AGA SERIES TRUST, 497, 1998-10-29

AGA SERIES TRUST
497, 1998-10-29

Previous: AGA SEPARATE ACCOUNT A, 497, 1998-10-29

Next: DOLLAR TREE STORES INC, 8-K, 1998-10-29

<PAGE> 1

AGA SERIES TRUST

2929 ALLEN PARKWAY

HOUSTON, TEXAS 77019

AGA Series Trust, (formerly, WNL Series Trust) (the "Trust") is an
open-end, diversified series management investment company that currently offers
shares of beneficial interest of seven series (the "Portfolios"), each of which
has a different investment objective and represents the entire interest in a
separate portfolio of investments. The Portfolios are: Credit Suisse Growth and
Income Portfolio, Credit Suisse International Equity Portfolio, EliteValue
Portfolio, State Street Global Advisors Growth Equity Portfolio, State Street
Global Advisors Money Market Portfolio, Salomon Brothers U.S. Government
Securities Portfolio, and Van Kampen Emerging Growth Portfolio. Prior to May 1,
1998, the Credit Suisse Growth and Income Portfolio was known as the BEA Growth
and Income Portfolio, the EliteValue Portfolio was known as the EliteValue Asset
Allocation Portfolio, the State Street Global Advisors Growth Equity Portfolio
was known as the Global Advisors Growth Equity Portfolio and the State Street
Global Advisors Money Market Portfolio was known as the Global Advisors Money
Market Portfolio. Prior to July 13, 1998, the Van Kampen Emerging Growth
Portfolio was known as the Van Kampen American Capital Emerging Growth
Portfolio. These Portfolios are currently available to the public only through
variable annuity contracts ("VA Contracts") issued by American General Annuity
Insurance Company (formerly, Western National Life Insurance Company) (the "Life
Company").

This Prospectus sets forth concisely the information about the Trust that a
prospective investor should know before investing. Please read it carefully and
retain it for future reference. A Statement of Additional Information ("SAI")
dated May 1, 1998 (as supplemented October 28, 1998), is available without
charge upon request, and may be obtained by calling the Life Company at
1-800-424-4990 or by writing to the Life Company, Attention: Variable Annuity
Service Center, 205 E. 10th Avenue, Amarillo, TX 79101. Some of the discussions
contained in this Prospectus refer to the more detailed descriptions contained
in the SAI, which is incorporated by reference into this Prospectus and has been
filed with the Securities and Exchange Commission (the "SEC"). The SEC maintains
a Web site (http://www.sec.gov) that contains the SAI, material incorporated by
reference, and other information regarding registrants that file electronically
with the SEC.

INVESTMENTS IN THE TRUST ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY, ANY BANK. SHARES OF THE TRUST ARE NOT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENTAL AGENCY. AN INVESTMENT IN THE TRUST IS SUBJECT TO RISK THAT MAY
CAUSE THE VALUE OF THE INVESTMENT TO FLUCTUATE, AND WHEN THE INVESTMENT IS
REDEEMED, THE VALUE MAY BE HIGHER OR LOWER THAN THE AMOUNT ORIGINALLY INVESTED
BY THE INVESTOR.

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

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

Prospectus Dated May 1, 1998 (as supplemented October 28, 1998)

<PAGE> 2

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY..................................................... 1
The Trust................................................. 1
Investment Adviser and Sub-Advisers....................... 1
The Portfolios............................................ 1
Credit Suisse Growth and Income Portfolio................. 1
Credit Suisse International Equity Portfolio.............. 2
EliteValue Portfolio...................................... 2
State Street Global Advisors Growth Equity Portfolio...... 2
State Street Global Advisors Money Market Portfolio....... 2
Salomon Brothers U.S. Government Securities Portfolio..... 3
Van Kampen Emerging Growth Portfolio...................... 3
Investment Risks.......................................... 3
Sales and Redemptions..................................... 3
FINANCIAL HIGHLIGHTS........................................ 4
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS........ 8
Credit Suisse Growth and Income Portfolio................. 8
Credit Suisse International Equity Portfolio.............. 10
EliteValue Portfolio...................................... 11
State Street Global Advisors Growth Equity Portfolio...... 13
State Street Global Advisors Money Market Portfolio....... 13
Salomon Brothers U.S. Government Securities Portfolio..... 15
Van Kampen Emerging Growth Portfolio...................... 16
MANAGEMENT OF THE TRUST..................................... 17
Investment Advise......................................... 17
Advisory Fee Waiver and Expense Cap....................... 18
Advisory Fees Waived...................................... 18
Expenses of the Trust..................................... 19
Sub-Advisers.............................................. 19
Sub-Advisory Fees......................................... 22
SALES AND REDEMPTIONS....................................... 22
NET ASSET VALUE............................................. 22
PERFORMANCE INFORMATION..................................... 23
TAX STATUS, DIVIDENDS, AND DISTRIBUTIONS.................... 24
ADDITIONAL INFORMATION...................................... 24
APPENDIX.................................................... 25
SECURITIES AND INVESTMENT PRACTICES......................... 25
American Depository Receipts and European Depository
Receipts............................................... 25
Asset-Backed Securities................................... 25
Bank Obligations.......................................... 25
Borrowing................................................. 26
Common Stock and Other Equity Securities.................. 26
Convertible Securities.................................... 26
Currency Management....................................... 27
Dollar Roll Transactions.................................. 27
Equity and Debt Securities Issued or Guaranteed by
Supranational Organizations............................ 27
Exchange Rate-Related Securities.......................... 28
Fixed-Income Securities................................... 28
Foreign Currency Exchange Transactions.................... 28
Foreign Investments....................................... 30
</TABLE>

i
<PAGE> 3

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Futures and Options on Futures............................ 30
Geographical and Industry Concentration................... 31
Government Stripped Mortgage-Backed Securities............ 31
Interest Rate Transactions................................ 32
Illiquid Securities....................................... 32
Investment Companies...................................... 33
Lease Obligation Bonds.................................... 33
Lending of Securities..................................... 33
Lower-Rated Securities.................................... 33
Mortgage-Backed Securities................................ 33
Collateralized Mortgage Obligation and Multi-Class
Pass-Through Securities................................ 34
New Issuers............................................... 35
Options on Securities..................................... 35
Options on Foreign Currencies............................. 37
Options on Indexes........................................ 37
Over-the-Counter Options.................................. 38
Repurchase Agreements..................................... 38
Reverse Repurchase Agreements............................. 39
Small Companies........................................... 39
Strategic Transactions.................................... 39
U.S. Government Securities................................ 39
When-Issued Securities and Delayed-Delivery
Transactions........................................... 40
</TABLE>

ii
<PAGE> 4

SUMMARY

THE TRUST

The Trust is an open-end diversified management investment company
established as a Massachusetts business trust under a Declaration of Trust dated
December 12, 1994, as amended April 19, 1995 and May 1, 1998. Each Portfolio
issues a separate class of shares. The Declaration of Trust permits the Trustees
to issue an unlimited number of full or fractional shares of each class of
stock.

Each Portfolio has distinct investment objectives and policies. (See
"Investment Objectives and Policies of the Portfolios.") Additional Portfolios
may be added to the Trust in the future.

INVESTMENT ADVISER AND SUB-ADVISERS

Subject to the authority of the Board of Trustees of the Trust, AGA
Investment Advisory Services, Inc. (the "Adviser") serves as the Trust's
investment adviser and has responsibility for the overall management of the
investment strategies and policies of the Portfolios. The Adviser has engaged
Sub-Advisers for each Portfolio to make investment decisions and place orders.
The Sub-Advisers for the Portfolios are:

<TABLE>
<CAPTION>
SUB-ADVISER NAME OF PORTFOLIO
----------- -----------------
<S> <C>
BEA Associates........................... Credit Suisse Growth and Income
Credit Suisse Asset Management Ltd....... Credit Suisse International Equity
OpCap Advisors........................... EliteValue
State Street Global Advisors............. State Street Global Advisors Growth
Equity
State Street Global Advisors Money Market
Salomon Brothers Asset Management Inc.... Salomon Brothers U.S. Government
Securities
Van Kampen Asset Management, Inc......... Van Kampen Emerging Growth
</TABLE>

For additional information concerning the Adviser and the Sub-Advisers,
including a description of advisory and sub-advisory fees, see "Management of
the Trust."

THE PORTFOLIOS

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

CREDIT SUISSE GROWTH AND INCOME PORTFOLIO

The Portfolio's fundamental investment objective is to provide long-term
capital growth, current income, and growth of income, consistent with reasonable
investment risk. The Portfolio invests primarily in domestic equity as well as
domestic debt securities. The proportion of the Portfolio's assets to be
invested in each type of security will vary from time to time in accordance with
the Sub-Adviser's assessment of economic conditions and investment
opportunities. The asset allocation strategy is based on the premise that, from
time to time, certain asset classes are more attractive long term than others.
The Sub-Adviser anticipates that, under normal market conditions, between 35%
and 65% of the Portfolio's total assets will be invested in equity securities,
and between 35% and 65% will be invested in debt securities.

1
<PAGE> 5

CREDIT SUISSE INTERNATIONAL EQUITY PORTFOLIO

The Portfolio's fundamental investment objective is long-term capital
appreciation. The Portfolio seeks to achieve its objective primarily by
investing in equity and equity-related securities of companies from at least
five different countries, excluding the United States. This Portfolio is
intended for investors who can accept the risks involved in investments in
equity and equity-related securities of non-U.S. issuers, as well as foreign
currencies, and in the active management techniques that the Portfolio generally
employs. Under normal conditions, the Portfolio will invest at least 65% of its
total assets in equity securities of issuers whose principal places of business
(as determined by location of the issuer's principal headquarters) are located
in countries other than the United States. The balance of the Portfolio, up to
35% of its total assets, may be invested in equity or debt securities of U.S.
issuers or foreign entities. Investing in foreign securities generally involves
risks not ordinarily associated with investing in securities of domestic
issuers. (See "Appendix -- Foreign Investments" and the SAI for a discussion of
the risks involved in foreign investing.)

ELITEVALUE PORTFOLIO

The Portfolio's fundamental investment objective is to achieve growth of
capital over time through investment in a portfolio consisting of common stocks,
bonds, and cash equivalents, the percentages of which will vary based on the
Sub-Adviser's assessments of the relative outlook for such investments. In
seeking to achieve its investment objective, the types of equity securities in
which the Portfolio may invest are likely to be primarily those of companies
that are believed by the Sub-Adviser to be undervalued in the marketplace in
relation to factors such as the companies' assets or earnings. Debt securities
are expected to be predominantly investment-grade, intermediate to long-term
U.S. government, and corporate debt, although the Portfolio will also invest in
high-quality, short-term money market and cash equivalent securities, and may
invest almost all of its assets in such securities when the Sub-Adviser deems it
advisable in order to preserve capital. In addition, the Portfolio may also
purchase foreign securities, provided they are listed on a domestic or foreign
securities exchange or represented by American Depository Receipts ("ADRs")
listed on a domestic securities exchange or traded in domestic or foreign
over-the-counter markets. Investing in foreign securities generally involves
risks not ordinarily associated with investing in securities of domestic
issuers. (See "Appendix -- Foreign Investments" and the SAI for a discussion of
the risks involved in foreign investing.) The allocation of the Portfolio's
assets among the different types of permitted investments will vary from time to
time, based upon the Sub-Adviser's evaluation of economic and market trends and
its perception of the relative values available from such types of securities at
any given time. There is neither a minimum nor a maximum percentage of the
Portfolio's assets that, at any given time, may be invested in any of the types
of investments identified above.

STATE STREET GLOBAL ADVISORS GROWTH EQUITY PORTFOLIO

The Portfolio's fundamental investment objective is to provide total
returns that exceed, over time, the Standard & Poor's 500 Composite Stock Price
Index through investment in equity securities. Equity securities are selected on
the basis of a proprietary analytical model of the Portfolio's Sub-Adviser. Each
security is ranked according to two separate and uncorrelated measures: value
and the momentum of Wall Street sentiment. The Portfolio invests at least 65% of
its total assets in equity securities. However, the Portfolio may invest
temporarily for defensive purposes, without limitation, in certain short-term,
fixed-income securities. Such securities may be used to invest uncommitted cash
balances or to maintain liquidity.

STATE STREET GLOBAL ADVISORS MONEY MARKET PORTFOLIO

The Portfolio's fundamental investment objective is to maximize current
income, to the extent consistent with the preservation of capital and liquidity
and the maintenance of a stable $1.00 per share net asset value, by investing in
dollar-denominated securities with remaining maturities of one year or less. The
Portfolio attempts to meet its investment objective by investing in high-quality
money market instruments. An investment in this Portfolio is neither insured nor
guaranteed by the U.S. government.

2
<PAGE> 6

SALOMON BROTHERS U.S. GOVERNMENT SECURITIES PORTFOLIO

The Portfolio's fundamental investment objective is to seek a high level of
current income. The Portfolio seeks to attain its objective by investing a
substantial portion of its assets in debt obligations and mortgage-backed
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities, and collateralized mortgage obligations backed by such
securities. The Portfolio may also invest a portion of its assets in U.S.
dollar-denominated corporate debt securities.

VAN KAMPEN EMERGING GROWTH PORTFOLIO

The Portfolio's investment objective is to seek to provide capital
appreciation; any ordinary income received from portfolio securities is entirely
incidental. The Portfolio will, under normal conditions, invest at least 65% of
its total assets in common stocks of small and medium-sized companies, both
domestic and foreign, in the early stages of their life cycles that the
Sub-Adviser believes have the potential to become major enterprises. While the
Portfolio invests primarily in common stocks, to a limited extent, it may invest
in other securities such as preferred stocks, convertible securities, and
warrants. The Portfolio may invest up to 20% of its assets in securities of
foreign issuers. Investing in foreign securities generally involves risks not
ordinarily associated with investing in securities of domestic issuers. (See
"Appendix -- Foreign Investments" and the SAI for a discussion of the risks
involved in foreign investing.)

INVESTMENT RISKS

The value of a Portfolio's shares will fluctuate with the value of the
underlying securities in its portfolio, and in the case of debt securities, with
the general level of interest rates. When interest rates decline, the value of
an investment portfolio invested in fixed-income securities can be expected to
rise. Conversely, when interest rates rise, the value of an investment portfolio
invested in fixed-income securities can be expected to decline. In the case of
foreign currency-denominated securities, these trends may be offset or amplified
by fluctuations in foreign currencies. Investments by a Portfolio in foreign
securities may be affected by adverse political, diplomatic, and economic
developments; changes in foreign currency exchange rates, taxes, or other
assessments imposed on distributions with respect to those investments; and
other factors generally affecting foreign investments. High-yielding, high-risk,
fixed-income securities, which are commonly known as "junk bonds," are subject
to greater market fluctuations and risk of loss of income and principal than
investments in lower-yielding, fixed-income securities. The Emerging Growth,
Growth Equity, and Money Market Portfolios will not invest in "junk bonds,"
while each of the other Portfolios may invest up to 5% of their respective total
assets in "junk bonds." Certain Portfolios intend to employ, from time to time,
certain investment techniques that are designed to enhance income or total
return or hedge against market or currency risks, but which themselves involve
additional risks. These techniques include options on securities, futures,
options on futures, options on indexes, options on foreign currencies, foreign
currency exchange transactions, lending of securities, and when-issued
securities and delayed-delivery transactions. The Portfolios may have
higher-than-average portfolio turnover, which may result in higher-than-average
brokerage commissions and transaction costs.

SALES AND REDEMPTIONS

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

3
<PAGE> 7

FINANCIAL HIGHLIGHTS

The following tables include selected data, derived from the financial
statements, for a share outstanding throughout the period shown for each of the
Portfolios. The tables should be read in conjunction with the financial
statements and notes thereto included in the Trust's Annual Report to
Shareholders, which are included in the SAI in reliance upon the report of
Coopers & Lybrand L.L.P., independent accountants.

Further information about the performance of the Trust is contained in the
Trust's Annual Report dated December 31, 1997, which may be obtained without
charge by calling the Life Company at 1-800-424-4990.

AGA SERIES TRUST
(FORMERLY, WNL SERIES TRUST)

FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD

<TABLE>
<CAPTION>
CREDIT SUISSE (FORMERLY, BEA GROWTH AND INCOME CREDIT SUISSE
GROWTH AND INCOME) INTERNATIONAL EQUITY
-------------------------------- --------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, PERIOD ENDED DECEMBER 31, PERIOD ENDED
----------------- DECEMBER 31, ----------------- DECEMBER 31,
1997 1996 1995* 1997 1996 1995*
------- ------- ------------ ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value
Net asset value, beginning of
period............................ $11.04.. $ 10.46 $ 10.00 $ 10.67 $ 10.33 10.00
Investment Operations
Net investment income ()............ 0.33 0.47 0.14 0.08 0.15 0.06
Net realized and unrealized gain
(loss)............................ 2.11 0.96 0.51 0.37 1.56 0.33
Total from investment operations.... 2.44 1.43 0.65 0.45 1.71 0.39
Distributions to Shareholders From:
Net investment income............... (0.33) (0.47) (0.14) (0.12) (0.15) (0.06)
In excess of net investment
income............................ -- -- -- (0.20) -- --
Net realized gains.................. (0.43) (0.38) -- (0.45) (0.24) --
In excess of net realized gains..... -- -- (0.05) -- (0.98) --
Total distributions to
shareholders...................... (0.76) (0.85) (0.19) (0.77) (1.37) (0.06)
Net asset value, end of period...... $ 12.72 $ 11.04 $ 10.46 $ 10.35 $ 0.67 $ 10.33
Total Return.......................... 22.33% 13.82% 6.57%(2) 4.30% 16.50% 3.93%(2)
Ratios and Supplemental Data
Expenses to average net assets(3)... 0.62% 0.49% 0.12%(4) 77% 0.60% 0.12%(4)
Net investment income to average net
assets............................ 2.87% 4.65% 6.99% 0.71% 1.09% 2.89%
Portfolio turnover rate............. 191% 217% 75% 6% 79% 2%
Average commission rate(5).......... $0.0421 $0.0600 $0.0623 $0.0135 $0.0134 $0.0371
Net assets, end of period (000s).... $ 7,388 $ 3,145 $ 2,136 $ 4,310 $ 2,727 $ 2,083
</TABLE>

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

* The Growth and Income Portfolio and International Equity Portfolio commenced
operations on October 20,1995.

(1) Net investment income is after waiver of fees and reimbursement of certain
expenses by the Investment Adviser, the Sub-administrator and the Life
Company, an affiliate of the Adviser (see Note 2 to the financial
statements). If the Investment Adviser and the Sub-administrator had not
waived fees and the Life Company had not reimbursed expenses for the periods
ended December 31,1997, December 31, 1996 and December 31, 1995, net
investment income (loss) per share would have been $0.10, $0.00 and $(0.06)
for the Growth and Income Portfolio, respectively and $(0.29), $(1.25) and
$(0.18) for the International Equity Portfolio, respectively.

(2) Total return represents aggregate total return for the period indicated and
is not annualized.

(3) If the Investment Adviser and the Sub-administrator had not waived fees and
the Life Company had not reimbursed expenses for the periods ended December
31,1997, December 31, 1996 and December 31, 1995, the ratio of operating
expenses to average net assets would have been 3.26%, 5.15% and 9.95% for
the Growth and Income Portfolio, respectively and 5.06%, 6.41% and 11.83%
for the International Equity Portfolio, respectively.

(4) Annualized.

(5) Represents the average commission rate paid on equity security transactions
on which commissions are charged.

4
<PAGE> 8
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD -- (CONTINUED)

<TABLE>
<CAPTION>
STATE STREET GLOBAL ADVISORS ADVISORS
GROWTH EQUITY (FORMERLY, GLOBAL
ELITEVALUE (FORMERLY, ADVISORS ADVISORS GROWTH EQUITY)
ELITEVALUE ASSET ALLOCATION) --------------------------------------
----------------------------- YEAR ENDED
YEAR ENDED PERIOD ENDED DECEMBER 31, PERIOD ENDED
DECEMBER 31, DECEMBER 31, --------------------- DECEMBER 31,
1997 1996* 1997 1996 1995*
------------- ------------- --------- --------- --------------
<S> <C> <C> <C> <C> <C>
Net Asset Value
Net asset value, beginning of
period....................... $ 12.32 $ 10.00 $ 11.85 $ 10.31 $ 10.00
Investment Operations
Net investment income(1)........ 0.19 0.18 0.17 0.20 0.05
Net realized and unrealized gain
(loss)....................... 2.39 2.48 3.56 1.99 0.31
Total from investment
operations................... 2.58 2.66 3.73 2.19 0.36
Distributions to Shareholders
From:
Net investment income........... (0.19) (0.18) (0.17) (0.20) (0.05)
Net realized gains.............. (0.33) (0.16) (1.34) (0.45) --
Total distributions to
shareholders................. (0.52) (0.34) (1.51) (0.65) (0.05)
Net asset value, end of
period....................... $ 14.38 $ 12.32 $ 14.07 $ 11.85 $ 10.31
Total Return...................... 21.08% 26.70%(2) 31.67% 21.36% 3.57%(2)
Ratios and Supplemental Data
Expenses to average net
assets(3).................... 0.52% 0.36%(4) 0.48% 0.39% 0.12%(4)
Net investment income to average
net assets................... 1.58% 1.74% 1.34% 1.80% 2.46%
Portfolio turnover rate......... 29% 21% 111% 89% 9%
Average commission rate(5)...... $0.0572 $0.0545 $0.0377 $0.0326 $0.0226
Net assets, end of period
(000s)....................... $ 9,471 $ 2,307 $ 7,327 $ 3,420 $ 2,073
</TABLE>

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

* The EliteValue Portfolio and Growth Equity Portfolio commenced operations on
January 2, 1996 and October 20, 1995, respectively.

(1) Net investment income is after waiver of fees and reimbursement of certain
expenses by the Investment Adviser, the Sub-administrator and the Life
Company, an affiliate of the Adviser (see Note 2 to the financial
statements). If the Investment Adviser and the Sub-administrator had not
waived fees and the Life Company had not reimbursed expenses for the periods
ended December 31, 1997 and December 31, 1996, net investment income (loss)
per share would have been $0.00 and $(0.54) for the EliteValue Portfolio,
respectively. For the periods ended December 31, 1997, December 31, 1996 and
December 31, 1995, the net investment income (loss) per share would have
been $(0.11), $(0.29) and $(0.15) for the Growth Equity Portfolio,
respectively.

(2) Total return represents aggregate total return for the period indicated and
is not annualized.

(3) If the Investment Adviser and the Sub-administrator had not waived fees and
the Life Company had not reimbursed expenses for the periods ended December
31, 1997 and December 31, 1996, the ratio of operating expenses to average
net assets would have been 2.76% and 7.45% for the EliteValue Portfolio,
respectively. For the periods ended December 31, 1997, December 31, 1996 and
December 31, 1995, the ratio of operating expenses to average net assets
would have been 3.29%, 4.83% and 9.94% for the Growth Equity Portfolio,
respectively.

(4) Annualized.

(5) Represents the average commission rate paid on equity security transactions
on which commissions are charged.

5
<PAGE> 9
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD -- (CONTINUED)

<TABLE>
<CAPTION>
STATE STREET GLOBAL ADVISORS MONEY SALOMON BROTHERS
MARKET (FORMERLY, GLOBAL ADVISORS U.S. GOVERNMENT
MONEY MARKET) SECURITIES
------------------------------------ -----------------
YEAR ENDED PERIOD ENDED
DECEMBER 31, PERIOD ENDED DECEMBER 31,
------------------- DECEMBER 31, -----------------
1997 1996 1995* 1997 1996*
------- ------- ------------- ------ ------
<S> <C> <C> <C> <C> <C>
Net Asset Value
Net asset value, beginning of
period........................... $ 1.00 $ 1.00 $ 1.00 $ 9.79 $10.00
Investment Operations
Net investment income(1)............ 0.05 0.05 0.01 0.57 0.53
Net realized and unrealized gain
(loss)........................... -- -- -- 0.28 (0.21)
Total from investment operations.... 0.05 0.05 0.01 0.85 0.32
Distributions to Shareholders From:
Net investment income............... (0.05) (0.05) (0.01) (0.57) (0.53)
Total distributions to
shareholders..................... (0.05) (0.05) (0.01) (0.57) (0.53)
Net asset value, end of period...... $ 1.00 $ 1.00 $ 1.00 $10.07 $ 9.79
Total Return.......................... 5.50% 5.19% 1.17%(2) 8.89% 3.40%(2)
Ratios and Supplemental Data
Expenses to average net assets(3)... 0.32% 0.29% 0.12%(4) 0.35% 0.22%(4)
Net investment income to average net
assets........................... 5.41% 5.23% 5.25% 6.25% 5.91%
Portfolio turnover rate............. N/A N/A N/A 615% 297%
Average commission rate(5).......... -- -- -- -- --
Net assets, end of period (000s).... $5,100 $1,291 $ 126 $3,986 $2,347
</TABLE>

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

* The Money Market Portfolio and U.S. Government Securities Portfolio
commenced operations on October 10, 1995 and February 6, 1996, respectively.

(1) Net investment income is after waiver of fees and reimbursement of certain
expenses by the Investment Adviser, the Sub-administrator and the Life
Company, an affiliate of the Adviser (see Note 2 to the financial
statements). If the Investment Adviser and the Sub-administrator had not
waived fees and the Life Company had not reimbursed expenses for the periods
ended December 31, 1997, December 31, 1996 and December 31, 1995, net
investment income (loss) per share would have been $0.03, $(0.08) and
$(0.35) for the Money Market Portfolio, respectively. For the periods ended
December 31, 1997 and December 31, 1996, the net investment income (loss)
per share would have been $0.28 and $0.10 for the U.S. Government Securities
Portfolio, respectively.

(2) Total return represents aggregate total return for the period indicated and
is not annualized.

(3) If the Investment Adviser and the Sub-administrator had not waived fees and
the Life Company had not reimbursed expenses for the periods ended December
31, 1997, December 31, 1996 and December 31, 1995, the ratio of operating
expenses to average net assets would have been 4.17%, 14.15% and 161.83% for
the Money Market Portfolio, respectively. For the periods ended December 31,
1997 and December 31, 1996, the ratio of operating expenses to average net
assets would have been 4.84% and 5.26% for the U.S. Government Securities
Portfolio, respectively.

(4) Annualized.

(5) Represents the average commission rate paid on equity security transactions
on which commissions are charged.

6
<PAGE> 10
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD -- (CONTINUED)

<TABLE>
<CAPTION>
VAN KAMPEN
EMERGING GROWTH
(FORMERLY, VAN KAMPEN
AMERICAN CAPITAL
EMERGING GROWTH)
----------------------------
YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31,
1997 1996*
------------ ------------
<S> <C> <C>
Net Asset Value.............................................
Net asset value, beginning of period...................... $ 11.54 $ 10.00
Investment Operations
Net investment income(1).................................. 0.03 0.05
Net realized and unrealized gain (loss)................... 2.33 1.86
Total from investment operations.......................... 2.36 1.91
Distributions to Shareholders From:
Net investment income..................................... (0.03) (0.05)
Net realized gains........................................ -- (0.32)
Total distributions to shareholders....................... (0.03) (0.37)
Net asset value, end of period............................ $ 13.87 $ 11.54
Total Return................................................ 20.45% 19.06%(2)
Ratios and Supplemental Data
Expenses to average net assets(3)......................... 0.62% 0.46%(4)
Net investment income to average net assets............... 0.23% 0.40%
Portfolio turnover rate................................... 107% 154%
Average commission rate(5)................................ $0.0419 $0.0419
Net assets, end of period (000s)............................ $ 5,499 $ 1,882
</TABLE>

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

* The Emerging Growth Portfolio commenced operations on January 2, 1996.

(2) Total return represents aggregate total return for the period indicated and
is not annualized.

(3) If the Investment Adviser and the Sub-administrator had not waived fees and
Life Company had not reimbursed expenses for the periods ended December 31,
1997 and December 31, 1996, the ratio of operating expenses to average net
assets would have been 5.65% and 11.22% for the Emerging Growth Portfolio.

(4) Annualized

(5) Represents the average commission rate paid on equity security transactions
on which commissions are charged.

7
<PAGE> 11

INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS

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

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

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

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

CREDIT SUISSE GROWTH AND INCOME PORTFOLIO

Investment Objective

The Portfolio's goal is to provide long-term capital growth, current
income, and growth of income, consistent with reasonable investment risk. This
investment objective is fundamental and may not be changed without the
affirmative vote of a majority of the Portfolio's outstanding shares (as defined
in the Investment Company Act of 1940, as amended ("the 1940 Act")).

Management Policies

The Portfolio will invest primarily in domestic equity and debt securities
and cash equivalent instruments. The Portfolio may also invest in securities of
foreign issuers. The proportion of the Portfolio's assets to be invested in each
type of security will vary from time to time in accordance with the
Sub-Adviser's assessment of economic conditions and investment opportunities.
The asset allocation strategy is based on the premise that, from time to time,
certain asset classes are more attractive long-term investments than others.
Timely shifts among equity securities, debt securities, and cash equivalent
instruments, as determined by their relative over-valuation or under-valuation,
should produce superior investment returns over the long term. In general, the
Portfolio will not attempt to predict short-term market movements or interest
rate changes, focusing instead upon a long-term outlook. The Sub-Adviser
anticipates that, under normal market conditions, between

8
<PAGE> 12

35% and 65% of the Portfolio's total assets will be invested in equity
securities, and between 35% and 65% will be invested in debt securities.

In selecting equity securities in which to invest, the Sub-Adviser
generally employs a value-oriented approach that combines "top-down" and
"bottom-up" elements. The process begins with a top-down thematic approach, by
which the Sub-Adviser attempts to identify the three or four macroeconomic
variables most likely to drive equity returns in the medium term, and the
sectors, industries, and stocks most likely to benefit as those themes are
played out. This is combined with a bottom-up approach to stock selection, which
identifies value through the application of "cash-on-cash analysis." The
Sub-Adviser looks at the free cash flow produced by a company within the context
of the total cash value of the enterprise. This ratio of cash flow to
"enterprise value" permits a comparative analysis of companies across industries
and sectors, and provides a tool with which to analyze the quality and
priorities of the company's management. The Portfolio's approach is based upon
the observation that a company focusing upon cash flow will generally be one in
which management's overarching concern is the maximization of shareholder value.
Equity securities may include common stocks, preferred stocks, and securities
that are convertible into common stock and readily marketable securities, such
as rights and warrants, that derive their value from common stock.

In selecting debt securities in which to invest, the Sub-Adviser generally
employs an approach that focuses on the exploitation of market inefficiencies,
which exist primarily due to the differing objectives of various investors and
to the varying restrictions that limit their investment choices. In determining
whether the Portfolio should invest in a particular debt security, the
Sub-Adviser reviews the terms of the instrument and evaluates the
creditworthiness of the issuer of the instrument, considering short-term debt,
leverage, capitalization, the quality and depth of management, profitability,
return on assets, and economic factors relative to the issuer's industry or
market sector. The Sub-Adviser then performs relative valuation analysis,
comparing the value in sectors and securities with regard to price as well as
yield. The Sub-Adviser generally does not rely on its ability to correctly
predict movements in the direction of interest rates. Debt securities may
include bonds, debentures, notes, equipment lease and trust certificates,
mortgage-related securities, and obligations issued or guaranteed by the U.S.
government or its agencies or instrumentalities. The Sub-Adviser's Fixed-Income
Management Team will manage the Fixed-Income portion of the Portfolio, which
will invest primarily in domestic fixed-income securities consistent with
comparable broad market fixed-income indexes, such as the Lehman Brothers
Aggregate Bond Index. The Sub-Adviser estimates that the average weighted
maturity of the debt securities held by the Portfolio will range between five
and 15 years. Depending on prevailing market conditions, the Portfolio may
purchase debt securities at a discount from face value, which produces a yield
greater than the coupon rate. Conversely, if debt securities are purchased at a
premium over-face value, the yield will be lower than the coupon rate. An
increase in interest rates will generally reduce the value of the fixed-income
investments in the Portfolio, and a decline in interest rates will generally
increase the value of those investments.

The cash equivalent instruments in which the Portfolio may invest consist
of U.S. government securities, certificates of deposit, time deposits, bankers'
acceptances, short-term investment-grade corporate bonds and short-term debt
instruments, and repurchase agreements. While the Portfolio does not intend to
limit the amount of its assets invested in cash equivalent instruments, except
to the extent believed necessary to achieve its investment objective, it does
not expect, under normal market conditions, to have a substantial portion of its
assets invested in money market instruments. However, when the Sub-Adviser
determines that adverse market conditions exist, the Portfolio may adopt a
temporary defensive posture and invest entirely in cash equivalent instruments.
In addition, the Portfolio may invest in cash equivalent instruments in
anticipation of investing cash positions. To the extent the Portfolio is so
invested, the Portfolio's investment objective may not be achieved. (See the
Appendix and the SAI for a discussion of these and other investment policies and
strategies with respect to this Portfolio.)

High rates of Portfolio turnover necessarily result in correspondingly
greater brokerage and portfolio trading costs, which are paid by the Portfolio.
The Portfolio turnover rate for the Portfolio for the period ended December 31,
1997, was 191%. (See "Portfolio Turnover" in the SAI.)

9
<PAGE> 13

CREDIT SUISSE INTERNATIONAL EQUITY PORTFOLIO

The Portfolio's investment objective is long-term capital appreciation.
This investment objective is fundamental and may not be changed without the
affirmative vote of a majority of the Portfolio's outstanding shares (as defined
in the 1940 Act). The Portfolio seeks to achieve its objective primarily by
investing in equity and equity-related securities of companies from at least
five different countries, excluding the United States.

The Portfolio is intended for investors who can accept the risks involved
in investments in equity and equity-related securities of non-U.S. issuers, as
well as in foreign currencies, and in the active management techniques that the
Portfolio generally employs.

Under normal conditions, the Portfolio will invest at least 65% of its
total assets in equity securities of issuers whose principal places of business
(as determined by the location of the issuer's principal headquarters) are
located in countries other than the United States.

Foreign Equity Securities. The Portfolio will invest, under normal
conditions, at least 65% of its total assets in issuers located in at least five
different countries, excluding the United States. The Sub-Adviser expects that
the majority of the Portfolio's investments will be in issuers in the following
markets: United States, Canada, Japan, the United Kingdom, Germany, France,
Malaysia, the Netherlands, Italy, Singapore, Switzerland, Spain, Mexico,
Australia, New Zealand, Hong Kong, and Sweden. However, the Portfolio will also
invest in other European, Pacific Rim, African, and Latin American markets. As
market and global conditions change, the Portfolio will change its allocations
among the countries of the world and nothing herein will limit the Portfolio's
ability to invest in or avoid any particular countries or regions. The Portfolio
may also invest in the securities of issuers traded on quoted markets of other
countries.

The equity and equity-related securities in which the Portfolio will
primarily invest are common stock, preferred stock, convertible debt
obligations, convertible preferred stock and warrants, or other rights to
acquire stock that the Sub-Adviser believes offer the potential for long-term
capital appreciation. The Portfolio also may invest in securities of foreign
issuers in the form of sponsored and unsponsored ADRs, Global Depository
Receipts ("GDRs"), European Depository Receipts ("EDRs"), International
Depository Receipts ("IDRs"), or other similar instruments representing
securities of foreign issuers. (See the Appendix and the SAI for a description
of these investments.) While the investment policy of the Portfolio is to be
diversified as to both countries and individual issuers, the Sub-Adviser selects
individual countries and securities on the basis of several factors. In
allocating the Portfolio's assets among various countries, the Sub-Adviser will
seek economic and market environments favorable for capital appreciation and,
with respect to developing countries, those with economic, political, and stock
market environments with prospects of stabilizing or improving.

In analyzing foreign companies for investment, the Sub-Adviser will
ordinarily look for one or more of the following characteristics in relation to
the prevailing prices of the securities of such companies: prospects for
above-average earnings growth per share; high return on invested capital; sound
balance sheet, financial, and accounting policies, and overall financial
strength; strong competitive advantages; effective research, product
development, and marketing; efficient service; pricing flexibility; strength of
management; and general operating characteristics that will enable the companies
to compete successfully in their respective marketplaces. The Sub-Adviser will
aim to invest in companies that have growth prospects or whose value it believes
is not fully reflected in the relevant markets.

Temporary Investments. The Portfolio may, when the Sub-Adviser determines
that market conditions warrant, adopt a temporary defensive position and may
hold cash (U.S. dollars or foreign currencies) and may invest up to 100% of its
assets in money market instruments or debt securities of U.S. or foreign
issuers. The Portfolio may also invest cash held to meet redemption requests and
expenses in such money market instruments and debt securities. For these
purposes, such money market instruments are banker's acceptances, certificates
of deposit, time deposits, commercial paper, short-term government, and
corporate obligations. The debt securities of U.S. issuers or foreign entities
in which the Portfolio will invest primarily will be investment-grade debt
securities, except that the Portfolio may invest up to 5% of its total assets in
non-

10
<PAGE> 14

investment-grade debt securities. Investment-grade debt securities include: (a)
bonds rated in one of the four highest rating categories by any NRSRO (e.g.,
"BBB" or higher by S&P); (b) U.S. government securities; (c) commercial paper
rated in one of the two highest rating categories of any NRSRO (e.g., "A-2" or
higher by S&P); (d) bank obligations (certificates of deposit, bankers'
acceptances, and time deposits) with a long-term rating in one of the four
highest categories by any NRSRO (e.g., "BBB" or higher by S&P), with respect to
bank obligations of more than one year, or in one of the three highest
categories by any NRSRO (e.g., "A-3" or higher by S&P), with respect to bank
obligations maturing in one year or less; (e) repurchase agreements involving
these securities; or (f) unrated debt securities that are deemed by the
Sub-Adviser to be of comparable quality. All ratings are determined at the time
of investment. Securities rated in the fourth-highest category, although
considered investment grade, have speculative characteristics and may be subject
to greater fluctuations in value than higher-rated securities.
Non-investment-grade debt securities include: (a) securities rated as low as "C"
by S&P, or their equivalents, which are commonly known as "junk bonds"; (b)
commercial paper rated as low as "A-3" by S&P, or their equivalents; and (c)
unrated debt securities determined to be of comparable quality by the
Sub-Adviser. (See "Appendix -- Lower-Rated Securities" and the SAI for a
discussion of the risks involved in investing in non-investment-grade
securities.) U.S. government securities are securities issued or guaranteed by
the U.S. government or its agencies or instrumentalities.

The Portfolio may enter into repurchase agreements to earn a return on
temporarily available cash. The Portfolio will not invest in repurchase
agreements maturing in more than seven days if any such investment, together
with any other illiquid securities held by the Portfolio, exceeds 10% of the
value of the Portfolio's net assets. The Portfolio may also lend portfolio
securities to unaffiliated brokers, dealers, and financial institutions provided
that: (a) immediately after any such loan, the value of the securities loaned
does not exceed 15% of the total value of the Portfolio's assets and (b) any
securities loan is collateralized in accordance with applicable regulatory
requirements.

The Portfolio may invest in restricted securities and other illiquid
assets. (See the Appendix and the SAI for further information relating to
restricted and illiquid securities.) The Portfolio may purchase and sell foreign
currencies on a spot basis in connection with the settlement of transactions in
securities traded in such foreign currencies. The Portfolio may enter into
forward foreign currency contracts and foreign currency futures and option
contracts primarily for hedging purposes. This includes entering into forward
foreign currency contracts and foreign currency futures contracts in
anticipation of investments in companies whose securities are denominated in
those currencies.

International investing, in general, may involve greater risks than U.S.
investments. These risks may be intensified in the case of investments in
emerging markets or countries with limited or developing capital markets. (See
"Appendix -- Foreign Investments" and the SAI for a discussion of the risks
involved in foreign investing.)

ELITEVALUE PORTFOLIO

The investment objective of the Portfolio is to achieve growth of capital
over time through investment in a portfolio consisting of common stocks, bonds,
and cash equivalents, the percentages of which will vary based on the
Sub-Adviser's assessments of the relative outlook for such investments. This
investment objective is fundamental and may not be changed without the
affirmative vote of a majority of the Portfolio's outstanding shares (as defined
in the 1940 Act). In seeking to achieve its investment objective, the types of
equity securities in which the Portfolio may invest are likely to be primarily
equity securities of companies that are believed by the Sub-Adviser to be
undervalued in the marketplace in relation to factors such as the companies'
assets or earnings. It is the Sub-Adviser's intention to invest in securities of
companies which, in the Sub-Adviser's opinion, possess one or more of the
following characteristics: undervalued assets, valuable consumer or commercial
franchises, securities valuation below peer companies, substantial and growing
cash flow, and/or a favorable price to book value relationship. Investments for
the equity portion of the Portfolio will primarily consist of equity securities,
such as common stocks, preferred stocks, convertible securities, and rights and
warrants, in proportions that will vary from time to time. The equity portion of
the Portfolio is invested primarily in stocks listed on the New York Stock
Exchange ("NYSE"). In addition, the Portfolio
11
<PAGE> 15

may also purchase securities listed on other domestic securities exchanges,
securities traded in the domestic over-the-counter market and foreign
securities, provided they are listed on a domestic or foreign securities
exchange, or represented by ADRs listed on a domestic securities exchange, or
traded in domestic or foreign over-the-counter markets.

To a lesser extent, the equity portion of the Portfolio will be invested in
equity securities of companies with market capitalizations of less than $1
billion. Smaller-capitalization companies are often underpriced for the
following reasons: (a) institutional investors, which currently represent a
majority of the trading volume in the shares of publicly traded companies, are
often less interested in such companies, because in order to acquire an equity
position that is large enough to be meaningful to an institutional investor,
such an investor may be required to buy a large percentage of the company's
outstanding equity securities and (b) such companies may not be regularly
researched by stock analysts, thereby resulting in greater discrepancies in
valuation. The Portfolio may also purchase securities in initial public
offerings, or shortly after such offerings have been completed, when the
Sub-Adviser believes that such securities have greater-than-average market
appreciation potential. Debt securities invested in by the Portfolio are
expected to be predominantly investment-grade intermediate to long-term U.S.
government and corporate debt, although the Portfolio will also invest in
high-quality, short-term money market and cash equivalent securities, and may
invest almost all of its assets in such securities when the Sub-Adviser deems it
advisable in order to preserve capital.

The allocation of the Portfolio's assets among the different types of
permitted investments will vary from time to time based on the Sub-Adviser's
evaluation of economic and market trends and its perception of the relative
values available from such types of securities at any given time. There is
neither a minimum nor a maximum percentage of the Portfolio's assets that may,
at any given time, be invested in any of the types of investments identified
above. Consequently, while the Portfolio will earn income to the extent it is
invested in bonds or cash equivalents, the Portfolio does not have any specific
income objective.

The Portfolio may dispose of investments (including money market
instruments) regardless of the holding period if, in the opinion of the
Sub-Adviser, an issuer's creditworthiness or perceived changes in a company's
growth prospects or asset value make selling them advisable. Such an investment
decision may result in capital gains or losses and could result in a high
portfolio turnover rate during a given period, resulting in increased
transaction costs related to equity securities. Disposing of debt securities in
these circumstances should not increase direct transaction costs, since debt
securities are normally traded on a principal basis without brokerage
commissions. However, such transactions do involve a mark-up or mark-down of the
price.

It is anticipated that the Portfolio will have an annual turnover rate
(excluding turnover of securities having a maturity of one year or less) of 100%
or less. A 100% annual turnover rate would occur, for example, if all the
securities in the Portfolio's investment portfolio were replaced once in a
period of one year. An investment in the Portfolio will entail both market and
financial risk, the extent of which depends on the amount of the Portfolio's
assets that are committed to equity, longer-term debt or money market securities
at any particular time. As the Portfolio may invest in mortgage-backed
securities, such securities, while similar to other fixed-income securities,
involve the additional risk of prepayment because mortgage prepayments are
passed through to the holder of the mortgage-backed security and must be
reinvested. Prepayments of mortgage principal reduce the stream of future
payments and generate cash which must be reinvested. When interest rates fall,
prepayments tend to rise. As such, the Portfolio may have to reinvest that
portion of its assets invested in such securities more frequently when interest
rates are low than when interest rates are high.

There is no limit to the amount of foreign securities that the Portfolio
may acquire. Certain factors and risks are presented by investment in foreign
securities, which are in addition to the usual risks inherent in domestic
securities. (See "Appendix -- Foreign Investments" and the SAI for a discussion
of the risks involved in foreign investing.)

It is the present intention of the Sub-Adviser to invest no more than 5% of
the Portfolio's net assets in bonds rated below "Baa3" by Moody's or "BBB" by
S&P (commonly known as "junk bonds"). In the event that the Sub-Adviser intends
in the future to invest more than 5% of the Portfolio's net assets in junk
bonds, appropriate disclosures will be made to existing and prospective
shareholders. (For information about the possible risks of investing in junk
bonds, see "Appendix -- Lower-Rated Investments" and the SAI.)
12
<PAGE> 16

The Portfolio may also engage in repurchase agreements, lend portfolio
securities (up to 10% of the value of the Portfolio's total assets), enter into
forward foreign currency contracts, and invest in modified pass-through
certificates. These investments and transactions are described in greater detail
in the Appendix and the SAI.

STATE STREET GLOBAL ADVISORS GROWTH EQUITY PORTFOLIO

The Portfolio's investment objective is to provide total returns that
exceed, over time, the S&P 500 Index through investment in equity securities.
This objective may be changed only with the approval of a majority of the
Portfolio's shareholders as defined by the 1940 Act.

Equity securities are selected for the Portfolio on the basis of a
proprietary analytical model of the Sub-Adviser. Each security is ranked
according to two separate and uncorrelated measures: value and the momentum of
Wall Street sentiment. The value measure compares a company's assets, projected
earnings growth, and cash flow growth with its stock price within the context of
its historical valuation. The measure of Wall Street sentiment examines changes
in Wall Street analysts' earnings estimates and ranks stocks by the strength and
consistency of those changes. These two measures are combined to create a single
composite score of each stock's attractiveness. These scores are then plotted on
a matrix according to their relative attractiveness. Sector weights are
maintained at a similar level to that of the S&P 500 Index to avoid unintended
exposure to factors such as the direction of the economy, interest rates, energy
prices, and inflation.

The Portfolio invests at least 65% of its total assets in equity
securities. However, the Portfolio may invest temporarily for defensive
purposes, without limitation, in certain high-quality, short-term, fixed-income
securities. Such securities may be used to invest uncommitted cash balances or
to maintain liquidity to meet shareholder redemptions. These securities include
obligations issued or guaranteed as to principal and interest by the U.S.
government, its agencies and instrumentalities, and repurchase agreements
collateralized by these obligations, commercial paper, bank certificates of
deposit, bankers' acceptances, and time deposits.

The Portfolio may invest in U.S. government securities, which include U.S.
Treasury bills, notes and bonds, and other obligations issued or guaranteed as
to interest and principal by the U.S. government, its agencies and
instrumentalities. Obligations issued or guaranteed as to interest and principal
by the U.S. government, its agencies and instrumentalities, include securities
that are supported by the full faith and credit of the United States Treasury,
securities that are supported by the right of the issuer to borrow from the
United States Treasury, discretionary authority of the U.S. government agency or
instrumentality, and securities supported solely by the creditworthiness of the
issuer.

The Portfolio may enter into or invest in repurchase agreements, reverse
repurchase agreements, forward commitments, when-issued transactions (up to 25%
of the Portfolio's net assets), illiquid securities (up to 15% of the
Portfolio's net assets), restricted securities (up to 10% of the Portfolio's net
assets), and variable amount master demand notes. The Portfolio also may enter
into futures contracts, options on futures, covered put and call options on
securities in which it may directly invest, and purchase or sell options on
securities indexes that are comprised of securities in which the Portfolio may
directly invest. The Portfolio may lend portfolio securities with a value of up
to 33 1/3% of the Portfolio's total assets.

In addition to the policies noted above, the Portfolio may also invest in
obligations of foreign issuers which are U.S. dollar-denominated, ADRs,
corporate bonds, debentures, notes, and warrants. Investment in each of these
instruments will not exceed 5% of the Portfolio's total net assets during the
coming year.

These investments and transactions are described in greater detail in the
Appendix and the SAI.

STATE STREET GLOBAL ADVISORS MONEY MARKET PORTFOLIO

The Portfolio's investment objective is to maximize current income, to the
extent consistent with the preservation of capital and liquidity and the
maintenance of a stable $1.00 per share net asset value, by investing in
dollar-denominated securities with remaining maturities of one year or less.
This investment

13
<PAGE> 17

objective is fundamental and may not be changed without the affirmative vote of
a majority of the Portfolio's outstanding shares (as defined in the 1940 Act).

The Portfolio attempts to meet its investment objective by investing in
high-quality money market instruments. Such instruments include: (a) U.S.
Treasury bills, notes and bonds; (b) other obligations issued or guaranteed as
to interest and principal by the U.S. government, its agencies and
instrumentalities; (c) instruments of U.S. and foreign banks, including
certificates of deposit, banker's acceptances, and time deposits; these
instruments may include Eurodollar Certificates of Deposit ("ECDs"), Eurodollar
Time Deposits ("ETDs") and Yankee Certificates of Deposit ("YCDs"); (d)
commercial paper of U.S. and foreign companies; (e) asset-backed securities; (f)
corporate obligations; (g) variable amount master demand notes; and (h)
repurchase agreements.

The Portfolio will limit its portfolio investments, including puts and
repurchase agreements, if any, to those U.S. dollar-denominated instruments
that, at the time of acquisition, the Sub-Adviser determines present minimal
credit risk and are: (a) rated as a First Tier or Second Tier security (as
defined in Rule 2a-7 under the 1940 Act) by any two NRSROs; (b) long-term
securities with a remaining maturity of 397 days or less and which have been
assigned a short-term rating in the two highest rating categories by any two
NRSROs or whose issuer has outstanding short-term obligations of comparable
priority and security which are rated in the two highest short-term rating
categories by any two NRSROs; (c) rated as a First Tier or Second Tier security
if rated by only one NRSRO; or (d) if unrated, determined by the Sub-Adviser to
be of a quality comparable to a First or Second Tier security.

The Portfolio may invest in U.S. government securities, which include U.S.
Treasury bills, notes and bonds, and other obligations issued or guaranteed as
to interest and principal by the U.S. government, its agencies and
instrumentalities. Obligations issued or guaranteed as to interest and principal
by the U.S. government, its agencies and instrumentalities include securities
that are supported by the full faith and credit of the United States Treasury,
securities that are supported by the right of the issuer to borrow from the
United States Treasury, discretionary authority of the U.S. government agency or
instrumentality, and securities supported solely by the creditworthiness of the
issuer.

The Portfolio may also purchase asset-backed securities representing
undivided fractional interests in pools of instruments, such as consumer loans.
The Portfolio may invest in mortgage-related pass-through securities, including
GNMA Certificates ("Ginnie Maes"), FHLMC Mortgage Participation Certificates
("Freddie Macs"), FNMA, and Guaranteed Mortgage Pass-Through Certificates
("Fannie Maes"). Mortgage pass-through certificates are mortgage-backed
securities representing undivided fractional interests in pools of
mortgage-backed loans. These loans are made by mortgage bankers, commercial
banks, savings and loan associations, and other lenders. Ginnie Maes are
guaranteed by the full faith and credit of the U.S. government, but Freddie Macs
and Fannie Maes are not.

The Portfolio may invest in zero-coupon securities and variable and
floating rate securities. As stated above, the Portfolio may invest in ECDs,
ETDs, and YCDs. ECDs are U.S. dollar-denominated certificates of deposit issued
by foreign branches of domestic banks. ETDs are U.S. dollar-denominated deposits
in foreign branches of U.S. banks and foreign banks. YCDs are U.S.
dollar-denominated certificates of deposit issued by U.S. branches of foreign
banks.

The Portfolio may lend portfolio securities with a value of up to 33 1/3%
of its total assets.

These investments and transactions are described in greater detail in the
Appendix and the SAI.

The Portfolio must limit investments to securities with remaining
maturities of 397 days or less, and must maintain a dollar-weighted average
maturity of 90 days or less. The Portfolio normally holds instruments to
maturity, but may dispose of them prior to maturity if the Sub-Adviser finds it
advantageous to do so.

14
<PAGE> 18

SALOMON BROTHERS U.S. GOVERNMENT SECURITIES PORTFOLIO

The investment objective of the Portfolio is to seek a high level of
current income. This investment objective is fundamental and may not be changed
without the affirmative vote of a majority of the Portfolio's outstanding shares
(as defined in the 1940 Act). The Sub-Adviser seeks to attain the Portfolio's
objective by investing a substantial portion of its assets in debt obligations
and mortgage-backed securities issued or guaranteed by the U.S. government and
its agencies or instrumentalities, and collateralized mortgage obligations
backed by such securities.

At least 80% of the total assets of the Portfolio will be invested in:

1. U.S. Treasury obligations;

2. Obligations issued or guaranteed by agencies or instrumentalities
of the U.S. government which are backed by their own credit and may not be
backed by the full faith and credit of the U.S. government;

3. Mortgage-backed securities guaranteed by the GNMA (popularly known
as "Ginnie Maes") that are supported by the full faith and credit of the
U.S. government, and mortgage-backed securities guaranteed by agencies or
instrumentalities of the U.S. government, which are supported by their own
credit, but not the full faith and credit of the U.S. government, such as
the FHLMC and the FNMA; and

4. Collateralized mortgage obligations issued by private issuers for
which the underlying mortgage-backed securities serving as collateral are
backed (a) by the credit only of the U.S. government agency or
instrumentality that issues or guarantees the mortgage-backed securities or
(b) by the full faith and credit of the U.S. government.

Up to 20% of the total assets of the Portfolio may be invested in U.S.
dollar-denominated marketable corporate debt securities (such as bonds and
debentures) of domestic and foreign issuers rated at the time of purchase "A" or
better by Moody's or S&P, or of comparable quality thereto as determined by the
Sub-Adviser. The risks associated with such investments are described in greater
detail in the Appendix.

From time to time, a significant portion of the Portfolio's assets may be
invested in mortgage-backed securities. The mortgage-backed securities in which
the Portfolio invests represent participating interests in pools of fixed-rate
and adjustable-rate residential mortgage loans issued or guaranteed by agencies
or instrumentalities of the U.S. government. However, any guarantee of these
types of securities runs only to the principal and interest payments on the
securities and not to the market value of such securities or the principal and
interest payments on the underlying mortgages. In addition, the guarantee only
runs to the portfolio securities held by the Portfolio and not the purchase of
shares of the Portfolio.

Mortgage-backed securities are issued by lenders such as mortgage bankers,
commercial banks, and savings and loan associations. Mortgage-backed securities
generally provide monthly payments which are, in effect, a "pass-through" of the
monthly interest and principal payments (including any prepayments) made by the
individual borrowers on the pooled mortgage loans. Principal prepayments result
from the sale of the underlying property or the refinancing or foreclosure of
underlying mortgages.

The yield of mortgage-backed securities is based on the prepayment rates
experienced over the life of the security. Prepayments tend to increase during
periods of falling interest rates, while during periods of rising interest rates
prepayments will most likely decline. Reinvestments by the Portfolio of
scheduled principal payments and unscheduled prepayments may occur at higher or
lower rates than the original investment, thus affecting the yield of the
Portfolio. Monthly interest payments received by the Portfolio have a
compounding effect, which will increase the yield to shareholders as compared to
debt obligations that pay interest semi-annually. (For a further description of
mortgage-backed securities, see the Appendix and the SAI.)

The Portfolio will not knowingly invest in a high-risk mortgage security.
The term "high-risk mortgage security" is defined generally as any mortgage
security that exhibits significantly greater price volatility than a benchmark
security, the FNMA current coupon 30-year, mortgage-backed pass-through
security. Shares of the Portfolio are neither insured nor guaranteed by the U.S.
government, its agencies or instrumentalities. Neither the issuance by, nor the
guarantee of, a U.S. government agency for a security constitutes assurance
15
<PAGE> 19

that the security will not significantly fluctuate in value or that the
Portfolio will receive the originally anticipated yield on the security.

The Portfolio may engage in various hedging and other strategic
transactions, including that it may: write covered call options and put options
on securities and purchase call and put options on securities; write covered
call and put options on securities indexes and purchase call and put options on
securities indexes; and may enter into futures contracts on financial
instruments and indexes and write and purchase put and call options on such
futures contracts. It is not presently anticipated that any of these strategies
will be used to a significant degree by the Portfolio. The Appendix and the SAI
contain a description of these strategies and of certain risks associated
therewith.

The Portfolio may purchase debt securities on a "when-issued" or
"forward-delivery" basis, loan portfolio securities (up to 20% of total
Portfolio assets), engage in repurchase agreements, reverse repurchase
agreements and dollar-roll transactions, and invest in illiquid securities (up
to 15% of the Portfolio's net assets, not including restricted securities for
which a ready market is available pursuant to exemption provided by Rule 144A
under the Securities Act of 1933 (the "1933 Act")). These investments and
transactions are described in greater detail in the Appendix and the SAI.

High rates of portfolio turnover necessarily result in correspondingly
greater brokerage and portfolio trading costs that are paid by the Portfolio.
The Portfolio turnover rate for the period ended December 31, 1997, was 615%.
(See "Portfolio Turnover" in the SAI.)

VAN KAMPEN EMERGING GROWTH PORTFOLIO

The Portfolio seeks to provide capital appreciation for its shareholders;
any ordinary income received from portfolio securities is entirely incidental.
This objective is not fundamental and may be changed by the Trust's Board of
Trustees without shareholder approval; however, no change is anticipated. If
there is a change in the investment objective of the Portfolio, shareholders
should consider whether the Portfolio remains an appropriate investment in light
of their then-current financial position and needs. There can, of course, be no
assurance that the objective of capital appreciation will be realized.
Therefore, full consideration should be given to the risks inherent in the
investment techniques that the Sub-Adviser may use to achieve such objective.

As a fundamental investment policy, the Portfolio, under normal conditions,
invests at least 65% of its total assets in common stocks of small and
medium-sized companies, both domestic and foreign, in the early stages of their
life cycles that the Sub-Adviser believes have the potential to become major
enterprises. Investments in such companies may offer greater opportunities for
growth of capital than larger, more established companies, but also may involve
certain special risks. Emerging growth companies often have limited product
lines, markets, or financial resources, and they may be dependent upon one
person or a few key people for management. The securities of such companies may
be subject to more abrupt or erratic market movements than securities of larger,
more established companies or the market averages in general. While the
Portfolio will invest primarily in common stocks, to a limited extent, it may
invest in other securities, such as preferred stocks, convertible securities,
and warrants.

The Portfolio does not limit its investment to any single group or type of
security. The Portfolio may also invest in special situations involving new
management, special products and techniques, unusual developments, mergers, or
liquidations. Investments in unseasoned companies and special situations often
involve much greater risks than are inherent in ordinary investments, because
securities of such companies may be more likely to experience unexpected
fluctuations in price.

The Portfolio's primary approach is to seek what the Sub-Adviser believes
to be unusually attractive growth investments on an individual company basis.
The Portfolio may invest in securities that have above-average volatility of
price movement. Because prices of common stocks and other securities fluctuate,
the value of an investment in the Portfolio will vary based on the Portfolio's
investment performance. The Portfolio attempts to reduce overall exposure to
risk from declines in securities prices by spreading its

16
<PAGE> 20

investments over many different companies in a variety of industries. There is,
however, no assurance that the Portfolio will be successful in achieving its
objective.

The Portfolio may invest up to 20% of its total assets in securities of
foreign issuers. (See "Appendix -- Foreign Investments" and the SAI for a
discussion of the risks involved in foreign investing.) Additionally, the
Portfolio may invest up to 10% of the value of its assets in restricted
securities (i.e., securities which may not be sold without registration under
the 1933 Act) and in other securities not having readily-available market
quotations. The Portfolio may enter into repurchase agreements with domestic
banks and broker-dealers that involve certain risks. The Portfolio does not
presently expect to commit as much as 5% of its total assets to investments in
either warrants or restricted securities. The risks involved in investing in
restricted securities, warrants, and repurchase agreements are described under
"Investment Objectives and Policies" in the SAI.

The Portfolio may invest in options, futures contracts, and related
options. These investments and transactions are described in greater detail in
the Appendix and SAI.

MANAGEMENT OF THE TRUST

INVESTMENT ADVISER

Under an Investment Advisory Agreement, dated April 21, 1995, AGA
Investment Advisory Services, Inc., (formerly, WNL Investment Advisory Services,
Inc.), a Delaware corporation (the "Adviser"), manages the business and affairs
of the Portfolios and the Trust, subject to the control of the Trustees. The
Adviser was incorporated in 1994 and is located at 2929 Allen Parkway, Houston,
Texas 77019. The Adviser is an indirect subsidiary of Western National
Corporation, a Delaware corporation ("Western National"). Effective February 25,
1998, Western National became a wholly owned subsidiary of AGC Life Insurance
Company, a Missouri domiciled life insurer and a wholly owned subsidiary of
American General Corporation, a Texas corporation.

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

17
<PAGE> 21

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

<TABLE>
<CAPTION>
PORTFOLIO ADVISORY FEE
--------- ------------
<S> <C>
Credit Suisse Growth and Income............................ .75% of average net assets
Credit Suisse International Equity......................... .90% of average net assets
EliteValue................................................. .65% of average net assets
State Street Global Advisors Growth Equity................. .61% of average net assets
State Street Global Advisors Money Market.................. .45% of average net assets
Salomon Brothers U.S. Government Securities................ .475% of average net assets
Van Kampen Emerging Growth................................. .75% of average net assets
</TABLE>

Advisory Fee Waiver and Expense Cap

The Adviser voluntarily agreed to waive that portion of its advisory fee
which is in excess of the amount payable by the Adviser to each Sub-Adviser
pursuant to the respective Sub-Advisory Agreements for each Portfolio until May
1, 1998. Thereafter the advisory fee shown in the table above will be charged.

For the periods ended December 31, 1997 and 1996 and the year ended 1995,
the Adviser waived its advisory fees in the following amounts with respect to
the Portfolios which were operational for such periods:

Advisory Fees Waived

<TABLE>
<CAPTION>
1996 OR 1995 OR
INCEPTION TO INCEPTION TO
DECEMBER 31, DECEMBER 31,
PORTFOLIO 1997 1996 1995
--------- ------- ------------ ------------
<S> <C> <C> <C>
Credit Suisse Growth and Income Portfolio
(formerly, the BEA Growth and Income
Portfolio)....................................... $12,263 $ 9,918 $3,106
Credit Suisse International Equity Portfolio....... 9,113 10,342 3,643
EliteValue Portfolio (an asset allocation
portfolio) (formerly, the EliteValue Asset
Allocation Portfolio)............................ 13,732 6,128 N/A
State Street Global Advisors Growth Equity
Portfolio (formerly, the Global Advisors Growth
Equity Portfolio)................................ 13,030 9,010 2,490
State Street Global Advisors Money Market Portfolio
(formerly, the Global Advisors Money Market
Portfolio)....................................... 7,387 1,984 106
Salomon Brothers U.S. Government Securities
Portfolio........................................ 6,395 7,227 N/A
Van Kampen Emerging Growth Portfolio
(formerly, Van Kampen American Capital Emerging
Growth Portfolio)................................ 8,943 5,171 N/A
</TABLE>

In addition, the Life Company, an affiliate of the Adviser, has undertaken
to bear until May 1, 1999, all operating expenses of each Portfolio, excluding
the compensation of the Adviser, that exceed .12% of each Portfolio's average
daily net assets. The Life Company has reserved the right to withdraw or modify
its policy of expense reimbursement for the Trust.

The Adviser and the Life Company have entered into an Investment Advisory
Services Agreement, dated August 23, 1995, the purpose of which is to ensure
that the Adviser, which is minimally capitalized, has adequate facilities and
financing for the carrying on of its business. Under the terms of this
Agreement, the Life Company is obligated to provide the Adviser with adequate
capitalization in order for the Adviser to meet any minimum capital
requirements. The Life Company is further obligated to reimburse the Adviser or
assume payment for any obligation incurred by the Adviser. The Life Company is
also obligated to provide the Adviser with facilities and personnel sufficient
for the Adviser to perform its obligations under the Investment Advisory
Agreement.

18
<PAGE> 22

The Adviser retains State Street Bank and Trust Company, a Massachusetts
trust company, to supervise various aspects of the Trust's administrative
operations and to perform certain specific services including, but not limited
to, the preparation and filing of Trust reports and tax returns, pursuant to a
Sub-Administration Agreement for Reporting and Accounting Services among the
Adviser, the Trust, and State Street Bank and Trust Company.

EXPENSES OF THE TRUST

The organizational expenses of the Trust were paid for by the Life Company.
The Life Company also contributed "seed money" and the initial working capital
to the Trust.

SUB-ADVISERS

In accordance with each Portfolio's investment objective and policies, and
under the supervision of the Adviser and the Trust's Board of Trustees, each
Portfolio's Sub-Adviser is responsible for the day-to-day investment management
of the Portfolio, makes investment decisions for the Portfolio, and places
orders on behalf of the Portfolio to effect the investment decisions made as
provided in separate Sub-Advisory Agreements among each Sub-Adviser, the
Adviser, and the Trust. The following organizations act as Sub-Advisers to the
Portfolios:

BEA ASSOCIATES ("BEA"), One Citicorp Center, 153 East 53rd Street, New
York, New York 10022, is the Sub-Adviser for the Credit Suisse Growth and Income
Portfolio of the Trust. BEA is a general partnership organized under the laws of
the State of New York and, together with its predecessor firms, has been engaged
in the investment advisory business for more than 60 years. BEA is a wholly
owned subsidiary of Credit Suisse Group, a Swiss corporation. Credit Suisse
Group is the largest global financial service group based in Switzerland. BEA is
registered investment advisor under the Investment Advisers Act of 1940.

BEA is a diversified asset manager, handling global equity, balanced,
fixed-income, and derivative securities accounts for private individuals, as
well as corporate pension and profit-sharing plans, state pension funds, union
funds, endowments, and other charitable institutions. As of December 31, 1997,
BEA managed approximately $34 billion in assets.

BEA currently acts as investment adviser for 19 registered investment
companies and 14 offshore funds.

The Portfolio is managed by teams of BEA managers, each dedicated to
managing a portion of the Portfolio's assets. The BEA Domestic Equity Management
Team manages the equity portion of the Portfolio. The BEA Fixed-Income
Management Team manages the fixed-income portion of the Portfolio.

CREDIT SUISSE ASSET MANAGEMENT, LTD. ("CSAM"), Beaufort House, 15 St.
Bartolph Street, London, England, is the Sub-Adviser for the Credit Suisse
International Equity Portfolio of the Trust. CSAM is an indirect wholly owned
subsidiary of Credit Suisse, the largest global financial services group based
in Switzerland.

The firm, which prior to June 1995 was owned by an affiliate of Credit
Suisse and was doing business under the name CS First Boston Investment
Management Limited, has been offering diverse global fixed-income and equity
investment strategies for institutional clients in more than 45 countries
worldwide since 1983. Clients include central banks and other government
entities, insurance companies, pension funds, multinational corporations,
commercial banks, and other institutions. Individual portfolio holdings are
denominated in more than 23 currencies. The team of 57 investment professionals
is dedicated to adding value to the investment process by creating and
implementing portfolio strategies tailored to each client's needs.

At December 31, 1997, Credit Suisse Investment Management Group provided
investment advice for approximately $36 billion of assets.

The day-to-day management of the Portfolio is the responsibility of Glenn
Wellman, who joined the firm in 1993 as a managing director and head of Global
Equity Portfolio Management. Mr. Wellman has been investing in international
markets since 1970. He has managed Europe Australia Far East (EAFE) benchmark
mutual funds, as well as private accounts for Fortune 100 clients since 1982. A
19
<PAGE> 23

worldwide equity team of 65 professionals supports Mr. Wellman. Prior to joining
CSAM, Mr. Wellman spent 14 years with Alliance Capital Limited, most recently as
chief investment officer with responsibility for developing Alliance's global
equity management service. He has been an associate of the Institute of
Investment Management and Research since 1974. Mr. Wellman earned a BSc (Hons)
in chemistry from the University of London and an M.B.A. from Manchester
Business School.

OPCAP ADVISORS ("ADVISORS"), One World Financial Center, 200 Liberty
Street, New York, New York 10281, is the Sub-Adviser for the EliteValue
Portfolio of the Trust. Advisors is a majority-owned subsidiary of Oppenheimer
Capital, a registered investment adviser whose employees perform all investment
advisory services provided to the Portfolio by the Sub-Adviser. Oppenheimer
Financial Corp., a holding company, is a 1% general partner of Advisors and
holds a one-third managing general partner interest in Oppenheimer Capital.
Oppenheimer Capital, L.P., a Delaware limited partnership whose units are traded
on the NYSE and of which Oppenheimer Financial Corp. is the sole 1% general
partner, owns the remaining two-thirds interest. Oppenheimer Capital has
operated as an investment adviser since 1968, and had more than $200 billion
under management as of December 31, 1997. The investments of the Portfolio are
managed by Richard J. Glasebrook II, a managing director of Oppenheimer Capital.

Oppenheimer Capital and its subsidiaries are owned by PIMCO Advisors L.P.
("PIMCO Advisors"), a registered investment adviser. PIMCO Partners, G. P.
("PIMCO GP") owns approximately 42.83% and 66.37% respectively of the total
outstanding Class A and Class B units of limited partnership interest (Units) of
PIMCO Advisors and is PIMCO Advisors' sole general partner. PIMCO GP is a
California general partnership with two general partners. The first of these is
Pacific Investment Management Company, which is a California Corporation and is
wholly-owned by Pacific Financial Asset Management Company, a direct subsidiary
of Pacific Life Insurance Company ("Pacific Life").

PIMCO Partners L.L.C. ("PPLLC"), a California limited liability company, is
the second, and managing general partner of PIMCO GP. PPLLC's members are the
Managing Directors (the "PIMCO Managers") of Pacific Investment Management
Company, a subsidiary of PIMCO Advisors (the "PIMCO Subpartnership"). The PIMCO
Managers are: William H. Gross, Dean S. Meiling, James F. Muzzy, William F.
Podlich, III, Frank B. Rabinovitch, Brent R. Harris, John L. Hague, William S.
Thompson, Jr., William C. Powers, David H. Edington, Benjamin Trosky, William R.
Benz, II and Lee R. Thomas III.

PIMCO Advisors is governed by an Operating Board and an Equity Board.
Governance matters are allocated generally to the Operating Board and the
Operating Board delegates to the Operating Committee the authority to manage
day-to-day operations of PIMCO Advisors. The Operating Board is composed of
twelve members, including the chief executive officer of the PIMCO
Subpartnership as Chairman and six PIMCO Managers designated by the PIMCO
Subpartnership.

The authority of PIMCO Advisors Operating Board and Operating Committee to
take certain specified actions is subject to the approval of PIMCO Advisors'
Equity Board. Equity Board approval is required for certain major transactions
(e.g., issuance of additional PIMCO Advisors Units and appointment of PIMCO
Advisors chief executive officer). In addition, the Equity Board has
jurisdiction over matters such as actions which would have a material effect
upon PIMCO Advisors business taken as a whole and (after an appeal from an
Operating Board decision) matters likely to have a material adverse economic
effect on any subpartnership of PIMCO Advisors. The Equity Board is composed of
twelve members, including the chief executive officer of PIMCO Advisors, three
members designated by a subsidiary of Pacific Life, the chairman of the
Operating Board and two members designated by PPLLC.

Because of its power to appoint (directly or indirectly) seven of the
twelve members of the Operating Board as described above, the PIMCO
Subpartnership may be deemed to control PIMCO Advisors. Because of direct or
indirect power to appoint 25% of the members of the Equity Board, (i) Pacific
Life and (ii) the PIMCO Managers and/or the PIMCO Subpartnership may each be
deemed, under applicable provisions of the Investment Company Act, to control
PIMCO Advisors. Pacific Life, the PIMCO Subpartnership and the PIMCO Managers
disclaim such control.

20
<PAGE> 24

SALOMON BROTHERS ASSET MANAGEMENT INC ("SBAM"), 7 World Trade Center, New
York, New York 10048, is the Sub-Adviser for the Salomon Brothers U.S.
Government Securities Portfolio of the Trust. SBAM is an indirect, wholly owned
subsidiary of Travelers Group Inc., which is a publicly traded financial
services holding company engaged in investment services, asset management,
consumer finance and life and property casualty insurance services. Through its
office in New York and affiliates in London, Frankfurt, Hong Kong, and Tokyo,
SBAM provides a full range of fixed-income and equity investment advisory
services for its individual and institutional clients around the world,
including central banks, pension funds, endowments, insurance companies, and
various investment companies (including portfolios thereof). As of December 31,
1997, SBAM had investment advisory responsibility for approximately $26 billion
of assets. SBAM has access to its affiliates' more than 400 economists,
mortgage, bond, sovereign, and equity analysts.

Roger Lavan is primarily responsible for the day-to-day management of the
Portfolio. Mr. Lavan, who joined SBAM in 1990, is a portfolio manager and is
responsible for investment company and institutional portfolios which invest in
mortgage-backed and U.S. government securities. Prior to joining SBAM, Mr. Lavan
spent four years analyzing portfolios for Salomon Brothers Inc's Fixed Income
Sales Group and Product Support Divisions. Mr. Lavan is a Chartered Financial
Analyst, a member of the New York Society of Security Analysts, and received his
M.B.A. from Fordham University in 1990.

STATE STREET GLOBAL ADVISORS, Two International Place, Boston, MA 02110,
the investment management division of State Street Bank and Trust Company, is
the Sub-Adviser for the State Street Global Advisors Growth Equity and State
Street Global Advisors Money Market Portfolios of the Trust. State Street Bank
and Trust Company, one of the largest providers of securities processing and
recordkeeping services for U.S. mutual funds and pension funds, is a wholly
owned subsidiary of State Street Boston Corporation, a publicly held bank
holding company. State Street Global Advisors, with more than $400 billion
(U.S.) under management as of December 31, 1997, provides complete global
investment management services from offices in the United States, London,
Sydney, Hong Kong, Tokyo, Toronto, Luxembourg, Melbourne, Montreal, and Paris.

Investment decisions regarding the Global Advisors Growth Equity Portfolio
are made by a committee, and no one person is primarily responsible for making
recommendations to that committee.

VAN KAMPEN ASSET MANAGEMENT, INC. ("VAN KAMPEN"), One Parkview Plaza,
Oakbrook Terrace, Illinois 60181, is the Sub-Adviser for the Van Kampen Emerging
Growth Portfolio of the Trust. Van Kampen is a diversified asset management
company with more than two million retail investor accounts, extensive
capabilities for managing institutional portfolios, and more than $60 billion
under management or supervision. Van Kampen's more than 60 open-end and 37
closed-end funds and more than 2,500 unit investment trusts are professionally
distributed by leading financial advisers nationwide.

Van Kampen is a wholly owned subsidiary of Van Kampen Investments, Inc.,
which is an indirect wholly owned subsidiary of Morgan Stanley, Dean Witter,
Discover & Co.

Morgan Stanley, Dean Witter, Discover & Co. and various of its directly or
indirectly owned subsidiaries, including Morgan Stanley Asset Management, Inc.,
and investment adviser, Morgan Stanley & Co. Incorporated, a registered
broker-dealer and investment adviser, and Morgan Stanley International, are
engaged in a wide range of financial services. Their principal businesses
include securities underwriting, distribution and trading, merger, acquisition,
restructuring, and other corporate finance advisory activities; merchant
banking; stock brokerage and research services; asset management; trading of
futures, options, foreign exchange, commodities, and swaps (involving foreign
exchange, commodities, indices, and interest rates); real estate advice,
financing, and investing; and global custody, securities clearance services, and
securities lending.

Gary M. Lewis is primarily responsible for the day-to-day management of the
Portfolio's investment portfolio. Mr. Lewis has been senior vice president of
Van Kampen since October 31, 1995. He was previously vice president -- portfolio
manager of Van Kampen. Since June 1995, Mr. Lewis has been a senior vice
president of Van Kampen Investment Advisory Corp.

21
<PAGE> 25

SUB-ADVISORY FEES

Under the terms of the Sub-Advisory Agreements, the Adviser pays to the
Sub-Advisers, as full compensation for services rendered under the respective
Agreements with respect to the various Portfolios, monthly fees at the following
annual rates shown in the table below based on the average daily net assets of
each Portfolio.

<TABLE>
<CAPTION>
PORTFOLIO SUB-ADVISORY FEE
--------- ----------------
<S> <C>
Credit Suisse Growth and Income............................ .50% of average net assets
Credit Suisse International Equity......................... .65% of average net assets
EliteValue................................................. .40% of average net assets
State Street Global Advisors Growth Equity................. .36% of average net assets
State Street Global Advisors Money Market.................. .20% of average net assets
Salomon Brothers U.S. Government Securities................ 225% of average net assets
Van Kampen Emerging Growth................................. .50% of average net assets
</TABLE>

SALES AND REDEMPTIONS

The Separate Account of the Life Company places orders to purchase and
redeem shares of each Portfolio based on, among other things, the amount of
premium payments to be invested and surrender and transfer requests to be
effected on that day pursuant to the VA Contracts issued by the Life Company.
Orders received by the Trust are effected on days on which the NYSE is open for
trading, at the net asset value per share next determined after receipt of the
order, except that, in the case of the State Street Global Advisors Money Market
Portfolio, purchases will not be effected until the next determination of net
asset value after federal funds have been made available to the Trust. For
orders received before 4:00 p.m., New York time, such purchases and redemptions
of shares of each Portfolio are effected at the respective net asset values per
share determined as of 4:00 p.m., New York time on that day. (See "Net Asset
Value," below and "Determination of Net Asset Value" in the Trust's SAI.)
Payment for redemptions will be made within seven days after receipt of a
redemption request in good order. No fee is charged the Separate Account of the
Life Company when it redeems Portfolio shares. The Trust may suspend the sale of
shares at any time and may refuse any order to purchase shares.

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

NET ASSET VALUE

Each Portfolio calculates the net asset value of a share by dividing the
total value of its assets less liabilities by the number of shares outstanding.
Shares are valued as of 4:00 p.m., New York time on each day the NYSE is open.
There may be dates when the New York Stock Exchange is open for business and the
Trust is not. The day after Thanksgiving is the only such date. On such date,
contract owners will not have access to their accounts and therefore, no
transactions will be processed on such date. The Trust will be closed for
business each date the New York Stock Exchange is closed for business.

The State Street Global Advisors Money Market Portfolio's securities are
valued at their amortized cost, which does not take into account unrealized
gains or losses on securities. This method involves initially valuing an
instrument at its cost, and thereafter assuming a constant amortization to
maturity of any premium paid or discount received. (See "Determination of Net
Asset Value" in the SAI for a more complete description of amortized cost
valuation.)

22
<PAGE> 26

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

PERFORMANCE INFORMATION

State Street Global Advisors Money Market Portfolio: From time to time, the
State Street Global Advisors Money Market Portfolio's annualized "yield" and
"effective yield" may be presented in advertisements and sales literature. These
yield figures are based on historical earnings and are not intended to indicate
future performance. The "yield" of the State Street Global Advisors Money Market
Portfolio refers to the income generated by an investment in the shares of that
Portfolio over a seven-day period (which period will be stated in the
advertisement). This income is then "annualized." That is, the amount of income
generated by the investment during that week is assumed to be generated each
week over a 52-week period and is shown as a percentage of the investment. The
"effective yield" is calculated similarly but, when annualized, the income
earned by an investment in the shares of the State Street Global Advisors Money
Market Portfolio is assumed to be reinvested. The "effective yield" will be
slightly higher than the "yield" because of the compounding effect of this
assumed reinvestment.

(See "Performance Information" in the SAI for more information regarding
the computation of "yield" and "effective yield.")

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

The yield of a Portfolio's shares is determined by annualizing net
investment income earned per share for a stated period (normally one month or 30
days) and dividing the result by the net asset value per share at the end of the
valuation period. The average annual total return and aggregate total return
figures measure both the net investment income generated by, and the effect of
any realized or unrealized appreciation or depreciation of the underlying
investments in, the Portfolio's portfolio for the period in question, assuming
the reinvestment of all dividends. Thus, these figures reflect the change in the
value of an investment in a Portfolio's shares during a specified period.
Average annual total return will be quoted for at least the one-, five- and
10-year periods ending on a recent calendar quarter (or if such periods have not
yet elapsed, at the end of a shorter period corresponding to the life of the
Portfolio). Average annual total return figures are annualized and, therefore,
represent the average annual percentage change over the period in question.
Total return figures are not annualized and represent the aggregate percentage
or dollar value change over the period in question. (See "Performance
Information" in the SAI for more information regarding the computation of yield,
average annual total return, and aggregate total return.)

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

Advertisements concerning the Trust may, from time to time, compare the
performance of one or more Portfolios to various indexes. Advertisements may
also contain the performance rankings assigned certain Portfolios or their
advisers by various publications and statistical services, including, for
example, SEI, Lipper Analytical Services Mutual Funds Survey, Lipper Variable
Insurance Products Performance Analysis Service, Morningstar, Intersec Research
Survey of Non-U.S. Equity Fund Returns, Frank Russell International Universe,
and Financial Services Week. Any such comparisons or rankings are based on past
performance and the statistical computation performed by publications and
services, and are not necessarily indications of

23
<PAGE> 27

future performance. Because the Portfolios are managed investment vehicles
investing in a wide variety of securities, the securities owned by a Portfolio
will not match those making up an index.

TAX STATUS, DIVIDENDS, AND DISTRIBUTIONS

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

The State Street Global Advisors Money Market Portfolio will declare a
dividend of its net ordinary income daily and distribute such dividend monthly.
The State Street Global Advisors Money Market Portfolio does not anticipate that
it will normally realize any long-term capital gains with respect to its
Portfolio securities. Distributions will be made shortly after the first
business day of each month following declaration of the dividend. Each of the
other Portfolios will declare and distribute dividends from net ordinary income
at least annually and will distribute net realized capital gains, if any, at
least annually. Distributions of ordinary income and capital gains will be made
in shares of such Portfolios unless an election is made on behalf of a separate
account to receive distributions in cash. The Life Company will be informed at
least annually about the amount and character of distributions from the Trust
for federal income tax purposes.

ADDITIONAL INFORMATION

The Trust was established as a Massachusetts business trust under the laws
of Massachusetts by a Declaration of Trust dated December 12, 1994, as amended
April 19, 1995 and May 1, 1998 (the "Declaration of Trust"). Under Massachusetts
law, shareholders of such a trust may, under certain circumstances, be held
personally liable as partners for the obligations of the trust. The Declaration
of Trust contains an express disclaimer of shareholder liability in connection
with Trust property or the acts, obligations, or affairs of the Trust. The
Declaration of Trust also provides for indemnification out of a Portfolio's
property of any shareholder of that Portfolio held personally liable for the
claims and liabilities to which a shareholder may become subject by reason of
being or having been a shareholder. Thus, the risk of a shareholder's incurring
financial loss on account of shareholder liability is limited to circumstances
in which the Portfolio itself would be unable to meet its obligations. A copy of
the Declaration of Trust is on file with the Secretary of State of The
Commonwealth of Massachusetts.

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

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

24
<PAGE> 28

APPENDIX

SECURITIES AND INVESTMENT PRACTICES

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

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

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

AMERICAN DEPOSITORY RECEIPTS AND EUROPEAN DEPOSITORY RECEIPTS

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

ASSET-BACKED SECURITIES

Certain Portfolios may purchase asset-backed securities that represent a
participation in, or are secured by and payable from, a stream of payments
generated by particular assets, most often a pool of assets similar to one
another. Assets generating such payments may include motor vehicle installment
purchase obligations, company receivables, truck and auto loans, leases, credit
card receivables, and home equity loans. Such securities are generally issued as
pass-through certificates, which represent undivided fractional ownership
interests in the underlying pools of assets. Such securities also may be debt
instruments that are also known as collateralized obligations and are generally
issued as the debt of a special purpose entity, such as a trust, organized
solely for the purpose of owning such assets and issuing such debt.

Asset-backed securities are not issued or guaranteed by the U.S. government
or its agencies or instrumentalities; however, the payment of principal and
interest on such obligations may be guaranteed up to certain amounts and for a
certain period by a letter of credit issued by a financial institution (such as
a bank or insurance company) unaffiliated with the issuers of such securities.
The purchase of asset-backed securities raises risk considerations peculiar to
the financing of the instruments underlying such securities. For example, there
is a risk that another party could acquire an interest in the obligations
superior to that of the holders of the asset-backed securities. There also is
the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on those securities. Asset-backed
securities entail prepayment risk that may vary depending on the type of asset,
but that is generally less than the prepayment risk associated with
mortgage-backed securities. In addition, credit card receivables are unsecured
obligations of the cardholder.

BANK OBLIGATIONS

All of the Portfolios may invest in bank obligations, that include
certificates of deposit, time deposits, and bankers' acceptances of U.S.
commercial banks or savings and loan institutions, which are determined by the
25
<PAGE> 29

Sub-Advisers to present minimal credit risks. Certain Portfolios may invest in
foreign currency-denominated bank obligations, including Eurocurrency
instruments and securities of U.S. and foreign banks and thrifts.

BORROWING

Each of the Portfolios may borrow money (including reverse repurchase
agreements, if permitted by the Portfolio's investment objectives and policies),
up to 33 1/3% of its assets for temporary or emergency purposes. In addition,
the State Street Global Advisors Money Market Portfolio may borrow to facilitate
redemptions. A Portfolio may borrow for leveraging or investment with respect to
reverse repurchase agreements and dollar-roll transactions (including covered
rolls) to the extent such investments are permitted under the Portfolio's
investment objectives and policies. If a Portfolio borrows money, its share
price may be subject to greater fluctuation until the borrowing is paid off. If
the Portfolio makes additional investments while borrowings are outstanding,
this may be construed as a form of leverage.

Borrowing, including reverse repurchase agreements and, in certain
circumstances, dollar rolls, creates leverage which increases a Portfolio's
investment risk. If the income and gains on the securities purchased with the
proceeds of borrowings exceed the cost of the arrangements, the Portfolio's
earnings or net asset value will increase faster than would be the case
otherwise. Conversely, if the income and gains fail to exceed the costs,
earnings or net asset value will decline faster than would otherwise be the
case.

As a matter of operating policy, no Portfolio will borrow more than 10% of
its total net asset value when borrowing for general purposes, and none will
borrow an amount equal to more than 25% of its total net asset value when
borrowing as a temporary measure or to facilitate redemptions. For these
purposes, net asset value is the market value of all investments or assets, less
outstanding liabilities at the time that the new or additional borrowing is
undertaken. Also, for these purposes, securities purchased on a when-issued or
delayed-delivery basis and short sales of securities are considered borrowing.
Reverse repurchase agreements and dollar rolls (including covered rolls) are not
considered borrowings for purposes of this operating policy. A Portfolio will
not purchase investments once borrowed funds (including reverse repurchase
agreements) exceed 5% of its total assets. This 5% limitation is a fundamental
investment restriction of the Trust that may not be changed without shareholder
approval.

COMMON STOCKS AND OTHER EQUITY SECURITIES

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

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

Investments in equity securities in general are subject to market risks
that may cause their prices to fluctuate over time. The value of convertible
equity securities is also affected by prevailing interest rates, the credit
quality of the issuer, and any call provision. Fluctuations in the value of
equity securities in which a Portfolio invests will cause the net asset value of
a Portfolio to fluctuate.

CONVERTIBLE SECURITIES

Convertible securities are corporate securities that are exchangeable for a
set number of another security at a pre-stated price. Convertible securities
typically have characteristics similar to both fixed-income and equity
securities.

Because of the conversion feature, the market value of convertible
securities tends to move with the market value of the underlying stock. The
value of a convertible security is also affected by prevailing interest rates,
the credit quality of the issuer, and any call provisions.

26
<PAGE> 30

CURRENCY MANAGEMENT

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

DOLLAR ROLL TRANSACTIONS

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

A Portfolio will establish with its custodian a segregated account in which
it will maintain cash, U.S. government securities, or other liquid high-grade
debt obligations equal in value at all times to its obligations in respect of
dollar rolls, and accordingly, the Portfolio will not treat such obligations as
senior securities for purposes of the 1940 Act. "Covered rolls' are not subject
to these segregation requirements. Dollar rolls and covered rolls may be
considered borrowings and are, therefore, subject to the borrowing limitations
applicable to the Portfolios, except that dollar rolls (including covered rolls)
shall not be considered to be "borrowed funds" for purposes of the 5% limitation
described under "Borrowings" above. Dollar rolls involve the risk that the
market value of the securities the Portfolio is obligated to repurchase under
the agreement may decline below the repurchase price. In the event the buyer of
securities under a dollar roll files for bankruptcy or becomes insolvent, the
Portfolio's use of proceeds of the dollar roll may be restricted, pending a
determination by the other party, or its trustee or receiver, whether to enforce
the Portfolio's obligation to repurchase the securities.

EQUITY AND DEBT SECURITIES ISSUED OR GUARANTEED BY SUPRANATIONAL ORGANIZATIONS

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

27
<PAGE> 31

EXCHANGE RATE-RELATED SECURITIES

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

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

FIXED-INCOME SECURITIES

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

FOREIGN CURRENCY EXCHANGE TRANSACTIONS

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

A forward foreign currency exchange contract is an obligation by a
Portfolio to purchase or sell a specific currency at a future date, which may be
any fixed number of days from the date of the contract. Forward foreign currency
exchange contracts establish an exchange rate at a future date. These contracts
are

28
<PAGE> 32

transferable in the interbank market conducted directly between currency traders
(usually large commercial banks) and their customers. A forward foreign currency
exchange contract generally has no deposit requirement and is traded at a net
price without a commission. The Portfolio maintains with its custodian, in a
segregated account, high-grade liquid assets in an amount at least equal to its
obligations under each forward foreign currency exchange contract. Neither spot
transactions nor forward foreign currency exchange contracts eliminate
fluctuations in the prices of the Portfolio's portfolio securities or in foreign
exchange rates, or prevent loss if the prices of these securities should
decline.

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

A Portfolio may enter into foreign currency exchange transactions for other
than hedging purposes, which presents greater profit potential, but also
involves increased risk. For example, if the Sub-Adviser believes that the value
of a particular foreign currency will increase or decrease relative to the value
of the U.S. dollar, the Portfolio may purchase or sell such currency,
respectively, through a forward foreign currency exchange contract. If the
expected changes in the value of the currency occur, the Portfolio will realize
profits, which will increase its gross income. Where exchange rates do not move
in the direction or to the extent anticipated, however, the Portfolio may
sustain losses that will reduce its gross income. Such transactions, therefore,
could be considered speculative.

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

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

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

29
<PAGE> 33

FOREIGN INVESTMENTS

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

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

In addition, while the volume of transactions effected on foreign stock
exchanges has increased in recent years, in most cases, it remains appreciably
below that of the NYSE. Accordingly, the Portfolios' foreign investments may be
less liquid and their prices may be more volatile than comparable investments in
securities of U.S. companies. Moreover, the settlement periods for foreign
securities, which are often longer than those for securities of U.S. issuers,
may affect portfolio liquidity. In buying and selling securities on foreign
exchanges, the Portfolio normally pays fixed commissions that are generally
higher than the negotiated commissions charged in the United States. In
addition, there is generally less governmental supervision and regulation of
securities exchanges, brokers, and issuers in foreign countries than in the
United States.

Certain Portfolios may invest a portion of their assets in developing
markets. The risks of investing in foreign markets are generally intensified for
investments in developing markets. Additional risks of investing in such markets
include: (a) less social, political, and economic stability; (b) the smaller
size of the securities markets in such countries and the lower volume of
trading, which may result in a lack of liquidity and in greater price
volatility; (c) certain national policies that may restrict a Portfolio's
investment opportunities, including restrictions on investment in issuers or
industries deemed sensitive to national interest; and (d) less developed legal
structures governing private or foreign investment or allowing for judicial
redress for injury to private property.

FUTURES AND OPTIONS ON FUTURES

When deemed appropriate by its Sub-Adviser, certain Portfolios may enter
into financial or currency futures and related options that are traded on a U.S.
exchange or board of trade or, to the extent permitted under applicable law, on
exchanges located outside the United States, for hedging purposes or for
non-hedging purposes to the extent permitted by applicable law. A Portfolio may
not enter into futures and options contracts for which aggregate initial margin
deposits and premiums paid for unexpired futures options entered into for
purposes other than "bona fide hedging" positioning, as defined in regulations
adopted by the Commodities Futures Trading Commission ("CFTC"), exceed 5% of the
fair market value of the Portfolio's

30
<PAGE> 34

net assets, after taking into account unrealized profits and unrealized losses
on futures contracts into which it has entered. With respect to each long
position in a futures contract or option thereon, the underlying commodity value
of such contract will always be covered by cash and cash equivalents set aside,
plus accrued profits held at the futures commission merchant.

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

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

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

GEOGRAPHICAL AND INDUSTRY CONCENTRATION

In a Portfolio that invests at least 25% of its assets in bank obligations,
the Portfolio's investments may be subject to greater risk than a Portfolio that
does not concentrate in the banking industry. In particular, bank obligations
may be subject to the risks associated with interest rate volatility, changes in
federal and state laws and regulations governing banking and the inability of
borrowers to pay principal and interest when due.

In addition, foreign banks present the risks of investing in foreign
securities generally and are not subject to reserve requirements and other
regulations comparable to those of U.S. banks.

GOVERNMENT STRIPPED MORTGAGE-BACKED SECURITIES

Certain Portfolios may invest in government stripped mortgage-backed
securities issued or guaranteed by the GNMA, FNMA and FHLMC. These securities
represent beneficial ownership interests in either periodic principal
distributions ("principal-only") or interest distributions ("interest-only") on
mortgage-backed certificates issued by GNMA, FNMA, or FHLMC, as the case may be.
The certificates underlying the government stripped mortgage-backed securities
represent all or part of the beneficial interest in pools of mortgage loans. The
Portfolios will invest in interest-only government stripped mortgage-backed
securities in
31
<PAGE> 35

order to enhance yield or to benefit from anticipated appreciation in value of
the securities at times when the appropriate Sub-Adviser believes that interest
rates will remain stable or increase. In periods of rising interest rates, the
value of interest-only government stripped mortgage-backed securities may be
expected to increase because of the diminished expectation that the underlying
mortgages will be prepaid. In this situation, the expected increase in the value
of interest-only government stripped mortgage-backed securities may offset all
or a portion of any decline in value of the portfolio securities of the
Portfolios. Investing in government stripped mortgage-backed securities involves
the risks normally associated with investing in mortgage-backed securities
issued by government or government-related entities. (See "Mortgage-Backed
Securities.") In addition, the yields on interest-only and principal-only
government stripped mortgage-backed securities are extremely sensitive to the
prepayment experience on the mortgage loans underlying the certificates
collateralizing the securities. If a decline in the level of prevailing interest
rates results in a rate of principal prepayments higher than anticipated,
distributions of principal will be accelerated, thereby reducing the yield to
maturity on interest-only government stripped mortgage-backed securities and
increasing the yield to maturity on principal-only government stripped
mortgage-backed securities. Conversely, if an increase in the level of
prevailing interest rates results in a rate of principal prepayments lower than
anticipated, distributions of principal will be deferred, thereby increasing the
yield to maturity on interest-only government stripped mortgage-backed
securities and decreasing the yield to maturity on principal-only government
stripped mortgage-backed securities. Sufficiently high prepayment rates could
result in the Portfolio not fully recovering its initial investment in an
interest-only government stripped mortgage-backed security. Government stripped
mortgage-backed securities are currently traded in an over-the-counter market
maintained by several large investment banking firms. There can be no assurance
that the Portfolio will be able to effect a trade of a government stripped
mortgage-backed security at a time when it wishes to do so. The Portfolios will
acquire government stripped mortgage-backed securities only if a liquid
secondary market for the securities exists at the time of acquisition.

INTEREST RATE TRANSACTIONS

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

ILLIQUID SECURITIES

Up to 15% (10% for Credit Suisse International Equity Portfolio and for
State Street Global Advisors Money Market Portfolio) of the net assets of a
Portfolio may be invested in securities that are not readily marketable,
including, where applicable: (a) repurchase agreements with maturities greater
than seven calendar days; (b) time deposits maturing in more than seven calendar
days; (c) to the extent a liquid secondary market does not exist for the
instruments, futures contracts, and options thereon (except for the State Street
Global Advisors Money Market Portfolio); (d) certain over- the-counter options,
as described below and in the SAI; (e) certain variable rate demand notes having
a demand period of more than seven days; and (f) securities, the disposition of
which is restricted under federal securities laws (excluding Rule 144A
securities, described below). The Portfolios will not include, for purposes of
the restrictions on
32
<PAGE> 36

illiquid investments, securities sold pursuant to Rule 144A under the Securities
Act of 1933, as amended, so long as such securities meet liquidity guidelines
established by the Trust's Board of Trustees. Under Rule 144A, securities that
would otherwise be restricted may be sold by persons other than issuers or
dealers to qualified institutional buyers.

INVESTMENT COMPANIES

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

LEASE OBLIGATION BONDS

Lease obligation bonds are mortgages on a facility that are secured by the
facility and are paid by a lessee over a long term. The rental stream to service
the debt, as well as the mortgage, are held by a collateral trustee on behalf of
the public bondholders. The primary risk of such instrument is the risk of
default. Under the lease indenture, the failure to pay rent is an event of
default. The remedy to cure default is to rescind the lease and sell the assets.
If the lease obligation is not readily marketable or market quotations are not
readily available, such lease obligations will be subject to a Portfolio's limit
on illiquid securities.

LENDING OF SECURITIES

All of the Portfolios have the ability to lend portfolio securities to
brokers and other financial organizations. By lending its securities, a
Portfolio can increase its income by continuing to receive interest on the
loaned securities, as well as by either investing the cash collateral in
short-term instruments or obtaining yield in the form of interest paid by the
borrower when U.S. government securities are used as collateral. These loans, if
and when made, may not exceed 20% (except 10% with respect to the EliteValue
Portfolio, 15% with respect to the Credit Suisse International Equity Portfolio,
and 33 1/3% with respect to the State Street Global Advisors Money Market
Portfolio) of a Portfolio's total assets taken at value. Loans of portfolio
securities by a Portfolio will be collateralized by cash, letters of credit, or
U.S. government securities that are maintained at all times in an amount at
least equal to the current market value of the loaned securities. Any gain or
loss in the market price of the securities loaned that might occur during the
term of the loan would be for the account of the Portfolio involved. Each
Portfolio's Sub-Adviser will monitor on an ongoing basis the creditworthiness of
the institutions to which the Portfolio lends securities.

LOWER-RATED SECURITIES

Certain Portfolios may invest in debt securities rated lower than "BBB" by
S&P or "Baa" by Moody's, or of equivalent quality as determined by the
Sub-Adviser. Securities rated "BB," "Ba," or lower are commonly referred to as
"junk bonds." Securities rated below investment-grade, as well as unrated
securities, are often considered to be speculative and usually entail greater
risk (including the possibility of default or bankruptcy of the issuers). Such
securities generally involve greater price volatility and risk of principal and
income, and may be less liquid than securities in higher-rated categories. Both
price volatility and illiquidity may make it difficult for the Portfolio to
value certain of these securities at certain times, and these securities may be
difficult to sell under certain market conditions. Prices for securities rated
below investment-grade may be affected by legislative and regulatory
developments. (See the SAI for additional information pertaining to lower-rated
securities including risks.)

MORTGAGE-BACKED SECURITIES

Certain Portfolios may invest in mortgage-backed securities, which
represent an interest in a pool of mortgage loans. The primary government
issuers or guarantors of mortgage-backed securities are GNMA, FHMA, and FHLMC.
Mortgage-backed securities generally provide a monthly payment consisting of
interest

33
<PAGE> 37

and principal payments. Additional payments may be made out of unscheduled
repayments of principal resulting from the sale of the underlying residential
property, refinancing, or foreclosure, net of fees or costs that may be
incurred. Prepayments of principal on mortgage-backed securities may tend to
increase due to refinancing of mortgages as interest rates decline. Prompt
payment of principal and interest on GNMA mortgage pass-through certificates is
backed by the full faith and credit of the U.S. government. FNMA guaranteed
mortgage pass-through certificates and FHLMC participation certificates are
solely the obligations of those entities, but are supported by the discretionary
authority of the U.S. government to purchase the agencies' obligations.

If mortgage-backed securities are purchased at a premium,
faster-than-expected prepayments will reduce yield to maturity, while
slower-than-expected prepayments will increase yield to maturity. Conversely, if
mortgage-backed securities are purchased at a discount, faster-than-expected
prepayments will increase yield to maturity, while slower-than-expected
prepayments will reduce yield to maturity. Accelerated prepayments on securities
purchased at a premium also impose a risk of loss of principal because the
premium may not have been fully amortized at the time the principal is prepaid
in full. Because of the reinvestment of prepayments of principal at current
rates, mortgage-backed securities may be less effective than Treasury bonds of
similar maturity at maintaining yields during periods of declining interest
rates. When interest rates rise, the value and liquidity of mortgage-backed
securities may decline sharply, and generally will decline more than would be
the case with other fixed-income securities; however, when interest rates
decline, the value of mortgage-backed securities may not increase as much as
other fixed-income securities due to the prepayment feature. Certain market
conditions may result in greater-than-expected volatility in the prices of
mortgage-backed securities. For example, in periods of supply and demand
imbalances in the market for such securities, and/or in periods of sharp
interest rate movements, the prices of mortgage-backed securities may fluctuate
to a greater extent than would be expected from interest rate movements alone.

To the extent that a Portfolio invests in adjustable rate mortgage-backed
securities, the Portfolio will not benefit from increases in interest rates to
the extent that interest rates rise to the point where they cause the current
coupon of the underlying adjustable rate mortgages to exceed any maximum
allowable annual or lifetime reset limits (or "cap rates") for a particular
mortgage. In this event, the value of the mortgage-backed securities in a
Portfolio would likely decrease. Also, a Portfolio's net asset value could vary
to the extent that current yields on adjustable rate mortgage securities are
different than market yields during interim periods between coupon reset dates,
or if the timing of changes to the index upon which the rate for the underlying
mortgages is based lags behind changes in market rates. During periods of
declining interest rates, income to a Portfolio derived from adjustable rate
mortgages that remain in a mortgage pool will decrease in contrast to the income
on fixed-rate mortgages, which will remain constant. Adjustable rate mortgages
also have less potential for appreciation in value as interest rates decline
than do fixed-rate investments.

COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTI-CLASS PASS-THROUGH SECURITIES

A Portfolio may invest in collateralized mortgage obligations.
Collateralized mortgage obligations, or "CMOs," are debt obligations
collateralized by mortgage loans or mortgage pass-through securities. Typically,
CMOs are collateralized by Ginnie Mae, Fannie Mae, or Freddie Mac certificates,
but also may be collateralized by whole loans or private pass-throughs (such
collateral collectively hereinafter referred to as "Mortgage Assets").
Multi-class pass-through securities are interests in a trust composed of
Mortgage Assets. Unless the context indicates otherwise, all references herein
to CMOs include multi-class pass-through securities. Payments of principal and
interest on the Mortgage Assets, and any reinvestment income thereon, provide
the funds to pay debt service on the CMOs or make scheduled distributions on the
multi-class pass-through securities. CMOs may be issued by agencies or
instrumentalities of the U.S. government, or by private originators of, or
investors in, mortgage loans, including savings and loan associations, mortgage
banks, commercial banks, investment banks, and special purpose subsidiaries of
the foregoing. CMOs acquired by the Salomon Brothers U.S. Government Securities
Portfolio will be limited to those issued or guaranteed by agencies or
instrumentalities of the U.S. government and, if available in the future, the
U.S. government.

In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," is issued at a specified
fixed or floating coupon rate and has a stated maturity or
34
<PAGE> 38

final distribution date. Principal prepayments on the Mortgage Assets may cause
the CMOs to be retired substantially earlier than their stated maturities or
final distribution dates. Interest is paid or accrues on all classes of the CMOs
on a monthly, quarterly, or semi-annual basis. The principal of and interest on
the Mortgage Assets may be allocated among the several classes of a series of a
CMO in innumerable ways. In one structure, payments of principal, including any
principal prepayments, on the Mortgage Assets are applied to the classes of a
CMO in the order of their respective stated maturities or final distribution
dates, so that no payment of principal will be made on any class of CMOs until
all other classes having an earlier stated maturity or final distribution date
have been paid in full. The Salomon Brothers U.S. Government Securities
Portfolio has no present intention to invest in CMO residuals. As market
conditions change, and particularly during periods of rapid or unanticipated
changes in market interest rates, the attractiveness of the CMO classes and the
ability of the structure to provide the anticipated investment characteristics
may be significantly reduced. Such changes can result in volatility in the
market value, and in some instances, reduced liquidity of the CMO class.

A Portfolio may also invest in, among others, parallel pay CMOs and Planned
Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated maturity
date or final distribution date, of each class, which as with other CMO
structures, must be retired by its stated maturity date or a final distribution
date, but may be retired earlier. PAC Bonds are a type of CMO tranche or series
designed to provide relatively predictable payments of principal provided that,
among other things, the actual prepayment experience on the underlying mortgage
loans falls within a predefined range. If the actual prepayment experience on
the underlying mortgage loans is at a rate faster or slower than the predefined
range, or if deviations from other assumptions occur, principal payments on the
PAC Bond may be earlier or later than predicted. The magnitude of the predefined
range varies from one PAC Bond to another; a narrower range increases the risk
that prepayments on the PAC Bond will be greater or smaller than predicted.
Because of these features, PAC Bonds generally are less subject to the risks of
prepayment than are other types of Mortgage-Backed Securities.

NEW ISSUERS

A Portfolio may invest up to 5% of its assets in the securities of issuers
that have been in continuous operation for less than three years.

OPTIONS ON SECURITIES

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

Covered Option Writing. Certain Portfolios may write put and call options
on securities for hedging purposes. The Portfolios realize fees (referred to as
"premiums") for granting the rights evidenced by the options. A put option
embodies the right of its purchaser to compel the writer of the option to
purchase from the option holder an underlying security at a specified price at
any time during the option period. In contrast, a
35
<PAGE> 39

call option embodies the right of its purchaser to compel the writer of the
option to sell to the option holder an underlying security at a specified price
at any time during the option period.

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

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

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

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

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

36
<PAGE> 40

incurred in hedging transactions and the costs of these transactions will
adversely affect the Portfolio's performance.

OPTIONS ON FOREIGN CURRENCIES

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

OPTIONS ON INDEXES

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

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

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

Options on securities indexes entail risks in addition to the risks of
options on securities. Because exchange trading of options on securities indexes
is relatively new, the absence of a liquid secondary market to close out an
option position is more likely to occur, although a Portfolio generally will
only purchase or write

37
<PAGE> 41

such an option if the Sub-Adviser believes the option can be closed out. Because
options on securities indexes require settlement in cash, a Portfolio may be
forced to liquidate portfolio securities to meet settlement obligations. A
Portfolio will engage in stock index options transactions only when determined
by its Sub-Adviser to be consistent with its efforts to control risk. There can
be no assurance that such judgement will be accurate or that the use of these
portfolio strategies will be successful.

OVER-THE-COUNTER OPTIONS

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

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

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

REPURCHASE AGREEMENTS

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

38
<PAGE> 42

REVERSE REPURCHASE AGREEMENTS

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

SMALL COMPANIES

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

STRATEGIC TRANSACTIONS

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

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

U.S. GOVERNMENT SECURITIES

U.S. government securities include direct obligations of the U.S. Treasury
(such as U.S. Treasury bills, notes, and bonds) and obligations directly issued
or guaranteed by U.S. government agencies or instrumentalities. Some obligations
issued or guaranteed by agencies or instrumentalities of the U.S. government are

39
<PAGE> 43

backed by the full faith and credit of the U.S. government (such as GNMA
certificates). Others are backed only by the right of the issuer to borrow from
the U.S. Treasury (such as securities of Federal Home Loan Banks) and still
others are backed only by the credit of the instrumentality (such as FNMA and
FHLMC certificates). Guarantees of principal by agencies or instrumentalities of
the U.S. government may be a guarantee of payment at the maturity of the
obligation so that, in the event of a default prior to maturity, there might not
be a market, and thus no means of realizing on the obligation prior to maturity.
Guarantees as to the timely payment of principal and interest do not extend to
the value or yield of these securities, nor to the value of a Portfolio's
shares.

WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY TRANSACTIONS

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

40
<PAGE> 44

[AMERICAN GENERAL ANNUITY LOGO]

ANNUITIES TO SECURE YOUR TOMORROWS . . .

AMERICAN GENERAL ANNUITY

INSURANCE COMPANY

Executive Offices: Houston, Texas

Variable Annuity Service Center:

205 E. 10th Avenue

P.O. Box 871

Amarillo, Texas 79105-0871

1-800-424-4990

<PAGE> 45

AGA SERIES TRUST

STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1998

(AS SUPPLEMENTED OCTOBER 28, 1998)

This Statement of Additional Information (the "SAI") contains information
which may be of interest to investors but which is not included in the
Prospectus of AGA Series Trust, formerly WNL Series Trust, (the "Trust"). The
SAI is not a prospectus and is only authorized for distribution when accompanied
or preceded by the Prospectus of the Trust dated May 1, 1998 (as supplemented
October 28, 1998). The SAI should be read together with the Prospectus.
Investors may obtain a free copy of the Prospectus by calling American General
Annuity Insurance Company, formerly Western National Life Insurance Company,
(the "Life Company") at 1-800-424-4990.

<PAGE> 46

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DEFINITIONS................................................. 4
INVESTMENT OBJECTIVES AND POLICIES OF THE TRUST............. 4
Options................................................... 4
Futures Contracts......................................... 6
Special Risks of Transactions in Futures Contracts and
Related Options........................................ 9
Liquidity Risks........................................... 9
Forward Commitments....................................... 10
Repurchase Agreements..................................... 10
Reverse Repurchase Agreements............................. 11
When-Issued Securities.................................... 11
Loans of Portfolio Securities............................. 11
Foreign Securities........................................ 12
Foreign Currency Transactions............................. 12
Commercial Mortgage-Backed Securities..................... 15
Zero-Coupon Securities.................................... 17
Variable- or Floating-Rate Securities..................... 17
Lower-Grade Securities.................................... 18
INVESTMENT RESTRICTIONS..................................... 19
Fundamental Investment Restrictions....................... 19
Non-Fundamental Investment Restrictions................... 20
MANAGEMENT OF THE TRUST..................................... 22
COMPENSATION TABLE.......................................... 24
Substantial Shareholders.................................. 24
Investment Adviser........................................ 24
Trust Administration...................................... 26
Sub-Advisers.............................................. 26
Code of Ethics............................................ 26
Investment Decisions...................................... 26
Brokerage and Research Services........................... 26
DETERMINATION OF NET ASSET VALUE............................ 27
TAXES....................................................... 29
DIVIDENDS AND DISTRIBUTIONS................................. 30
PERFORMANCE INFORMATION..................................... 31
SHAREHOLDER COMMUNICATIONS.................................. 32
ORGANIZATION AND CAPITALIZATION............................. 32
PORTFOLIO TURNOVER.......................................... 32
CUSTODIAN................................................... 32
LEGAL COUNSEL............................................... 33
INDEPENDENT ACCOUNTANTS..................................... 33
SHAREHOLDER LIABILITY....................................... 33
DESCRIPTION OF NRSRO RATINGS................................ 33
Description of Moody's Corporate Ratings.................. 33
Description of S&P's Corporate Ratings.................... 34
Description of Duff Corporate Ratings..................... 34
Description of Fitch Corporate Ratings.................... 35
Description of Thomson Bankwatch, Inc. Corporate
Ratings................................................ 35
</TABLE>

2
<PAGE> 47

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Description of IBCA Limited and IBCA Inc. Corporate
Ratings................................................ 35
Description of S&P's Commercial Paper Ratings............. 35
Description of Moody's Commercial Paper Ratings........... 36
Description of Duff Commercial Paper Ratings.............. 36
Description of Fitch Commercial Paper Ratings............. 36
Description of IBCA Limited and IBCA Inc. Commercial Paper
Ratings................................................ 36
Description of Thomson Bankwatch, Inc. Commercial Paper
Ratings................................................ 36
FINANCIAL STATEMENTS........................................ 37
</TABLE>

3
<PAGE> 48

AGA SERIES TRUST

STATEMENT OF ADDITIONAL INFORMATION

DEFINITIONS

THE "TRUST" -- AGA Series Trust, formerly WNL Series Trust.
"ADVISER" -- AGA Investment Advisory Services, Inc., formerly WNL Investment
Advisory Services, Inc., the Trust's investment adviser.

INVESTMENT OBJECTIVES AND POLICIES OF THE TRUST

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

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

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

OPTIONS

Each Portfolio, other than the State Street Global Advisors Money Market
Portfolio, may purchase put and call options on portfolio securities in which
they may invest that are traded on a U.S. or foreign securities exchange or in
the over-the-counter market.

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

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

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

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

4
<PAGE> 49

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

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

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

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

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

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

Risks Involved in the Sale of Options. Options transactions involve certain
risks, including the following: (a) that a Portfolio's Sub-Adviser will not
forecast interest rate or market movements correctly; (b) that a Portfolio may
be unable at times to close out such positions; or (c) that hedging transactions
may not accomplish their purpose because of imperfect market correlations. The
successful use of these strategies depends on the ability of a Portfolio's
Sub-Adviser to forecast market and interest rate movements correctly.

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

5
<PAGE> 50

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

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

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

FUTURES CONTRACTS

The Trust may, on behalf of each Portfolio that may invest in debt
securities, other than the State Street Global Advisors Money Market Portfolio,
buy and sell futures contracts on debt securities of the type in which the
Portfolio may invest and on indexes of debt securities. In addition, the Trust
may, on behalf of each Portfolio that may invest in equity securities, purchase
and sell stock index futures for hedging and non-hedging purposes. The Trust may
also, for hedging and non-hedging purposes, purchase and write options on
futures contracts of the type that such Portfolios are authorized to buy and
sell and may engage in related closing transactions. All futures and related
options which are traded in the United States will, as may be required by
applicable law, be traded on exchanges that are licensed and regulated by the
Commodities Futures Trading Commission (the "CFTC"). Trading on foreign
commodity exchanges is not regulated by the CFTC.

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

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

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

6
<PAGE> 51

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

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

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

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

The following example illustrates generally the manner in which index
futures contracts operate. The Standard & Poor's 100 Stock Index (the "S&P 100
Index") is composed of 100 selected common stocks, most of which are listed on
the New York Stock Exchange (the "NYSE"). The S&P 100 Index assigns relative
weightings to the common stocks included in the S&P 100 Index, and the S&P 100
Index fluctuates with changes in the market values of those common stocks. In
the case of the S&P 100 Index, contracts are to buy or sell 100 units. Thus, if
the value of the S&P 100 Index were $180, one contract would be worth $18,000
(100 units x $180). The stock index futures contract specifies that no delivery
of the actual stocks making up the index will take place. Instead, settlement in
cash must occur upon the termination of the contract, with the settlement being
the difference between the contract price and the actual level of the stock
index at the expiration of the contract. For example, if a Portfolio enters into
a futures contract to buy 100 units of the S&P 100 Index at a specified future
date at a contract price of $180 and the S&P 100 Index is at $184 on that future
date, the Portfolio will gain $400 (100 units X gain of $4). If the Portfolio
enters into a futures contract
7
<PAGE> 52

to sell 100 units of the stock index at a specified future date at a contract
price of $180 and the S&P 100 Index is at $182 on that future date, the
Portfolio will lose $200 (100 units X loss of $2).

The Trust does not presently expect to invest in debt index futures
contracts. Stock index futures contracts are currently traded with respect to
the S&P 100 Index on the Chicago Mercantile Exchange, and with respect to other
broad stock market indexes, such as the New York Stock Exchange Composite Stock
Index, which is traded on the New York Futures Exchange, and the Value Line
Composite Stock Index, which is traded on the Kansas City Board of Trade, as
well as with respect to narrower "sub-indexes" such as the S&P 100 Energy Stock
Index and the New York Stock Exchange Utilities Stock Index. To the extent
permitted under applicable law, a Portfolio may trade futures contracts and
options on futures contracts on exchanges created outside the United States,
such as the London International Financial Futures Exchange and the Sydney
Futures Exchange Limited. Foreign markets may offer advantages such as trading
in commodities that are not currently traded in the United States or arbitrage
possibilities not available in the United States. Foreign markets, however, may
have greater risk potential than domestic markets. A Portfolio may purchase or
sell futures contracts with respect to any stock. Positions in index futures may
be closed out only on an exchange or board of trade which provides a secondary
market for such futures.

In order to hedge a Portfolio's investments successfully using futures
contracts and related options, the Trust must invest in futures contracts with
respect to indexes or sub-indexes, the movements of which will, in its judgment,
have a significant correlation with movements in the prices of the Portfolio's
securities. Options on index futures contracts are similar to options on
securities except that options on index futures contracts give the purchaser the
right, in return for the premium paid, to assume a position in an index futures
contract (a long position if the option is a call and a short position if the
option is a put) at a specified exercise price at any time during the period of
the option. Upon exercise of the option, the holder would assume the underlying
futures position and would receive a variation margin payment of cash or
securities approximating the increase in the value of the holder's option
position. If an option is exercised on the last trading day prior to the
expiration date of the option, the settlement will be made entirely in cash
based on the difference between the exercise price of the option and the closing
level of the index on which the futures contract is based on the expiration
date. Purchasers of options who fail to exercise their options prior to the
exercise date suffer a loss of the premium paid.

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

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

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

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

8
<PAGE> 53

that is returned to the Trust upon termination of the contract, assuming the
Trust satisfies its contractual obligations.

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

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

SPECIAL RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS

LIQUIDITY RISKS

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

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

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

Successful use of futures contracts and options by a Portfolio for hedging
purposes is also subject to a Portfolio's Sub-Adviser's ability to correctly
predict movements in the direction of the market. It is possible that, where a
Portfolio has purchased puts on futures contracts to hedge its portfolio against
a decline in the market, the securities or index on which the puts are purchased
may increase in value and the value of securities held in the Portfolio may
decline. If this occurred, the Portfolio would lose money on the puts and

9
<PAGE> 54

also experience a decline in value in its portfolio securities. In addition, the
prices of futures, for a number of reasons, may not correlate perfectly with
movements in the underlying securities or index due to certain market
distortions. First, all participants in the futures market are subject to margin
deposit requirements. Such requirements may cause investors to close futures
contracts through offsetting transactions which could distort the normal
relationship between the underlying security or index and futures markets.
Second, the margin requirements in the futures markets are less onerous than
margin requirements in the securities markets in general, and as a result, the
futures markets may attract more speculators than the securities markets.
Increased participation by speculators in the futures markets may also cause
temporary price distortions. Due to the possibility of price distortion, even a
correct forecast of general market trends by a Portfolio's Sub-Adviser still may
not result in a successful hedging transaction over a very short time period.

Foreign Transaction Risks. Unlike trading on domestic commodity exchanges,
trading on foreign commodity exchanges is not regulated by the CFTC and may be
subject to greater risks than trading on domestic exchanges. For example, some
foreign exchanges are principal markets so that no common clearing facility
exists and a trader may look only to the broker for performance of the contract.
In addition, unless a Portfolio hedges against fluctuations in the exchange rate
between the U.S. dollar and the currencies in which trading is done on foreign
exchanges, any profits that the Portfolio might realize in trading could be
eliminated by adverse changes in the exchange rate, or the Portfolio could incur
losses as a result of those changes. Transactions on foreign exchanges may
include both commodities which are traded on domestic exchanges and those which
are not.

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

FORWARD COMMITMENTS

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

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

REPURCHASE AGREEMENTS

On behalf of each Portfolio, the Trust may enter into repurchase
agreements. A repurchase agreement is a contract under which the Portfolio
acquires a security for a relatively short period (usually not more than one
week) subject to the obligation of the seller to repurchase and the Portfolio to
resell such security at a fixed time and price (representing the Portfolio's
cost plus interest). It is the Trust's present intention to enter into
repurchase agreements only with member banks of the Federal Reserve System and
securities dealers meeting

10
<PAGE> 55

certain criteria as to creditworthiness and financial condition established by
the Trustees of the Trust and only with respect to obligations of the U.S.
government or its agencies or instrumentalities or other high-quality,
short-term debt obligations. Repurchase agreements may also be viewed as loans
made by the Trust which are collateralized by the securities subject to
repurchase. The Sub-Advisers will monitor such transactions to ensure that the
value of the underlying securities will be at least equal at all times to the
total amount of the repurchase obligation, including the interest factor. If the
seller defaults, the Trust could realize a loss on the sale of the underlying
security to the extent that the proceeds of sale, including accrued interest,
are less than the resale price provided in the agreement including interest. In
addition, if the seller should be involved in bankruptcy or insolvency
proceedings, the Trust may incur delay and costs in selling the underlying
security or may suffer a loss of principal and interest if the Trust is treated
as an unsecured creditor and required to return the underlying collateral to the
seller's estate.

REVERSE REPURCHASE AGREEMENTS

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

WHEN-ISSUED SECURITIES

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

LOANS OF PORTFOLIO SECURITIES

The Trust may lend the portfolio securities of any Portfolio, provided: (a)
the loan is secured continuously by collateral consisting of U.S. government
securities, cash, or cash equivalents adjusted daily to have market value at
least equal to the current market value of the securities loaned; (b) the Trust
may, at any time, call the loan and regain the securities loaned; (c) the Trust
will receive any interest or dividends paid on the loaned securities; and (d)
the aggregate market value of securities of any Portfolio loaned will not, at
any

11
<PAGE> 56

time, exceed 20% (except 10% with respect to the EliteValue Portfolio, 15% with
respect to the Credit Suisse International Equity Portfolio, and 33 1/3% with
respect to the State Street Global Advisors Money Market Portfolio and the State
Street Global Advisors Growth Equity Portfolio) of the total assets of the
Portfolio taken at value. In addition, it is anticipated that the Portfolio may
share with the borrower some of the income received on the collateral for the
loan or that it will be paid a premium for the loan. Before the Portfolio enters
into a loan, a Portfolio's Sub-Adviser considers all relevant facts and
circumstances including the creditworthiness of the borrower. The risks in
lending portfolio securities, as with other extensions of credit, consist of
possible delay in recovery of the securities or possible loss of rights in the
collateral should the borrower fail financially. Although voting rights, or
rights to consent, with respect to the loaned securities pass to the borrower,
the Trust retains the right to call the loans at any time on reasonable notice,
and it will do so in order that the securities may be voted by the Trust if the
holders of such securities are asked to vote upon or consent to matters
materially affecting the investment. The Trust will not lend portfolio
securities to borrowers affiliated with the Trust.

FOREIGN SECURITIES

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

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

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

FOREIGN CURRENCY TRANSACTIONS

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

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

12
<PAGE> 57

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

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

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

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

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

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

Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which a Portfolio owns or intends to
purchase or sell. They simply establish a rate of exchange that one can achieve
at some future point in time.

Additionally, although these techniques tend to minimize the risk of loss
due to a decline in the value of the hedged currency, they tend to limit any
potential gain which might result from the increase in the value of such
currency.

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

Currency Forward and Futures Contracts. A forward foreign currency exchange
contract involves an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days from the date of the contract
as agreed by the parties, at a price set at the time of the contract. In the
case of a cancelable forward contract, the holder has the unilateral right to
cancel the contract at maturity by paying a specified fee. The contracts are
traded in the interbank market conducted directly between currency traders

13
<PAGE> 58

(usually large commercial banks) and their customers. A forward contract
generally has no deposit requirement, and no commissions are charged at any
stage for trades. A foreign currency futures contract is a standardized contract
for the future delivery of a specified amount of a foreign currency at a future
date at a price set at the time of the contract. Foreign currency futures
contracts traded in the United States are designed by and traded on exchanges
regulated by the CFTC, such as the New York Mercantile Exchange.

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

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

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

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

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

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

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

14
<PAGE> 59

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

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

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

COMMERCIAL MORTGAGE-BACKED SECURITIES

A Portfolio may invest in commercial mortgage-backed securities. Commercial
mortgage-backed securities are generally multi-class debt or pass-through
securities backed by a mortgage loan or pool of mortgage loans secured by
commercial property, such as industrial and warehouse properties, office
buildings, retail space and shopping malls, multi-family properties and
cooperative apartments, hotels and motels, nursing homes, hospitals, senior
living centers, and agricultural property. The commercial mortgage loans that
underlie commercial mortgage-backed securities have certain distinct
characteristics. Commercial mortgage loans are generally not amortizing or not
fully amortizing. At their maturity date, repayment of the remaining principal
balance or "balloon" is due and is repaid through the attainment of an
additional loan or sale of the property. Unlike most single-family residential
mortgages, commercial real property loans often contain provisions which
substantially reduce the likelihood that such securities will be prepaid. The
provisions generally impose significant prepayment penalties on loans and, in
some cases, there may be prohibitions on principal prepayments for several years
following origination. This difference in prepayment exposure is significant due
to extraordinarily high levels of refinancing of traditional residential
mortgages experienced over the past year as mortgage rates have reached a
25-year low. Assets underlying commercial mortgage-backed securities may relate
to only a few properties or to a single property.

15
<PAGE> 60

Commercial mortgage-backed securities have been issued in public and
private transactions by a variety of public and private issuers.
Non-governmental entities that have issued or sponsored commercial mortgage-
backed securities offerings include owners of commercial properties, originators
of and investors in mortgage loans, savings and loan associations, mortgage
banks, commercial banks, insurance companies, investment banks, and
special-purpose subsidiaries of the foregoing. The BlackRock Managed Bond
Portfolio may, from time to time, purchase commercial mortgage-backed securities
directly from issuers in negotiated transactions or from a holder of such
commercial mortgage-backed securities in the secondary market.

Commercial mortgage-backed securities generally are structured to protect
the senior class investors against potential losses on the underlying mortgage
loans. This is generally provided by the subordinated class investors, which may
be included in the Portfolio, by taking the first loss if there are defaults on
the underlying commercial mortgage loans. Other protection, which may benefit
all of the classes, including the subordinated classes in which the Portfolio
intends to invest, may include issuer guarantees, reserve funds, additional
subordinated securities, cross-collateralization, over-collateralization, and
the equity investors in the underlying properties.

By adjusting the priority of interest and principal payments on each class
of a given commercial mortgage-backed security, issuers are able to issue senior
investment-grade securities and lower-rated or non-rated subordinated securities
tailored to meet the needs of sophisticated institutional investors. In general,
subordinated classes of commercial mortgage-backed securities are entitled to
receive repayment of principal only after all required principal payments have
been made to more senior classes and have subordinate rights as to receipt of
interest distributions. Such subordinated classes are subject to a substantially
greater risk of nonpayment than are senior classes of commercial mortgage-backed
securities. Even within a class of subordinate securities, most commercial
mortgage-backed securities are structured with a hierarchy of levels (or "loss
positions"). Loss positions are the order in which nonrecoverable losses of
principal are applied to the securities within a given structure. For instance,
a first-loss subordinate security will absorb any principal losses before any
higher-loss position subordinate security. This type of structure allows a
number of classes of securities to be created with varying degrees of credit
exposure, prepayment exposure, and potential total return.

Subordinated classes of commercial mortgage-backed securities have more
recently been structured to meet specific investor preferences and issuer
constraints and have different priorities for cash flow and loss absorption. As
previously discussed, from a credit perspective, they are structured to absorb
any credit-related losses prior to the senior class. The principal cash flow
characteristics of subordinated classes are designed to be among the most stable
in the mortgage-backed securities market, the probability of prepayment being
much lower than with traditional residential mortgage-backed securities. This
characteristic is primarily due to the structural feature that directs the
application of principal payments first to the senior classes until they are
retired before the subordinated classes receive any prepayments. While this
serves to enhance the credit protection of the senior classes, it produces
subordinated classes with more stable average lives. Subject to the applicable
provisions of the 1940 Act, there are no limitations on the classes of
commercial mortgage-backed securities in which the Portfolio may invest.
Accordingly, in certain circumstances, the Portfolio may recover proportionally
less of its investment in a commercial mortgage-backed security than the holders
of more senior classes of the same commercial mortgage-backed security.

The rating assigned to a given issue and class of commercial
mortgage-backed securities is a product of many factors, including the structure
of the security, the level of subordination, the quality and adequacy of the
collateral, and the past performance of the originators and servicing companies.
The rating of any commercial mortgage-backed security is determined to a
substantial degree by the debt service coverage ratio (i.e., the ratio of
current net operating income from the commercial properties, in the aggregate,
to the current debt service obligations on the properties) and the loan-to-value
(the "LTV") ratio of the pooled properties. The amount of the securities issued
in any one rating category is determined by the rating agencies after a rigorous
credit rating process which includes analysis of the issuer, servicer, and
property manager, as well as verification of the LTV and debt service coverage
ratios. LTV ratios may be particularly important in the case of commercial
mortgages because most commercial mortgage loans provide that the lender's sole
remedy in the event of a default is against the mortgaged property, and the
lender is not permitted to pursue remedies
16
<PAGE> 61

with respect to other assets of the borrower. Accordingly, LTV ratios may, in
certain circumstances, determine the amount realized by the holder of the
commercial mortgage-backed security.

ZERO-COUPON SECURITIES

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

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

In addition, the Treasury has facilitated transfers of ownership of
zero-coupon securities by accounting separately for the beneficial ownership of
particular interest coupons and corpus payments on Treasury securities through
the Federal Reserve book-entry recordkeeping system. The Federal Reserve
program, as established by the Treasury Department, is known as "STRIPS" or
"Separate Trading of Registered Interest and Principal of Securities." Under the
STRIPS program, a Portfolio will be able to have its beneficial ownership of
U.S. Treasury zero-coupon securities recorded directly in the book-entry
recordkeeping system in lieu of having to hold certificates or other evidences
of ownership of the underlying U.S. Treasury securities.

When debt obligations have been stripped of their unmatured interest
coupons by the holder, the stripped coupons are sold separately. The principal
or corpus is sold at a deep discount because the buyer only receives the right
to receive a future fixed payment on the security and does not receive any
rights to periodic cash interest payments. Once stripped or separated, the
corpus and coupons may be sold separately. Typically, the coupons are sold
separately or grouped with other coupons with like maturity dates and sold in
such bundled form. Purchasers of stripped obligations acquire, in effect,
discount obligations that are economically identical to the zero-coupon
securities issued directly by the obligor.

VARIABLE- OR FLOATING-RATE SECURITIES

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

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

17
<PAGE> 62

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

LOWER-GRADE SECURITIES

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

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

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

Lower-grade securities generally involve greater credit risk than
higher-grade securities. A general economic downturn or a significant increase
in interest rates could severely disrupt the market for lower-grade securities
and adversely affect the market value of such securities. In addition, in such
circumstances, the ability of issuers of lower-grade securities to repay
principal and to pay interest, to meet projected financial
18
<PAGE> 63

goals, and to obtain additional financing may be adversely affected. Such
consequences could lead to an increased incidence of default for such securities
and adversely affect the value of the lower-grade securities in a Portfolio's
portfolio and thus a Portfolio's net asset value. The secondary market prices of
lower-grade securities are less sensitive to changes in interest rates than are
those for higher-rated securities, but are more sensitive to adverse economic
changes or individual issuer developments. Adverse publicity and investor
perceptions, whether or not based on rational analysis, may also affect the
value and liquidity of lower-grade securities.

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

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

INVESTMENT RESTRICTIONS

FUNDAMENTAL INVESTMENT RESTRICTIONS

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

The Trust may not, on behalf of a Portfolio:

(1) With respect to 75% of its total assets, purchase the securities
of any issuer if such purchase would cause more than 5% of the value of a
Portfolio's total assets to be invested in securities of any one issuer
(except securities issued or guaranteed by the U.S. government or any
agency or instrumentality thereof), or purchase more than 10% of the
outstanding voting securities of any one issuer;

(2) Invest more than 25% of the value of its net assets in the
securities (other than U.S. government securities) of issuers in a single
industry, except that this policy shall not limit

19
<PAGE> 64

investment by the State Street Global Advisors Money Market Portfolio in
obligations of U.S. banks (excluding their foreign branches);

(3) Borrow money (including reverse repurchase agreements), except as
a temporary measure for extraordinary or emergency purposes or, with
respect to the State Street Global Advisors Money Market Portfolio, to
facilitate redemptions (and not for leveraging or investment, except with
respect to reverse repurchase agreements and dollar roll transactions, to
the extent such investments are permitted under a Portfolio's investment
objectives and policies), provided that borrowings do not exceed an amount
equal to 33 1/3% of the current value of the Portfolio's assets taken at
market value, less liabilities other than borrowings. If at any time a
Portfolio's borrowings exceed this limitation due to a decline in net
assets, such borrowings will be reduced within three days to the extent
necessary to comply with this limitation. A Portfolio will not purchase
investments once borrowed funds (including reverse repurchase agreements)
exceed 5% of its total assets;

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

(5) Purchase or sell any commodity contract, except that each
Portfolio (other than the State Street Global Advisors Money Market
Portfolio), to the extent permitted by its investment objectives and
policies, may purchase and sell futures contracts based on debt securities,
indexes of securities, and foreign currencies and purchase and write
options on securities, futures contracts which it may purchase, securities
indexes, and foreign currencies and purchase forward contracts. (Securities
denominated in gold or other precious metals or whose value is determined
by the value of gold or other precious metals are not considered to be
commodity contracts.)

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

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

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

NON-FUNDAMENTAL INVESTMENT RESTRICTIONS

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

The Trust may not, on behalf of a Portfolio:

(1) Invest more than 15% (except 10% with respect to the Credit Suisse
International Equity Portfolio and the State Street Global Advisors Money
Market Portfolio) of the net assets of a Portfolio (taken at market value)
in illiquid securities, including repurchase agreements maturing in more
than seven days;

(2) Purchase securities on margin, except (with respect to all
Portfolios other than the State Street Global Advisors Money Market
Portfolio) such short-term credits as may be necessary for the clearance of
purchases and sales of securities, and except (with respect to all
Portfolios other than the State Street Global Advisors Money Market
Portfolio) that it may make margin payments in connection with options,

20
<PAGE> 65

futures contracts, options on futures contracts, and forward foreign
currency contracts and in connection with swap agreements;

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

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

21
<PAGE> 66

MANAGEMENT OF THE TRUST

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION DURING
NAME, ADDRESS, AND AGE POSITION HELD WITH THE TRUST PAST FIVE YEARS
---------------------- ---------------------------- ---------------------------
<S> <C> <C>
Richard W. Scott* President, Principal Director, Vice President and Chief
2929 Allen Parkway Executive Officer, and Investment Officer, the Variable Annuity
Houston, Texas 77019 Trustee Life Insurance Company (VALIC) and
Age: 44 American General Annuity Insurance
Company (AGAIC) since March 1998;
Executive Vice President and Chief
Investment Officer since February 1998
of American General Corporation; prior
thereto Vice Chairman, General Counsel
and Chief Investment Officer or
Executive Vice President of Western
National Corporation from February 1994;
prior thereto, a partner with Vinson &
Elkins L.L.P.
John A. Graf* Executive Vice President and President and Director, VALIC and AGAIC
2929 Allen Parkway Trustee (1998 to Present). Director, Boy Scouts
Houston, Texas 77019 of America. Formerly, Director
Age: 38 (1993-1998), President and Chief
Executive Officer (1997-1998), Vice
Chairman (1996-1997), Chief Marketing
Officer (1993-1997) and Executive Vice
President (1993-1996), Western National
Life Insurance Corporation and Senior
Vice President, Conseco, Inc. (1987-
1993).
Alden W. Brosseau Trustee Owner Sonoma Group Consulting to
16670 Arnold Drive Management since March 1993; prior
Sonoma, CA 95476 thereto, Vice President, Investment
Age: 70 Administration & Planning, American
General Corporation.
S. Tevis Grinstead Trustee Retired since 1993; prior thereto, a
c/o Vinson & Elkins L.L.P. partner with Vinson & Elkins L.L.P.
2300 First City Tower
1001 Fannin
Houston, Texas 77002-6760
Age: 59
Hugh L. Hyde Trustee Owner, HLH Consulting Inc. since
952 Echo Lane, Suite 322 November, 1994; from March 1, 1993 --
Houston, Texas 77024 September 15, 1994, President and
Age: 55 Director of Texas Capital Bancshares,
Inc. and its subsidiary bank, Texas
Capital Bank, N.A.; prior thereto, a
partner with KPMG Peat Marwick
Melvin C. Payne Trustee President & Chief Executive Officer of
1300 Post Oak Blvd., Carriage Services since 1991.
Suite 1500
Houston, Texas 77045
Age: 55
</TABLE>

22
<PAGE> 67

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION DURING
NAME, ADDRESS, AND AGE POSITION HELD WITH THE TRUST PAST FIVE YEARS
---------------------- ---------------------------- ---------------------------
<S> <C> <C>
Brent C. Nelson Vice President Senior Vice President, Controller and
Director, VALIC and AGAIC. Formerly,
Vice President and Controller, VALIC
(1990-1994); Controller, VALIC
(1987-1990); Second Vice President and
Controller, VALIC (1986-1987); Second
Vice President -- Fund Operations, VALIC
(1985-1986); Assistant Vice
President -- Controller, Lomas Financial
Security Insurance Co. (1982-1985).
Peter V. Tuters Vice President and Senior Executive Vice President, American
Investment Officer General Investment Management, L.P.,
Vice President and Investment Officer,
VALIC and AGAIC; Senior Vice President
and Chief Investment Officer, American
General Corporation (1993-1998).
Maruti D. More Vice President -- Vice President, American General
Investments Investment Management, L.P.; Vice
President, Investments, VALIC. Formerly,
Managing Director, Marketable
Securities, Paul Revere Investment
Management Corporation; Senior Portfolio
Manager, Dewey Square Investors;
Investment Vice President, New York Life
Insurance Company.
Cynthia A. Toles Vice President and Secretary Senior Vice President, General Counsel
and Secretary, VALIC and AGAIC;
Secretary and Assistant Treasurer,
VAMCO. Formerly, Senior Associate
General Counsel and Secretary, VALIC
(1990-1998); Vice President, Associate
General Counsel and Secretary, VALIC
(1988-1989); Second Vice President,
Associate General Counsel and Assistant
Secretary, VALIC (1986-1988); Assistant
Vice President, Assistant General
Counsel and Assistant Secretary, VALIC
(1983-1986).
Nori L. Gabert Vice President and Assistant Associate General Counsel, VALIC.
Secretary Formerly, Of Counsel, Winstead Sechrest
& Minick P.C. (1997); Vice President and
Associate General Counsel of Van Kampen
American Capital, Inc. (1981-1996).
Gregory R. Seward Treasurer Vice President -- Variable Product
Accounting, VALIC and AGAIC. Formerly,
Director of Fund Operations and
Assistant Controller, VALIC and AGAIC;
Controller, Avanti Health Systems, Inc.
(1988-1991); Reports Manager, American
Capital Asset Management, Inc.
(1986-1988); Senior Auditor, Price
Waterhouse (1982-1986).
</TABLE>

23
<PAGE> 68

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION DURING
NAME, ADDRESS, AND AGE POSITION HELD WITH THE TRUST PAST FIVE YEARS
---------------------- ---------------------------- ---------------------------
<S> <C> <C>
Cynthia A. Gibbons Assistant Vice President Senior Compliance Analyst, VALIC.
Kurt R. Fredland Vice President Vice President of AGA Investment
Advisory Services, Inc. since September
1994; prior thereto Assistant Vice
President -- Variable Annuity
Administration, Western National Life
Insurance Company from April 1994; prior
thereto, a financial consultant.
</TABLE>

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

* INTERESTED PERSON OF THE TRUST WITHIN THE MEANING OF THE 1940 ACT. EACH
TRUSTEE OF THE TRUST WHO IS NOT AN EMPLOYEE, OFFICER, OR DIRECTOR OF THE LIFE
COMPANY, THE ADVISER, OR A SUB-ADVISER RECEIVES AN ANNUAL FEE OF $7,500 AND AN
ADDITIONAL FEE OF $750 FOR EACH TRUSTEES' MEETING ATTENDED. IN ADDITION,
DISINTERESTED TRUSTEES WHO ARE MEMBERS OF ANY BOARD COMMITTEES WILL RECEIVE A
SEPARATE $750 FEE FOR ATTENDANCE OF ANY COMMITTEE MEETING THAT IS HELD ON A
DAY ON WHICH NO BOARD MEETING IS HELD. NONE OF THE TRUSTEES OR OFFICERS OF THE
TRUST OWN ANY OF THE OUTSTANDING SHARES OF THE TRUST AS OF MAY 1, 1998. WITH
RESPECT TO THE YEAR ENDED DECEMBER 31, 1997, THE TRUST PAID TRUSTEES' FEES
AGGREGATING $41,250. THE FOLLOWING TABLE SHOWS THE 1997 COMPENSATION BY
TRUSTEE.

24
<PAGE> 69

COMPENSATION TABLE

<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
PENSION OR TOTAL
RETIREMENT COMPENSATION
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL FROM REGISTRANT
NAME OF PERSON, COMPENSATION AS PART OF FUND BENEFITS UPON AND FUND COMPLEX
POSITION FROM REGISTRANT EXPENSES RETIREMENT PAID TO TRUSTEE
- --------------- --------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Richard W. Scott................ None None None None
President and Trustee
John A. Graf.................... None None None None
Trustee
Alden W. Brosseau............... $10,500 None None $10,500
Trustee
Hugh L. Hyde.................... $10,500 None None $10,500
Trustee
Melvin C. Payne................. $ 9,750 None None $ 9,750
Trustee
S. Tevis Grinstead.............. $10,500 None None $10,500
Trustee
</TABLE>

SUBSTANTIAL SHAREHOLDERS

Shares of the Portfolios are issued and redeemed in connection with
investments in and payments under certain variable annuity contracts issued
through a Separate Account of the Life Company. As of May 1, 1998 the Separate
Account of the Life Company was known to the Board of Trustees and the
management of the Trust to own of record 100% of the shares of each Portfolio of
the Trust.

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

INVESTMENT ADVISER

Under the Investment Advisory Agreement between the Trust and the Adviser
(the "Investment Advisory Agreement"), the Adviser, at its expense, provides the
Portfolios with investment advisory services and advises and assists the
officers of the Trust in taking such steps as are necessary or appropriate to
carry out the decisions of its Trustees regarding the conduct of business of the
Trust and each Portfolio. The fees to be paid under the Investment Advisory
Agreement are set forth in the Trust's prospectus. Under the Investment Advisory
Agreement, the Adviser is obligated to formulate a continuing program for the
investment of the assets of each Portfolio of the Trust in a manner consistent
with each Portfolio's investment objectives, policies, and restrictions and to
determine, from time to time, securities to be purchased, sold, retained, or
lent by the Trust and implement those decisions, subject always to the
provisions of the Trust's Declaration of Trust and By-laws, and of the 1940 Act,
and subject further to such policies and instructions as the Trustees may from
time to time establish. The Investment Advisory Agreement further provides that
the Adviser shall furnish the Trust with office space and necessary personnel,
pay ordinary office expenses, pay all executive salaries of the Trust, and
furnish, without expense to the Trust, the services of such members of its
organization as may be duly elected officers or Trustees of the Trust.

Under the Investment Advisory Agreement, the Trust is responsible for all
its other expenses including, but not limited to, the following expenses: legal,
auditing, or accounting expenses; Trustees' fees and expenses;

25
<PAGE> 70

insurance premiums; brokers' commissions; taxes and governmental fees; expenses
of issue or redemption of shares; expenses of registering or qualifying shares
for sale; reports and notices to shareholders and fees and disbursements of
custodians, transfer agents, registrars, shareholder servicing agents, and
dividend disbursing agents; and certain expenses with respect to membership fees
of industry associations.

The Investment Advisory Agreement provides that the Adviser may retain
sub-advisers, at Adviser's own cost and expense, for the purpose of managing the
investment of the assets of one or more Portfolios. The Investment Advisory
Agreement provides that neither the Adviser nor any director, officer, or
employee of Adviser will be liable for any loss suffered by the Trust in the
absence of willful misfeasance, bad faith, gross negligence, or reckless
disregard of obligations and duties. In addition, the Agreement provides for
indemnification of the Adviser by the Trust.

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

The Adviser voluntarily agreed to waive that portion of its advisory fee
which is in excess of the amount payable by the Adviser to each Sub-Adviser
pursuant to the respective sub-advisory agreements for each Portfolio until May
1, 1998. Thereafter, the advisory fees shown in the Prospectus under "Management
of the Trust" will be charged. In addition, the Life Company, an affiliate of
the Adviser, has undertaken to bear all operating expenses of each Portfolio,
excluding the compensation of the Adviser, that exceed .12% of each Portfolio's
average daily net assets until May 1, 1999. Information concerning the advisory
fees waived and expenses reimbursed for the period ended December 31, 1997 is
contained in the Prospectus.

For the years ended December 31, 1997, 1996 and 1995, respectively, the
Adviser was paid advisory fees as follows:

<TABLE>
<CAPTION>
1997 1996 1995
------- ------ ------
<S> <C> <C> <C>
Credit Suisse Growth and Income Portfolio................. $24,528 $4,727 --
Credit Suisse International Equity Portfolio.............. 23,693 5,824 --
EliteValue Portfolio...................................... 21,970 986 N/A
State Street Global Advisors Growth Equity Portfolio...... 18,753 3,353 --
State Street Global Advisors Money Market Portfolio....... 5,909 569 --
Salomon Brothers U.S. Government Securities Portfolio..... 5,756 355 N/A
Van Kampen Emerging Growth Portfolio...................... 17,856 970 N/A
</TABLE>

For the years ended December 31, 1997, 1996 and 1995, respectively, the
Adviser waived advisory fees as follows:

<TABLE>
<CAPTION>
1997 1996 1995
------- ------ ------
<S> <C> <C> <C>
Credit Suisse Growth and Income Portfolio................. $12,263 $6,812 $3,106
Credit Suisse International Equity Portfolio.............. 9,113 6,699 3,643
EliteValue Portfolio...................................... 13,732 6,128 N/A
State Street Global Advisors Growth Equity Portfolio...... 13,030 6,520 2,490
State Street Global Advisors Money Market Portfolio....... 7,387 1,878 106
Salomon Brothers U.S. Government Securities Portfolio..... 6,395 7,227 N/A
Van Kampen Emerging Growth Portfolio...................... 8,973 5,171 N/A
</TABLE>

26
<PAGE> 71

TRUST ADMINISTRATION

State Street Bank and Trust Company provides certain accounting, transfer
agency, and other services to the Trust.

SUB-ADVISERS

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

CODE OF ETHICS

To mitigate the possibility that a Series will be adversely affected by
personal trading of employees, the Trust, the Adviser and the Sub-Advisers have
adopted Codes of Ethics under Rule 17j-1 of the 1940 Act. These Codes contain
policies restricting securities trading in personal accounts of the portfolio
managers and others who normally come into possession of information on
portfolio transactions. These Codes comply, in all material respects, with the
recommendations of the Investment Company Institute.

INVESTMENT DECISIONS

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

BROKERAGE AND RESEARCH SERVICES

Transactions on U.S. stock exchanges and other agency transactions involve
the payment by the Trust of negotiated brokerage commissions. Such commissions
vary among different brokers. Also, a particular broker may charge different
commissions according to such factors as the difficulty and size of the
transaction. Transactions in foreign securities often involve the payment of
fixed brokerage commissions, which are generally higher than those in the United
States. There is generally no stated commission in the case of securities traded
in the over-the-counter markets, but the price paid by the Trust usually
includes an undisclosed dealer commission or mark-up. In underwritten offerings,
the price paid by the Trust includes a disclosed, fixed commission or discount
retained by the underwriter or dealer. It is currently intended that the
Sub-Advisers will place all orders for the purchase and sale of portfolio
securities for the Trust and buy and sell securities for the Trust through a
substantial number of brokers and dealers. In so doing, the Sub-Advisers will
use their best efforts to obtain for the Trust the best price and execution
available. In seeking the best price and execution, the Sub-Advisers, having in
mind the Trust's best interests, will consider all factors they deem relevant,
including, by way of illustration, price; the size of the transaction; the
nature of the market for the security; the amount of the commission; the timing
of the transaction taking into account market prices and trends; the reputation,
experience, and financial stability of the broker-dealer involved; and the
quality of service rendered by the broker-dealer in other transactions.

It has for many years been a common practice in the investment advisory
business for advisers of investment companies and other institutional investors
to receive research, statistical, and quotation services from broker-dealers who
execute portfolio transactions for the clients of such advisers. Consistent with
this practice, the Sub-Advisers may receive research, statistical, and quotation
services from any broker-dealers
27
<PAGE> 72

with whom they place the Trust's portfolio transactions. These services, which
in some cases may also be purchased for cash, include such matters as general
economic and security market reviews, industry and company reviews, evaluations
of securities, and recommendations as to the purchase and sale of securities.
Some of these services may be of value to the Sub-Advisers and/or their
affiliates in advising various other clients (including the Trust), although not
all of these services are necessarily useful and of value in managing the Trust.
The management fees paid by the Trust are not reduced because the Sub-Advisers
and/or their affiliates may receive such services.

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

During the Trust's fiscal years ended December 31, 1997 and December 31,
1996, the Portfolios paid the following amounts in brokerage commissions:

<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Credit Suisse Growth and Income Portfolio, formerly BEA
Growth and Income Portfolio............................... $ 7,681 $13,588
Credit Suisse International Equity Portfolio................ 14,086 14,302
EliteValue Portfolio, formerly EliteValue Asset Allocation
Portfolio................................................. 6,958 2,448
State Street Global Advisors Growth Equity Portfolio,
formerly Global Advisors Growth Equity Portfolio.......... 10,851 4,082
State Street Global Advisors Money Market Portfolio,
formerly Global Advisors Money Market Portfolio........... -- --
Salomon Brothers U.S. Government Securities Portfolio....... -- --
Van Kampen Emerging Growth Portfolio, formerly Van Kampen
American Capital Emerging Growth Portfolio................ 5,131 3,423
</TABLE>

During the Trust's fiscal year ended December 31, 1997, the following
aggregate dollar amounts of brokerage commissions were paid to affiliated
brokers by the respective Portfolios along with the percentage that such amounts
represent of each Portfolio's aggregate annual brokerage commissions paid:
Credit Suisse International Equity Portfolio $169 -- 1.21% to Salomon Inc and
$126 or .89% to CS First Boston; EliteValue Portfolio $186 or 2.67% to Salomon
Inc and $186 or 2.67% to CS First Boston; State Street Global Advisors Growth
Equity $607 or 5.59% to Salomon Inc and $465 or 4.29% to CS First Boston and Van
Kampen Emerging Growth Portfolio $483 or 9.41% to Salomon Inc and $2,117 or
41.26% to CS First Boston.

DETERMINATION OF NET ASSET VALUE

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

There may be dates when the New York Stock Exchange is open for business
and the Trust is not. The day after Thanksgiving is the only such date. On such
date, contact owners will not have access to their accounts and therefore, no
transactions will be processed on such date. The Trust will be closed for
business each date the New York Stock Exchange is closed for business.

28
<PAGE> 73

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

The valuation of the State Street Global Advisors Money Market Portfolio's
portfolio securities is based upon their amortized cost, which does not take
into account unrealized securities gains or losses. This method involves
initially valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of the effect of
fluctuating interest rates on the market value of the instrument. By using
amortized cost valuation, the Trust seeks to maintain a constant net asset value
of $1 per share for the State Street Global Advisors Money Market Portfolio,
despite minor shifts in the market value of its portfolio securities. While this
method provides certainty in valuation, it may result in periods during which
value, as determined by amortized cost, is higher or lower than the price the
State Street Global Advisors Money Market Portfolio would receive if it sold the
instrument. During periods of declining interest rates, the quoted yield on
shares of the State Street Global Advisors Money Market Portfolio may tend to be
higher than a like computation made by a fund with identical investments
utilizing a method of valuation based on market prices and estimates of market
prices for all of its portfolio instruments. Thus, if the use of amortized cost
by the Portfolio resulted in a lower aggregate portfolio value on a particular
day, a prospective investor in the State Street Global Advisors Money Market
Portfolio would be able to obtain a somewhat higher yield if he or she purchased
shares of the Global Advisors Money Market Portfolio on that day, than would
result from investment in a fund utilizing solely market values, and existing
investors in the State Street Global Advisors Money Market Portfolio would
receive less investment income. The converse would apply on a day when the use
of amortized cost by the Portfolio resulted in a higher aggregate portfolio
value. However, as a result of certain procedures adopted by the Trust, the
Trust believes any difference will normally be minimal.

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

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

Generally, trading in certain securities (such as foreign securities) is
substantially completed each day at various times prior to the close of the
NYSE. The values of these securities used in determining the net asset value of
the Trust's shares are computed as of such times. Also, because of the amount of
time required to collect and process trading information as to large numbers of
securities issues, the values of certain securities (such as convertible bonds
and U.S. government securities) are determined based on market quotations
collected earlier in the day at the latest practicable time prior to the close
of the NYSE. Occasionally, events affecting the value of such securities may
occur between such times and the close of the NYSE which will not
29
<PAGE> 74

be reflected in the computation of the Trust's net asset value. If events
materially affecting the value of such securities occur during such period, then
these securities will be valued at their fair value, in the manner described
above.

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

TAXES

Each Portfolio of the Trust intends to qualify each year and elect to be
taxed as a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). As a regulated investment company
qualifying to have its tax liability determined under Subchapter M, a Portfolio
will not be subject to federal income tax on any of its net investment income or
net realized capital gains that are distributed to the Separate Account of the
Life Company. As a Massachusetts business trust, a Portfolio, under present law,
will not be subject to any excise or income taxes in Massachusetts.

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

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

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

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

30
<PAGE> 75

It is the policy of each of the Portfolios to meet the requirements of the
Code to qualify as a regulated investment company that is taxed pursuant to
Subchapter M of the Code.

This discussion of the federal income tax and state tax treatment of the
Trust and its shareholders is based on the law as of the date of this SAI. It
does not describe in any respect the tax treatment of any insurance or other
product pursuant to which investments in the Trust may be made. For further
information concerning federal income tax consequences for the holders of the VA
Contracts of the Life Company, investors should consult the Prospectus used in
connection with the issuance of their VA Contracts.

DIVIDENDS AND DISTRIBUTIONS

State Street Global Advisors Money Market Portfolio. The net investment
income of the State Street Global Advisors Money Market Portfolio is determined
as of the close of trading on the NYSE (generally 4 p.m., New York time) on each
day on which the NYSE is open for business. All of the net investment income so
determined normally will be declared daily as a dividend to shareholders of
record as of the close of trading on the NYSE after the purchase and redemption
of shares. Unless the business day before a weekend or holiday is the last day
of an accounting period, the dividend declared on that day will include an
amount in respect of the Portfolio's income for the subsequent non-business day
or days. No daily dividend will include any amount of net income in respect of a
subsequent semi-annual accounting period. Dividends commence on the next
business day after the date of purchase. Dividends declared during any month
will be invested as of the close of business on the last calendar day of that
month (or the next business day after the last calendar day of the month if the
last calendar day of the month is a non-business day) in additional shares of
the Portfolio at the net asset value per share, normally $1, determined as of
the close of business on that day, unless payment of the dividend in cash has
been requested.

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

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

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

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

31
<PAGE> 76

PERFORMANCE INFORMATION

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

OTHER PORTFOLIOS:

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

As required by regulations of the SEC, the annualized total return of a
Portfolio for a period is computed by assuming a hypothetical initial payment of
$1,000. It is then assumed that all of the dividends and distributions by the
Portfolio over the period are reinvested. It is then assumed that at the end of
the period, the entire amount is redeemed. The annualized total return is then
calculated by determining the annual rate required for the initial payment to
grow to the amount which would have been received upon redemption.

Investment operations for the Portfolios depicted in the chart below
commenced on October 10, 1995, for the State Street Global Advisors Money Market
Portfolio; on October 20, 1995, for the Credit Suisse Growth and Income, Credit
Suisse International Equity, and State Street Global Advisors Growth Equity
Portfolios; on January 2, 1996 EliteValue, and Van Kampen Emerging Growth
Portfolios; and on February 6, 1996, for the Salomon Brothers U.S. Government
Securities Portfolio. The performance figures shown for the Portfolios in the
chart below reflect the actual fees and expenses paid by the Portfolios.

AVERAGE TOTAL RETURN FOR THE PERIODS INDICATED

<TABLE>
<CAPTION>
12 MONTHS ENDED INCEPTION TO
PORTFOLIO 12/31/97 12/31/97
--------- --------------- ------------
<S> <C> <C>
Credit Suisse Growth and Income Portfolio, formerly BEA
Growth and Income Portfolio............................. 22.33% 19.62%
Credit Suisse International Equity Portfolio.............. 4.30% 11.18%
EliteValue Portfolio, formerly EliteValue Asset Allocation
Portfolio............................................... 21.08% 23.86%
State Street Global Advisors Growth Equity Portfolio,
formerly Global Advisors Equity Portfolio............... 31.67% 25.70%
State Street Global Advisors Money Market Portfolio,
formerly Global Advisors Money Market Portfolio......... 5.50% 5.33%
Salomon Brothers U.S. Government Securities Portfolio..... 8.89% 6.42%
Van Kampen Emerging Growth Portfolio, formerly Van Kampen
American Capital Emerging Growth Portfolio.............. 20.45% 19.75%
</TABLE>

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

32
<PAGE> 77

SHAREHOLDER COMMUNICATIONS

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

ORGANIZATION AND CAPITALIZATION

The Trust is an open-end investment company established under the laws of
The Commonwealth of Massachusetts by a Declaration of Trust dated December 12,
1994, as amended April 19, 1995 and May 1, 1998.

Shares entitle their holders to one vote per share, with fractional shares
voting proportionately; however, a separate vote will be taken by each Portfolio
on matters affecting an individual Portfolio. For example, a change in a
fundamental investment policy for the Credit Suisse Growth and Income Portfolio
would be voted upon only by shareholders of that Portfolio. Additionally,
approval of the Investment Advisory Agreement is a matter to be determined
separately by each Portfolio. Approval by the shareholders of one Portfolio is
effective as to that Portfolio. Shares have noncumulative voting rights.
Although the Trust is not required to hold annual meetings of its shareholders,
shareholders have the right to call a meeting to elect or remove Trustees or to
take other actions as provided in the Declaration of Trust. Shares have no
preemptive or subscription rights, and are transferable. Shares are entitled to
dividends as declared by the Trustees, and if a Portfolio were liquidated, the
shares of that Portfolio would receive the net assets of that Portfolio. The
Trust may suspend the sale of shares at any time and may refuse any order to
purchase shares.

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

PORTFOLIO TURNOVER

The portfolio turnover rate of a Portfolio is defined by the SEC as the
ratio of the lesser of annual sales or purchases to the monthly average value of
the portfolio, excluding from both the numerator and the denominator securities
with maturities at the time of acquisition of one year or less. Under that
definition, the State Street Global Advisors Money Market Portfolio would not
calculate portfolio turnover. Portfolio turnover generally involves some expense
to a Portfolio, including brokerage commissions or dealer mark-ups and other
transaction costs on the sale of securities and reinvestment in other
securities. The portfolio turnover rate of each of the Portfolios for the period
ended December 31, 1995, for the applicable Portfolios and December 31, 1996,
for all Portfolios is set forth under "Financial Highlights" in the Prospectus.

CUSTODIAN

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

33
<PAGE> 78

LEGAL COUNSEL

Legal matters in connection with the offering are being passed upon by
Blazzard, Grodd & Hasenauer, P.C., Westport, Connecticut.

INDEPENDENT ACCOUNTANTS

The Trust has selected Coopers & Lybrand L.L.P. as the independent
accountants to audit the annual financial statements of the Trust.

SHAREHOLDER LIABILITY

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

DESCRIPTION OF NRSRO RATINGS

DESCRIPTION OF MOODY'S CORPORATE RATINGS

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

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

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

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

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

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

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

34
<PAGE> 79

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

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

DESCRIPTION OF S&P'S CORPORATE RATINGS

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

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

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

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

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

DESCRIPTION OF DUFF CORPORATE RATINGS

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

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

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

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

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

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

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

35
<PAGE> 80

DESCRIPTION OF FITCH CORPORATE RATINGS

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

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

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

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

BB -- Bonds considered speculative and of low investment grade. The
obligor's ability to pay interest and repay principal is not strong and is
considered likely to be affected over time by adverse economic changes.

B -- Bonds considered highly speculative. Bonds in this class are lightly
protected as to the obligor's ability to pay interest over the life of the issue
and repay principal when due.

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

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

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

DESCRIPTION OF THOMSON BANKWATCH, INC. CORPORATE RATINGS

AAA -- Long-term, fixed-income securities that are rated "AAA" indicate
that the ability to repay principal and interest on a timely basis is very high.

AA -- Long-term, fixed-income securities that are rated "AA" indicate a
superior ability to repay principal and interest on a timely basis with limited
incremental risk vs. issues rated in the highest category.

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

DESCRIPTION OF IBCA LIMITED AND IBCA INC. CORPORATE RATINGS

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

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

DESCRIPTION OF S&P'S COMMERCIAL PAPER RATINGS

Commercial paper rated "A-1" by S&P indicates that the degree of safety
regarding timely payments is either over-whelming or very strong. Those issues
determined to possess overwhelming safety characteristics

36
<PAGE> 81

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

DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS

The rating "Prime-1" is the highest commercial paper rating assigned by
Moody's. Issuers rated "Prime-1" (or related supporting institutions) are
considered to have a superior capacity for repayment of short-term promissory
obligations. Issuers rated "Prime-2" (or related supporting institutions) are
considered to have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the characteristics of
issuers rated "Prime-1" but to a lesser degree. Earnings trend and coverage
ratios, while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternative liquidity is maintained. "P-3" issuers have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained. Not Prime
issuers do not fall within any of the Prime rating categories.

DESCRIPTION OF DUFF COMMERCIAL PAPER RATINGS

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

DESCRIPTION OF FITCH COMMERCIAL PAPER RATINGS

The rating "Fitch-1" (Highest Grade) is the highest commercial paper rating
assigned by Fitch. Paper rated "Fitch-1" is regarded as having the strongest
degree of assurance for timely payment. The rating "Fitch-2" (Very Good Grade)
is the second highest commercial paper rating assigned by Fitch which reflects
an assurance of timely payment only slightly less in degree than the strongest
issues.

DESCRIPTION OF IBCA LIMITED AND IBCA INC. COMMERCIAL PAPER RATINGS

A1 -- Short-term obligations rated "A1" are supported by a very strong
capacity for timely repayment. A plus ("+") sign is added to those issues
determined to possess the highest capacity for timely payment.

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

DESCRIPTION OF THOMSON BANKWATCH, INC. COMMERCIAL PAPER RATINGS

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

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

37
<PAGE> 82

FINANCIAL STATEMENTS

The Trust's financial statements and notes thereto for the year ended
December 31, 1997, are incorporated by reference to the WNL Series Trust 1997
Annual Report filed on March 6, 1998.