07 $2.33 $2.40 ($0.11) ($0.14)
September 2, 1994 (3)
to August 31, 1995 10.00 (4) 0.15 2.20 2.35 (0.05) --

Year Ended August 31, 1996 $14.45 19.73% $18,274 1.28%(1,2,6) 0.97%(1,2) 26% $0.06
September 2, 1994 (3)
to August 31, 1995 12.30 23.60% 5,515 0.40%(1,5) 2.29%(1,5) 33% --

(1) During the periods presented above, Saratoga Capital Management waived all of its fees and assumed a portion of the operating
expenses. Additionally, for the year ended August 31, 1996, the Portfolio benefited from an expense offset arrangement with its
custodian bank. If such waivers, assumptions and expense offsets had not been in effect for the respective periods, the ratios
of net operating expenses to average daily net assets and the ratios of net investment income (loss) to average daily net
assets would have been 2.19% and 0.04%, respectively, for the year ended August 31, 1996 and 6.54% and (3.85%), annualized,
respectively, for the period September 2, 1994 (commencement of operations) to August 31, 1995.

Year Ended August 31, 1996 $12.86 ($0.02) $0.35 $0.33 ($0.01) ($0.02)
September 2, 1994 (3)
to August 31, 1995 10.00 (4) 0.02 2.85 2.87 (0.01) --
<CAPTION>
RATIOS
-------------------------------------------------------------
Net Net Ratio of Net Ratio of Net
Asset Assets Operating Investment
Value, End of Expenses Income(Loss) Portfolio Average
End of Total Period to Average to Average Turnover Commission
Period Return* (000's) Net Assets Net Assets Rate Rate
<S> <C> <C> <C> <C> <C> <C> <C>
Large Capitalization Growth Portfolio

Year Ended August 31, 1996 $13.16 2.56% $33,962 1.34%(1,2,6) (0.13%)(1,2) 50% $0.07
September 2, 1994 (3)
to August 31, 1995 12.86 28.77% 11,107 0.51%(1,5) 0.32%(1,5) 23% --

(1) During the periods presented above, Saratoga Capital Management waived a portion or all of its fees and assumed a portion of
the operating expenses. Additionally, for the year ended August 31, 1996, the Portfolio benefited from an expense offset
arrangement with its custodian bank. If such waivers, assumptions and expense offsets had not been in effect for the respective
periods, the ratios of net operating expenses to average daily net assets and the ratios of net investment income (loss) to
average daily net assets would have been 1.67% and (0.60%), respectively, for the year ended August 31, 1996 and 5.00% and
(4.17%), annualized, respectively, for the period September 2, 1994 (commencement of operations) to August 31, 1995.

Year Ended August 31, 1996 $12.62 ($0.09) $1.44 $1.35 ($0.00) ($0.39)
September 2, 1994 (3)
to August 31, 1995 10.00(4) 0.02 2.61 2.63 (0.01) --

Year Ended August 31, 1996 $13.58 11.03% $22,071 1.25%(1,2,6) (0.83%(1,2) 95% $0.06
September 2, 1994 (3)
to August 31, 1995 12.62 26.38% 15,103 0.42%(1,5) 0.07%(1,5) 111% --

(1) During the periods presented above, Saratoga Capital Management waived a portion or all of its fees and assumed a portion of
the operating expenses. Additionally, for the year ended August 31, 1996, the Portfolio benefited from an expense offset
arrangement with its custodian bank. If such waivers, assumptions and expense offsets had not been in effect for the respective
periods, the ratios of net operating expenses to average daily net assets and the ratios of net investment income (loss) to
average daily net assets would have been 1.84% and (1.42%), respectively, for the year ended August 31, 1996 and 3.57% and
(3.08%), annualized, respectively, for the period September 2, 1994 (commencement of operations) to August 31, 1995.

Year Ended August 31, 1996 $9.33 $0.00 $0.34 $0.34 ($0.03) ($0.05)
September 2, 1994 (3)
to August 31, 1995 10.00(4) 0.05 (0.71) (0.66) (0.01) --

Year Ended August 31, 1996 $9.59 3.68% $6,857 1.65%(1,2,6) 0.23%(1,2) 58% $0.09
September 2, 1994 (3)
to August 31, 1995 9.33 (6.61%) 2,907 0.38%(1,5) 1.03%(1,5) 36% --
</TABLE>

(1) During the periods presented above, Saratoga Capital Management waived all
of its fees and assumed a portion of the operating expenses. Additionally,
for the year ended August 31, 1996, the Portfolio benefited from an expense
offset arrangement with its custodian bank. If such waivers, assumptions
and expense offsets had not been in effect for the respective periods, the
ratios of net operating expenses to average daily net assets and the ratios
of net investment income (loss) to average daily net assets would have been
3.91% and (2.33)%, respectively, for the year ended August 31, 1996 and
8.96% and (7.55%), annualized, respectively, for the period September 2,
1994 (commencement of operations) to August 31, 1995.

- ----------------
(2) Average daily net assets for the year ended August 31, 1996 were
$14,679,617; $10,861,629; $3,067,626; $11,644,595; $22,974,545; $18,217,666
and $5,019,160 for U.S. Government Money Market, Investment Quality Bond,
Municipal Bond, Large Capitalization Value, Large Capitalization Growth,
Small Capitalization and International Equity, respectively.
(3) Commencement of operations.
(4) Initial offering price.
(5) Annualized.
(6) Does not reflect expense offsets.

* Assumes reinvestment of all dividends and distributions. Aggregate (not
annualized) total return is shown for any period shorter than one year.

B-25
<PAGE>

- --------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT
- --------------------------------------------------------------------------------

To the Shareholders and Board of Trustees of
The Saratoga Advantage Trust:

We have audited the accompanying statements of assets and liabilities, including
the schedules of investments, of The Saratoga Advantage Trust (comprising,
respectively, the U.S. Government Money Market, Investment Quality Bond,
Municipal Bond, Large Capitalization Value, Large Capitalization Growth, Small
Capitalization and International Equity Portfolios) as of August 31, 1996, and
the related statements of operations, changes in net assets and financial
highlights for the year ended August 31, 1996 and for the period September 2,
1994 (commencement of operations) to August 31, 1995. These financial statements
and financial highlights are the responsibility of the Trust's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
August 31, 1996 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the respective portfolios constituting The Saratoga Advantage Trust as of
August 31, 1996, the results of their operations, the changes in their net
assets and the financial highlights for the year ended August 31, 1996 and for
the period September 2, 1994 (commencement of operations) to August 31, 1995, in
conformity with generally accepted accounting principles.

KPMG Peat Marwick LLP

New York, New York
October 17, 1996

B-26